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

Form 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009oro

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


Commission File Number: 0-27596

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

Delaware(State or other jurisdiction of
incorporation or organization)

94-3170244(I.R.S. Employer
Identification No.)


331 East EvelynMountain View, CA 94041(Address of principal executive offices)

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

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

Title of each class:

Name of each exchange on which registered:Common Stock, par value $0.003 per share

The NASDAQ Stock Market LLC


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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes o    No o

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

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

The aggregate market value of the shares of common stock of the registrant held by non-affiliates as of June 30, 2009 was $170,317,068 based
upon the closing price of the common stock on the Nasdaq Global Market on June 30, 2009. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other
purposes.

There
were 30,952,277 shares of registrant's Common Stock issued and outstanding as of February 28, 2010.

DOCUMENTS INCORPORATED BY REFERENCE

Portions
of the Proxy Statement for the registrant's 2009 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.



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CONCEPTUS, INC.    FORM 10-K    FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009



PagePart I.Item 1.

Business


3Item 1A.

Risk Factors


15Item 1B.

Unresolved Staff Comments


30Item 2.

Properties


30Item 3.

Legal Proceedings


30Item 4.

Reserved


30Part II.Item 5.

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


31Item 6.

Selected Consolidated Financial Data


33Item 7.

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


34Item 7A.

Quantitative and Qualitative Disclosures About Market Risk


54Item 8.

Consolidated Financial Statements and Supplementary Data


55Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure


55Item 9A.

Controls and Procedures


55Item 9B.

Other Information


56Part III.Item 10.

Directors, Executive Officers of the Registrant and Corporate Governance


57Item 11.

Executive Compensation


57Item 12.

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


57Item 13.

Certain Relationships and Related Transactions, and Director Independence


57Item 14.

Principal Accounting Fees and Services


57Part IV.Item 15.

Exhibits, Financial Statement Schedules


58Index to Consolidated Financial Statements


62Signatures


109


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

Market, Ranking and Other Data

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

PART I

ITEM 1.    BUSINESS

Overview

We develop, manufacture and market theEssure® permanent birth control
system, an innovative and proprietary medical device for women. TheEssuresystem delivers a soft and flexible insert into a woman's fallopian tubes,
causing benign tissue in-growth which blocks the fallopian tubes. A successfully placedEssuremicro-insert and the subsequent tissue growth
prohibits the egg from traveling through the fallopian tubes, preventing conception. The effectiveness rate of theEssureprocedure determined in our
clinical study is 99.8%
after four years of follow-up. We obtained approval to marketEssurein the European Union in February 2001 and obtained the U.S. Food and
Drug Administration, or FDA, approval forEssurein November 2002. Over 370,000 women worldwide have undergone the Essureprocedure.

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On
January 7, 2008, we acquired all of the outstanding shares of Conceptus SAS, based in Versailles, France. As a result of this transaction, Conceptus SAS became a wholly-owned
subsidiary, and through it we sellEssuredirectly in France and through a network of distributors throughout the rest of Europe. This acquisition
expanded our presence in international markets and has increased our revenues as we now recognize sales at end-user pricing.

On
December 15, 2008, we incorporated Conceptus Medical Limited ("CML") as a wholly owned subsidiary in the United Kingdom to serve as our direct sales office in
the United Kingdom after terminating our distributor relationship with our previous distributor during the fourth quarter of 2008. This incorporation further expanded our presence in international
markets and has increased our revenues as we now recognize sales at end-user pricing in the United Kingdom.

During
2009, we received a National Institute for Health and Clinical Excellence ("NICE") positive recommendation in the United Kingdom and an approval for the Essureprocedure from the Brazilian National
Health Service. During 2009, we sold theEssuresystem in
twenty two countries. For financial information about geographic areas and for segment information with respect to net sales, refer to the information set forth in Note 2Summary of
Significant Accounting Policies in the Notes to Consolidated Financial Statements.

We
were incorporated in the state of Delaware on September 18, 1992. Our mailing address and executive offices are located at 331 East Evelyn, Mountain View, California 94041, and
our telephone number is (650) 962-4000. We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, or Exchange Act, and, in
accordance therewith, file periodic reports, proxy statements and other information with the Securities and Exchange Commission, or SEC. Such periodic reports, proxy statements and other information
is available for inspection and copying at the SEC's Public Reference Room at 100 F Street, NE., Washington, DC 20549 or may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains a Web site athttp://www.sec.govthat contains reports, proxy
statements and other information regarding issuers that file electronically with the SEC. We maintain three websites located at www.conceptus.com, www.essuremd.com and www.essure.com. We make
available, free of charge, on or through our websites, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically
file or furnish such material to the Securities and Exchange
Commission (SEC). We also post on the investors relations page of our www.conceptus.com website a link to our Code of Business Conduct and Ethics, Corporate Governance Guidelines, Corporate Risk
Policy, Disclosure Policy Statement, Whistleblower Policy and the charters of each of our Audit, Compensation and Nominating and Corporate Governance committees of our Board of Directors. Information
contained on our websites is not incorporated by reference into and does not form a part of this Form 10-K. You can also obtain copies of these documents free of charge by
writing to us at: Corporate Secretary, Conceptus, Inc., 331 East Evelyn, Mountain View, California 94041.

TheEssureProcedure Benefits

With 99.8% effectiveness based on four years of follow up, theEssureprocedure is the
most effective form of permanent contraception on the market based on a comparison of four-year clinical trial data. We developed theEssureprocedure in response to the market need for a less invasive and more cost effective solution for women whose families are complete. TheEssureprocedure is typically performed in an office setting without general anesthesia and women typically can return to their daily activities within one day. Other permanent birth control procedures, such
as tubal ligation or vasectomy, are done in a hospital setting, entail general anesthesia and require additional recovery time.

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Benefits
for the patients:



Benefits
to the physician and healthcare system:



Benefits
to the payers:



The Essure Procedure

TheEssuremicro-insert is designed to be placed into each fallopian tube during a
single procedure using a hysteroscope, an instrument that allows visual examination of the cervix and uterine cavity, and our minimally invasive delivery system. The delivery system is a disposable
plastic handle that is connected to our proprietary guidewire and catheter system. The micro-insert is constructed of a stainless steel inner coil, a dynamic outer coil made from a nickel titanium
alloy, called Nitinol, and a layer of polyethylene terephthalate, or polyester fibers, wound between the inner coils. Using the hysteroscope for guidance, the delivery catheter is guided through the
uterus and into the opening of

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the
fallopian tube. Once the physician has properly positioned the delivery system in the fallopian tube, the physician releases the micro-insert. When released, the micro-insert automatically expands
to the contours of the fallopian tube and anchors itself in place. Over a three-month time frame, the polyester fibers within the micro-insert elicit a localized, benign tissue in-growth
that occludes, or blocks, the fallopian tubes, thereby preventing conception.

Currently,
local anesthesia is used as the predominate method of controlling discomfort during theEssureprocedure. General anesthesia is
not typically used unless required by hospital protocol, if requested by the patient, or based on the experience and comfort level of the physician. The Essure procedure can be performed in the
comfort of a physician's office in less than ten minutes (average hysteroscopic time) without hormones, cutting, burning or the risks associated with general anesthesia or tubal ligation. A patient is
typically discharged approximately 45 minutes after theEssureprocedure. No overnight hospital stay is required. Furthermore, the Essureprocedure is
effective without drugs or hormones. There is a three-month waiting period after the Essureprocedure is completed during which the patient must continue to use her current form of birth control or an
alternative form while tissue
in-growth occurs. After three months, U.S. patients complete a confirmation test called a hysterosalpingogram, or HSG, which provides confirmation to both the doctor and the patient of the
placement of the inserts and the occlusion of the fallopian tubes. Outside of the United States, the confirmation test is a standard flat plate pelvic X-ray conducted three months after
completion of the procedure, with a subsequent HSG if device location on the initial radiographic image appears suspicious.

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

Essure Procedure

Tubal LigationProcedure

Transcervical --> Non-incisional

Incisional --> Abdominal incision or punctureTypical anesthesia

Local or IV sedation

GeneralAverage post-op recovery time

45 minutes

4 - 5 hoursProcedure location

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

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

typically 24 hours

4 - 6 days


*Excluding
the day of procedure


Physician Penetration

We require physicians to be preceptored for between 3 and 5 cases by a certified trainer before being able to perform the procedure
independently. We continue to see an increase in the number of physicians becoming trained or who are in the process of training to perform theEssureprocedure. The level of sales for theEssuresystem is highly dependent on the number of physicians trained to perform the procedure. However, we
understand that a strong base of trained physicians does not necessarily correlate to an increase in revenue proportionately. Furthermore, there are no revenues associated with the training
activities. We do not charge a fee for the activity and no commitment arises for the physician from the preceptorship.

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Our Clinical Progress

As the first commercialized method of hysteroscopic sterilization,Essurerequired
numerous clinical studies to prove that it was a safe procedure that would be effective in preventing pregnancy. The following chart summarizes our clinical studies and notes the key study endpoints.

November 1998
May 2000

Phase II clinical study of safety and preliminary effectiveness of theEssureprocedure commences.
Pivotal (Phase III) clinical trail commences. The clinical endpoints of the study include safety, effectiveness and patient satisfaction.

The number of women in whom at least one of twoEssuremicro-inserts was placed totaled 682 between the two clinical trials. At three month follow-up, 647 women began relying
on theEssuredevice as a method of permanent birth control. Based on clinical data, theEssureprocedure has been demonstrated to be 99.8% effective after
four years of follow-up. The Essure procedure has proven to have high patient satisfaction in our clinical trials. Clinical data submitted to the FDA in our Annual Reports show that Phase II study patients' tolerance to wearing theEssuredevice up to five years was rated as "good" to "excellent" in 99% of women at all visits. Among women from our Pivotal trial who have worn the micro-inserts up to five years, at least 99% reported their
comfort with the Essure device as "good" to "excellent" at all visits.February 2001

Approval to affix CE Mark for the European markets.April 2002

PMA application submitted to the FDA for approval.November 2002

Approval from FDA to marketEssureprocedure in the United States.March 2005

ESS 205 Post Approval Study completed and final report submitted to FDA for approval.

Based on the ESS 205 post-approval study, theEssureprocedure has a 94.6% first procedure bilateral placement rate. The bilateral placement rate is based on the number
of women who are able to have twoEssuremicro-inserts successfully placed in their fallopian tubes at the time of their initial procedure. Three months later, theEssureConfirmation Test documents whether they can rely onEssurefor contraception.June 2007

FDA approved a PMA supplement for a modified delivery system, ESS305.June 2009

ESS 305 Post Approval Study completed and final reports submitted to FDA.Note: ESS 205 and ESS 305 are collectively calledEssure.


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

The
FDA requires that all medical devices introduced to the market either be preceded by a pre-market notification clearance under Section 510(k) of the FD&C Act, or
an approved PMA. A PMA application is approved when the FDA has determined that the clinical trial data and manufacturing quality assurance information proves a product is safe and effective for its
labeled indications, or for devices that are not of the same type or substantially equivalent to a device in commercial distribution prior to 1976. FDA enforcement policy strictly prohibits the
promotion of approved medical devices for uses other than those for which the device is specifically approved by the FDA. Ongoing compliance with the Quality Systems Regulations and other applicable
regulatory requirements is monitored through periodic inspections by federal and state agencies, including the FDA and the California Department of Health Services.

Other
investigators are also conducting studies onEssure. As of February 2010, we know of 194 clinical publications related to Essureand hysteroscopic
sterilization.

Our Market

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

The
NSFG estimated that approximately 24.3 million women in the United States use temporary methods of birth control, such as oral contraceptives, condoms, implants and
injectables. Included in this group, according to the same source, are approximately 7.6 million women who have two or more children. It is our belief that by making these women aware of the
benefits a minimally invasive
procedure offers, they will considerEssurein their continuum of family planning and opt for permanent birth control rather than their current
temporary method.

In
addition to the temporary methods, published reports estimate that 700,000 tubal ligation procedures are performed each year in the United States, and the prevalence increases with
age and number of children. According to the NSFG, approximately 89% of women in the United States who have had tubal ligation have birthed two or more children. According to the same source, among
the women in the United States who have had tubal ligation, approximately 70% are between the ages of 35 and 44.

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

Age 30-34

Age 35-39

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


60.8
%

47.1
%

30.4
%Method:Tubal ligation


28
%

41
%

50
%Pill


31
%

19
%

11
%Condom


17
%

16
%

12
%Vasectomy


9
%

14
%

18
%All others


15
%

10
%

9
%


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

The Essureprocedure is the better solution for women who have completed their families and are seeking alternatives to use of hormones,
pills or more intrusive regimes in their temporary contraception. TheEssureprocedure is fast becoming the gold standard for permanent birth control.

Sales and Marketing

Our sales and marketing strategy has two components: to educate, train and certify physicians for the Essureprocedure, and to increase
awareness of theEssureprocedure among women and referring primary
care physicians. .

In
training physicians, our strategy in the near term is to focus on moving physicians through three stages of usage: preceptorship, certification and certified in-office.

We
believe the office is the best site of service for theEssureprocedure because it is where the benefits are most realized: the patient
is typically most comfortable, the physician is the most economically and logistically efficient, and the payer or state pays the lowest costs. Additionally, we have a robust publication profile of
clinical articles (more than 190) in peer-reviewed medical journals and we continue to attend and present new data at key scientific meetings including the American Association of
Gynecologic Laparoscopists (AAGL), American College of Obstetricians and Gynecologists (ACOG) and women's healthcare societies.

Through
the use of public relations and targeted direct-to-consumer ("DTC") advertising, we intend to continue increasing awareness of the Essureprocedure among consumers. A variety of mediums are being used
and tested to ensure that women are aware of the Essureprocedure as they move through the continuum of birth control during each stage of their family planning.

We
are distributing theEssureprocedure in the United States through our direct sales force. We continue to increase the size of our
sales force to increase our call frequency on physicians. Our sales representatives' primary goals are to increase penetration within the physician base and the number of Essureprocedures performed,by
Essure providers as well as to facilitate an increase in the number of Essureprocedures performed in the physician's office.

Internationally,
we sell theEssuredevice through a combination of direct sales forces and distribution networks.

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Reimbursement

Market acceptance of theEssuresystem depends in part upon the availability of
reimbursement within prevailing healthcare payment systems. We believe that physician advocacy of our product will be required to continue to obtain reimbursement. As of March 15, 2010 we have
received positive coverage decisions for theEssureprocedure from most private insurers and from all of the 51 Medicaid programs and favorable office
reimbursement in 26 states (defined as $1,800 or more) in the United States. We continue to receive positive responses relating to reimbursement, which we believe will help increase the adoption of
theEssuredevice by doctors and patients. We intend to continue our effort to educate payers of the cost-effectiveness of our product and
to establish further programs to help physicians to navigate reimbursement issues. As with all healthcare plans, coverage will vary and is dependent upon the individual's specific benefit plan.

Effective
January 1, 2010, the Centers for Medicare and Medicaid Service ("CMS"), the Medicare Physician Fee Schedule national average payment for hysteroscopic sterilization
("CPT code") is $423.05 when performed in a hospital (facility) and $1,822.41 (non-facility) when performed in a physician's office. In addition, in the CMS Final Rule for the 2010
Outpatient Prospective Payment System, or OPPS, which assigns hospital outpatient reimbursement amounts, CPT 58565 maps to APC 202 which is assigned a Medicare National Average of $3,032.56,
which under Medicare includes the cost of the implant. In 2010, the Medicare national average payment for hysteroscopic sterilization in the Ambulatory Surgery Center ("ASC") is $1,671.96, which
includes the cost of the implant. We believe these values are favorable for theEssureprocedure and will help in establishing increased utilization of
the device amongst doctors.

Effective
May 15, 2008, California's state fee-for-service Medicaid program announced coverage of the Essureprocedure for beneficiaries that are 21 years of age or older. Physicians may perform the Essureprocedure in the physician's office, the ambulatory surgery center or the hospital outpatient department. Medi-Cal is to pay $2,282
as a global fee for an in-office procedure. We believe these values are very favorable for theEssureprocedure and will continue to help
increase utilization ofEssuredevices by MediCal provider physicians.

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

During
the last several years, we received several positive responses from government and private agencies relating to reimbursement, which we believe will help us to speed up the
acceptance of theEssureprocedure by doctors and patients. In Europe, we are developing a strategic plan to obtain reimbursement in a number of
European countries. In France, we have obtained official reimbursement with the Haute Autorité de Santé ("HAS"). The Essureprocedure is covered in France for all age-appropriate women,
regardless of their medical status. The Economic Committee for
Healthcare Devices in France ruled in November 2007 that the reimbursement for theEssuredevice will remain at the then current levels of
663 Euros, net of value added tax, for the next five years.

Manufacturing

We have a manufacturing facility at our headquarters in Mountain View, California, which we use for pilot-line
manufacturing. We have two third-party original equipment manufacturers ("OEM") which manufactureEssuredevices at their manufacturing facilities. Both
of these manufacturing facilities are located in Mexico.

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

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

Research and Development

Our research and development activities are performed by our product development, process engineering, intellectual property and
regulatory and clinical research staff. Research and development expenses for 2009, 2008, and 2007 were approximately $7.1 million, $6.8 million, and $5.9 million, respectively.
We intend to continue to focus our research and development efforts on the development of new or alternative product designs and enhancements.

Intellectual Property

Our policy is to protect our proprietary position aggressively by, among other things, filing U.S. and foreign patent applications to
protect technology, inventions and improvements that are important to the development of our business. In addition to the patent protection we have obtained in our license from Target Therapeutics, a
division of Boston Scientific Corporation, we have filed device and method patents for the use of our product in new clinical applications and have pursued patents for several of our other inventions
and developments. As of January 31, 2010, we had 60 U.S. patent applications pending, 33 U.S. issued patents, 55 foreign and/or international patent applications pending and 98 issued foreign
patents. Our issued patents include claims relevant to transcervical fallopian tube occlusion devices and methods, guidewire manipulation, a guidewire design, fallopian tube visualization,
electrosurgical instruments and a delivery mechanism for a tubal occlusion device. The pending applications describe various aspects of our proprietary tubal access platform technology, including
claims specific to ourEssuretubal occlusion device.

We
obtained an exclusive license in the field of reproductive physiology to technology developed by Target Therapeutics. In addition, we have granted to Target Therapeutics an exclusive
license to our technology in certain fields of interventional medicine outside of reproductive physiology. Our exclusive license of Target Therapeutics' technology encompasses certain technology
developed by Target Therapeutics as of February 1, 1996. We do not have any preferential rights to technology developed by Target Therapeutics after that date. The license from Target
Therapeutics includes patents which relate

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to
the design of its micro-catheters (the initial patent for which expired in June 2006), certain aspects of guidewire design and other important aspects of micro-catheter, guidewire and
micro-coil technologies. In addition, should any of our Target Therapeutics technology be found to infringe upon a third party's patent rights, it may affect our ability to develop, market
and sell additional products in the future. Finally, Target Therapeutics has the right to terminate our license if we materially breach the terms of the license. If the Target Therapeutics license
were terminated, it might affect our ability to develop, market and sell additional products in the future.

We
believe that we are free to make and sell our product, and that our product and its intended use does not infringe any valid patent rights of any other party. During the third quarter
of 2009, we entered into an Asset Purchased Agreement with American Medical Systems, Inc. ("AMS") pursuant to which we acquired the intellectual property assets, including patents and licenses
from Ovion Inc. ("Ovion"), a wholly owned subsidiary of AMS. In connection with the purchase agreement, AMS and Ovion released us from any and all current and future domestic and international
royalty obligations under such licenses, including the obligations under a previous patent infringement settlement agreement with Ovion that had required us to pay 3.25% of the accumulative revenue
derived from sale of theEssuresystem in excess of $75.0 million as royalty for a period of ten years starting from October 23, 2003, the
date we entered into that settlement agreement. We believe the acquisition of these intellectual property assets secured complete ownership over the use and further development of the Essuresystem and
we also believe it will enable us to expand gross profit margins.

Government Regulations

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



The manufacture and sale of our product are subject to extensive regulation by numerous governmental authorities, principally the FDA
as well as state agencies. In particular, the FDA regulates the research, clinical testing, manufacturing, safety, labeling, storage, record keeping, advertising, distribution, sale and promotion of
medical devices in the United States. The FDA requires that all medical devices introduced to the market either be preceded by a pre-market notification clearance under
Section 510(k) of the FD&C Act, or an approved PMA. A PMA application is approved when the FDA has determined that the clinical trial data and manufacturing quality assurance information proves
a product is safe and effective for its labeled indications, or for devices that are not of the same type or substantially equivalent to a device in commercial distribution prior to 1976. FDA
enforcement policy strictly prohibits the promotion of approved medical devices for uses other than those for which the device is specifically approved by the FDA. Ongoing compliance with the Quality
Systems Regulations and other applicable regulatory requirements is monitored through periodic inspections by federal and state agencies, including the FDA and the California Department of Health
Services.

TheEssureprocedure received FDA PMA approval for commercialization in the United States on November 6, 2002. We received approval
to commercialize the latest model of ourEssureprocedure on June 15, 2007. For the newest model of the Essuresystem, we were also required to
conduct a post approval study in the United States to evaluate placement rates. We are required to provide
information to the FDA on death or serious injuries which our medical devices have allegedly caused or with which they have been associated, as well as product malfunctions that would likely cause or

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contribute
to death or serious injury if the malfunction were to recur. If the FDA believes that a company is not in compliance with the law or regulations, it can institute proceedings to detain or
seize products, issue a recall, enjoin future violations and assess civil and criminal penalties against the company, its officers and its employees.

A
California Department of Health Services inspection occurred at our Mountain View facility in June 2008, and resulted in a State Manufacturing License for Conceptus. In July 2008, our
Mountain View facility underwent FDA inspection and we successfully passed our inspection with no action indicated.

We
and our OEMs are required to adhere to applicable FDA and other regulations, including testing, control and documentation requirements. If we or our OEMs do not comply
with applicable regulatory requirements, we may be subject to warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, withdrawal
of approvals and criminal prosecution, among other penalties.

We
are also subject to regulation by the U.S. Occupational Safety and Health Administration and by other government entities. Regulations regarding the manufacture and sale of our
product are subject to change. We cannot predict what impact, if any, such changes might have on our future ability to manufacture market and distribute the Essuresystem.



Sales of medical devices outside of the United States are subject to international regulatory requirements that vary widely from
country to country. The time required to obtain clearance required by foreign countries may be longer or shorter than that required for FDA clearance, and requirements for licensing may differ
significantly from FDA requirements. No assurance can be given that such foreign regulatory approvals will be granted on a timely basis, or at all. Some countries in which we currently operate or
contemplate to operate either do not currently regulate medical devices or have minimal registration requirements. However, these countries may develop more extensive regulations in the future that
could delay or prevent us from marketing theEssuresystem in these countries.

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

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

During
2009 we received a National Institute for Health and Clinical Excellence ("NICE") recommendation in the United Kingdom and an approval for the Essureprocedure from the Brazilian National Health
Service.

Competition

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

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products
and technologies. As we commercialize and market theEssuresystem, we expect to compete with:



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

TheEssureprocedure faces direct competition from Adiana, a hysteroscopic sterilization method that is manufactured and sold by
Hologic, Inc. in Europe and the United States. We believe theEssureprocedure has significant advantages over its competitor such as its higher
effectiveness rate, no risks from the use of RF energy and the fact that the micro-inserts are radio-opaque, which enables the physician to visually confirm that the micro-inserts have been properly
placed in the fallopian tubes.

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



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

Product Liability and Insurance

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

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effect
on us, or that such insurance will continue to be available on commercially reasonable terms or at all. Insurance is expensive and in the future may not be available on acceptable terms, if at
all. A successful product liability claim or series of claims brought against us in excess of our insurance coverage or a recall of our product could have a material adverse effect on our business,
financial condition and results of operations.

Employees

As of December 31, 2009, we have 272 full-time employees, consisting of 26 in manufacturing and quality assurance
and engineering, 14 in research and development, 185 in sales and marketing and 47 in general and administrative functions worldwide. We generally depend on a number of key management, sales and
marketing and technical personnel. The loss of the services of one or more key employees could delay the achievement of our strategic objectives. Our success will also depend on our ability to attract
and retain additional highly qualified management, sales and marketing and technical personnel to meet our growth goals. We face intense competition for qualified personnel, many of whom are often
subject to competing employment offers, and we do not know whether we will be able to attract and retain such personnel.

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

ITEM 1A.    RISK FACTORS

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

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

We are dependent on theEssuresystem, which is currently our only commercial product.
Notwithstanding FDA approval to market theEssuresystem in November 2002, theEssuresystem is a novel
product compared to other products in the contraception market, which is dominated by procedures that are well established among physicians and patients and are routinely taught to new physicians. As
a result, we believe that recommendations and endorsements by physicians continue to be essential for market acceptance of our product. Physicians and patients may not accept our product and we may
not be able to obtain their recommendations or endorsements in sufficient amounts to sustain profitability. We believe that physicians will not use a product unless they determine, based on clinical
data and other factors, that it is an attractive alternative to other means of contraception and that it offers clinical utility in a cost-effective manner. Physicians are traditionally
slow to adopt new products and treatment practices, partly because of perceived liability risks. If theEssuresystem does not achieve significant
market acceptance among physicians, patients and healthcare payers, even if reimbursement levels are sufficient and necessary U.S. and international regulatory approvals are maintained, we may fail to
achieve significant revenues or sustain profitability.

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

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



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

TheEssureprocedure faces direct competition from Adiana, a hysteroscopic sterilization method that is manufactured and sold by
Hologic, Inc. in Europe and the United States. We believe theEssureprocedure has significant advantages over its competitor such as its higher
effectiveness rate, no risks from the use of RF energy and the fact that the micro-inserts are radio-opaque, which enables the physician to visually confirm that the micro-inserts have been properly
placed in the fallopian tubes.

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



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

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

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



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

Our advertising campaigns may not be successful.

Our advertising programs, which are aimed at increasing consumer awareness for our Essuresystem, are generally expensive and may have
limited success, if any. We have increased the number and extent of these advertising programs to
make more women aware of theEssureprocedure. Such campaigns require consumers to make contact with an Essuretrained physician, which at times may
involve a referral from their primary care physician, and to then be provided information regarding birth
control options by the physician, be preauthorized for insurance reimbursement and then be scheduled for the procedure. Many of these steps are not within our control, and the advertising programs may
not result in revenue generation commensurate with their costs.

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

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

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

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

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

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

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

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

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

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

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

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

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

One
of the patents included in our license from Target Therapeutics, a division of Boston Scientific Corporation, has been the subject of reexamination proceedings in the PTO and an
infringement lawsuit by Target Therapeutics. We are not a party to this lawsuit. The patent is directed to variable stiffness catheters for use with guidewires, as might be used in our future
products. Although the PTO reaffirmed the patent with amended claims and the lawsuit was settled, the patent could be challenged or invalidated in the future. If this patent is invalidated, our
ability to prevent others from using this proprietary technology would be compromised.

On
May 22, 2009, we filed a lawsuit in the United States District Court, Northern District of California against Hologic, Inc., ("Hologic") seeking declaratory judgment by
the Court that Hologic's planned importation, use, sale or offer to sell of its forthcoming Adiana Permanent Contraception system will infringe several U.S. patents owned by us including U.S. Patent
Nos. 6,634,361, 6,709,667,

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7,237,552,
7,428,904 and 7,506,650, and an injunction prohibiting Hologic from importing, using, selling or offering to sell its Adiana system in the United States. Upon FDA approval of the Adiana
Permanent Contraception system, we filed an Amended Complaint in July 2009 seeking a judgment that Hologic's importation, use, sale and/or offer to sell the system infringes the same patents mentioned
above and requested an injunction against such activity. On August 13, 2009, the Company filed a motion for preliminary injunction, requesting the Court to enjoin the Adiana system in the
United States pending final judgment in the action. On August 25, 2009, Hologic filed its Answer and asserted counterclaims against the Company that it was violating the Lanham Act and the
California Statutory Unfair Competition Law. On October 14, 2009, the Company answered with its own counterclaims asserting that Hologic was violating the Lanham Act and the California
Statutory Unfair Competition Law through its selling practices. A hearing was held on that motion on November 4, 2009 and an order denying the motion was issued on November 6, 2009 Upon
stipulation of the parties, on January 19, 2010, all claims relating to three of the five asserted patents were dismissed with prejudice. A claim construction hearing was held on
March 10, 2010. A trial date is scheduled for February 28, 2011.

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

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

We have a limited history of operation with the Essure system, and have only recently achieved profitability.. We may again incur operating losses and we may not sustain
profitability.

We have a limited history of operation with theEssuresystem and since our inception
in 1992, we have incurred operating losses until we experienced our first operating profit in Fiscal 2008. We may again incur operating losses as we continue sales and marketing efforts worldwide and
in the United States, particularly on a quarterly basis. Our operating loss may l continue until sufficient revenues can be generated to offset expenses. Losses have caused and may continue to cause
our stockholders' equity and net current assets to decrease. Our failure to sustain profitability would negatively impact the market price of our common stock and our ability to satisfy our
obligations in the future.

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

Worldwide market acceptance of ourEssuresystem is dependent upon the medical
equipment purchasing and procurement practices of our physician customers, patient demand for ourEssuresystem and procedures and the reimbursement of
patient's medical expenses by government healthcare programs. The current economic climate may result in the purchasers of medical equipment decreasing their medical equipment purchasing and
procurement activities.

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Our stock price is volatile.

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



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

Our future liquidity and capital requirements are uncertain.

As we market theEssuresystem on a wide scale basis, we may require additional
financing and therefore, may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Any additional equity or debt financing may be
dilutive to stockholders, and debt financing, if available, may involve restrictive covenants and interest expenses that will affect our financial results. Additional funding may not be available when
needed or on terms acceptable to us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our selling and marketing activities. Our future
liquidity and capital requirements will depend upon many factors, including, among others:



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Disruptions in the financial markets could affect our ability to obtain debt financing on favorable terms or at all.

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

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

At December 31, 2009, we had cash and cash equivalents of $61.7 million (excluding our investments in auction rate
securities discussed below). This available cash and cash equivalents are held in accounts at financial institutions and consist of invested cash and cash in our operating accounts. The invested cash
is invested in interest bearing money market funds managed by third party financial institutions. These funds invest in direct obligations of the government of the
United States and traditional money market funds. We can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial
markets.

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

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

As of December 31, 2009, we held approximately $43.6 million (par value) of investments consisting entirely of auction
rate securities backed by federal and state student loans securities. These auction rate securities have contractual maturities ranging from 2028 through 2047. These investments have characteristics
similar to short-term investments, because at pre-determined intervals, generally ranging from 20 to 30 days, there is a new auction process at which the interest rates
for these securities are reset to current interest rates. At the end of each such period, we historically have either chosen to roll-over these securities or redeem the securities for
cash.

During
2008 and 2009, we experienced failed auctions of our auction rate securities and there is no assurance that auctions on these securities in our investment portfolio will succeed
in the future. In November 2008, we accepted an offer from UBS, the fund manager with whom we hold our auction rate securities, pursuant to which UBS issued to us Series C-2 Auction
Rate Securities Rights, or Rights, which allow us to sell the auction rate securities to UBS at par value during the period beginning June 2010 and ending July 2012. In exchange, the Company released
UBS from claims that it may have for damages related to the auction rate securities (other than consequential damages), and we granted UBS the right to sell or otherwise dispose of the auction rate
securities on its behalf (so long as we are paid the par value of the auction rate securities upon any disposition). We intend to sell our ARS under the Rights at the inception of the Rights period in
June 2010.

The
Rights are subject to a number of risks. Given the substantial dislocation in the financial markets and among financial services companies, we cannot assure you that UBS will
ultimately have the ability to repurchase our auction rate securities at par, or at any other price during the put period described above. We will be required to periodically assess the economic
ability of UBS to meet that obligation in assessing the fair value of the Rights. Moreover, if we choose to not exercise the Rights or if UBS is unable to honor the Rights, our ability to liquidate
our investments in the near term may

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be
limited, and our ability to fully recover the carrying value of our investments may be limited or non-existent. If issuers of these securities are unable to successfully close future
auctions or their credit ratings deteriorate, we may in the future be required to record further impairment charges on these investments. It could take until the final maturity of the underlying notes
(up to 38 years) to realize our investments' recorded value. Based on our ability to access our cash and cash equivalents, expected operating cash flows, and our other sources of cash, we do
not anticipate that the current lack of liquidity on these investments will affect our ability to continue to operate our business in the ordinary course. However, we can provide no assurance as to
when these investments will again become liquid or as to whether we may ultimately have to recognize additional impairment charges in our results of operations with respect to these investments.

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

Essure has undergone two clinical studies that have evaluated safety and effectiveness of the Essureprocedure: our Phase II and
Pivotal Trials. Two additional studies have evaluated safety and bilateral placement in the commercial
environment. Current labeling includesEssure's four year effectiveness rate of 99.8%; data beyond four years have been collected and are currently
undergoing analysis. If long-term studies or clinical experience indicate that theEssuresystem is less effective or less safe than our
current data suggest, we may not achieve or sustain market acceptance and/or we could be subject to significant liability.

If we lose FDA approval or fail to comply with existing or future regulatory requirements in the United States or Internationally, it would delay or prevent us from
generating further product revenues.

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

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

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

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

Numerous government authorities, both in the United States and internationally, regulate the manufacture and sale of medical devices,
including theEssuresystem. In the United States, the principal regulatory authority is the FDA. The process of obtaining and maintaining required
regulatory clearances is lengthy, expensive and uncertain.

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

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

We
now have two third-party subcontractor manufacturers in Mexico for theEssuresystem. In April 2004, we received FDA approval to begin
manufacturing theEssureproduct at Accellent, Inc., or Accellent, formerly named Venusa. In September 2009, we received FDA approval to begin
manufacturing theEssuresystem at FlexMed, formerly named Avail Medical, as a second subcontractor manufacturing site in Mexico. Similarly, we have
subcontracted with Sterigenics International to handle the sterilization of our products.

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

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

Market acceptance of theEssuresystem in the United States and in international
markets will depend in part upon the availability of reimbursement within prevailing healthcare payment systems. Reimbursement systems in international markets vary significantly by country and
sometimes by region, and reimbursement approvals must be obtained on a country-by-country basis. Many international

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

Availability
and extent of continued reimbursement will depend, at least in part, on the clinical and cost effectiveness of our product. We cannot assure that reimbursement for our
product will continue to be available in the United States or in international markets under either government or private reimbursement systems, or that those physicians will support and advocate
reimbursement for use of our product for all indications intended by us. We may be unable to obtain or maintain reimbursement in any country within a particular time frame, for a particular amount or
at all, which would limit our future product revenues and delay or prevent our profitability.

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

Currency exchange rate fluctuations will impact our financial performance.

Although a majority of our revenue and operating expenses is denominated in U.S. dollars, and we prepare our financial statements in
U.S. dollars in accordance with U.S. GAAP, a portion of our revenue and operating expenses is in foreign currencies. As a result, we are subject to currency risks that could adversely affect
our operations, including:



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

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

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



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Our business, financial condition, results of operations and cash flows could be significantly and adversely affected if certain types of healthcare reform programs are
adopted in our key markets and other administration and legislative proposals are enacted into law.

Recently, President Obama and members of Congress have proposed significant reforms to the U.S. healthcare system. Both the U.S. Senate
and House of Representatives have conducted hearings about U.S. healthcare reform. The Obama administration's fiscal year 2010 budget included proposals to limit Medicare payments, reduce drug
spending and increase taxes. In addition, members of Congress have proposed a single-payer healthcare system, a government health insurance option to compete with private plans and other expanded
public healthcare measures. In September 2009, the U.S. Senate Finance Committee released a draft of the committee's healthcare reform bill, a bill which included an excise tax on all medical devices,
requiring the medical device industry to contribute $4 billion to healthcare reform each year for a period of 10 years. In February 2010, the Obama Administration released highlights of
its revamped healthcare reform bill, which includes a medical device manufacturer's excise tax of $20 billion over 10 years that would begin in 2013. It is unclear whether this bill will
be passed by Congress at this time because the Democratic controlled Senate no longer has a 60-member majority and may need to use a reconciliation process to pass a version of the Obama
Administration's proposed bill. Various healthcare reform proposals have also emerged at the state level. We cannot predict what healthcare initiatives, if any, will be implemented at the federal or
state level, or the effect any future legislation or regulation will have on us. However, an expansion in government's role in the U.S. healthcare industry may lower reimbursements for our products,
reduce medical procedure volumes and adversely affect our business and results of operations, possibly materially. In addition, if the excise tax contained in the proposed legislation is enacted into
law, our effective tax rate and results of operations would be adversely affected and our ability to innovate and conduct necessary research and development to remain competitive with large, global
companies could be negatively impacted.

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

Our operations may be directly or indirectly affected by various broad state and federal healthcare fraud and abuse laws. Such laws
include the federal Anti-Kickback Statute and related state anti-kickback laws, which prohibit any person from knowingly and willfully offering, paying, soliciting or receiving
remuneration, directly or indirectly, to induce or reward either the referral of an individual, or the furnishing, purchasing, leasing or ordering of, or arranging for or recommending the furnishing,
purchasing, leasing or ordering of an item or service, for which payment may be made under federal

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healthcare
programs, such as Medicaid programs. The federal Stark law and self-referral prohibitions under analogous state laws restrict referrals by physicians and, in some instances,
other healthcare providers, practitioners and professionals, to entities with which they have indirect or direct financial relationships for furnishing of designated health services. These healthcare
fraud and abuse laws are subject to evolving interpretations by various state and federal enforcement and regulatory authorities. Under current interpretations of the federal false claims act and
certain similar state laws, some of these laws may also be subject to enforcement in a qui tam lawsuit brought by a private party "whistleblower," with or without the intervention of the government.

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

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

The manufacture and sale of medical products involve an inherent risk of exposure to product liability claims and product recalls. We
currently maintain product liability insurance with coverage limits of $10.0 million per occurrence and an annual aggregate maximum of $10.0 million, which we believe is comparable to
that maintained by other companies of similar size serving similar markets. However, we cannot assure you that product liability claims in connection with clinical trials or commercial sales of the Essuresystem will not exceed such insurance coverage limits or that such insurance will continue to be available on commercially reasonable terms, or
at all. Insurance is expensive and in the future may not be available on acceptable terms, if at all. A successful product
liability claim or series of claims brought against us in excess of our insurance coverage, or a recall of our product, could cause our stock price to fall.

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

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

We are required to recognize expense for stock-based compensation related to employee stock options and other share-based payment awards, and we cannot assure you that the
expense that we are required to recognize measures accurately the value of our share-based payment awards and the recognition of this expense could cause the trading price of our common stock to
decline.

Medical technology companies like ours have a history of using broad based employee stock option programs to hire, incentivize and
retain our workforce in a competitive marketplace. Effective January 1, 2006, we adopted the provisions of Accounting Standards Codification ("ASC") ASC 718, CompensationStock Compensation,
("ASC 718"). ASC 718 established accounting for stock-based awards exchanged for employee services.
Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award which is computed using the Black-Scholes option valuation model, and is recognized as
expense over the employee requisite service period. The

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application
of ASC 718 requires the use of an option pricing model to determine the fair value of share-based payment awards. This determination of fair value is affected by our stock price as well as
assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards and actual
and projected employee stock option exercise behaviors. Option pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are
fully transferable. Because our employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can
materially affect the estimated value, the existing valuation models may not provide an accurate measure of the fair value of our employee stock options. Although the fair value of employee stock
options is determined in accordance with ASC 718 using the Black-Scholes option-pricing model, that value may not be
indicative of the fair value observed in a willing buyer/willing seller market transaction. As a result of the application of ASC 718, our net income (losses) for the fiscal years 2009, 2008, 2007,
and 2006 were lower (higher) than they would have been had we not been required to adopt ASC 718. This will continue to be the case for future periods. We cannot predict the effect that this adverse
impact on our reported operating results will have on the trading price of our common stock. In addition, this could impact our ability to utilize broad based employee stock plans to reward employees
and could result in a competitive disadvantage to us in the employee marketplace.

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

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

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

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

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

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The
indenture for the notes will not restrict our ability to incur in additional indebtedness. Our level of indebtedness could have important consequences on our future operations,
including:



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

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

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

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

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

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prevent
or deter a third party from acquiring us even where the acquisition could be beneficial to our security holders.

ITEM 1B.    UNRESOLVED STAFF COMMENTS.

Not applicable.

ITEM 2.    PROPERTIES

We are headquartered in Mountain View, California where we lease a building occupying approximately 58,242 square feet of office,
research and development and manufacturing space. This lease commenced in July 2009 and will terminate in July 2013.

With
the acquisition of Conceptus SAS on January 2008 we assumed a lease of a 1,938 square foot sales office located in Versailles, France. This lease expires on March 2011. On February
2009 we entered into a new lease agreement for a 4,703 square foot office space in Versailles, France for Conceptus SAS, and moved into this new building. The lease for the new building at Conceptus
SAS will expire on February 2018.

We
have minimal office space in the United Kingdom. This lease expires in July 2010.

ITEM 3.    LEGAL PROCEEDINGS

On May 22, 2009, we filed a lawsuit in the United States District Court, Northern District of California against
Hologic, Inc., ("Hologic") seeking declaratory judgment by the Court that Hologic's planned importation, use, sale or offer to sell of its forthcoming Adiana Permanent Contraception system will
infringe several U.S. patents owned by us including U.S. Patent Nos. 6,634,361, 6,709,667, 7,237,552, 7,428,904 and 7,506,650, and an injunction prohibiting Hologic from importing, using,
selling or offering to sell its Adiana system in the United States. Upon FDA approval of the Adiana Permanent Contraception system, we filed an Amended Complaint in July 2009 seeking a judgment that
Hologic's importation, use, sale and/or offer to sell the system infringes the same patents mentioned above and requested an injunction against such activity. On August 13, 2009, the
Company filed a motion for preliminary injunction, requesting the Court to enjoin the Adiana system in the United States pending final judgment in the action. On August 25, 2009, Hologic filed
its Answer and asserted counterclaims against the Company that it was violating the Lanham Act and the California Statutory Unfair Competition Law. On October 14, 2009, the Company answered
with its own counterclaims asserting that Hologic was violating the Lanham Act and the California Statutory Unfair Competition Law through its selling practices. A hearing was held on that motion on
November 4, 2009 and an order denying the motion was issued on November 6, 2009 Upon stipulation of the parties, on January 19, 2010, all claims relating to three of the five
asserted patents were dismissed with prejudice. A claim construction hearing was held on March 10, 2010. A trial date is scheduled for February 28, 2011.

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

ITEM 4.    RESERVED

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PART II



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

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

High

LowYear Ended December 31, 2009:Fourth Quarter

$
20.00

$
16.41Third Quarter

$
19.30

$
15.90Second Quarter

$
17.25

$
10.80First Quarter

$
16.00

$
10.26Year Ended December 31, 2008:Fourth Quarter

$
17.40

$
9.01Third Quarter

$
20.37

$
15.30Second Quarter

$
20.00

$
16.38First Quarter

$
19.93

$
13.80


As
of March 8, 2010, there were 112 stockholders of record and the last reported sale price of our common stock was $21.32

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

The
information under the caption "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" in Part III, Item 11 of this Annual
Report on Form 10-K is incorporated herein by reference.

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Performance Graph

The following graph compares the five years cumulative total stockholder return for the Company's common stock, assuming reinvestment
of all dividends, for the period from December 31, 2004 to December 31, 2009 to that of the Nasdaq Stock MarketU.S. Index and the Nasdaq Medical Equipment Index for the
period from December 31, 2004 to December 31, 2009. The graph assumes that $100 was invested on December 31, 2004 in the Company's common stock and in each of the comparative
indices.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Conceptus, Inc., The NASDAQ Composite Index
And The NASDAQ Medical Equipment Index

GRAPHIC

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ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents our selected consolidated financial data. This historical data should be read in conjunction with the
attached consolidated financial statements and the related notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing in Item 6 of this
report. The selected consolidated statement of operations data for the years ended December 31, 2009, 2008, and 2007 and the consolidated balance sheet data as of December 31, 2009 and
2008 are derived from our audited consolidated financial statements and the related notes, which are included elsewhere in this report. The selected consolidated statement of operations data for the
years ended December 31, 2006 and 2005 and the consolidated balance sheet data as of December 31, 2007, 2006 and 2005 are derived from our audited consolidated financial statements and
the related notes, which are not included in this report.

Years Ended December 31,2009(1)

2008(1)(2)

2007(1)(2)

2006(1)

2005(in thousands, except per share data)Consolidated Statement of Operations Data:Net sales

$
131,407

$
101,977

$
64,442

$
41,900

$
21,169Cost of goods sold


24,048


21,650


16,682


14,027


8,396Gross profit


107,359


80,327


47,760


27,873


12,773Operating expenses:Research and development


7,080


6,788


5,875


4,366


4,264Selling, general and administrative


85,636


72,685


56,084


43,318


31,255Total operating expenses


92,716


79,473


61,959


47,684


35,519Operating profit (loss)


14,643


854


(14,199
)

(19,811
)

(22,746
)Interest income and other expense and other expense, net


(6,340
)

(4,764
)

(583
)

1,324


945Income (loss) before income tax provision


8,303


(3,910
)

(14,782
)

(18,487
)

(21,801
)Provision (benefit) for income taxes


358


(24
)







Net income (loss)

$
7,945

$
(3,886
)
$
(14,782
)
$
(18,487
)
$
(21,801
)Basic income (loss) per share:Net income (loss)

$
0.26

$
(0.13
)
$
(0.50
)
$
(0.64
)
$
(0.82
)Shares used in per share amounts


30,572


30,216


29,463


28,993


26,725Diluted income (loss) per share:Net income (loss)

$
0.25

$
(0.13
)
$
(0.50
)
$
(0.64
)
$
(0.82
)Shares used in per share amounts


31,252


30,216


29,463


28,993


26,725


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December 31,2009

2008(5)

2007(5)

2006

2005(in thousands)Consolidated Balance Sheet Data:Cash, cash equivalents(3)

$
61,658

$
54,720

$
28,450

$
3,238

$
12,642Short-term investments


40,626





16,700


22,600


19,850Long-term investmetns





43,177


48,800





Put option


2,933


5,144








Working capital


83,539


36,848


50,484


26,079


34,589Total assets(4)


187,139


163,221


120,036


39,751


47,409Notes payable


76,531


72,344


68,387





Accumulated deficit


(234,340
)

(242,285
)

(238,399
)

(223,617
)

(205,130
)Total stockholders' equity


60,858


43,868


39,151


31,014


40,171


---

ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read in conjunction
with our consolidated financial statements and related notes thereto located elsewhere in this report.

Overview

We develop, manufacture and market theEssure® permanent birth control
system, an innovative and proprietary medical device for women. TheEssuresystem delivers a soft and flexible insert into a woman's fallopian tubes,
causing benign tissue in-growth which blocks the fallopian tubes. A successfully placedEssuremicro-insert and the subsequent tissue growth
prohibits the egg from traveling through the fallopian tubes, preventing conception. The effectiveness rate of theEssureprocedure determined in our
clinical study is 99.8% after four years of follow-up. We obtained approval to marketEssurein the European Union in February 2001 and
obtained the U.S. Food and Drug Administration, or FDA, approval forEssurein November 2002. Over 370,000 women worldwide have undergone the Essureprocedure.

On
January 7, 2008, we acquired all of the outstanding shares of Conceptus SAS, based in Versailles, France. As a result of this transaction, Conceptus SAS became a wholly-owned
subsidiary, and through it we sellEssuredirectly in France and through a network of distributors throughout the rest of Europe. This acquisition
expanded our presence in international markets and has increased our revenues as we now recognize sales at end-user pricing.

On
December 15, 2008, we incorporated Conceptus Medical Limited ("CML") as a wholly owned subsidiary in the United Kingdom to serve as our direct sales office in
the United Kingdom after terminating our distributor relationship with our previous distributor during the fourth quarter of 2008.

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This
incorporation further expanded our presence in international markets and has increased our revenues as we now recognize sales at end-user pricing in United Kingdom.

During
2009 we received a National Institute for Health and Clinical Excellence ("NICE") positive recommendation in the United Kingdom and an approval for the Essureprocedure from the Brazilian National
Health Service. During 2009, we sold theEssuresystem in
twenty two countries. For financial information about geographic areas and for segment information with respect to net sales, refer to the information set forth in Note 2Summary of
Significant Accounting Policies in the Notes to Consolidated Financial Statements.

The Essure Procedure

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

Currently,
local anesthesia is used as the predominate method of controlling discomfort during theEssureprocedure. General anesthesia is
not typically used unless required by hospital protocol, if requested by the patient, or based on the experience and comfort level of the physician. The Essure procedure can be performed in the
comfort of a physician's office in less than ten minutes (average hysteroscopic time) without hormones, cutting, burning or the risks associated with general anesthesia or tubal ligation. A patient is
typically discharged approximately 45 minutes after theEssureprocedure. No overnight hospital stay is required. Furthermore, the Essureprocedure is
effective without drugs or hormones. There is a three-month waiting period after the Essureprocedure is completed during which the patient must continue to use her current form of birth control or an
alternative form while tissue
in-growth occurs. After three months, U.S. patients complete a confirmation test called a hysterosalpingogram, or HSG, which provides confirmation to both the doctor and the patient of the
placement of the inserts and the occlusion of the fallopian tubes. Outside of the United States, the confirmation test is a standard flat plate pelvic X-ray conducted three months after
completion of the procedure, with a subsequent HSG if device location on the initial radiographic image appears suspicious.

Critical Accounting Estimates and Policies

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

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in
future periods. We believe our most critical accounting policies, estimates and judgments include the following:



Revenue Recognition

Our revenue is primarily comprised of the sale of ourEssuresystem. We recognize
revenue in accordance with Accounting Standards Codification ("ASC") ASC 605Revenue
Recognition. Under this standard, the following four criteria must be met in order to recognize revenue:



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

We
recognize revenues from ourEssuresystem when title to the product and the risk of loss transfers to an external customer. We do not
accept returns of theEssuresystem. We obtain written authorizations from our customers for a specified amount of product at a specified price and the
price is not dependent on actualEssureprocedures performed.

For
sales through distributors we recognize revenues from ourEssuresystem when title to the product and the risk of loss transfers to
the distributor. Our distributors are responsible for all marketing, sales, training and warranty for theEssuresystem in their respective territories.
Our standard terms and conditions do not provide price protection or stock rotation rights to any of our distributors. In addition, our distributor agreements do not allow the distributor to return or
exchange theEssuresystem and the distributor is obligated to pay us for the sale regardless of their ability to resell the product.

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

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

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Certain
sales of ourEssuresystem may include delivery of additional items. These obligations may be fulfilled after shipment of the Essuresystem, and in these
cases, we recognize revenue in accordance with the multiple element accounting guidance set forth in ASC 605-25 RevenueMultiple- Element Arrangements.When we have objective and reliable evidence
of fair value of the undelivered elements we defer
revenue attributable to the post-shipment obligations and recognize such revenue when the obligation is fulfilled. Otherwise we defer all revenue until all elements are delivered.

Stock-Based Compensation Expense

Effective January 1, 2006, we adopted the provisions of ASC 718CompensationStock
Compensation("ASC 718"), using the modified prospective transition method. Accordingly, stock-based compensation cost is measured on the grant date, based on the fair value of
the award which is computed using the Black-Scholes option valuation model, and is recognized as expense over the employee requisite service period. We previously applied Accounting Principles Board,
or APB, Opinion No. 25,Accounting for Stock Issued to Employees, and related Interpretations and provided the required pro forma disclosures of
SFAS No. 123,Accounting for Stock-Based Compensation.

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

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

Allowance for Doubtful Accounts

We assess the credit worthiness of our customers on an ongoing basis in order to mitigate the risk of loss from customers not paying
us. However, we account for the possibility that certain customers may not pay us by maintaining an allowance for doubtful accounts. We perform ongoing credit evaluations of our customers and adjust
credit limits based upon payment history and the customer's current credit worthiness, as determined by our review of their current credit information. We monitor collections and payments from our
customers and maintain our allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. Our exposure to credit losses may
change as we increase our receivables. Changes in customer type and mix, as well as domestic and international economic climate, will also impact potential credit losses. Despite the significant
amount of analysis used to compute the required allowance, if the financial condition of our customers were to deteriorate, resulting in an impairment of our ability to make payments, additional
allowances may be required. In addition, our increase in sales may result in a higher accounts receivable balance, which may require a higher balance in the allowance. As of December 31, 2009
and 2008, our allowance for doubtful accounts totaled approximately $0.6 million and $0.5 million, respectively.

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Cash, Cash Equivalents and Investments

We consider all highly liquid investments with maturity from date of purchase of three months or less to be cash equivalents. We
maintain deposits with four financial institutions and invest our excess cash primarily in money market funds, commercial paper, corporate notes, municipal bonds and government securities, which bear
minimal risk. Our cash and cash equivalents in our operating accounts are with third party financial institutions. At times, these balances exceed the Federal Deposit Insurance Corporation insurance
limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or
are subject to other adverse conditions in the financial markets. To date we have experienced no loss or lack of access to cash in our operating accounts. At December 31, 2009
short-term investments consist of auction rate securities ("ARS").

As
of December 31, 2009, we held $43.6 million (par value) in ARS, backed by federal and state student loans which are variable rate debt instruments and bear interest
rates that reset approximately every 20-30 days. These ARS have a contractual maturity ranging from 2028 through 2047.

Our
ARS are short-term debt instruments backed by student loans, a substantial portion of which are guaranteed by the United States government. Prior to 2008, our ARS were
highly liquid, using a Dutch auction process that resets the applicable interest rate at predetermined intervals, typically every 20-30 days, to provide liquidity at par. We have
experienced failed auctions in 2009 and 2008 on most of our ARS. The failures of these auctions do not affect the value of the collateral underlying the ARS, and we continue to earn and receive
interest on our ARS at a pre-determined formula with spreads tied to particular interest rate indexes. However, we had settlements of our ARS in the twelve months ended December 31,
2009 of $4.9 million at full par value. See Note 3Short-term Investment and Note 4Fair Value Measurements in the Notes to Consolidated
Financial Statements.

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

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

Although
the Rights represent the right to sell the securities back to UBS at par, we will be required to periodically assess the economic ability of UBS to meet that obligation in
assessing the fair value of the Rights.

We
have accounted for the Rights as a freestanding financial instrument and elected to record the value of the Rights under the fair value option of ASC 825 Financial Instruments.Upon acceptance of the
offer from UBS, we recorded approximately $5.1 million as the fair value of the Rights with a
corresponding credit to other expense, net in the fourth quarter of 2008. As a result of our election to record the Rights at fair value, unrealized gains and losses have been included in earnings. We
estimated the fair value of the Rights using the expected value that we will receive from UBS which was calculated as the difference between the anticipated recognized loss and par value of the ARS as
of the option exercise date. This value was discounted by using a UBS credit default rate to account for the consideration of UBS credit risk. For the twelve months ended December 31, 2009, we
recorded an

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additional
loss of $2.2 million, respectively which represents the decrease in the fair value of the put option.

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

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

In
connection with our acceptance of the UBS offer in November 2008, resulting in our right to require UBS to purchase our ARS at par value beginning on June 2010, we transferred our ARS
from available-for-sale to trading securities in accordance with ASC 320InvestmentsDebt and Equity Securities. The
transfer to trading securities reflected our intent to exercise our put option during the third quarter of 2010. Prior to our agreement with UBS, our intent was to hold our ARS until we realized the
par value. We recorded a temporary reduction in carrying value of $2.8 million for the nine months ended September 30, 2008, which was recorded as an unrealized loss in accumulated other
comprehensive loss. Upon transfer to trading securities, we transferred the $2.8 million recorded as unrealized loss in accumulated other comprehensive loss and recorded an unrealized loss of
$5.3 million in other expense, net in the fourth quarter of 2008, representing the difference between the par and fair value of the ARS at the date of transfer. We determined that use of a
valuation model was the best available technique for measuring the fair value of our ARS. We used a trinomial discount model weighting estimated future cash flows, quality of collateral and the
probability of future successful auctions occurring. In determining a discount factor for each ARS, the model weights various factors, including assessments of credit quality, duration, insurance
wraps, portfolio composition, discount rates, overall capital market liquidity and comparable securities, if any.

In
September 2009 we reclassified the ARS and the associated put option from long-term investments to short-term investments because we intend to sell our ARS
under the Rights at the inception of the Rights period in the third quarter of 2010.

Additionally,
in November 2008, we entered into a revolving credit line agreement with UBS, payable on demand, in an amount equal to 75% of fair value of our auction rate securities at
net no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the ARS that we have pledged as security for the credit line. Under the terms of the
settlement agreement, if UBS is able to sell our ARS at par, proceeds would be utilized to first repay any outstanding balance under the revolving credit line. We are still able to sell the ARS, but
in such a circumstance, if we sold at less than par value, we would not be entitled to recover the par value support from UBS. See Note 10Credit Line in the Notes to Consolidated
Financial Statements.



We provide for the estimated cost of our product warranties at the time revenue is recognized. We record a liability for the estimated
future costs associated with warranty claims, which is based upon historical experiences and our estimate of the level of future costs. Warranty costs are reflected in the statement of operations as a
cost of goods sold. We expect that warranty expense will increase as and if we increase our net sales. Warranty reserve rates may change if we change the manufacturing process or change our
third-party manufacturing contractors. Should actual costs differ from historical experience, increases in warranty expense may be required. Warranty reserves as of December 31, 2009 and 2008
were approximately $0.3 million.

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We account for the impairment of long-lived assets in accordance with ASC 360Property, Plant and
Equipment.We evaluate the carrying value of our long-lived assets, consisting primarily of our property and equipment, the patents acquired in connection with our
purchase of the intellectual property assets from Ovion Inc, and intangible assets acquired in connection with our acquisition of Conceptus SAS in 2008, whenever certain events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable. (See Note 5Goodwill and Intangible Assets in the Notes to Consolidated Financial Statements).
Such events or circumstances include a prolonged industry downturn, a significant decline in our market value or significant reductions in projected future cash flows.

Significant
judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including profit margins,
long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition,
significant estimates and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economic obsolescence, and the
value that could be realized in orderly liquidation. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to
write down the assets. Our net long-lived assets as of December 31, 2009 and 2008 included property and equipment of $9.8 million and $8.6 million, respectively, and
other identifiable intangible assets of $27.7 million and $5.3 million, respectively.



Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets
acquired in business combinations. We have recorded goodwill in connection with our acquisition of Conceptus SAS in 2008. Under ASC 350IntangiblesGoodwill and
Other, goodwill and other intangible assets with indefinite lives are not amortized, but are assigned to reporting units and tested for impairment annually, or whenever there
is an impairment indicator. We operate as one reporting unit engaged in developing, manufacturing, and marketing medical devices. We assess goodwill impairment indicators quarterly, or more
frequently, if a change in circumstances or the occurrence of events suggests the remaining value may not be recoverable. Intangible assets that are not deemed to have an indefinite life are amortized
over their estimated useful lives.

The
first step of the impairment test for goodwill compares the fair value of a reporting unit with its carrying amount, including goodwill and other indefinite lived intangible assets.
If the fair value is less than the carrying amount, the second step determines the amount of the impairment by comparing the implied fair value of the goodwill with the carrying amount of that
goodwill. An impairment charge is recognized only when the calculated fair value of a reporting unit, including goodwill and indefinite lived intangible assets, is less than its carrying amount. We
performed an annual assessment during the fourth quarter of 2009 of our goodwill at the reporting unit level. No impairment charges have been recorded through December 31, 2009.

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



We account for our convertible senior notes in accordance with ASC 815Derivative and
Hedging("ASC 815"). In this regard, our convertible debt and net share settlement feature does not fall under the category of a derivative, and consequently, we classify our
long term debt as a liability in our consolidated balance sheet. Our convertible hedge and our outstanding warrants are accounted as set

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forth
by ASC 815, through which we record the convertible hedge transaction and the warrants in additional paid in capital. Subsequent changes in fair value of the agreement are not recognized.

In
addition, we account for the cost issuance of debt in accordance with ASC 835-30Interest("ASC 835-30").
Consequently, these costs were recognized as an asset and are amortized by periodic charges to income.

ASC
470-20Debt with Conversion and Other Options("ASC 470-20") clarifies the accounting for convertible debt
instruments that may be settled in cash upon conversion, including partial cash settlement. ASC 470-20 specifies that an issuer of such instruments should separately account for the
liability and equity components of the instruments in a manner that reflect the issuer's non-convertible debt borrowing rate which interest costs are recognized in subsequent periods. ASC
470-20 is effective for fiscal years beginning after December 15, 2008, and retrospective application is required for all periods presented. We adopted ASC 470-20 in the
first quarter of fiscal 2009.



We account for contingencies in accordance with ASC 450Contingencies("ASC 450"). ASC
450 requires that an estimated loss from a loss contingency shall be accrued when information available prior to issuance of the financial statements indicates that it is probable that an asset has
been impaired or a liability has been incurred at the date of the financial statements and when the amount of the loss can be reasonably estimated. Accounting for contingencies such as legal and
income tax matters requires us to use our judgment. We believe that our accruals for these matters are adequate. Nevertheless, the actual loss from a loss contingency might differ from our estimates.



On January 1, 2007, we adopted the provisions of ASC 740Income Taxes("ASC
740"). We account for income taxes in accordance with ASC 740. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax
bases of assets and liabilities using the enacted tax rates in effect for the year in which the differences are expected to affect taxable income. ASC 740 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The adoption of the provisions of ASC 740 did not have a
material effect on our financial position and results of operations.

In
preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our
actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and the extent
we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations. Due to experiencing only a short history of profitability, management believes that there is sufficient uncertainty regarding the realization
of deferred tax assets and a full valuation allowance is appropriate. Management reviews its assumptions regarding the realization of deferred tax assets on an ongoing basis. Continued profitability
and future changes in management's assumptions may result in a partial or full release of the deferred tax valuation allowance. A release of the valuation allowance would have a favorable impact on
the tax provision within the statement of operations.

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Our net deferred tax assets consist primarily of net operating loss carry-forwards generated before we achieved profitability. Recognition of deferred tax assets
is appropriate when realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and the recorded domestic
cumulative net losses we have provided a full valuation allowance against our U.S. deferred tax assets. We intend to maintain valuation allowances until sufficient evidence exists to support the
reversal of the valuation allowances. Under certain conditions related to our future profitability and other business factors, we believe it is possible our results will yield sufficient positive
evidence to support the conclusion that it is more likely than not that we will realize the tax benefit of our net operating losses. If that is the case, subject to review of other qualitative factors
and uncertainties, we would expect to begin reversing the remaining deferred tax asset valuation allowance as a reduction of tax expense. For the periods following the recognition of this tax benefit
and to the extent we are profitable, we will record a tax provision for which the actual payment may be offset against our accumulated net operating loss carryforwards. However, our tax rate may
significantly increase in future periods.

RESULTS OF OPERATIONS

2009 results compared to 2008 (in thousands, except percentages)

Years Ended December 31,2009

2008(a)2009 - 2008
%
ChangeAmount

%(b)

Amount

%(b)Net sales

$
131,407


100
%
$
101,977


100
%

29
%Gross profit


107,359


82
%

80,327


79
%

34
%Research and development expenses


7,080


5
%

6,788


7
%

4
%Selling, general and administrative expenses


85,636


65
%

72,685


71
%

18
%Net income (loss)


7,945


6
%

(3,886
)

-4
%

304
%


(a)Adjusted
for retrospective adoption of ASC 470-20. See Note 9: Convertible Senior Notes in the Notes to the Consolidated Financial
Statements.(b)Expressed
as a percentage of total net sales.




Net sales were $131.4 million for 2009 as compared to $102.0 million for 2008, representing an increase of approximately
$29.4 million or 29%. The increase is primarily the result of continued commercialization and marketing of theEssureprocedure worldwide and
reflects the increasing numbers of physicians entering and completing training in the use of the procedure. The increase also reflects the continuation of our programs aimed at raising consumer
awareness of theEssureprocedure, such as radio, print and television advertising.

International
sales comprised 21% of our total sales in 2009 and 2008. Revenue from international sales increased 25% in 2009 as compared to 2008. This increase reflects continued growth
at Conceptus SAS (France) and the establishment of Conceptus Medical LTD in the United Kingdom. Additionally, international sales were positively impacted by the increased number of global
distributors in 2009.

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

Years Ended
December 31,2009

2008Net sales (in thousands)

$
131,407

$
101,977United States of America


79
%

79
%France


13
%

13
%Europe (other than France)


7
%

7
%Other


1
%

1
%


For
the years ended December 31, 2009 and 2008, we had no customers that accounted for greater than 10% of our net sales. One customer accounted for 11% of our total gross
outstanding accounts receivable as of December 31, 2009. We had no customers who had an outstanding accounts receivable balance greater than 10% of our total gross outstanding accounts
receivable as of December 31, 2008.

We
expect our net sales for 2010 to be in the range of approximately $160.0 million to $165.0 million, which would represent 22% to 26% growth from net sales in 2009 as we
continue to increase the number of physicians performing theEssureprocedure. We will also continue our programs aimed at raising consumer awareness of
theEssureprocedure. We believe our revenue growth in 2010 and beyond will be significantly influenced by how successful we are in achieving enhanced
consumer and physician awareness. However, as we have noted elsewhere and in the risk factors in this report, our expected revenue growth involves many risks, many of which are not entirely within our
control.



Cost of goods sold increased by $2.4 million to $24.1 million in 2009 as compared to $21.7 million in 2008. This
increase was caused by higher volumes of sales. The gross profit margin was 82% for 2009 compared with 79% for 2008. The year-over-year increase in gross margin is related to
lower manufacturing costs associated with higher unit volume and a domestic price increase implemented during the first quarter of 2009.

Additionally,
during the third quarter of 2009, we entered into an Asset Purchased Agreement with American Medical Systems, Inc. ("AMS") pursuant to which we acquired the
intellectual property assets, including patents and licenses from Ovion Inc. ("Ovion"), a wholly owned subsidiary of AMS. In connection with the purchase agreement, AMS and Ovion released us
from any and all current and future domestic and international royalty obligations under such licenses. We released an accrual of approximately $1.5 million related to previously accrued
international royalty obligations, which contributed approximately 1% in our gross profit margins for 2009. The acquisition of these intellectual property assets secured complete ownership over the
use and further development of theEssuresystem. We believe that our gross profit margin will continue to benefit from this asset purchase because
amounts that would have been previously recorded as royalty expense would have been greater than amounts that will be recorded as amortization of the acquired assets.

Our
gross profit margin will vary as our sales mix changes. Increases in sales of our devices through distributors in international markets will tend to decrease our overall gross profit
margin.



Research and development expenses were $7.1 million in 2009 as compared to $6.8 million in 2008, which represents an
increase of $0.3 million or 4%. As a percentage of revenues, research and development expenses for 2009 and 2008 represented 5% and 7%, respectively.

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The
primary reason for the increase is due to higher costs resulted to develop and test prototypes for the next generation devices, increased cost for tools and supplies, and higher
clinical trials related expenses of approximately $0.8 million. This increase was partially offset by a $0.5 million decreases related to payroll, stock compensation and consulting
expenses.

Research
and development expenses reflect product development, clinical research and regulatory affairs, which are substantially related to the ongoing development and associated
regulatory approvals of our technology. Our goal is to continue our product enhancements over the coming years, which are intended to result in improved ease of use and clinical performance. We expect
to identify and hire additional research and development personnel in the future to staff our planned research and development activities, and we expect that these costs will increase as we seek to
maintain our leading position in the market for permanent female birth control.



Selling, general and administrative expenses for 2009 were $85.6 million as compared to $72.7 million for 2008, which
represents an increase of 18%. As a percentage of revenues, selling, general and administrative expenses for 2009 and 2008 were 65% and 71%, respectively.

The
increases were the result of payroll, consulting personnel expenses, and stock compensation expenditures of approximately $6.2 million. Advertising expenditures increased by
$3.7 million primarily for our consumer-awareness campaigns. The increase also reflects the following: increased rent, insurance and sales taxes related expenses of approximately
$1.1 million; increased costs related to marketing materials and research of approximately $0.8 million; increased banking fees of approximately $0.2 million; increased audit and
tax related fees of approximately $0.2 million; increased travel related expenses of approximately $0.4 million; an increase in bad debt expense of approximately $0.1 million; and
increased supplies, freight and maintenance of approximately $0.2 million.



Total interest income and expenses and other expenses for 2009 was a net expense of $6.3 million as compared to a net expense of
$4.8 million for 2008, which represents an increase of $1.6 million or 33%. Interest income for 2009 was lower by $1.3 million compared to 2008, primarily as a result of lower
interest rates on our investment portfolio, which consists of auction rate securities and money market funds that are currently earning lower interest rates compared to 2008.

Interest
expense in 2009 was $0.5 million higher than 2008, primarily due to the interest on our revolving credit line with UBS. See Note 10Credit Line in the
Notes to Consolidated Financial Statements.

In
May 2008, FASB issued ASC 470-20, which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash
settlement. ASC 470-20 specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflect the
issuer's non-convertible debt borrowing rate which interest costs are recognized in subsequent periods. ASC 470-20 is effective for fiscal years beginning after
December 15, 2008 and retrospective application is required for all periods presented. We have adopted ASC 470-20 with our first quarter of fiscal 2009. The adoption resulted in
non-cash interest expense of $4.2 million and $4.0 million for 2009 and 2008, respectively. See Note 9Convertible Senior Notes in the Notes to
Consolidated Financial Statements.



We adopted the provisions of ASC 740, on January 1, 2007. The adoption of ASC 740 with respect to uncertain tax positions did
not have a material impact on our financial position and results of

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operations.
We have not been audited by the Internal Revenue Service or any state income or franchise tax agency. As of December 31, 2009, our federal returns for the years ended 2006 through
the current period and most state returns for the years ended 2005 through the current period are still open to examination. The tax returns of Conceptus SAS for the years ended 2005 to 2007 were
examined and closed by the French tax authorities in 2008. In addition, all of the net operating losses and research and development credit carryforwards that may be used in future years are still
subject to inquiry given that the statute of limitation for these items would begin in the year of the utilization.

In
2009 we recorded a provision for income taxes of $0.4 million. Our effective tax rate was 4% for 2009.

The
amount of unrecognized tax benefits at December 31, 2009 was approximately $2.4 million, of which, if ultimately recognized, approximately $0.6 million would
decrease the effective tax rate in the period in which the benefit is recognized. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is
placed.

We
do not expect our unrecognized tax benefits to change significantly over the next 12 months. In connection with the adoption of ASC 740, we recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax expense.

In
preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our
actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets
and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and the extent
we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations. Due to experiencing only a short history of profitability, management believes that there is sufficient uncertainty regarding the realization
of deferred tax assets and a full valuation allowance is appropriate. Management reviews its assumptions regarding the realization of deferred tax assets on an ongoing basis. Continued profitability
and future changes in management's assumptions may result in a partial or full release of the deferred tax valuation allowance. A release of the valuation allowance would have a favorable impact on
the tax provision within the statement of operations.

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

Years Ended December 31,2008(a)

2007(a)2008-2007
%
ChangeAmount

%(b)

Amount

%(b)Net sales

$
101,977


100
%
$
64,442


100
%

58
%Gross profit


80,327


79
%

47,760


74
%

68
%Research and development expenses


6,788


7
%

5,875


9
%

16
%Selling, general and administrative expenses


72,685


71
%

56,084


87
%

30
%Net loss


(3,886
)

-4
%

(14,782
)

-23
%

74
%


(a)Adjusted
for retrospective adoption of ASC 470-20. See Note 9: Convertible Senior Notes in the Notes to the Consolidated Financial
Statements.(b)Expressed
as a percentage of total net sales.


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The following table summarizes net sales by geographic region:

Years Ended
December 31,2008

2007Net sales (in thousands)

$
101,977

$
64,442United States of America


79
%

92
%France


13
%

7
%Europe (other than France)


7
%

0
%Other


1
%

1
%


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

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



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



Research and development expenses increased by $0.9 million to $6.8 million in 2008 as compared to $5.9 million in
2007. As a percentage of revenues, research and development expenses for 2008 and 2007 represented 7% and 9%, respectively. Research and development expenses reflect clinical expenditures and product
development, which are substantially related to the ongoing development and associated regulatory approvals of our technology.

To
support these initiatives during 2008 we increased payroll and payroll related expenditures by $0.7 million, consulting and outside service expenses by $0.7 million,
project material prototypes by $0.3 million. These increases were partially offset by a reduction in stock compensation, patent related fees and supplier charges of $0.8 million.



Selling, general and administrative expenses increased by $16.6 million to $72.7 million in 2008 as compared to
$56.1 million in 2007. As a percentage of revenues, selling, general and administrative expenses for 2008 and 2007 represented 71% and 87%, respectively. The increases were primarily the result
of the operating expenses of Conceptus SAS of $6.6 million, an increase of $6.4 million due to expansion of our U.S. field sales force, and increased domestic advertising expenditures of
$4.1 million, primarily for our direct-to-consumer advertising campaign. In addition, fees related to audit and tax, depreciation, bank related fees, and general
building maintenance increased by $1.1 million; offset by

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decrease
in fees related to legal fees, stock compensation, professional education and bad debt by $1.6 million.



Total interest income and expenses and other expenses for 2008 was a net expense of $4.8 million as compared to a net expense of
$0.6 million for 2007, which represents an increase of $4.2 million. Interest income for 2008 was lower by $2.7 million compared with 2007. Interest income was negatively impacted
due to lower interest rates on the Company's investment portfolio, which consists of auction rate securities and money market funds that earned lower interest rates compared to 2007.

Interest
expense in 2008 increased by $1.1 million compared to 2007. Approximately $0.7 million was due to increase of non-cash interest expense. In addition,
approximately $0.3 million increase is due to the interest expense and debt issuance expenses related to the convertible senior notes. Additionally, in 2008 we recorded approximately
$5.1 million as the fair value of the auction rate security rights associated with a corresponding credit to other expenses, net in connection with the auction rate securities settlement. We
subsequently recorded approximately $5.3 million in other expense, net in the fourth quarter of 2008, representing the difference between the par and fair value of the auction rate securities
at the date of transfer.

Other
expenses increased by $0.4 million in 2008 as compared to 2007 due to foreign exchange related to the the Conceptus SAS acquisition in 2008.



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

We
adopted the provisions of ASC 740, on January 1, 2007.

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

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

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

In
connection with the adoption of ASC 740, we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, Accounting Standards Codification ("ASC") ASC 105Generally Accepted Accounting
Principles("ASC 105") was issued. ASC 105 became the single official source of authoritative, nongovernmental generally accepted accounting principles ("GAAP") in the United
States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting
policies were not affected by the conversion to ASC. However, references to specific accounting standards in the

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footnotes
to our consolidated financial statements have been changed to refer to the appropriate section of ASC.

In
December 2007, FASB issued ASC 805Business Combinations("ASC 805"). ASC 805 will impact financial statements on the acquisition date
and in subsequent periods. Some of the changes, such as the accounting for contingent consideration, may introduce more volatility into our earnings and may impact our acquisition strategy.
Additionally, in February 2009 FASB issued an amendment to ASC 805 which amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and
liabilities arising from contingencies in a business combination under ASC 805. ASC 810Consolidations("ASC 810") changes the accounting and reporting
for minority interests, which are re-characterized as non-controlling interests and classified as a component of equity. ASC 805 is applied prospectively and ASC 810 requires
retroactive adoption of the presentation and disclosure requirements for existing minority interests, while the remaining requirements of ASC 810 are applied prospectively. ASC 805 and ASC 810 became
effective on January 1, 2009. We adopted ASC 805 and ASC 810 in the first quarter of fiscal 2009 and their adoption did not have a material impact on our financial condition, results of
operations, or cash flows.

Effective
January 1, 2008, we adopted ASC 820,Fair Value Measurements and Disclosures("ASC 820") with respect to its
financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and provides for expanded disclosure about
fair value measurements. ASC 820 applies prospectively to all other accounting pronouncements that require or permit fair value measurements. ASC 820 excludes certain leasing transactions accounted
for under ASC 840,Leases("ASC 840"). ASC 820 defers the effective date of ASC 820 for all non-financial assets and
non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. We adopted ASC 820 in the first quarter of fiscal 2009. See Note 4Fair Value Measurements to Consolidated Financial Statements.

In
May 2008, FASB issued ASC 470-20,Debt with Conversion and Other Options("ASC 470-20"). On January 1,
2009, we adopted the Cash Conversion Subsections of ASC 470-20, which clarify the accounting for convertible debt instruments that may be settled in cash (including partial cash
settlement) upon conversion. ASC 470-20 clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. ASC
470-20 specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflect the issuer's
non-convertible debt borrowing rate which interest costs are recognized in subsequent periods. ASC 470 is effective for fiscal years beginning after December 15, 2007, and
retrospective application is required for all periods presented. We have accounted for this change in accounting principal by retrospectively adjusting prior period financial statements, including
those set forth herein.

In
April 2009, FASB issued ASC 825Financial Instruments("ASC 825") and ASC 270Interim
Reportingor ("ASC 270"). ASC 825 and ASC 270 requires us to disclose on a quarterly basis, providing quantitative and qualitative information about fair value estimates for
all financial instruments not measured in the Consolidated Balance Sheets at fair value. ASC 825 and ASC 270 are effective for interim periods ending after June 15, 2009. We have adopted the
provisions of ASC 825 and ASC 270 effective the second quarter of fiscal 2009. See Note 4Fair Value Measurements and Note 9Convertible Senior Notes to
Consolidated Financial Statements.

In
April 2009, FASB issued ASC 320InvestmentsDebt and Equity Securities("ASC 320"). ASC 320 modifies the
other-than-temporary impairment guidance for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the
credit and noncredit components of impaired debt securities that are not expected to be sold. In addition,

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increased
disclosures are required for both debt and equity securities regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. ASC 320 is effective for interim
and annual reporting periods that end after June 15, 2009. We have adopted the provisions of ASC 320 effective the second quarter of fiscal 2009. We have considered the guidance provided by ASC
320 in our determination of impairment, and have determined that the impact was not material. See Note 9Convertible Senior Notes to Consolidated Financial Statements.

In
April 2009, FASB issued ASC 820Fair Value Measurement and Disclosure("ASC 820"). ASC 820 provides additional guidance for estimating
fair value when the volume and level of activity for the asset or liability have significantly decreased. ASC 820 re-emphasizes that regardless of market conditions the fair value
measurement is an exit price concept. ASC 820 clarifies and includes additional factors to consider in determining whether there has been a significant decrease in market activity for an asset or
liability and provides additional clarification on estimating fair value when the market activity for an asset or liability has declined significantly. The scope of ASC 820 does not include assets and
liabilities measured under level 1 inputs. ASC 820 is applied prospectively to all fair value measurements where appropriate and is effective for interim and annual periods ending after
June 15, 2009. We have adopted the provisions of ASC 820 effective the second quarter of fiscal 2009,
and have determined that the adoption did not have an impact on our consolidated financial statements.

In
January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using
significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than
one net number). The updated guidance also requires that and entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated
guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the
roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We do
not expect adoption of the updated guidance to have a material impact on its consolidated results of operations or financial condition.

LIQUIDITY AND CAPITAL RESOURCES

We have experienced significant cumulative operating losses since inception and, as of December 31, 2009, had an accumulated
deficit of $296.2 million. Although we were profitable during 2009, we cannot assure you that we can maintain profitability. We will continue to expend substantial resources in the selling and
marketing of theEssuresystem worldwide. We will be in an accumulated deficit position unless sufficient revenues can be generated to offset expenses.

As
of December 31, 2009, we had cash and cash equivalents of $61.7 million, compared to $54.7 million at December 31, 2008. The increase of
$7.0 million is primarily due to cash proceeds from operating and financing activities offset by cash used in investing activities as explained below.

As
of December 31, 2009, we also held $43.6 million (par value) in auction rate securities ("ARS") backed by federal and state student loans which are variable rate debt
instruments and bear interest rates that reset approximately every 20-30 days. These ARS have a contractual maturity ranging from 2028 through 2047. Our ARS are
short-term debt instruments. Prior to 2008, our ARS were highly liquid, using a Dutch auction process that resets the applicable interest rate at predetermined intervals,

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typically
every 20-30 days, to provide liquidity at par. We have experienced failed auction in 2009 and 2008 on most of our ARS. The failures of these auctions do not affect the
value of the collateral underlying the ARS, and we continue to earn and receive interest on our ARS at a pre-determined formula with spreads tied to particular interest rate indexes.

In
November 2008, we accepted an offer from UBS AG, providing us with the Rights to require UBS to purchase our ARS at par value, which is defined as the price equal to the liquidation
preference of the ARS plus accrued but unpaid dividends or interest, at any time during the period of June 2010 through July 2012. Conversely, UBS has the right, in its discretion, to purchase or sell
our ARS at any time until July 2012, so long as we receive payment at par value upon any sale or disposition. We expect to sell our ARS under the Rights at par value in June 2010. However, if the
Rights are not exercised before July 2012 they will expire and UBS will have no further rights or obligation to buy our ARS. So long as we hold our ARS, they will continue to accrue interest as
determined by the auction process or the terms of the ARS if the auction process fails. We had settlements of our ARS in 2009 of $4.9 million at full par value. UBS's obligations under the
Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights. UBS has disclaimed any assurance that it will have
sufficient financial resources to satisfy its obligations under the Rights.

We
believe that our existing cash and cash equivalents will be sufficient to meet our cash requirements for at least the next twelve months.

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



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Sources and Uses of Cash

Our cash flows for 2009, 2008 and 2007 are summarized as follows:

Year ended December 31,2009

2008(a)

2007(a)Net cash provided by (used in) operating activities

$
28,497

$
4,742

$
(7,563
)Net cash used in investing activities


(23,716
)

(12,060
)

(46,211
)Net cash provided by financing activities


2,091


33,736


78,986Effect of exchange rate changes on cash and cash equivalents


66


(148
)

Net increase in cash and cash equivalents

$
6,938

$
26,270

$
25,212


(a)Adjusted
for retrospective adoption of ASC 470-20. See Note 9: Convertible Senior Notes in the Notes to the Consolidated Financial
Statements.


Operating Activities

Net cash provided by operating activities was $28.5 million in 2009, as compared to $4.7 million provided by operating
activities in 2008, and $7.6 million used in operating activities 2007. Net cash provided by operating activities in 2009 was primarily related to:



Net
cash provided by operating activities in 2008 was primarily related to:



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We monitor our accounts receivable turnover closely to ensure that receivables are collected timely and have established a credit and collection policy to
facilitate our collection process and reduce our credit loss exposure. We expect to grow our business and increase our revenues and to continue to use cash received from collection of outstanding
receivables to fund our operations.

Investing Activities

Net cash used in investing activities for 2009 was $23.7 million, primarily due to the asset purchase agreement with AMS of
$23.7 million and capital expenditures primarily related to purchases of additional hysteroscopy equipment of $4.9 million. These were offset by the settlements of our ARS for
$4.9 million at full par value during the twelve months ended December 31, 2009.

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

Financing Activities

Net cash provided by financing activities in 2009 was due to $2.1 million from the issuance of common stock for our stock
programs of $3.0 million and $4.4 million from proceeds from our UBS line of credit, offset by repayment of our UBS line of credit of $5.3 million. See
Note 10Credit Line in the Notes to Consolidated Financial Statements.

Net
cash provided by financing activities in the twelve months ended December 31, 2008 was $33.8 million from the issuance of common stock for our stock option programs and
proceeds from our demand revolving credit line agreement with UBS.



We have operating lease obligations on our current building facilities and automobiles used primarily by our sales personnel worldwide.

The
following table discloses aggregate information about our contractual obligations and the periods in which payments are due as of December 31, 2009 (in thousands):

Payments due by periodTotal

Less than
1 year

1-3 years

3-5 years

ThereafterConvertible senior notes(1)

$
86,250

$


$


$


$
86,250Line of credit


29,240


29,240








Operating lease obligations


7,877


2,364


3,566


1,364


583Interest on our convertible senior notes


33,961


1,941


3,881


3,881


24,258Total

$
157,328

$
33,545

$
7,447

$
5,245

$
111,091


(1)Our
convertible senior notes have a maturity of February 15, 2027, unless earlier redeemed, repurchased or purchased by us or converted and thus the
principal of the convertible senior notes is included in the "more than 5 years" column in the table above. Holders of our convertible senior notes may require us to purchase all or a portion
of their convertible senior notes for cash on February 15, 2012, February 15, 2017 and February 15, 2022.


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

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

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

In
addition, in connection with the issuance of the notes, we entered into separate convertible note hedge transactions and separate warrant transactions to reduce the potential dilution
upon conversion of the notes ("Call Spread Transactions"). As a result of the Call Spread Transactions, we do not anticipate experiencing an increase in the total shares outstanding from the
conversion of the notes unless the price of our common stock appreciates above $36.47 per share, effectively increasing the conversion premium to us to $36.47. We purchased call options to cover
approximately 3.1 million shares of our common stock, which is the number of shares underlying the notes. In addition, we sold warrants permitting the purchasers to acquire up to approximately
3.1 million shares of our common stock. See Note 4Fair Value and Note 9Convertible Senior Notes in the Consolidated Financial Statements.



In November 2008, we entered into a revolving credit line agreement with UBS, payable on demand, in an amount equal to 75% of fair
value of our ARS at net no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the ARS that we have pledged as security for the credit line.
Additionally, under the terms of the settlement agreement, if UBS is able to sell our ARS at par value, proceeds would be utilized to first repay any outstanding balance under the demand revolving
credit line. We are still able to sell the ARS, but in such a circumstance, if we sold at less than par value, we would not be entitled to recover the par value support from UBS. During 2009, we
borrowed an additional $4.4 million, accrued interest of $0.2 million and repaid $5.3 million under this line of credit. Our loan balance as of December 31, 2009 was
$29.2 million. We intend to repay this line of credit in its entirety when we exercise our Rights to have UBS purchase the

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underlying
ARS at full par value the third quarter of 2010. See Note 10Credit Line in the Consolidated Financial Statements.



We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material
effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources as of December 31, 2009.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk:We have been exposed to interest rate risk through interest earned on holdings of available-for-sale and
trading marketable securities. We have experienced failed auctions in 2009 and 2008 of most all of our ARS and there is no assurance that auctions on these ARS in our investment portfolio will succeed
in the future. As a result, our ability to liquidate our investments in the near term may be limited, and our ability to fully recover the carrying value of our investments may be limited or
non-existent. An auction failure means that the parties wishing to sell securities could not carry out the transaction. If the issuers of these securities are unable to successfully close
future auctions or their credit ratings deteriorate, we may be required to record further impairment charges on these investments. It could take until the final maturity of the underlying notes (up to
38 years) to realize our investments' recorded value. As of December 31, 2009 we held $43.6 million (par value) in ARS which are variable rate debt instruments and bear interest
rates that are due to reset approximately every 20-30 days. In September 2009 we re-classified the ARS from long-term investments to short-term
investments because our intention is to sell our ARS under the Rights at par value at the inception of the Rights period in the third quarter of 2010. Due in part to these factors, our future
investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in
interest rates. Interest rates that may affect these items in the future will depend on market conditions and may differ from the rates we have experienced in the past. A hypothetical
10 percent change in interest rate will not have a material impact on our cash balance.

Foreign Currency Exchange Risk:A portion of our net sales are denominated in the Euro and the British Pound. To date the foreign
currency exchange
risk related to British Pounds has been minimal due to the size of Conceptus Medical Limited.

We
are exposed to foreign exchange rate fluctuations as we translate the financial statements of our foreign subsidiaries into U.S. Dollars in consolidation. If there is a change in
foreign currency exchange rates, the translation of the foreign subsidiaries' financial statements into U.S. Dollars will lead to translation gains or losses which are recorded net as a component of
accumulated other comprehensive loss. We seek to manage our foreign exchange risk through operational means, including managing same currency revenues in relation to same currency expenses, and same
currency assets in relation to same currency liabilities. Periodically, during 2009 we entered into forward contracts to buy U.S dollars at fixed intervals in the retail market in an
over-the-counter environmeant. As of December 31, 2009, we had foreign currency forward contracts to sell 4.7 million Euros in exchange for $6.9 million
maturing in January 2010 through April 2010. As of December 31, 2009 these forward contracts are recorded at their fair value of $0.1 million in other current assets on our consolidated
balance sheet. We have outstanding short-term intercompany receivables of $7.0 million as of

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December 31,
2009. We expect the changes in the fair value of the intercompany receivables to be materially offset by the changes in the fair value of the forward contracts.

The
purpose of these forward contracts is to minimize the risk associated with foreign exchange rate fluctuations. We have developed a foreign exchange policy to govern our forward
contracts. These foreign currency contracts do not qualify as cash flow hedges and all changes in fair value are reported in earnings as part of other income and expenses. We have not entered into any
other types of derivative financial instruments for trading or speculative purpose. Our foreign currency forward contract valuation inputs are based on quoted prices and quoted pricing intervals from
public data and do not involve management judgment.

In
2008, we assumed a forward exchange contract to hedge U.S. Dollar-denominated estimated accounts payable in 2008 in connection with the acquisition of Conceptus SAS. We recorded the
changes of the fair value of the hedge contract in our results of operations in 2008. The hedge contract was fully utilized by December 31, 2008.

At
December 31, 2009, our intercompany receivable balance with foreign subsidiaries is $7.0 million, with Conceptus SAS whose functional currency is Euro, and the potential
loss in fair value resulting from a hypothetical 10 percent strengthening in the value of the U.S. dollar/local currency exchange rate would be approximately $0.7 million.

ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements are set forth in this Annual Report on Form 10-K beginning on page 51.

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

None.

ITEM 9A.    CONTROLS AND PROCEDURES

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

As
of December 31, 2009, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

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

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



Under
the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting as of December 31, 2009 based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2009.

Our
internal control over financial reporting as of December 31, 2009 has been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm who
also audited our consolidated financial statements, as stated in their report which is included elsewhere herein.

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

Inherent Limitations of Internal Controls

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

ITEM 9B.    OTHER INFORMATION

Not applicable.

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PART III

Certain information required by Part III is incorporated by reference from our definitive proxy statement (or Proxy Statement),
for our annual meeting of stockholders to be held on June 14, 2010, which will be filed within 120 days after the end of our fiscal year pursuant to Regulation 14A, and the
information included therein is incorporated by reference to the extent detailed below.

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item, insofar as it relates to directors and officers, will be contained in our Proxy Statement in
connection with our 2010 Annual Meeting of Stockholders, which we anticipate will be filed no later than 120 days after the end of our fiscal year pursuant to Regulation 14A, under the
captions "Election of Directors" and "Management." Information required by this item as to compliance with Section 16(a) of the Securities Exchange Act of 1934 will be contained in the our
Proxy Statement under the caption "Section 16(a) Beneficial Owner Reporting Compliance," and is hereby incorporated by reference into this report.

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

ITEM 11.    EXECUTIVE COMPENSATION

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

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

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

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

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

57

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PART IV



ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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



Exhibit
Number

Description3.1

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

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

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

Certificate of Amendment No. 1 to the Amended and Restated By-Laws of Conceptus, Inc. Incorporated by reference to Exhibit 3.1 of the Registrant's Form 8-K filed on March 2, 2009.4.1

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

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


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Exhibit
Number

Description10.1

Form of Indemnification Agreement for directors and officers. Incorporated by reference to Exhibit 10.1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2008.10.2
*
Amended and Restated 1993 Stock Plan. Incorporated by reference to Exhibit 10.31 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000.10.3
*
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
*
Amended and Restated 2002 Non-Qualified Stock Option Plan. Incorporated by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002.10.5
*
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,
2004.10.6
*
Amended and Restated Change in Control Agreement, dated January 1, 2009, between the Company and Kathryn Tunstall. Incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2009.10.7

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, 1996.10.8

Amended and Restated Preferred Shares Rights Agreement, dated as of February 26, 2007, between the Registrant and Mellon Shareholder Services, L.L.C., including the Certificate of Designation of Rights,
Preferences and Privileges of Series A Participating Preferred Stock, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively. Incorporated by reference to Exhibit 10.1 of the
Registrant's Report on Form 8-K filed on February 23, 2007.10.9
+
Exclusive U.S. Co-Promotion Agreement, dated as of October 30, 2003, by and between the Registrant and Gynecare Worldwide Division of Ethicon, Inc. Incorporated by reference to Exhibit 10.1 of the
Registrant's Report on Form 8-K filed on March 1, 2004.10.10
+
Supply Agreement, dated June 1, 2009, between Accellent Inc. and Conceptus Incorporated. Incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2009.10.11
*
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, 2003.10.12
*
Amended and Restated Employment Agreement between the Company and Mark M. Sieczarek dated December 24, 2008. Incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2009.10.13
*
Letter Agreement between Ulric 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.


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Exhibit
Number

Description10.14
*
Employment Commencement Nonstatutory Stock Option Agreement between Ric Cote and Conceptus, Inc. executed April 5, 2004. Incorporated by reference to Exhibit 4.2 of the Registrant's Registration Statement
on Form S-8 filed on June 29, 2004.10.15
*
Stand-Alone Restricted Stock Purchase Agreement between Ric Cote and Conceptus, Inc. executed April 5, 2004. Incorporated by reference to Exhibit 4.3 of the Registrant's Registration Statement on
Form S-8 filed on June 29, 2004.10.16
*
Relocation Expense Agreement dated October 28, 2005 between the Registrant andUlric Cote. Incorporated by reference to Exhibit 10.40 of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2005.10.17

Form of Stock Appreciation Right Agreement under Conceptus, Inc. Amended and Restated 2001 Equity Incentive Plan. Incorporated by reference to Exhibit 10.1 to the Registrant's Form 8-K filed on
February 6, 2007.10.18

Form of Restricted Stock Unit Award Grant Notice and Restricted Stock Unit Award Agreement under Conceptus, Inc. Amended and Restated 2001 Equity Incentive Plan. Incorporated by reference to Exhibit 10.2 to
the Registrant's Form 8-K filed on February 6, 2007.10.19

Confirmation of Convertible Bond Hedge Transaction, dated February 6, 2007, by and between the Registrant and UBS AG, London Branch. Incorporated by reference to Exhibit 10.1 to the Registrant's
Form 8-K filed on February 12, 2007.10.20

Confirmation of Convertible Bond Hedge Transaction, dated February 6, 2007, by and between the Registrant and Societe Generale. Incorporated by reference to Exhibit 10.2 to the Registrant's Form 8-K
filed on February 12, 2007.10.21

Confirmation of Issuer Warrant Transaction, dated February 6, 2007, by and between the Registrant and UBS AG, London Branch. Incorporated by reference to Exhibit 10.3 to the Registrant's Form 8-K filed
on February 12, 2007.10.22

Confirmation of Issuer Warrant Transaction, dated February 6, 2007, by and between the Registrant and Societe Generale. Incorporated by reference to Exhibit 10.4 to the Registrant's Form 8-K filed on
February 12, 2007.10.23
*
Stock Appreciation Right Agreement, by and between the Registrant and Spencer Roeck, dated October 10, 2007. Incorporated by reference to Exhibit 10.1 to the Registrant's Form S-8 filed on
December 4, 2007.10.24

Lease Agreement for the premises located at 331 East Evelyn, Mountain View, California. Incorporated by reference to Exhibit 10.35 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2008.10.25

Credit Line Account Application and Agreement for Organization and Business and Addendum, by and between Conceptus, Inc. and UBS Bank USA. Incorporated by reference to Exhibit 10.36 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2008.10.26

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


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Table of Contents

Exhibit
Number

Description10.27

Asset Purchase Agreement, dated September 30, 2009, between American Medical Systems, Inc. and Conceptus Incorporated. Incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2009.10.28
*
Employment Agreement, dated November 2, 2009 between Julie Brooks and Conceptus Incorporated. Incorporated by reference to Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2009.10.29

Twelfth Amended and Restated 2001 Equity Incentive Plan.14.1

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

List of Conceptus subsidiaries.23.1

Consent of Independent Registered Public Accounting Firm.24.1

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

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

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

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

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


*Management
contract or compensatory plan or arrangement.+Confidential
treatment has been granted with respect to certain portions of this Exhibit by order from the Securities and Exchange Commission.


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CONCEPTUS, INC.        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



PageReport of Independent Registered Public Accounting Firm


63Consolidated Balance Sheets, December 31, 2009 and 2008


65Consolidated Statements of Operations for Years Ended December 31, 2009, 2008, and 2007


66Consolidated Statements of Stockholders' Equity for Years Ended December 31, 2009, 2008 and 2007


67Consolidated Statements of Cash Flows for Years Ended December 31, 2009, 2008 and 2007


68Notes to Consolidated Financial Statements


69


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Table of Contents

Report of Independent Registered Public Accounting Firm

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

In
our opinion, the accompanying consolidated financial statements listed in the index under Item 15(a) (1) present fairly, in all material respects, the financial position
of Conceptus, Inc. and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed
in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for these financial
statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in Management's Report on Internal Control over Financial Reporting, appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the
financial statement schedule and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As
discussed in Note 9 to the consolidated financial statements, in 2009 the Company changed the manner in which it accounts for convertible debt instruments that may be settled
in cash upon conversion.

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

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Table of Contents

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

/s/
PRICEWATERHOUSECOOPERS LLP

San
Jose, California
March 15, 2010

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ITEM 1.    CONSOLIDATED FINANCIAL STATEMENTS



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

December 31,2009

2008(a)AssetsCurrent assets:Cash and cash equivalents

$
61,658

$
54,720Short-term investments


40,626


Put option


2,933


Accounts receivable, net of allowance for doubtful accounts of $600 and $478 at December 31, 2009 and 2008, respectively


17,315


14,377Inventories


4,908


3,829Prepaids


1,897


7,478Other current assets


1,540


1,617Total current assets


130,877


82,021Property and equipment, net


9,782


8,635Debt issuance costs, net


987


1,451Intangible assets, net


27,687


5,287Long-term investments





43,177Put option





5,144Restricted cash


360


351Goodwill


17,318


17,105Other assets


128


50Total assets

$
187,139

$
163,221Liabilities and stockholders' equityCurrent liabilities:Accounts payable

$
5,878

$
3,869Accrued compensation


8,208


6,762Line of credit


29,240


29,944Other accrued liabilities


4,012


4,598Total current liabilities


47,338


45,173Deferred tax liability


1,277


1,442Notes payable


76,531


72,344Other accrued liabilities


1,135


394Total liabilities


126,281


119,353Commitments and contingencies (Note 8)Stockholders' equity:Preferred stock:$0.003 par value, authorized 3,000,000 shares; no shares issued or outstanding at December 31, 2009 and 2008





Common stock and additional paid-in capital:$0.003 par value, 50,000,000 shares authorized, 30,855,722 and 30,494,686 shares issued and 30,777,859 and 30,416,823 shares outstanding at
December 31, 2009 and 2008, respectively


296,191


286,951Accumulated other comprehensive loss


(993
)

(798
)Accumulated deficit


(234,340
)

(242,285
)Treasury Stock, 77,863 shares, at cost, at December 31, 2009 and 2008, respectively





Total stockholders' equity


60,858


43,868Total liabilities and stockholders' equity

$
187,139

$
163,221


(a)Adjusted
for the retrospective adoption of ASC 470-20 Debt with Conversion and Other Options, see Note 9Convertible Senior
Notes.


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

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

Years Ended December 31,2009

2008(a)

2007(a)Net sales

$
131,407

$
101,977

$
64,442Cost of goods sold


24,048


21,650


16,682Gross profit


107,359


80,327


47,760Operating expenses:Research and development


7,080


6,788


5,875Selling, general and administrative


85,636


72,685


56,084Total operating expenses


92,716


79,473


61,959Operating profit (loss)


14,643


854


(14,199
)Interest income and expense and other expense, net:Interest income


822


2,150


4,852Interest expense


(7,013
)

(6,543
)

(5,435
)Other expense, net


(149
)

(371
)

Total interest income and expense and other expense, net


(6,340
)

(4,764
)

(583
)Income (loss) before provision (benefit) for income taxes


8,303


(3,910
)

(14,782
)Provision (benefit) for income taxes


358


(24
)

Net income (loss)

$
7,945

$
(3,886
)
$
(14,782
)Basic income (loss) per share:Net income (loss)

$
0.26

$
(0.13
)
$
(0.50
)Shares used in per share amounts


30,572


30,216


29,463Diluted income (loss) per share:Net income (loss)

$
0.25

$
(0.13
)
$
(0.50
)Shares used in per share amounts


31,252


30,216


29,463


(a)Adjusted
for the retrospective adoption of ASC 470-20, see Note 9Convertible Senior Notes.


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

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

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

Accumulated
Deficit

Total
Stockholders'
EquityShares

AmountBalances as of December 31, 2006


29,270,545

$
254,631







$
(223,617
)
$
31,014Issuance of common stock for cash upon exercise of options


360,427


3,319











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


82,217


1,126











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


1,957














Stock-based compensation for consultants' services





243











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





5,941











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





309











309Issuance of common stock upon payment of bonus





219











219Issuance of common stock from restricted stock awards


113,166


(68
)










(68
)Treasury stock issuances


10,468


133











133Issuance of debt





(8,677
)










(8,677
)Net loss(a)





20,375








(14,782
)

5,593Balances as of December 31, 2007(a)


29,838,780


277,551








(238,399
)

39,152Issuance of common stock for cash upon exercise of options


378,267


3,100











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


61,144


871











871Issuance of common stock upon exercise of SAR's


5,253


(9
)










(9
)Stock-based compensation for consultants' services





183











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





5,145











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





280











280Issuance of common stock from restricted stock awards


133,379


(170
)










(170
)Accumulated other comprehensive loss










$
(798
)




(798
)Net loss(a)














(3,886
)

(3,886
)Balances as of December 31, 2008(a)


30,416,823


286,951





(798
)

(242,285
)

43,868Issuance of common stock for cash upon exercise of options


265,819


2,186











2,186Issuance of common stock for cash from employee stock purchase plan


66,970


904











904Issuance of common stock upon exercise of SAR's


1,524


(16
)










(16
)Stock-based compensation for consultants' services





70











70Stock-based compensation related to restricted stock, restricted stock units, SAR's and stock option grants





5,762











5,762Stock-based compensation related to employee stock purchase plan





370











370Issuance of stock appreciation rights





66











66Tax benefit from stock based compensation





18











18Issuance of common stock from restricted stock awards


26,723


(120
)










(120
)Accumulated other comprehensive loss











(195
)




(195
)Net income














7,945


7,945Balances as of December 31, 2009


30,777,859

$
296,191

$


$
(993
)
$
(234,340
)
$
60,858


(a)Adjusted
for the retrospective adoption of ASC 470-20, see Note 9Convertible Senior Notes.


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

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

Years Ended December 31,2009

2008(a)

2007(a)Cash flows from operating activitiesNet income (loss)

$
7,945

$
(3,886
)
$
(14,782
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization of property, plant and equipment


4,101


2,939


1,534Amortization of debt issuance costs


465


464


407Accretion of note payable


4,187


3,958


3,285Amortization of intangibles


1,387


782


186Loss (gain) on put option


2,211


(5,144
)

Loss (gain) on trading securities


(2,324
)

5,273


Stock-based compensation expense


6,282


5,667


6,493Loss on disposal of fixed assets


12


48


61Tax benefit from stock-based compensation


18





Excess tax benefit from stock-based compensation


(18
)




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


(2,661
)

(1,673
)

(4,927
)Inventories


(1,398
)

559


(1,808
)Prepaid and other current assets


5,645


(5,198
)

(2,207
)Other assets


(79
)

102


894Accounts payable


1,168


(1,735
)

1,163Accrued compensation


1,350


1,333


(515
)Deferred tax liability


(165
)

(417
)

Other accrued and long term liabilities


371


1,670


2,653Net cash provided by (used in) operating activities


28,497


4,742


(7,563
)Cash flows from investing activitiesPurchase of Conceptus SAS, net of cash acquired





(22,978
)

Purchase of investments





(5,000
)

(88,600
)Sales & maturities of investments


4,875


22,050


45,700Restricted cash


(9
)

(351
)

Purchase of intellectual property assets from Ovion, Inc.


(23,729
)




Purchases of property and equipment


(4,853
)

(5,781
)

(3,311
)Net cash used in investing activities


(23,716
)

(12,060
)

(46,211
)Cash flows from financing activitiesProceeds from line of credit


4,357


30,000


Repayment of line of credit


(5,303
)

(56
)

Excess tax benefit from stock-based compensation


18





Proceeds from issuance of long term debt








86,250Payment of debt issuance costs








(3,097
)Purchase of call options on convertible senior notes








(19,372
)Proceeds from issuance of warrants








10,695Proceeds from issuance of common stock


3,019


3,792


4,510Net cash provided by financing activities


2,091


33,736


78,986Effect of exchange rate changes on cash and cash equivalents


66


(148
)

Net increase in cash and cash equivalents


6,938


26,270


25,212Cash and cash equivalents at beginning of year


54,720


28,450


3,238Cash and cash equivalents at end of year

$
61,658

$
54,720

$
28,450Supplemental information:Cash paid for:Interest on convertible debt

$
1,941

$
1,941

$
986


(a)Adjusted
for the retrospective adoption of ASC 470-20, see Note 9Convertible Senior Notes.


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

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CONCEPTUS, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization, Ownership and Business

Conceptus, Inc. ("we" or "us" or "our") was incorporated in the state of Delaware on September 18, 1992 to design, develop and market minimally invasive devices for
reproductive medical applications. Our mailing address and executive offices are located at 331 East Evelyn, Mountain View, California 94041, and our telephone number is
(650) 962-4000.

We
develop, manufacture and market theEssure® permanent birth control system, an innovative and proprietary medical device
for women. TheEssuresystem delivers a soft and flexible insert into a woman's fallopian tubes, causing benign tissue in-growth which
blocks the fallopian tubes. A successfully placedEssuremicro-insert and the subsequent tissue growth prohibits the egg from traveling through the
fallopian tubes, preventing conception. The effectiveness rate of theEssureprocedure determined in our clinical study is 99.8% after four years of
follow-up. We obtained approval to marketEssurein the European Union in February 2001 and obtained the U.S. Food and Drug Administration,
or FDA, approval forEssurein November 2002. Over 370,000 women worldwide have undergone theEssureprocedure.

On
January 7, 2008, we acquired all of the outstanding shares of Conceptus SAS, based in Versailles, France. As a result of this transaction, Conceptus SAS became a wholly-owned
subsidiary, and through it we sellEssuredirectly in France and through a network of distributors throughout the rest of Europe. This acquisition
expanded our presence in international markets and has increased our revenues as we now recognize sales at end-user pricing.

On
December 15, 2008, we incorporated Conceptus Medical Limited ("CML") as a wholly owned subsidiary in the United Kingdom to serve as our direct sales office in
the United Kingdom after terminating our distributor relationship with our previous distributor during the fourth quarter of 2008. This incorporation further expanded our presence in international
markets and has increased our revenues as we now recognize sales at end-user pricing in United Kingdom.

We
have a limited history of operations with theEssuresystem and since our inception in 1992, we have incurred operating losses until we
experienced our first operating profit in Fiscal 2009. In December 2006, we filed a Registration Statement on Form S-3, through which we may sell from time to time any combination
of debt securities, common stock, preferred stock and warrants, in one or more offerings, with an initial offering price not to exceed $150,000,000. In February 2007, we issued an aggregate principal
amount of $86,250,000 of our 2.25% convertible senior notes due 2027. If the notes are converted, then upon conversion ("net shares settlement"), holders will receive cash and in certain
circumstances, shares of our common stock based on an initial conversion rate, subject to adjustment, of 35.8616 shares per $1,000 principal amount of notes (which represents an initial conversion
price of $27.89 per share). Upon conversion, a holder would receive cash up to the principal amount of the note and our common stock in respect of such note's conversion value in excess of such
principal amount. This net share settlement feature of the notes would reduce our liquidity, and we may not have sufficient funds to pay in full the cash obligation upon such conversion. In the
future, depending upon a variety of factors, we may need to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve covenants that restrict us. Additional funding may not be available when needed or on terms acceptable to us. If we are unable
to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our research and development programs or reduce our sales and marketing activities. See
Note 9Convertible Senior Notes.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies



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



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



On January 7, 2008, we acquired Conceptus SAS, which sells to customers throughout Europe. Sales by Conceptus SAS are
denominated in Euros. On December 15, 2008, we incorporated Conceptus Medical Limited ("CML") as our United Kingdom subsidiary. In preparing our consolidated financial
statements, we are required to translate the financial statements of Conceptus SAS and CML from the currency in which they keep their accounting records into U.S. Dollars. Conceptus SAS and CML both
maintain their accounting records in the functional currency which is also their local currency. The functional currency of CML is the British Pound and the functional currency of Conceptus SAS is the
Euro. The functional currency is determined based on management's judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency
in which the subsidiary transacts a majority of its transactions, including billing, financing, payroll and other expenditures would be considered the functional currency, but any dependency upon the
parent and the nature of the subsidiary's operations must also be considered. Since the functional currency of Conceptus SAS and CML has been determined to be their local currency, any gain or loss
associated with the translation of Conceptus SAS's and CML's financial statements into U.S. Dollars is included as a component of stockholders' equity, in accumulated other
comprehensive loss. If in the future we determine that there has been a change in the functional currency of Conceptus SAS or CML from its local currency to the U.S. Dollar, any translation gains or
losses arising after the date of change would be included within our statement of operations.



Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets
acquired in business combinations. Under Accounting Standards Codification ("ASC") ASC 350IntangiblesGoodwill and Other, goodwill and
other intangible assets with indefinite lives are not amortized, but are assigned to reporting units and tested for impairment annually, or whenever there is an impairment indicator. We operate as one
reporting unit engaged in developing, manufacturing, and marketing medical devices. We assess goodwill impairment indicators annually or more frequently, if a change in circumstances or the occurrence
of events suggests the

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2. Summary of Significant Accounting Policies (Continued)

remaining
value may not be recoverable. Intangible assets that are not deemed to have an indefinite life are amortized over their estimated useful lives.

The
first step of the impairment test for goodwill compares the fair value of a reporting unit with its carrying amount, including goodwill and other indefinite lived intangible assets.
If the fair value is less than the carrying amount, the second step determines the amount of the impairment by comparing the
implied fair value of the goodwill with the carrying amount of that goodwill. An impairment charge is recognized only when the calculated fair value of a reporting unit, including goodwill and
indefinite lived intangible assets, is less than its carrying amount. We performed an annual assessment during the fourth quarter of 2009 of our goodwill at the reporting unit level. No impairment
charges have been recorded through December 31, 2009.

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



We account for the impairment of long-lived assets in accordance with ASC 360Property, Plant and
Equipment. We evaluate the carrying value of our long-lived assets, consisting primarily of our property and equipment, the patents acquired in connection with our
purchase of the intellectual property assets from Ovion Inc, and intangible assets acquired in connection with our acquisition of Conceptus SAS, whenever certain events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable (see Note 5Goodwill and Intangible Assets). Such events or circumstances include a prolonged industry
downturn, a significant decline in our market value or significant reductions in projected future cash flows.

Significant
judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including profit margins,
long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition,
significant estimates and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economic obsolescence, and the
value that could be realized in orderly liquidation. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to
write down the assets. Our net long-lived assets as of December 31, 2009 and 2008 included property and equipment of $9.8 million, and $8.6 million, respectively, and
other identifiable intangible assets of $27.7 million, and $5.3 million, respectively.



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

We
assess the credit worthiness of our customers on an ongoing basis in order to mitigate the risk of loss from customers not paying us. However, we account for the possibility that
certain customers may not pay us by maintaining an allowance for doubtful accounts. We perform ongoing credit evaluations of our customers and adjust credit limits based upon payment history and the
customer's

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

current
credit worthiness, as determined by our review of their current credit information. We monitor collections and payments from our customers and maintain our allowance for doubtful accounts
based upon our historical experience and any specific customer collection issues that we have identified. As of December 31, 2009 and 2008, our allowance for doubtful accounts totaled
approximately $0.6 million and $0.5 million, respectively.

For
the years ended December 31, 2009, and 2008, we had no customers that accounted for greater than 10% of our net sales. One customer accounted for 11% of our total gross
outstanding accounts receivable as of December 31, 2009. We had no customers who had an outstanding accounts receivable balance greater than 10% of our total gross outstanding accounts
receivable as of December 31, 2008.

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



We consider all highly liquid investments with maturity from date of purchase of three months or less to be cash equivalents. We
maintain deposits with four financial institutions and invest our excess cash primarily in money market funds, commercial paper, corporate notes, municipal bonds and government securities, which bear
minimal risk. Our cash and cash equivalents in our operating accounts are with third party financial institutions. At times, these balances exceed the Federal Deposit Insurance Corporation insurance
limits. While we monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or
are subject to other adverse conditions in the financial markets. To date we have experienced no loss or lack of access to cash in our operating accounts. At December 31, 2009 we held
$43.6 million (par value) in auction rate securities, or ("ARS"), backed by federal and state student loans which are variable rate debt instruments and bear interest rates that reset
approximately every 20-30 days. These ARS have a contractual maturity ranging from 2028 through 2047. Our ARS are short-term debt instruments backed by student loans, a
substantial portion of which are guaranteed by the United States government. See Note 3Short-term Investments.



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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)



Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization of property and
equipment are calculated using the straight-line method over the estimated useful lives of the respective assets as follows: computer, software, office furniture, machinery, tooling are
over 3 years; rental equipment and other
equipment are over 5 years. Leasehold improvements are amortized over the lesser of the lease term or 5 years.



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



We offer warranties on our product and record a liability for the estimated future costs associated with warranty claims, which is
based upon historical experience and our estimate of the level of future costs. Warranty costs are reflected in the statement of operations as a cost of goods sold. A reconciliation of the changes in
our warranty liability for the years ended December 31, 2009 and 2008 (in thousands):

As of
December 31,2009

2008Balance at the beginning of the period

$
272

$
208Accruals for warranties issued during the period


478


350Settlements made in kind during the period


(473
)

(286
)Balance at the end of the period

$
277

$
272




Our revenue is primarily comprised of the sale of ourEssuresystem. We recognize
revenue in accordance with ASC 605Revenue Recognition. Under this standard, the following four criteria must be met in order to recognize
revenue:



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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

We
recognize revenues from ourEssuresystem when title to the product and the risk of loss transfers to an external customer. We do not
accept returns of theEssuresystem. We obtain written authorizations from our customers for a specified amount of product at a specified price and the
price is not dependent on actualEssureprocedures performed.

For
sales through distributors we recognize revenues from ourEssuresystem when title to the product and the risk of loss transfers to
the distributor. Our distributors are responsible for all marketing, sales, training and warranty for theEssuresystem in their respective territories.
Our standard terms and conditions do not provide price protection or stock rotation rights to any of our distributors. In addition, our distributor agreements do not allow the distributor to return or
exchange theEssuresystem and the distributor is obligated to pay us for the sale regardless of their ability to resell the product.

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

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

Certain
sales of ourEssuresystem may include delivery of additional items. These obligations may be fulfilled after shipment of the Essuresystem, and in these
cases, we recognize revenue in accordance with the multiple element accounting guidance set forth in ASC 605-25 RevenueMultiple- Element Arrangements.When we have objective and reliable evidence
of fair value of the undelivered elements we defer
revenue attributable to the post-shipment obligations and recognize such revenue when the obligation is fulfilled. Otherwise we defer all revenue until all elements are delivered.



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



Advertising production costs are recorded as expense as incurred. Costs of communicating advertising are recorded as expense as
advertising space or airtime is used. All other advertising costs are expensed as incurred. Total advertising expenses were approximately $10.4 million, $7.2 million, and
$2.1 million in the years ended December 31, 2009, 2008, and 2007, respectively.



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

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2. Summary of Significant Accounting Policies (Continued)



Net loss for the years ended December 31, 2009, 2008, and 2007 included stock-based compensation expense under ASC 718, CompensationStock
Compensation("ASC 718") of $6.2 million, $5.5 million, and $6.3 million, respectively, which
consisted of stock-based compensation expense of $5.4 million, 4.8 million, and $5.4 million respectively, related to employee stock options, employee stock purchase plan and
stock appreciation rights and stock-based compensation expense of approximately $0.8 million, $0.7 million, and $0.9 million, respectively, related to employee restricted stock
and restricted stock units. Stock-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized on a straight line basis as expense over the employee
requisite service period, which is generally the vesting period.

Awards to consultants:During the fiscal year ended December 31, 2009, we granted a total of 30,000 stock appreciation rights to
two
consultants. During the fiscal year ended December 31, 2008, we did not grant any stock awards to consultants. During the fiscal year ended December 31, 2007, we granted 5,000 stock
appreciation rights to one consultant. Stock-based compensation arrangements to non-employees are accounted for in accordance with ASC 505-50Equity
Based Payments to Non-Employees, which requires that these equity instruments are recorded at their fair value on the measurement date. The measurement of
stock-based compensation is subject to adjustment as the underlying equity instruments vest. We remeasure the fair value of the options as they vest and recognize changes in fair value as expense in
the period. We recorded stock based compensation expense of approximately $0.1 million during the year ended December 31, 2009, and $0.2 million during each of the years ended
December 31, 2008 and 2007 in connection with our grants to consultants.

We
recorded an $18 thousand tax benefit from stock-based compensation in 2009. No such tax benefit was recognized in 2008 and 2007.

Stock Appreciation Rights:During the year ended December 31, 2009, we granted 1,300,653 stock appreciation rights to employees,
with an
estimated total grant-date fair value of approximately $7.6 million and a grant date weighted-average fair value of $5.85 per share.

As
of December 31, 2009, there was $11.3 million of unrecognized stock-based compensation cost related to stock options and stock appreciation rights. This cost is expected
to be recognized over a weighted-average amortization period of 2.7 years.

During
the year ended December 31, 2008, we granted 1,026,910 stock options and stock appreciation rights, with an estimated total grant-date fair value of
approximately $7.6 million and a grant date weighted-average fair value of $7.40 per share.

Employee Stock Purchase Plan (ESPP):The compensation cost in connection with the ESPP for the year ended December 31, 2009 was
approximately
$0.4 million. The grant date weighted-average fair value was $5.51 per share. The compensation cost in connection with the ESPP for the year ended December 31, 2008 was approximately
$0.3 million. The grant date weighted-average fair value was $5.18 per share.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

Restricted Stock Units:During the year ended December 31, 2009 we granted 84,634 restricted stock units, with an estimated total
grant date
fair value of approximately $1.0 million and a grant date weighted average fair value of $12.15. This stock compensation is being recorded as compensation expense on a straight-line
basis over the vesting periods of the underlying stock awards.

As
of December 31, 2009, there was $1.4 million of unrecognized stock-based compensation related to nonvested restricted stock awards and restricted stock units. This cost
is expected to be recognized over a weighted-average amortization period of 2.9 years.

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

Years Ended December 31,2009

2008

2007Cost of goods sold

$
61

$
46

$
27Research and development


217


238


565Selling, general and administrative


6,004


5,383


5,901Total stock-based compensation expense

$
6,282

$
5,667

$
6,493


Valuation assumptions

The fair value of stock-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for
the years ended December 31, 2009, 2008 and 2007:

Years Ended December 31,2009

2008

2007Stock Option
and Stock
Appreciation
Right Plans

Employee
Stock
Purchase
Plan

Stock Option
and Stock
Appreciation
Right Plans

Employee
Stock
Purchase
Plan

Stock Option
and Stock
Appreciation
Right Plans

Employee
Stock
Purchase
PlanExpected term (in years)


4.34


0.72


4.55


0.50


3.57


0.67Average risk-free interest rate


1.76
%

0.41
%

2.73
%

2.01
%

4.55
%

4.82
%Average volatility factor


51.8
%

71.0
%

47.3
%

42.7
%

47.8
%

41.2
%Dividend yield




















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

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

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

As
stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures.
ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based
on historical experience.

Refer
to Note 11Incentive and Stock Plans, for a description of our awards.



In preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which
we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets
will be recovered from future taxable income and the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or
increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Due to experiencing only a short history of profitability, management believes
that there is sufficient uncertainty regarding the realization of deferred tax assets and a full valuation allowance is appropriate. Management reviews its assumptions regarding the realization of
deferred tax assets on an ongoing basis. Continued profitability and future changes in management's assumptions may result in a partial or full release of the deferred tax valuation allowance. A
release of the valuation allowance would have a favorable impact on the tax provision within the statement of operations.

Our
net deferred tax assets consist primarily of net operating loss carry-forwards generated before we achieved profitability. Recognition of deferred tax assets is appropriate when
realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and the recorded domestic cumulative net losses we
have provided a full valuation allowance against our U.S. deferred tax assets. We intend to maintain valuation allowances until sufficient evidence exists to support the reversal of the valuation
allowances. Under certain conditions related to our future profitability and other business factors, we believe it is possible our results will yield sufficient positive evidence to support the
conclusion that it is more likely than not that we will realize the tax benefit of our net operating losses. If that is the case, subject to review of other qualitative factors and uncertainties, we
would expect to begin reversing the remaining deferred tax asset valuation allowance as a reduction of tax expense. For the periods following the recognition of this tax benefit and to the extent we
are profitable, we will record a tax provision for which the actual payment may be offset against our accumulated net operating loss carryforwards. However, our tax rate may significantly increase in
future periods.



Basic net income (loss) per share excludes any potential dilutive effects of options, unvested restricted shares and restricted stock
units and common stock shares subject to repurchase. Diluted net income (loss) per share includes the impact of potentially dilutive securities. In net loss periods

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

presented,
basic and diluted net loss per share are both computed using the weighted average number of common shares outstanding.

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

2009

2008(a)

2007(a)Numerator:Numerator for diluted earnings per shareNet income (loss) available to common stockholders

$
7,945

$
(3,886
)
$
(14,782
)Denominator:Denominator for basic earnings per shareWeighted-average number of common shares outstanding


30,574


30,226


29,497Less: weighted-average unvested restricted common shares


2


10


34Weighted-average number common shares outstanding used in share computing basic net income (loss) per common share


30,572


30,216


29,463Effect of dilutive securities:Diluted options and stock appreciation rights


642





Diluted stock awards


38





Weighted-average number of common shares outstanding used in computing basic and dilutive net income (loss) per common share


31,252


30,216


29,463


(a)Adjusted
for the retrospective adoption of ASC 470-20.


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

At December 31,2009

2008

2007Outstanding options and SARs


1,944


4,234


3,996Restricted stock





4


17Restricted stock units





102


191Warrants issued in connection with our convertible notes


3,093


3,093


3,0935,037


7,433


7,297


Our
senior convertible notes were excluded from the diluted net income (loss) per share calculation in 2009, 2008 and 2007 because the conversion price was greater than the average
market price of our stock during the period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)



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

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

Years Ended December 31,2009

2008

2007Net sales (in thousands)

$
131,407

$
101,977

$
64,442United States of America


79
%

79
%

92
%France


13
%

13
%

7
%Europe (other than France)


7
%

7
%

0
%Other


1
%

1
%

1
%




Comprehensive income (loss) generally represents all changes in stockholders' equity except those resulting from investments or
contributions by stockholders. Our comprehensive income (loss) consists of cumulative translation adjustments. A summary of the comprehensive income (loss) for the periods indicated is as follows (in
thousands):

Years Ended December 312009

2008(a)

2007(a)Net income (loss)

$
7,945

$
(3,886
)
$
(14,782
)Other comprehensive lossForeign currency translation adjustment, net of tax


(195
)

(798
)

Comprehensive income (loss)

$
7,750

$
(4,684
)
$
(14,782
)


(a)Adjusted
for the retrospective adoption of ASC 470-20.


The
balances of each component of accumulated other comprehensive income (loss), net of taxes, as of December 31, 2009, 2008 and 2007 consist of the following (in thousands):

Foreign
Currency
Translation

Accumulated Other
Comprehensive
LossBalance as of December 31, 2006

$


$
Net change during the twelve month period





Balance as of December 31, 2007





Net change during the twelve month period


(798
)

(798
)Balance as of December 31, 2008

$
(798
)
$
(798
)Net change during the twelve month period


(195
)

(195
)Balance as of December 31, 2009

$
(993
)
$
(993
)


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)



In June 2009, Accounting Standards Codification ("ASC") ASC 105Generally Accepted Accounting
Principles("ASC 105") was issued. ASC 105 became the single official source of authoritative, nongovernmental generally accepted accounting principles ("GAAP") in the United
States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting
policies were not affected by the conversion to ASC. However, references to specific accounting standards in the footnotes to our consolidated financial statements have been changed to refer to the
appropriate section of ASC.

In
December 2007, FASB issued ASC 805Business Combinations("ASC 805"). ASC 805 will impact financial statements on the acquisition date
and in subsequent periods. Some of the changes, such as the accounting for contingent consideration, may introduce more volatility into our earnings and may impact our acquisition strategy.
Additionally, in February 2009 FASB issued an amendment to ASC 805 which amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and
liabilities arising from contingencies in a business combination under ASC 805. ASC 810Consolidations("ASC 810") changes the accounting and reporting
for minority interests, which are re-characterized as non-controlling interests and classified as a component of equity. ASC 805 is applied prospectively and ASC 810 requires
retroactive adoption of the presentation and disclosure requirements for existing minority interests, while the remaining requirements of ASC 810 are applied prospectively. ASC 805 and ASC 810 became
effective on January 1, 2009. We adopted ASC 805 and ASC 810 in the first quarter of fiscal 2009 and their adoption did not have a material impact on our financial condition, results of
operations, or cash flows.

Effective
January 1, 2008, we adopted ASC 820,Fair Value Measurements and Disclosures("ASC 820") with respect to its
financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and provides for expanded disclosure about
fair value measurements. ASC 820 applies prospectively to all other accounting pronouncements that require or permit fair value measurements. ASC 820 excludes certain leasing transactions accounted
for under ASC 840,Leases("ASC 840"). ASC 820 defers the effective date of ASC 820 for all non-financial assets and
non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years. We adopted ASC 820 in the first quarter of fiscal 2009. See Note 4Fair Value Measurements.

In
May 2008, FASB issued ASC 470-20,Debt with Conversion and Other Options("ASC 470-20"). On January 1,
2009, we adopted the Cash Conversion Subsections of ASC 470-20, which clarify the accounting for convertible debt instruments that may be settled in cash (including partial cash
settlement) upon conversion. ASC 470-20 clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. ASC
470-20 specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflect the issuer's
non-convertible debt borrowing rate which interest costs are recognized in subsequent periods. ASC 470 is effective for fiscal years beginning after December 15, 2007, and
retrospective application is required for all periods presented. We have accounted for this change in accounting principal by retrospectively adjusting prior period financial statements, including
those set forth herein. See Note 9Convertible Senior Notes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Summary of Significant Accounting Policies (Continued)

In
April 2009, FASB issued ASC 825Financial Instruments("ASC 825") and ASC 270Interim
Reportingor ("ASC 270"). ASC 825 and ASC 270 requires us to disclose on a quarterly basis, providing quantitative and qualitative information about fair value estimates for
all financial instruments not measured in the Consolidated Balance Sheets at fair value. ASC 825 and ASC 270 are effective for interim periods ending after June 15, 2009. We have adopted the
provisions of ASC 825 and ASC 270 effective the second quarter of fiscal 2009. See Note 4Fair Value Measurements and Note 9Convertible Senior Notes.

In
April 2009, FASB issued ASC 320InvestmentsDebt and Equity Securities("ASC 320"). ASC 320 modifies the
other-than-temporary impairment guidance for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the
credit and noncredit components of impaired debt securities that are not expected to be sold. In addition, increased disclosures are required for both debt and equity securities regarding expected
cash flows, credit losses, and an aging of securities with unrealized losses. ASC 320 is effective for interim and annual reporting periods that end after June 15, 2009. We have adopted the
provisions of ASC 320 effective the second quarter of fiscal 2009. We have considered the guidance provided by ASC 320 in our determination of impairment, and have determined that the impact was not
material. See Note 9Convertible Senior Notes.

In
April 2009, FASB issued ASC 820Fair Value Measurement and Disclosure("ASC 820"). ASC 820 provides additional guidance for estimating
fair value when the volume and level of activity for the asset or liability have significantly decreased. ASC 820 re-emphasizes that regardless of market conditions the fair value
measurement is an exit price concept. ASC 820 clarifies and includes additional factors to consider in determining whether there has been a significant decrease in market activity for an asset or
liability and provides additional clarification on estimating fair value when the market activity for an asset or liability has declined significantly. The scope of ASC 820 does not include assets and
liabilities measured under level 1 inputs. ASC 820 is applied prospectively to all fair value measurements where appropriate and is effective for interim and annual periods ending after
June 15, 2009. We have adopted the provisions of ASC 820 effective the second quarter of fiscal 2009, and have determined that the adoption did not have an impact on our consolidated financial
statements.

In
January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant
transfers in and out of Level 1and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using
significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than
one net number). The updated guidance also requires that and entity should provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation
techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated
guidance is effective for interim or annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the
roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. We do
not expect adoption of the updated guidance to have a material impact on its consolidated results of operations or financial condition.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Short-term investments

As of December 31, 2009, we held $43.6 million (par value) in auction rate securities, or ARS, backed by federal and state student loans which are variable rate debt
instruments and bear interest rates that reset approximately every 20-30 days. These ARS have a contractual maturity ranging from 2028 through 2047.

Our
ARS are short-term debt instruments backed by student loans, a substantial portion of which are guaranteed by the United States government. Prior to 2008, our ARS were
highly liquid, using a Dutch auction process that resets the applicable interest rate at predetermined intervals, typically every 20-30 days, to provide liquidity at par. We have
experienced failed auctions in 2009 and 2008 on most of our ARS. The failures of these auctions do not affect the value of the collateral underlying the ARS, and we continue to earn and receive
interest on our ARS at a pre-determined formula with spreads tied to particular interest rate indexes.

In
November 2008, we accepted an offer from UBS AG, providing us with rights related to our ARS (the "Rights"). The Rights permit us to require UBS to purchase our ARS at par value,
which is defined as the price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or interest, at any time during the period of June 2010 through July 2012. Conversely,
UBS has the right, at its discretion, to purchase or sell our ARS at any time until July 2012, so long as we receive payment at par value upon any sale or disposition. We expect to sell our ARS under
the Rights at par value. However, if the Rights are not exercised before July 2012 they will expire and UBS will have no further rights or obligation to buy our ARS. So long as we hold our ARS, they
will continue to accrue interest as determined by the auction process or the terms of the ARS if the auction process fails. We had settlements of our ARS in the twelve months ended December 31,
2009 of $4.9 million at full par value and recorded a gain of $2.3 million which represents the increase in the fair value of the ARS.

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

Although
the Rights represent the right to sell the securities back to UBS at par, we will be required to periodically assess the economic ability of UBS to meet that obligation in
assessing the fair value of the Rights.

We
have accounted for the Rights as a freestanding financial instrument and elected to record the value of the Rights under the fair value option of ASC 825 Financial Instruments.As a result, upon
acceptance of the offer from UBS, we recorded approximately $5.1 million as the fair value of the Rights
with a corresponding credit to other expense, net in the fourth quarter of 2008. As a result of our election to record the Rights at fair value, unrealized gains and losses have been included in
earnings. We estimated the fair value of the Rights using the expected value that we will receive from UBS which was calculated as the difference between the anticipated recognized loss and par value
of the ARS as of the option exercise date. This value was discounted by using a UBS credit default rate to account for the consideration of UBS credit risk. For the twelve months ended
December 31, 2009, we recorded an additional loss of $2.2 million, respectively which represents the decrease in the fair value of the put option.

Prior
to accepting the UBS offer, we recorded our ARS as available-for-sale investments. We recorded unrealized gains and losses on our
available-for-sale securities in accumulated other

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. Short-term investments (Continued)

comprehensive
loss in the stockholders' equity section of our balance sheets. Such an unrealized loss did not change net income (loss) for the applicable accounting period.

In
connection with our acceptance of the UBS offer in November 2008, resulting in our right to require UBS to purchase our ARS at par value beginning on June 2010, we transferred our ARS
from available-for-sale to trading securities in accordance with ASC 320InvestmentsDebt and Equity Securities. The
transfer to trading securities reflected our intent to exercise our put option during the third quarter of 2010. Prior to our agreement with UBS, our intent was to hold our ARS until we realized the
par value. We recorded a temporary reduction in carrying value of $2.8 million for the nine months ended September 30, 2008, which was recorded as an unrealized loss in accumulated other
comprehensive loss. Upon transfer to trading securities, we transferred the $2.8 million recorded as unrealized loss in accumulated other comprehensive loss and recorded an unrealized loss of
$5.3 million in other expense, net in the fourth quarter of 2008, representing the difference between the par and fair value of the ARS at the date of transfer.

In
September 2009 we reclassified the ARS and the associated put option from long-term investments to short-term investments because we intend to sell our ARS
under the Rights at the inception of the Rights period in the third quarter of 2010.

In
November 2008, we entered into a revolving credit line agreement with UBS, payable on demand, in an amount equal to 75% of fair value of our auction rate securities at net no cost,
meaning that the interest we pay on the credit line will not exceed the interest that we receive on the ARS that we have pledged as security for the credit line. Additionally, under the terms of the
settlement agreement, if UBS is able to sell our ARS at par, proceeds would be utilized to first repay any outstanding balance under the revolving credit line. We are still able to sell the ARS, but
in such a circumstance, if we sold at less than par value, we would not be entitled to recover the par value support from UBS. See Note 10Line of Credit.

4. Fair Value Measurements

On January 1, 2008, we adopted the methods of fair value as described in ASC 820Fair Value Measurement and Disclosure("ASC 820")
to value our financial assets and liabilities. As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that
prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:



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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Fair Value Measurements (Continued)



Our cash and cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted
market prices, broker or dealer quotations, or alternative pricing sources with a reasonable level of price transparency. As of December 31, 2009, our Level 1 instruments are solely
comprised of our investments in money market funds.

As
a result of continued auction failures, quoted prices for our ARS did not exist as of December 31, 2009 and, accordingly, we concluded that Level 1 inputs were not
available for these assets. Brokerage statements received from our broker-dealer that held our ARS included their estimated market value as of December 31, 2009. Our broker-dealer valued our
ARS at 90% of par. We made inquiries relative to the measurements utilized to derive the estimated market values quoted on our brokerage statements, but the broker-dealer declined to provide detailed
information relating to their valuation methodologies. Due to the lack of transparency into the methodologies used to determine the estimated market values, we concluded that estimated market values
provided on our brokerage statements did not constitute valid inputs and thus we did not utilize them in measuring the fair value of these ARS as of December 31, 2009.

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

The
put option is a free standing asset separate from the ARS, and represents our contractual right to require our broker, UBS, to purchase our ARS at par value during the period of June
2010 through July 2012. The put option is classified as short-term because we intend to is to sell our ARS under the Rights at the inception of the Rights period in the third
quarter of 2010. See Note 3Short-term Investments.

Periodically,
during the twelve months ended December 31, 2009 we entered into forward contracts to buy U.S dollars at fixed intervals in the retail market in an
over-the-counter environment. As of December 31, 2009, we had foreign currency forward contracts to sell 4.7 million Euros in exchange for $6.9 million
maturing in January 2010 through April 2010. As of December 31, 2009 these forward contracts are recorded at their fair value of $0.1 million in other current assets on our consolidated
balance sheet. We have outstanding short-term intercompany receivables of $7.0 million as of December 31, 2009. We expect the changes in the fair value of the intercompany
receivables to be materially offset by the changes in the fair value of the forward contracts.

The
purpose of these forward contracts is to minimize the risk associated with foreign exchange rate fluctuations. We have developed a foreign exchange policy to govern our forward
contracts. These foreign currency contracts do not qualify as cash flow hedges and all changes in fair value are reported in earnings as part of other income and expenses. We have not entered into any
other types of derivative financial instruments for trading or speculative purpose. Our foreign currency forward

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Fair Value Measurements (Continued)

contract
valuation inputs are based on quoted prices and quoted pricing intervals from public data and do not involve management judgment. Accordingly, we have classified our outstanding foreign
currency forward contract within Level 2 of the fair value hierarchy and have recorded the fair value of the contract in other current assets on our consolidated balance sheet as of
December 31, 2009.

During
2008, we assumed a forward exchange contract to hedge U.S. Dollar-denominated estimated accounts payable in 2008 in connection with the acquisition of Conceptus SAS. We recorded
the changes of the fair value of the hedge contract in our results of operations for the twelve months ended December 31, 2008. The forward contract was fully utilized by December 31,
2008.

Assets
measured at fair value on a recurring basis at December 31, 2009 are as follows (in thousands):

Fair Value Measurements at Reporting DataDecember 31
2009

Quoted Price in
Active Markets
for Identical
Instruments
Level 1

Significant Other
Observable
Inputs
Level 2

Significant
Unobservable
Inputs
Level 3Assets:Money market funds

$
54,884

$
54,884

$


$
Auction rate securities


40,626








40,626Put option


2,933








2,933Foreign currency forward contract


145





145Total assets

$
98,588

$
54,884

$
145

$
43,559


Assets
measured at fair value on a recurring basis at December 31, 2008 are as follows (in thousands):

Fair Value Measurements at Reporting DataDecember 31
2008

Active Markets for
Identical
Instruments
Level 1

Significant
Other
Observable
Inputs
Level 2

Significant
Unobservable
Inputs
Level 3Assets:Money market funds

$
47,170

$
47,170

$


$
Auction rate securities


43,177








43,177Put option


5,144








5,144Total assets

$
95,491

$
47,170

$


$
48,321


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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Fair Value Measurements (Continued)

The following table presents a reconciliation of all assets measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs
(Level 3) as of December 31, 2009 (in thousands):

Put Option

Auction Rate
Securities

TotalBalance at December 31, 2007

$


$


$
Transfers from Level 2 to Level 3





48,800


48,800Sales of auction rate securities





(350
)

(350
)Impairment of auction rate securities





(5,273
)

(5,273
)Issuance of put option


5,144





5,144Balance at December 31, 2008

$
5,144

$
43,177

$
48,321Sales of auction rate securities, at par value





(4,875
)

(4,875
)Gain on auction rate securities





2,324


2,324Loss on put option


(2,211
)




(2,211
)Accretion of notes payable








Balance at December 31, 2009

$
2,933

$
40,626

$
43,559




The fair value of the Convertible Senior Notes (see Note 9Convertible Senior Notes) was estimated using quoted
market prices. Accordingly, we have classified our convertible senior notes within Level 1 of the fair value hierarchy and have recorded the carrying value of the notes in long-term liabilities
on our consolidated balance sheet as of December 31, 2009.

The
following table summarizes the principal outstanding and estimated fair values of our debt (in thousands):

December 31, 2009

December 31, 2008Carrying Value

Fair Value

Carrying Value

Fair ValueConvertible senior notes

$
76,531

$
81,075

$
72,344

$
55,200


5. Goodwill and Intangible Assets

On January 7, 2008, we acquired all of the outstanding shares of Conceptus SAS. Our consolidated financial statements include the financial results of Conceptus SAS beginning from
the acquisition date of January 7, 2008.

The
total purchase price of $22.5 million included $24.4 million in cash consideration and $0.3 million in direct transaction costs, less a reduction to the purchase
price of $2.2 million as explained below. On February 27, 2007, we entered into an amendment to the Share Purchase and Call Option Agreement with Conceptus SAS and into an amendment to
the Distribution Agreement with Conceptus SAS. Pursuant to the amendment to the Share Purchase and Call Option Agreement, we agreed not to exercise the call option to acquire Conceptus SAS in 2007 and
agreed to exercise our call option to acquire SAS sometime between January 1, 2008 and January 2, 2009 subject to the satisfaction of certain closing conditions. Pursuant to the
amendment to the Distribution Agreement,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Goodwill and Intangible Assets (Continued)

Conceptus
SAS agreed to increase the price they pay to us for theEssureproduct. The difference in price of product under the revised Distribution
Agreement compared to the previous agreement was recorded as a current liability in our consolidated balance sheet prior to the acquisition. The balance of this current liability of
$2.2 million on the date of acquisition was recorded as a reduction of the purchase price of Conceptus SAS.

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

(in thousands):Cash acquired

$
1,689Inventory


1,816Accounts receivable


3,270Deferred tax asset


328Other tangible assets acquired


396Amortizable intangible assets:Customer relationships


5,024Covenant not to compete


71Goodwill


17,807Liabilities assumed


(7,952
)Total

$
22,449


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

(unaudited)

Year Ended December 31, 2007(a)Pro forma total net sales

$
74,395Pro forma net loss


(13,067
)Pro forma net loss per share basic and diluted

$
(0.44
)Pro forma weighted average basic and diluted shares


29,463


(a)Adjusted
for retrospective adoption of ASC 470-20.


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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Goodwill and Intangible Assets (Continued)




On
September 30, 2009, we entered into an Asset Purchase Agreement (the "Purchase Agreement") with American Medical Systems, Inc. ("AMS") pursuant to which we acquired the
intangible intellectual property assets, including patents and licenses, ("the assets") of Ovion Inc. ("Ovion"), a wholly owned subsidiary of AMS. In connection with this purchase, we were
released from any and all current and future royalty obligations under such licenses.

As
consideration for the assets acquired in the purchase agreement, we paid to AMS $23.6 million in cash plus $0.1 million in direct cost to acquire the assets. The
purchase agreement contains customary representations, warranties and covenants, as well as a covenant from AMS that it will not compete with us in the field of permanent female sterilization for a
period of five years and that it will not engage in the research, development, manufacture or sale of permanent female sterilization products consisting of a stent-like device delivered
transcervically using a catheter for an additional four-year period. The purchase agreement also contains mutual indemnification obligations for, among other things, breach of any
representation, warranty or covenant in the purchase agreement. We did not acquire any employees, tangible assets or processes from AMS. These assets do not represent a purchase of a business but
rather, a purchase of intangible assets. These assets are capitalized and are being amortized over a period of nine years, the estimated useful life of the intangible assets.

Goodwill
is tested for impairment on an annual basis or more frequently upon the occurrence of circumstances that indicate that goodwill assets might be impaired. We did not record any
impairment of goodwill during the twelve months ended December 31, 2009, 2008 and 2007.

The
changes in the carrying amount of goodwill at December 31, 2009 and 2008 are as follows:

Years Ended
December 31,(in thousands)

2009

2008Goodwill, beginning of period

$
17,105

$
Adjustments to goodwill from acquisitions





17,807Effect of currency translation


213


(702
)Goodwill, end of period

$
17,318

$
17,105


The
following table provides additional information concerning intangible assets (in thousands):

Intangible
assets are being amortized over straight-line periods ranging from 3 to 9 years.

December 31, 2009(in thousands)

Weighted avg
remaining life
(years)

Gross
carrying
amount

Accumulated
amortization

Effect of
currency
translation

Net book
valuePatents and Licenses


8.7

$
25,750

$
(1,896
)
$


$
23,854Customer relationships


7.0


5,024


(1,084
)

(131
)

3,809Covenant not to compete


1.0


71


(45
)

(2
)

24Total intangibles




$
30,845

$
(3,025
)
$
(133
)
$
27,687


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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Goodwill and Intangible Assets (Continued)



December 31, 2008(in thousands)

Weighted avg
remaining life
(years)

Gross
carrying
amount

Accumulated
amortization

Effect of
currency
translation

Net book
valuePatents and Licenses


4.7

$
2,020

$
(1,060
)
$


$
960Customer relationships


8.0


5,024


(555
)

(188
)

4,281Covenant not to compete


2.0


71


(23
)

(2
)

46Total intangibles




$
7,115

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


The
following discloses expected aggregate amortization expense for currently-owned intangible assets (in thousands) for 2010 through 2018:

Year

Expected2010

$
3,2962011


3,2712012


3,2682013


3,2682014


3,268Thereafter


11,316


6. Inventories

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

December 31,2009

2008Raw materials

$
92

$
230Work-in-progress


1,577


1,225Finished goods


3,239


2,374Total

$
4,908

$
3,829


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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Property and Equipment

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

December 31,2009

2008Equipment, tooling and furniture and fixtures

$
13,199

$
10,408Software

$
2,680


3,277Leasehold improvements

$
1,281


1,039Machinery

$
1,390


833$
18,550


15,557Less: accumulated depreciation and amortization

$
(8,768
)

(6,922
)Property and equipment, net

$
9,782

$
8,635


Property
and equipment depreciation and amortization expenses for the years 2008, 2007 and 2006 were approximately $4.1 million, $2.9 million and $1.5 million,
respectively.

8. Commitments and Contingencies



We renewed our current Lease Agreement for our 58,242 square foot headquarters located in Mountain View, California. The lease
commenced in July 2009 and will terminate in July 2013. We are recognizing the rent expense on a straight-line basis over the life of the lease. In connection with this lease we were
required to open a long term restricted CD account for $0.4 million, which is classified as "restricted cash" on our balance sheet. This restricted cash account earns a nominal interest rate.

With
the acquisition of Conceptus SAS on January 2008 we assumed a lease of a 1,938 square foot sales office located in Versailles, France. This lease expires on March 2011. On February
2009 we entered into a new lease agreement for a 4,703 square foot office space in Versailles, France for Conceptus SAS, and moved into this new building. The lease for the new building at Conceptus
SAS will expire on February 2018. We were unable to find a sub-lessee for the vacated building; therefore in 2009, we recorded an impairment charge of approximately $0.1 million,
which represents the future lease payments through March 2011.

We
have minimal office space in the United Kingdom. This lease will expire in July 2010.

In
addition to the lease agreements for facilities we have certain operating leases on automobiles and copiers worldwide. These leases have terms expiring from July 2010 through February
2018. Expenses for all leases were approximately $2.9 million, $2.3 million and $1.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Commitments and Contingencies (Continued)

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

2010

$
2,3642011


1,7872012


1,7792013


1,1372014


227Thereafter


583Total operating lease obligations

$
7,877




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

We
have entered into indemnification agreements with our directors and officers that may require us to indemnify our directors and officers against liabilities that may arise by reason
of their status or service as directors or officers, other than liabilities arising from willful misconduct of a culpable nature; to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified; and to make good faith determination whether or not it is practicable for us to obtain
directors and officers insurance. We currently have directors and officers insurance. At December 31, 2009 we had no material outstanding commitments.



From time to time, we may have certain contingent liabilities that arise in the ordinary course of our business activities. We account
for contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonable estimated. At December 31, 2009 we had no material outstanding
contingencies.

9. Convertible Senior Notes

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

The
notes will mature on February 15, 2027, unless earlier redeemed, repurchased or purchased by us or converted, and are convertible into cash and, if applicable, shares of our
common stock based on

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Convertible Senior Notes (Continued)

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

We
concluded that the embedded stock conversion option is not considered a derivative under ASC 815Derivative andHedging ("ASC 815"),
because the embedded stock conversion option would be recorded in stockholders' equity if it were a freestanding instrument.

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

ASC
815 provides that contracts are initially classified as equity if (1) the contract requires physical settlement or net-share settlement, or (2) the contract
gives the company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The settlement terms of our purchased call
options and sold warrant contracts require net-share settlement. Based on the guidance in ASC 815, the purchased call option contracts were recorded as a reduction of equity and the
warrants were recorded as an addition to equity as of the trade date. ASC 815 states that a reporting entity shall not consider contracts to be derivative instruments if the contract issued or held by
the reporting entity is both indexed to its own stock and classified in stockholders' equity in its statement of financial position. We concluded the purchased call option contracts and the warrant
contracts should be accounted for in stockholders' equity.



ASC
470-20Debt with Conversion and Other Options("ASC 470-20"), clarifies the
accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement. ASC 470-20 specifies that an issuer of such instruments should
separately account for the

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Convertible Senior Notes (Continued)

liability
and equity components of the instruments in a manner that reflect the issuer's non-convertible debt borrowing rate which interest costs are recognized in subsequent periods. ASC
470-20 is effective for fiscal years beginning after December 15, 2008, and retrospective application is required for all periods presented. We adopted ASC 470-20 in the
first quarter of fiscal 2009.

The
effect of the adoption of ASC 470-20 was to bifurcate the debt and equity components of our convertible notes. The note payable principal balance at the date of issuance
of $86.3 million in February 2007 was bifurcated into the debt component of $65.1 million and the equity component of $21.2 million. The difference between the note payable
principal balance of $86.3 million and the $65.1 million value of the debt component is being accreted to interest expense over a period of 5 years, which is the expected term of
our notes payable. We reclassified $0.8 million of debt issuance costs to additional paid in capital. The debt component was recognized at the present value of its cash flows discounted using a
5.51% discount rate, our borrowing rate at the date of the issuance of the Debenture for a similar debt instrument without the conversion feature.

Interest
expense associated with the Convertible Senior Notes consisted of the following (in thousands):

Years Ended December 31,2009

2008(a)

2007(a)Contractual coupon rate of interest

$
1,941

$
1,941


1,717Accretion of note payable


4,187


3,958


3,285Interest expenseconvertible senior notes

$
6,128

$
5,899

$
5,002


(a)Adjusted
for the retrospective adoption of ASC 470-20.


Amounts
comprising the carrying amount of the Convertible Senior Notes are as follows (in thousands):

December 31,
2009

December 31,
2008(a)

December 31,
2007(a)Beginning carrying amount

$
72,344

$
68,386

$
65,101Accretion of note payable


4,187


3,958


3,285Carrying amount

$
76,531

$
72,344

$
68,386


(a)Adjusted
for the retrospective adoption of ASC 470-20.


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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Convertible Senior Notes (Continued)




The
impact of the adoption of ASC 470-20 on the Consolidated Balance Sheet as of December 31, 2008 (in thousands) is as follows:

As Previously
Reported

Incremental
Impact of
Adoption of
ASC 470-20

As AdjustedDebt issuance costs, net

$
1,935

$
(484
)
$
1,451Total liabilities


133,259


(13,906
)

119,353Common stock and additional paid in capital


266,576


20,375


286,951Accumulated deficit


(235,332
)

(6,953
)

(242,285
)


The
impact of the adoption of ASC 470-20 on the Consolidated Statement of Operations (in thousands, except per share amount) is as follows:

Year Ended December 31, 2008As Previously
Reported

Incremental
Impact of
Adoption of
ASC 470-20

As AdjustedTotal interest income and expense and other expense, net

$
(961
)
$
(3,803
)
$
(4,764
)Net loss


(83
)

(3,803
)

(3,886
)Basic and diluted net loss per share


0.00


(0.13
)

(0.13
)




Year Ended December 31, 2007As Previously
Reported

Incremental
Impact of
Adoption of
ASC 470-20

As AdjustedTotal interest income and expense and other expense, net

$
2,567

$
(3,150
)
$
(583
)Net loss


(11,632
)

(3,150
)

(14,782
)Basic and diluted net loss per share


(0.39
)

(0.11
)

(0.50
)


The
impact of the adoption of ASC 470-20 on the Consolidated Statement of Cash Flows (in thousands) is as follows:

Year Ended December 31, 2008As Originally
Reported

Incremental
Impact of
Adoption of
ASC 470-20

As AdjustedNet loss

$
(83
)
$
(3,803
)
$
(3,886
)Amortization of debt issuance costs


619


(155
)

464Accretion of note payable





3,958


3,958


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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Convertible Senior Notes (Continued)



Year Ended December 31, 2007As Originally
Reported

Incremental
Impact of
Adoption of
ASC 470-20

As AdjustedNet loss

$
(11,632
)
$
(3,150
)
$
(14,782
)Amortization of debt issuance costs


542


(135
)

407Accretion of note payable





3,285


3,285


10. Credit Line

In November 2008 we entered into a revolving credit line agreement with UBS, payable on demand, in an amount equal to 75% of the fair value of our ARS at a net no cost, meaning that the
interest we pay on the credit line will not exceed the interest that we receive on the ARS that we have pledged as
security for the credit line. Additionally, if UBS is able to sell our ARS at par value, proceeds would be utilized to first repay any outstanding balance under the revolving credit line. We are still
able to sell the ARS, but in such a circumstance, if we sold the ARS at less than par, we would not be entitled to recover the par value support from UBS. During the twelve months ended
December 31, 2009 we borrowed an additional $4.4 million, and repaid $5.3 million under this line of credit, and our loan balance as of December 31, 2009 was
$29.2 million. Our loan balance as of December 31, 2008 was $29.9 million. We intend to repay this line of credit in entirety when we exercise our Right to have UBS purchase the
underlying ARS at full par value in June 2010. Our line of credit is payable on demand and we classify as short term. We believe the fair value equals the balance sheet value. See
Note 3Short-term Investments.

11. Incentive and Stock Plans



In November 1995, the Board of Directors adopted the Employee Stock Purchase Plan (ESPP). The ESPP became effective November 29,
1995. At that time, 200,000 shares were reserved for issuance under the ESPP. The ESPP permits participants to purchase common stock through payroll deductions of up to 10% of an employee's annual
base earnings. The purchase price per share is equal to 85% of the fair market value per share on the participant's entry date into the offering period or, if lower, 85% of the fair market value per
share on the semi-annual purchase date. In March 2004, the Board of Directors approved an amendment to the ESPP to increase the number of shares of common stock reserved for issuance by
150,000 shares. The stockholders approved this amendment in June 2004, to be effective July 1, 2004. In March 2006, the Board of Directors approved an amendment to the ESPP to increase the
number of shares of common stock reserved for issuance by 160,000 shares. This amendment was approved by the stockholders in June 2006. In April 2008, the Board of Directors approved an amendment to
the ESPP to increase the number of shares of common stock reserved for issuance by 150,000 shares. This amendment was approved by the stockholders in June 2008. As of December 31, 2009, 553,611
shares had been issued under the ESPP and 106,389 shares were available for future issuance.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Incentive and Stock Plans (Continued)



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

Under
the terms of the 2002 Plan, options may be granted with different vesting terms from time to time and all options under the 2002 Plan expire ten years after grant. The options may
include provisions permitting exercise of the option prior to full vesting. In 2009, there were no shares that were exercised prior to full vesting.

In
March 2001, the Board of Directors approved the 2001 Equity Incentive Plan ("2001 Plan") allowing granting of stock options and restricted stock to employees, directors and
consultants. The 2001 Plan provides for the grant of options, restricted stock, stock appreciation rights, performance share awards, dividend equivalents awards, stock payment awards, stock purchase
rights and restricted stock unit awards to our employees, directors and consultants. The 2001 Plan was originally adopted by the Board of Directors on March 21, 2001 with a total of 1,000,000
shares of common stock reserved for issuance thereunder, and was approved by the stockholders in May 2001. In March 2002, the Board of Directors approved an amendment and restatement of the 2001 Plan
to increase the shares reserved for issuance thereunder by an additional 1,000,000 shares, bringing the aggregate number reserved for issuance to 2,000,000 shares of common stock, and to provide for
automatic grants of non-qualified stock options to non-employee directors as had been provided under the 1995 Director's Stock Option Plan. The stockholders approved this
amendment and restatement in May 2002. In April 2003, the Board of Directors approved the Second Amended and Restated 2001 Plan to increase the size of the formula grants to non-employee
directors and to prohibit repricing. The stockholders approved this amendment and restatement in June 2003. In March 2004, the Board of Directors approved the Third Amended and Restated 2001 Plan to
reduce the size of the automatic grants of stock options to non-employee directors and to provide for automatic grants of restricted stock to non-employee directors and to
increase the shares of Common Stock reserved for issuance thereunder by an additional 500,000 shares, bringing the aggregate number reserved for issuance to 2,500,000 shares of common stock. The
stockholders approved this amendment and restatement in June 2004. In November 2004, the Board of Directors approved the Fourth Amended and Restated 2001 Plan to provide for the grant of restricted
stock units and stock appreciation rights. In January 2005, the Board of Directors approved the Fifth Amended and Restated 2001 Plan to provide for a change in the number of shares to be automatically
granted to non-employee directors under the plan. In December 2005, the Board of Directors approved the Sixth Amended and Restated 2001 Plan to establish that the

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Incentive and Stock Plans (Continued)

price
of future grants be based on the closing price of our stock on the date of grant, rather than the previous trading day. In February 2006, the Board of Directors approved the Seventh Amended and
Restated 2001 Plan to provide for the increase the annual grant of restricted stock for directors from 2,000 shares to 2,500 shares. In April 2006, the Board of Directors approved the amendment to the
Eighth Amended and Restated 2001 Plan to increase the shares of Common Stock reserved for issuance thereunder by an additional 1,500,000 shares, bringing the aggregate number reserved for issuance to
4,000,000 shares of Common Stock. This amendment was approved by the stockholders in June 2006. In June 2008, the Board of Directors approved the Tenth Amended and Restated 2001 Plan to provide for
the increase the number of shares of Common Stock reserved for issuance thereunder by an additional 1,500,000 shares, bringing the aggregate number reserved for issuance to 5,500,000 shares of common
stock. This amendment was approved by the stockholders in June 2008.

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

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

In
July 1993, the Board of Directors adopted the 1993 Stock Plan (the "1993 Plan"), and amendments to the 1993 Plan were adopted by the Board of Directors in March 1994, May 1995,
October 1995, February 1997 and April 2000 and approved by the stockholders in March 1994, January 1996, May 1997 and May 2000 to allow granting of options up to 3,075,000 shares of common stock in
the aggregate. Stock options granted under the 1993 Plan may be either incentive stock options or non-qualified stock options and can be granted to employees, distributors, consultants and
directors. Incentive stock options may be granted to employees with exercise prices of no less than the fair market value and non-qualified options may be granted at exercise prices of no
less than 85% of the fair market value of the common stock on the date of grant, as determined by the Board of Directors. The options expire no more than 10 years after the date of grant.
Options may be granted with different vesting terms from time to time but generally provide for vesting of at least 25% of the total number of shares per year. The options may include provisions
permitting exercise of the option prior to full vesting. Any unvested shares so purchased shall be subject to repurchase by us at the original exercise price of the option. Such repurchase rights
generally lapse at a minimum rate of 25% per year from the date the option was granted. As of December 31, 2009, there were no shares that are subject to repurchase.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Incentive and Stock Plans (Continued)

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

As
of December 31, 2009, 115,317 shares remained as available for grant under the 2002 Plan, 571,183 shares remained as available for grant under the 2001 Plan, no shares remained
available for grant under the 1993 Plan, 1995 Plan and no shares remained available for grant under the Director's Plan.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Incentive and Stock Plans (Continued)

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

Awards OutstandingShares
Available
For Grant

Awards
Outstanding

Weighted-
Average Exercise
PriceBalance at December 31, 2006


1,697,111


3,764,202

$
11.18Additional authorized(a)


225,000





Options granted(a)


(1,024,490
)

1,024,490


18.57Restricted stock awards and restricted stock units granted


(60,550
)

60,550


Restricted stock units issued





(116,721
)

Options exercised(b)





(370,731
)

9.31Stock appreciation rights exercised(b)


5,912


(8,033
)

14.42Options cancelled and expired


159,505


(159,505
)

14.85Restricted stock awards and restricted stock units cancelled


8,062


(8,062
)

Balance at December 31, 2007


1,010,550


4,186,190


11.60Additional authorized(c)


1,600,000





Options granted(c)


(1,026,910
)

1,026,910


17.47Restricted stock awards and restricted stock units granted


(61,710
)

61,710


Restricted stock units issued





(142,789
)

Options exercised





(378,267
)

8.20Stock appreciation rights exercised


8,571


(52,025
)

17.30Options cancelled and expired(d)


260,453


(357,932
)

17.21Restricted stock awards and restricted stock units cancelled


11,514


(7,625
)

Balance at December 31, 2008


1,802,468


4,336,172


12.62Stock appreciation rights and options granted


(1,335,653
)

1,335,653


13.66Restricted stock units granted


(84,634
)

84,634


Restricted stock units issued





(40,448
)

Options exercised





(265,819
)

8.22Stock appreciation rights exercised





(8,915
)

13.39Options cancelled and expired


302,632


(302,632
)

16.14Restricted stock units cancelled


1,687


(1,687
)

Balance at December 31, 2009


686,500


5,136,958

$
13.53


(a)Includes
stand-alone inducement grants of stock appreciation rights of 225,000 shares.(b)Includes
treasury stock issuances of 10,468 shares.(c)Includes
stand-alone inducement grants of stock appreciation rights of 100,000 shares.(d)Includes
stand-alone inducement plan cancellation of 93,750 shares.


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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Incentive and Stock Plans (Continued)




A
summary of the activity for the year ended December 31, 2009 of stock options and stock appreciation rights is as follows:

Options
and Stock
Appreciation
Rights
Outstanding

Weighted-
Average
Exercise Price

Aggregate
Intrinsic
ValueBalance outstanding at December 31, 2008


4,234,320

$
14.20

$
9,701,062Grants


1,335,653


13.66Exercises


(274,735
)

8.39Cancelled and expired


(302,632
)

16.14Balance outstanding at December 31, 2009


4,992,606

$
14.24

$
22,941,171Exercisable at December 31, 2009


3,140,202

$
13.53

$
16,688,458


The
following table summarizes information about stock options outstanding and exercisable at December 31, 2009:

Options Outstanding

Options Vested
and ExercisableRange of Exercise Prices

Options
Outstanding

Weighted
Average
Contractual
Remaining
Life (years)

Weighted
Average
Exercise
Price

Options
Vested
and
Exercisable

Weighted
Average
Exercise
Price$5.56 - $9.76


447,338


4.54

$
8.31


447,338

$
8.31$9.95 - $9.95


528,311


3.29

$
9.95


528,311

$
9.95$9.96 - $11.03


82,600


5.99

$
10.48


62,016

$
10.30$11.35 - $11.35


773,557


9.16

$
11.35


170,302

$
11.35$11.47 - $13.90


514,223


4.96

$
12.91


466,231

$
12.92$13.40 - $14.95


502,974


4.99

$
14.48


477,867

$
14.48$14.97 - $17.34


504,991


8.40

$
16.68


158,823

$
16.63$17.49 - $17.74


531,889


8.37

$
17.70


206,213

$
17.74$17.97 - $18.25


541,700


7.44

$
18.07


341,812

$
18.06$18.37 - $22.61


565,023


7.66

$
19.37


281,289

$
19.66$5.56 - $22.61


4,992,606


6.70

$
14.24


3,140,202

$
13.53


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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Incentive and Stock Plans (Continued)



Restricted stock award and restricted stock unit activity for the year ended December 31, 2009, is as follows:

Shares
and Units

Weighted-
Average
Grant Date
Fair ValueNonvested stock outstanding at December 31, 2008


105,685

$
16.26Grants


84,634


12.15Vested


(44,280
)

12.93Cancellations


(1,687
)

13.22Nonvested stock outstanding at December 31, 2009


144,352

$
14.04




Under our retirement savings plan ("401K Plan"), employees may elect to defer up to 15% of their total compensation, not to exceed the
amount allowed by applicable Internal Revenue Service regulations. There were no employer contributions to the 401K Plan for the years ended 2009, 2008 and 2007.

12. Stockholder's Equity

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

We
have repurchased 91,752 shares of restricted common stock at par value in accordance with the terms of restricted stock agreements. Net of treasury stock issuances of 13,889 shares,
77,863 shares remain as treasury stock. We recorded $18 thousand of tax benefits from stock-based compensation in 2009. No such tax benefit was recognized in 2008 and 2007.

13. Income Taxes

We adopted the provisions of ASC 740Income taxesor ("ASC 740"). ASC 740, on January 1, 2007. The adoption of ASC 740 with respect
to uncertain tax positions did not have a material impact on our
financial position and results of operations. We have not been audited by the Internal Revenue Service or any state income or franchise tax agency. As of December 31, 2009, our federal returns
for the years ended 2006 through the current period and most state returns for the years ended 2005 through the current period are still open to examination. The tax returns of Conceptus SAS for the
years ended 2005 to 2007 were examined and closed by the French tax authorities in 2008. In addition, all of the net operating losses and research and development credit carryforwards that may be used
in future years are still subject to inquiry given that the statute of limitation for these items would begin in the year of the utilization.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Income Taxes (Continued)

In
2009 we recorded provision for income taxes of $0.4 million. In 2008 we recorded a benefit for income taxes of $0.02 million. Our effective tax rate was 4% for 2009. Our
effective rate for the twelve months ended December 31, 2009 and 2008 is primarily related to our foreign and domestic operations.

The
amount of unrecognized tax benefits at December 31, 2009 was approximately $2.4 million, of which, if ultimately recognized, approximately $0.6 million would
decrease the effective tax rate in the period in which the benefit is recognized. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is
placed.

We
do not expect our unrecognized tax benefits to change significantly over the next 12 months. In connection with the adoption of ASC 740, we recognize interest and penalties
accrued on any unrecognized tax benefits as a component of income tax expense.

For
financial reporting purposes, income before taxes includes the following components (in thousands):

Years Ended December 31,2009

2008(a)

2007(a)United States

$
9,424

$
6,808

$
(14,782
)Foreign


(1,121
)

(2,898
)

Income (loss) before provision (benefit) for income taxes

$
8,303

$
(3,910
)
$
(14,782
)


(a)Adjusted
for the retrospecitve adoption of ASC 470-20.


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

Years Ended
December 31,2009

2008

2007CurrentU.S. Federal

$
(138
)
$


$
State & local


257





Foreign


133


393


DeferredU.S. Federal








State & local








Foreign


106


(417
)

Income tax expense (benefit)

$
358

$
(24
)
$



As
of December 31, 2009, we had net operating loss carryforwards for federal and state income tax purposes of approximately $198.2 million and $106.8 million
respectively. The net operating loss carryforwards includes $7.0 million which relates to stock option deductions that will be recognized through additional paid in capital when utilized. As
such, these deductions are not reflected in our deferred tax assets. If not utilized, these carryforwards will begin to expire starting in 2010. In addition, at December 31, 2009 we had both
federal and state research credit carryforwards of approximately

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Income Taxes (Continued)

$2.5 million
and $2.7 million, respectively. If not utilized the federal tax carryforward will begin to expire in 2010 while the California credit can be carried forward indefinitely.
Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change provisions of the Internal Revenue Code of 1986, as amended. The
annual limitation may result in the expiration of net operating losses and credits before utilization and in the event we have a change of ownership, utilization of the carryforwards could be
restricted.

We
account for income taxes under the asset and liability method set forth by ASC 740. In preparing our consolidated financial statements we are required to estimate our income taxes in
each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of
items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood
that our deferred tax assets will be recovered from future taxable income and the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a
valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of operations. Due to experiencing only a short history of
profitability, management believes that there is sufficient uncertainty regarding the realization of deferred tax assets and a full valuation allowance is appropriate. Management reviews its
assumptions regarding the realization of deferred tax assets on an ongoing basis. Continued profitability and future changes in management's assumptions may result in a partial or full release of the
deferred tax valuation allowance. A release of the valuation allowance would have a favorable impact on the tax provision within the statement of operations.

Our
net deferred tax assets consist primarily of net operating loss carry-forwards generated before we achieved profitability. Recognition of deferred tax assets is appropriate when
realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical
operating performance and the recorded domestic cumulative net losses we have provided a full valuation allowance against our U.S. deferred tax assets. We intend to maintain valuation allowances until
sufficient evidence exists to support the reversal of the valuation allowances. Under certain conditions related to our future profitability and other business factors, we believe it is possible our
results will yield sufficient positive evidence to support the conclusion that it is more likely than not that we will realize the tax benefit of our net operating losses. If that is the case, subject
to review of other qualitative factors and uncertainties, we would expect to begin reversing the remaining deferred tax asset valuation allowance as a reduction of tax expense. For the periods
following the recognition of this tax benefit and to the extent we are profitable, we will record a tax provision for which the actual payment may be offset against our accumulated net operating loss
carryforwards. However, our tax rate may significantly increase in future periods.

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Income Taxes (Continued)

Significant components of our deferred tax assets and liabilities as of December 31, 2009 and December 31, 2008 are as follows (in thousands):

Years Ended
December 31,2009

2008Deferred tax assetsCurrent deferred tax assets:Othernet

$
6,700

$
3,300Total current deferred tax assets


6,700


3,300Net current deferred tax assets:Net operating loss carryforwards


71,000


76,900Research credits


2,300


4,400Capitalized research and development


4,900


5,900Interest





7,500Total non-current deferred tax assets


78,200


94,700Total deferred tax assets


84,900


98,000Less: valuation allowance


(84,900
)

(97,700
)Net deferred tax assets





300Deferred tax liabilitiesNon current deferred tax liability:Intangible assets


(1,300
)

(1,400
)Net non-current deferred tax liability

$
(1,300
)
$
(1,100
)


Because
of our lack of U.S. earnings history, the U.S. deferred tax assets have been offset by a valuation allowance. The increase (decrease) in the valuation allowance was approximately
$(12.8) million, $(1.8) million and $14.6 million during 2009, 2008 and 2007, respectively.

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

Years Ended December 31,2009

2008

2007U.S. federal statutory income tax rate

$
2,823

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


620


731


State tax








231Permanent items


164


129


(27
)Stock based compensation


307


(6
)

1,390R&D credit refund


(138
)




Valuation allowance


(3,418
)

(842
)

2,351Income tax expense (benefit)

$
358

$
(24
)
$



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Table of Contents

CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Income Taxes (Continued)

We
adopted the provisions of ASC 740, on January 1, 2007. We file income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. We have
not been audited by the Internal Revenue Service or any state income or franchise tax agency. As of December 31, 2009, our federal returns for the years ended 2006 through the current period
and most state returns for the years ended 2005 through the current period are still open to examination. In addition, all of the net operating losses and research and development credit carryforwards
that may be used in future years are still subject to adjustment. The tax returns for our newly acquired French subsidiary for the years ended 2005 to 2007 were examined and closed by the French tax
authorities. As of December 31, 2009, we also recorded approximately $0.4 million of income tax expense related to uncertain tax position attributable to our French subsidiary.

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

Federal
and
State Tax

Foreign
Tax

Federal Tax
Benefit
of State
Income Tax
UTBs

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

$


$


$


$
Increases for tax positions during 2007


2,271





357


1,914Balance at January 1, 2008


2,271





357


1,914Increases for tax positions during 2008





393





393Decreases related to expiration / lapse of statute of limitations during 2008


(46
)







(46
)Balance at December 31, 2008


2,225


393


357


2,261Increases for tax positions related to current year


154


213


25


342Decrease for tax positions related to prior years





(149
)




(149
)Decreases related to expiration/lapse of statute of limitations


(77
)







(77
)Balance at December 31, 2009

$
2,301

$
457

$
382

$
2,376


If
the $2.4 million of unrecognized income tax benefits is recognized, approximately $0.6 million would decrease the effective tax rate in the period in which each of the
benefits is recognized. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed.

We
do not expect our unrecognized tax benefits to change significantly over the next 12 months. In connection with the adoption of ASC 740, the Company recognizes interest and
penalties accrued on any unrecognized tax benefits as a component of income tax expense.

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

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CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

14. Legal Proceedings

On May 22, 2009, we filed a lawsuit in the United States District Court, Northern District of California against Hologic, Inc., ("Hologic") seeking declaratory judgment by
the Court that Hologic's planned importation, use, sale or offer to sell of its forthcoming Adiana Permanent Contraception system will infringe several U.S. patents owned by us including U.S. Patent
Nos. 6,634,361, 6,709,667, 7,237,552, 7,428,904 and 7,506,650, and an injunction prohibiting Hologic from importing, using, selling or offering to sell its Adiana system in the United States.
Upon FDA approval of the Adiana Permanent Contraception system, we filed an Amended Complaint in July 2009 seeking a judgment that Hologic's importation, use, sale and/or offer to sell the system
infringes the same patents mentioned above and requested an injunction against such activity. On August 13, 2009, the Company filed a motion for preliminary injunction, requesting the Court to
enjoin the Adiana system in the United States pending final judgment in the action. On August 25, 2009, Hologic filed its Answer and asserted counterclaims against the Company that it was
violating the Lanham Act and the California Statutory Unfair Competition Law. On October 14, 2009, the Company answered with its own counterclaims asserting that Hologic was violating the
Lanham Act and the California Statutory Unfair Competition Law through its selling practices. A hearing was held on that motion on November 4, 2009 and an order denying the motion was issued on
November 6, 2009 Upon stipulation of the parties, on January 19, 2010, all claims relating to three of the five asserted patents were dismissed with prejudice. A claim construction
hearing was held on March 10, 2010. A trial date is scheduled for February 28, 2011.

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

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Table of Contents

CONCEPTUS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. Quarterly Information (unaudited)

Supplementary Data

Quarterly Results of Operations (Unaudited)

Three Months EndedDecember 31,
2009

September 30,
2009

June 30,
2009

March 31,
2009

December 31,
2008(a)

September 30,
2008(a)

June 30,
2008(a)

March 31,
2008(a)Net Sales

$
36,960

$
34,247

$
33,049

$
27,151

$
28,525

$
26,645

$
25,680

$
21,127Cost of goods sold


6,577


5,044


6,671


5,756


5,919


5,090


5,196


5,445Gross profit


30,383


29,203


26,378


21,395


22,606


21,555


20,484


15,682Operating expenses:Research and development


1,931


1,734


2,008


1,407


1,602


1,611


1,644


1,931Selling, general and administrative


20,257


19,472


23,337


22,570


16,139


16,363


20,081


20,102Total operating expenses


22,188


21,206


25,345


23,977


17,741


17,974


21,725


22,033Operating income (loss)


8,195


7,997


1,033


(2,582
)

4,865


3,581


(1,241
)

(6,351
)Interest income and expense and other expense, net


(1,607
)

(1,615
)

(1,506
)

(1,612
)

(1,212
)

(1,451
)

(1,143
)

(958
)Net income (loss) before provision for income taxes


6,588


6,382


(473
)

(4,194
)

3,653


2,130


(2,384
)

(7,309
)Provision (benefit) for income taxes


(15
)

150


82


141


(305
)

113


168


0Net income (loss)


6,603


6,232


(555
)

(4,335
)

3,958


2,017


(2,552
)

(7,309
)Basic income (loss) per share

$
0.21

$
0.20

$
(0.02
)
$
(0.14
)
$
0.13

$
0.07

$
(0.08
)
$
(0.24
)Diluted income (loss) per share

$
0.21

$
0.20

$
(0.02
)
$
(0.14
)
$
0.13

$
0.06

$
(0.08
)
$
(0.24
)Weighted average shares used in computing basic net income (loss) per share


30,728


30,599


30,518


30,438


30,362


30,342


30,217


29,935Weighted average shares used in computing diluted net income (loss) per share


31,661


31,503


30,518


30,438


30,874


31,207


30,217


29,935


(a)Adjusted
for the retrospective adoption of ASC 470-20.


107

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Table of Contents

Conceptus, Inc.

Schedule II  Schedule of Valuation and Qualifying Accounts  (In thousands)

Balance at
Beginning
of Period

Additions

Deductions

Balance at
End of PeriodAllowance for doubtful accounts:Year ended December 31, 2007

$
167

$
264

$


$
431Year ended December 31, 2008

$
431

$
74

$
27

$
478Year ended December 31, 2009

$
478

$
165

$
43

$
600


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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
Report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Mountain View, California on this 15th day of March 2010.

CONCEPTUS, INC.By:

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


POWER OF ATTORNEY

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

Signature

Title

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

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

March 15, 2010/s/ GREGORY E. LICHTWARDT (Gregory E. Lichtwardt)

Executive Vice President, Treasurer and Chief Financial Officer

March 15, 2010/s/ JOHN BISHOP (John Bishop)

Director

March 15, 2010/s/ THOMAS F. BONADIO (Thomas F. Bonadio)

Director

March 15, 2010/s/ PAUL A. LAVIOLETTE (Paul A. Laviolette)

Director

March 15, 2010/s/ ROBERT V. TONI (Robert V. Toni)

Director

March 15, 2010


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Table of Contents

Signature

Title

Date/s/ KATHRYN A. TUNSTALL (Kathryn A. Tunstall)

Director

March 15, 2010/s/ PETER L. WILSON (Peter L. Wilson)

Director

March 15, 2010


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EXHIBIT INDEX

Exhibit
Number

Description10.29

Twelfth Amended and Restated 2001 Equity Incentive Plan.21

List of Conceptus subsidiaries.23.1

Consent of Independent Registered Public Accounting Firm.24.1

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

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

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

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

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


111

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