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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                               ----------------

                                   Form 10-K

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

                 For the Fiscal Year Ended December 31, 1998 or


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

                For the Transition period from        to

                         Commission File Number: 0-27596



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

           Delaware                                      97-3170244             
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
incorporation or organization) 

                               1021 Howard Avenue
                              San Carlos, CA 94070
                    (Address of principal executive offices)
       Registrant's telephone number, including area code: (650) 802-7240

                               ----------------

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

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

                    Common Stock, $0.003 par value per share
                               ----------------

     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  than the
Registrant  was required to file such  reports) and (2) has been subject to such
filing requirements for the past 90 days. YES _X_ NO ___

     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. [ ]

     The aggregate market value of the voting stock held by nonaffiliates of the
Registrant based on the closing sale price of the  Registrant's  Common Stock on
the Nasdaq National Market on February 28, 1999 was approximately $11,423,993 as
of such date.  Shares of Common  Stock held by each  officer and director and by
each  person  who owns 5% or more of the  outstanding  Common  Stock  have  been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate  status is not  necessarily  a conclusive  determination  for other
purposes.

     There  were  9,620,205  shares of  Registrant's  Common  Stock  issued  and
outstanding as of February 28, 1999.

                      DOCUMENTS INCORPORATED BY REFERENCE

                                     None

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         The  following  information  should  be read in  conjunction  with  the
Consolidated  Financial Statements and the notes thereto.  This annual report on
Form 10-K,  and in  particular  the  Management's  Discussion  and  Analysis  of
Financial  Condition  and  Results  of  Operations,   contains  "forward-looking
statements" within the meaning of the Private  Securities  Litigation Reform Act
of  1995.  In this  report,  the  words  "believes,"  "anticipates,"  "intends,"
"expects" 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 the actual results,  performance or achievements of
Conceptus to be materially  different  from any future  results,  performance or
achievements  expressed or implied by such  forward-looking  achievements.  Such
factors  include,  among  others,  the  following:  the  uncertainty  of  market
acceptance  of the  Company's  products;  the limited  operating  history of the
Company;  the ability of the Company to develop and maintain proprietary aspects
of  its  technology;  the  ability  of  the  Company  to  obtain  the  necessary
governmental clearances or approvals to market its products; intense competition
in the  medical  device  industry;  the  inherent  risk of  exposure  to product
liability claims and product recalls;  and other factors referenced in this Form
10-K.  Certain of these factors are discussed in more detail below.  Given these
uncertainties, persons evaluating the Company and its business are cautioned not
to place undue reliance on such forward-looking  statements. The Company assumes
no  obligation  to update these  forward-looking  statements  to reflect  actual
results or changes in factors  or  assumptions  affecting  such  forward-looking
statements.

                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

         Conceptus,  Inc.  ("Conceptus"  or the "Company")  designs and develops
minimally invasive devices for reproductive medical applications.  The Company's
current focus is on the development of a non-surgical approach to fallopian tube
sterilization,  the most commonly performed  contraceptive  procedure worldwide.
Given the Company's Focus on the development of the STOP  contraception  device,
the Company is not  actively  marketing or  manufacturing  its  infertility  and
therapeutic hysteroscopic products.

         The Company's  commercially available infertility products are designed
to improve  the  accuracy  of  diagnostic  procedures  for  infertility,  and to
increase  the  safety  of  resectoscopic  procedures.  Conceptus  has  developed
proprietary  micro-catheter  and  guidewire  systems  that allow  physicians  to
transcervically  (through the cervix) access and navigate the full length of the
fallopian tubes in a non-surgical  approach.  The Company's catheter systems are
based on technology initially developed by Target Therapeutics, Inc. ("Target"),
and licensed  exclusively to Conceptus in the field of reproductive  physiology.
To date, Conceptus has received five 510(k) clearances to market applications of
its  T-TAC(TM)  (Transcervical  Tubal  Access  Catheter)  systems and two 510(k)
clearances for the Selective  Tubal  Assessment to Refine  Reproductive  Therapy
("STARRT")  falloposcopy  products for  proximal  tubal  occlusion.  The Company
commenced  marketing  of  its  catheter  systems  for  certain  applications  in
September 1995.

         In November 1996, the Company entered into the therapeutic hysteroscopy
market through its acquisition of Microgyn, Inc. ("Microgyn"),  a privately held
medical  device  company.  Microgyn's  technology  was  develped to increase the
safety  and  performance  of  resectoscope  procedures,   including  therapeutic
hysteroscopy  procedures,  which  utilize an  endoscope  to guide the  selective
excision of abnormal uterine tissue. The Company began marketing its ERA(TM) and
FUTURA(TM)  resectoscope  sleeves for  gynecology  and urology  applications  in
September 1997 upon 510(k) clearance.

         In July,  1998 the Company  implemented a

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restructuring  plan  when  the  Company  determined  that the  near-term  market
potential of the Company's T-TAC,  STARRT, and Microgyn products did not justify
a  direct,  specialty  salesforce.  This  restructuring  reduced  the  number of
employees by approximately  fifty employees from seventy-two at the beginning of
the year by eliminating  all sales and marketing  personnel,  the  manufacturing
function,  and most administrative  personnel.  As a result of these actions the
Company reduced  operating  losses to $1.3 million in the fourth quarter of 1998
from $4.3 million in the fourth quarter of 1997. The Company is actively engaged
in discussions with potential  marketing and manufacturing  partners in order to
bring the T-TAC, STARRT, and Microgyn products to the gynecology market.

         The Company is currently focused on developing its S/TOP(TM) (Selective
Tubal  Occlusion  Procedure)  system  to  provide  a  non-surgical  approach  to
fallopian tube sterilization, the most common method of contraception worldwide.
The Company estimates that over 13 million female  sterilization  procedures are
performed annually worldwide.  The S/TOP system uses the Company's transcervical
tubal access technology to deliver a proprietary  micro-coil device to the lumen
of the  fallopian  tube.  Conceptus  believes  that the S/TOP  system will allow
physicians to perform fallopian tube  sterilization in an office setting without
general  anesthesia.  The Company also believes that the  elimination of surgery
from the procedure  will increase both patient  demand for the procedure and the
availability  of tubal  sterilization  in developing  countries,  where surgical
facilities  may be  limited.  The United  States  accounts  for less than 20% of
annual  worldwide  fallopian  tube  sterilization  procedures,  and the  Company
estimates that the United States market for such procedures exceeds $1.5 billion
annually.  Conceptus has performed clinical feasibility studies in two different
patient groups and is currently engaged in a Phase II study of effectiveness.

         Conceptus  has an  exclusive,  worldwide,  royalty-free  license to the
reproductive  applications of technology  developed by Target, a manufacturer of
minimally invasive medical devices for neurovascular applications, which in 1997
became a separate business unit of Boston Scientific  Corporation  ("BSC").  BSC
beneficially owns  approximately 15% of the Company's  outstanding Common Stock.
Conceptus  was  formed in 1992 in  response  to  reports  by  physicians  of the
successful use of Target's products to access the fallopian tubes.

         In November  1998,  the Company  announced  that it has  retained  CIBC
Oppenheimer  Corporation  to evaluate  strategic  alternatives  for the Company,
including  inquiries that have been received by the Company  regarding  possible
business  alliances.  The  Company  intends to review  opportunities  in women's
health, its traditional market focus, as well as other areas of medicine.


         T-TAC(TM),   STARRT(TM),   S/TOP(TM),  VS(TM),  Soft  Torque(TM),  Soft
Seal(TM),   Minicerv(TM),    Progression(TM),    Robust(TM),   Coaxess(TM)   and
Stargate(TM) are trademarks of the Company.  All other tradenames and trademarks
appearing in this report are the property of their respective holders.


HUMAN REPRODUCTION

         Human  reproduction  has been the  focus of  increased  scientific  and
medical attention over the last twenty years.  Contemporary  lifestyle  choices,
such as  deferred  childbearing,  have led to an  increased  demand for  certain
reproductive  medical  services,  including  the  treatment of  infertility  and
improved methods of  contraception.  As a result,  increasing  numbers of OB/GYN
specialists in the United States treat infertility as well as other

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reproductive disorders,  and the number of family  planning/reproductive  health
units in community hospitals in the United States increased sice 1985.

Contraception Overview

         Despite the risks,  high  costs,  and  recovery  time  associated  with
surgical  sterilization  performed  under general  anesthesia,  surgical  female
sterilization is the most widely used form of contraception in the United States
and  internationally.  According  to a 1995  survey by the  Centers  for Disease
Control and Prevention,  female  sterilization is the most commonly used form of
contraception in the United States by women between the ages of 15 and 44. Among
women 35 years and over,  33% rely on  sterilization  and among all  married  or
divorced   women  over  35  years  of  age,   54%  utilize   sterilization   for
contraception.  The high rate of reliance on female sterilization is due in part
to concerns about the safety and reliability of those birth control methods that
are readily  accepted by younger women.  Consequently,  despite recent favorable
clinical  studies,   patient  concerns  about  the  long-term  effects  of  oral
contraceptives  have limited their acceptance among women 35 and over where only
12% of these women use oral contraceptives.  Use of intrauterine devices ("IUD")
in the United  States has  declined in women of all age groups.  Due to concerns
that use of IUDs may result in increased  incidence of pain and heavy  menstrual
bleeding,  which could mask the symptoms of serious uterine disease, use of IUDs
among women in the United States age 15 - 44 is less than 1%. For these reasons,
women are seeking new methods of permanent contraception. Increasingly, women in
the United States have turned to surgical tubal sterilization,  which has become
the contraceptive  method of choice. In 1995, 59% of women between 15 - 44 years
of age  relied  on tubal  sterilization,  compared  with  only  23% in 1973.  In
developing  countries where there are concerns about population  growth,  23% of
all women have  undergone  surgical tubal  sterilization.  Throughout the world,
there is a need for a safe, non-surgical, and permanent contraceptive method.

         
Because the fallopian tubes are the organs in which conception  occurs,
they serve a critical  function  in the  reproductive  process and are often the
focus of treatment  whether the objective is to increase a woman's  reproductive
potential,  such  as  in  the  treatment  of  infertility,  or to  decrease  her
reproductive potential,  such as in the performance of sterilization procedures.
Surgical  fallopian tube  sterilization has become the fastest growing method of
contraception  worldwide,  especially  among  women  over  35,  because  of  its
reliability,  and the  absence  of  chronic  side  effects  associated  with the
procedure.  Although  mechanical  occlusion of the  fallopian  tubes is a highly
effective means of achieving female  sterilization,  the difficulty in accessing
the  fallopian  tubes  has made it  necessary  to  perform  surgery  in order to
accomplish fallopian tube sterilization.  Typically, fallopian tubes are ligated
by cutting or  cauterizing  the tubes,  or by mechanical  occlusion of the tubal
lumen  using clips or rings in a surgical  procedure  such as a  laparoscopy  or
laparotomy. The requirement of surgery, however, is an obvious limitation of the
procedure.  The risks  associated  with  surgery,  including the risk of general
anesthesia, infection and other complications, combined with concerns about cost
and recovery  time,  make the procedure less than ideal.  Additionally,  in many
developing  countries,  where the need for permanent  contraception is critical,
there is a shortage of community surgical  facilities.  In the United States, it
is  estimated  that  approximately  1.3  million  surgical  tubal  sterilization
procedures are performed  annually.  The average cost of these procedures ranges
from approximately  $2,500 to approximately  $8,000,  depending on the degree of
invasiveness of the surgery.

S/TOP System Procedure-Specific Product

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<PAGE>

         The Company is developing a proprietary micro-coil sterilization device
which is  deployed  permanently  into each  fallopian  tube using the  Company's
minimally  invasive  tubal access and delivery  system and the Company's  unique
delivery wire. The  micro-coil  device has been designed to effectively  occlude
the lumen of the fallopian  tube and be physically  incorporated  into the tubal
wall to prevent  expulsion.  The Company believes that this device and procedure
should reduce the clinical  risks and costs  associated  with most current tubal
sterilization   procedures   while   delivering  a  reliable,   safe  method  of
sterilization.

Clinical and Regulatory Status

          In 1995,  the Company  completed  in vitro  feasibility  studies and a
successful animal study that  demonstrated  100% pregnancy  prevention in the 20
animals  in which the device  remained  correctly  placed.  In  September  1995,
Conceptus  commenced  a Phase I  clinical  study of the  S/TOP  device  under an
Institutional   Review  Board  ("IRB")  approval  with  a  non-significant  risk
determination.  In April  1996  this  study  was  approved  by the FDA  under an
Investigational  Device Exemption  ("IDE").  The study involved the placement of
the S/TOP device in patients at the time of  hysterectomy in order to assess the
ability to access the fallopian  tube,  properly place the device,  and test the
acute retention of the device.  As of November 1998, 68 women have been enrolled
in this study.  IDE approval has been obtained for an expanded  Phase I clinical
study in 20 patients who are scheduled for a hysterectomy  six to 12 weeks after
hysteroscopic  placement of the S/TOP device. In addition to the initial Phase I
trial  objectives,  this study is designed to evaluate the histology of adjacent
tissue  reaction  and  patient  recovery  from the device  placement  procedure.
Twenty-seven  patients have been  enrolled in this study and have  undergone the
S/TOP device placement procedure without anesthesia.  The results from the first
five patients to undergo histologic evaluation of their fallopian tubes provides
early evidence of a local inflammatory tissue response to the device, as well as
damage  to the  tubal  architecture,  which is  expected  to be  unfavorable  to
conception.  In addition,  a  hysterosalpingography  performed just prior to the
hysterectomy  demonstrated  complete occlusion in all tubes tested to date, with
the  exception of three tubes in which the device did not remain due to improper
placement.

         In 1997, the Company  commenced a Phase II clinical study in Australia.
In 1998, a Phase II study was initiated at two sites in the United  States.  The
Company  also tested  several  different  configurations  of the S/TOP device in
pre-clinical  studies, in an attempt to improve handling  characteristics of the
device  and to  address  issues of device  migration  and  expulsion  which were
observed in the early clinical testing.  As of year-end 1998,  fourteen patients
are relying on the device for contraception and are being followed in the study.
In 67 months of wearing and through 37 months of efficacy testing, there were no
pregnancies  reported. A majority of the implantation  procedures were performed
without general  anesthesia and were tolerated by patients.  The Company expects
to follow this study with an expanded Phase II study,  which will likely involve
50 patients.  Depending on the results of this  expanded  Phase II study and the
Company's  on-going  development  efforts,  the  Company  is in the  process  of
formulating a Phase III study,  which will involve a larger  patient  population
and long-term follow up in support of a Pre-Market Approval ("PMA") application.
There can be no assurance  that the Company will be able to  formulate,  design,
and execute a large Phase III study or that such a study will enable the Company
to obtain a PMA of the S/TOP device.

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<PAGE>

Infertility and the Role of the Fallopian Tubes in Reproduction

         Infertility  is one of the most  common and  emotionally  traumatic  of
reproductive  disorders and appears to be increasing in most developed countries
due to both sociological and epidemiological factors. Studies indicate that five
to eight  million  couples  in the  United  States  (or up to 15% of  couples of
childbearing age from 20 to 44) are clinically infertile, which has been defined
as the failure to conceive  after one year of unprotected  intercourse.  Current
estimates of the United States market for diagnosis and treatment of infertility
are in excess of $2.0 billion annually.

         Because the fallopian tubes are the organs in which conception  occurs,
they serve a critical role in the reproductive  process.  Of the up to 8 million
couples   experiencing   infertility  in  the  United  States,   fallopian  tube
infertility  may affect as many as 2.8 million.  Yet, the fallopian tubes do not
lend  themselves  to easy  study and  treatment.  Because of the  difficulty  in
accessing the fallopian tubes,  current  non-surgical  techniques for diagnosing
fallopian  tube  diseases and  disorders  often do not  adequately or accurately
delineate  the  nature,  extent and  location  of tubal  pathology.  Therapeutic
choices  for  the  treatment  of  infertility  are  equally  constrained  by the
difficulty in accessing the fallopian tubes, and therefore,  most fallopian tube
therapies must be performed surgically.

         The most  commonly  performed  fallopian  tube  infertility  diagnostic
procedure is  hysterosalpingography  ("HSG"), which involves the injection of an
x-ray  contrast  medium  (or dye)  transcervically  into the uterus to allow the
physician to observe and evaluate  the flow of dye through the  fallopian  tubes
under fluoroscopy (x-ray).  This procedure is often painful and is also known to
be  highly  inaccurate,  with  false-positive  results  in as  many  as  40%  of
HSG-diagnosed  cases of proximal tubal  occlusion  ("PTO").  Because of its high
rate of inaccuracy,  when HSG indicates an occlusion,  the physician will likely
perform   a   surgical    confirmatory    procedure    known   as   laparoscopic
chromopertubation (commonly called "lap and dye").

         Because of the  inability  to access  the  fallopian  tubes  easily and
non-surgically  in order to effect an accurate  diagnosis of tubal health, it is
often difficult for physicians to select the most appropriate therapeutic option
for each patient.  The difficulties in accessing the fallopian tubes also result
in  current  therapies  for  tubal  infertility  being  far more  invasive  than
necessary.

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<PAGE>

Conceptus' First Platform Technology:  Transcervical Tubal Access Technology

         Conceptus  has developed its  minimally  invasive  transcervical  tubal
access technology to address the clinical problems and technological limitations
presented  by  current  fallopian  tube  infertility  and  tubal   sterilization
approaches.  The Company believes that the ability to directly and nonsurgically
access the fallopian tubes will lead to better reproductive outcomes by:

         o        Improving the accuracy of conventional  diagnostic  procedures
                  performed to assess tubal patency.

         o        Facilitating   the  performance  of  a  new  endoscopic  tubal
                  diagnostic  procedure,  which  will  permit the  diagnosis  of
                  several  key  aspects of tubal  functionality  not  adequately
                  assessed today.

         o        Enabling   physicians   to  select  more   appropriate   tubal
                  therapies, thereby eliminating many unnecessary therapies.

         o        Allowing more tubal  therapies to be performed  nonsurgically,
                  thus avoiding the risks and costs of surgery and the potential
                  for further surgery-induced damage to the fallopian tubes.

         o        Accelerating   the   selection  of   appropriate   infertility
                  treatment,   an  important   consideration   for  women  whose
                  infertility status has already been compromised by age.

         o        Providing   a   non-surgical   approach  to   fallopian   tube
                  sterilization,  thereby  increasing  patient  demand for tubal
                  sterilization  and  expanding its  availability  in developing
                  countries where surgical facilities may be limited.


Infertility Products

         The  Company's   proprietary   transcervical  tubal  access  technology
consists of specially designed,  micro-catheters and guidewires,  designed to be
atraumatic,  which provide non-surgical access through the cervix and uterus and
into the fallopian tubes. These components are combined with the Company's other
procedure-specific   products  to  produce  the  T-TAC  system  and  the  STARRT
Falloposcopy system.

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The following table sets forth the clinical indications of each of the Company's
principal infertility products:

                 Product Systems                   Clinical Indications
                 ---------------                   --------------------
     T-TAC System
     ------------
     VS (Variable Softness) Catheter          Diagnostic tubal
     Guidewires                                catheterization; therapeutic
     Soft Torque Uterine Catheter              tubal catheterization; HSG;
     Soft Seal Cervical Catheter               lap and dye; and
     Minicerv Cervical Catheter                intrauterine insemination.
     Progression Catheter

     STARRT Falloposcopy System
     --------------------------
     Stargate Catheter                        Operative fallopian tube
     StarQuest Guidewire                       endoscopy; in-office
     Coaxess Uterine Catheter                  fallopian tube endoscopy.
     Falloposcope
     Gyne-Flex Stabilizing Arm

Conceptus' Second Platform Technology: Resectoscopy

         ERA(TM)  and  FUTURA(TM)  are  trademarks  of the  Company.  All  other
tradenames  and  trademarks  appearing  in this report are the property of their
respective holders.

         Conceptus acquired Microgyn, Inc.,a privately held company, in November
1996.The technology  developed at Microgyn has been incorporated into Conceptus'
ERA  and  FUTURA  Resectoscope  Sleeves,  for  use in  therapeutic  resectoscopy
procedures  in  gynecology  and  urology.  In 1997,  the  Company  acquired  the
manufacturing  rights  for  the  ERA  and  FUTURA  product  lines  from  Medical
Scientific,  Inc.  The  Company  is  in  the  process  of  identifying  contract
manufacturers for the Microgyn sleeve products.

ERA Product Line

         The ERA product line for gynecology focuses on products to increase the
safety  and  performance  of  resectoscope  procedures,   including  therapeutic
hysteroscopy  procedures,  which  utilize an  endoscope  to guide the  selective
excision of abnormal uterine tissue. These procedures,  including endometrial or
fibroid resection and endometrial  ablation,  are growing in clinical acceptance
because they are less invasive,  non-incisional alternatives to the over 600,000
hysterectomies performed in the United States annually.

         In performing uterine therapy using a hysteroscope,  the uterus must be
distended  and the  visibility  maintained  by use of an optically  clear fluid.
Using monopolar (RF) electrosurgical  energy to cut or ablate adds a restriction
on  the  type  of  fluid  that  can  be  used:  a   non-conductive,   hypotonic,
non-physiologic  distention medium must be employed.  Non-conductive  fluids are
electrolyte-free (hypotonic) substances and therefore can change levels of vital
electrolytes such as sodium,  potassium, and chloride in the blood stream of the
patient.  Fluids such as  mannitol,  sorbitol  and glycine are adequate for this
purpose but present a risk to the patient.

                                       8
<PAGE>

         In therapeutic hysteroscopy, both small and large blood vessels are cut
as tissue is removed. Since the hypotonic fluids must be infused into the uterus
under pressure as high as 60-80 mmHg in order to distend the uterine  cavity,  a
large  amount  of fluid can be  forced  into  venous  channels,  which  normally
maintain  pressure of about 20 mmHg.  During the procedure,  fluid loss into the
patient is carefully monitored, via fluid deficit calculations, comparing fluids
used versus  fluids  recovered.  The surgeon is kept  apprised of the  patient's
fluid status,  because of the  complications  associated  with the absorption of
large amounts of hypotonic  solutions.  These include  serious heart,  lung, and
brain disorders, which sometimes result in coma or death.

         The Company's ERA product line  consists of the following  products:  a
simple, disposable ERA Resectoscope Sleeve, cutting loops and coagulating roller
balls. The ERA Resectoscope  Sleeve, when installed on a standard  hysteroscope,
changes  the flow of  electrosurgical  energy  delivered  during  cutting.  This
innovative  approach  permits  the use of  isotonic  solutions,  such as  normal
saline,  which are  physiologically  compatible  with the  patient.  The Company
believes  that  the  ability  to  effectively  use  isotonic   solutions  during
hysterscopic   procedures  should  minimize  the  risk  of  serious  electrolyte
disturbances and their associated complications. The ERA product line is easy to
use because it is designed  for total  mechanical  compatibility  with  existing
hysteroscopic instrumentation and power sources.

FUTURA Product Line

         There is also an important urological  application for the resectoscope
sleeve.  The FUTURA  Resectoscope  Sleeve  enables  the  urologist  to perform a
Transurethral  Resection of the Prostate  ("TURP") more safely.  TURP is used to
treat symptomatic  enlargement of the prostate,  or benign prostatic hyperplasia
("BPH").  Approximately  180,000 TURP  procedures  were  performed in the United
States in 1997.

         TURP typically involves the electrosurgical  removal of abnormal tissue
through  a  resectoscope,   without  the  need  for  an  incision.  Conventional
electrosurgical  procedures,  however,  require the use of hypotonic  irrigation
solutions,  the excessive  absorption of which is associated  with a potentially
catastrophic  complication referred to as "TUR Syndrome." In order to reduce the
risk of TUR Syndrome,  most  hospitals have adopted a strict  surgical  protocol
limiting the TURP procedure time,  which may make it difficult for physicians to
completely  resect abnormal  prostate tissue in a single  procedure.  The FUTURA
Resectoscope  Sleeve,  which utilizes the same patented Microgyn technology used
for  the   gynecological   application,   enables  the   urologist   to  perform
transurethral procedures using isotonic (physiologic) solutions, eliminating the
risk of TUR Syndrome, and permitting the extra procedure time that may be needed
to complete resection of the prostate.


Clinical and Regulatory Status

     Both the ERA and FUTURA  Resectoscope  Sleeve  products  have  received FDA
510(k) clearance for therapeutic hysteroscopy.

Research and Development

         The Company's research and development activities are performed through
a  combination  of internal  employees  and  external  consultants.  The Company
intends  to  continue  to focus its  research  and  development  efforts  on the
development  of  the  S/TOP  contraceptive  product.  Research  and  development
expenses in 1998,  1997,  and 1996 were $4.3  million,  $5.4  million,  and $3.8
million, respectively.

                                       9
<PAGE>

Manufacturing

         The Company  eliminated  its  manufacturing  function in July 1998 as a
part of its restructuring.  Prior to eliminating manufacturing,  the Company was
inspected  by  the  FDA,  and  was  in  substantial   compliance  with  all  FDA
requirements  including  FDA Good  Manufacturing  Practices  ("GMP") for medical
devices.  The  Company  has also been  inspected  in the past by the  California
Department  of Health  Services  ("CDHS")  and is  registered  with the State of
California to manufacture its medical devices and drugs. The State of California
Food and Drug Branch  conducted a two-day  inspection of the San Carlos facility
in February 1997 and as a result of that inspection,  recommended that Conceptus
be  issued a drug  license  by the  State of  California  Department  of  Health
Services.  See "Risk  Factors-Dependence  Upon Sole  Source  Suppliers;  Lack of
Contractual  Arrangements"  and - "Limited  Manufacturing  Experience  and Third
Party Manufacturers."

Marketing and Distribution

         Prior to the Company's July 1998  restructuring,  the ERA  resectoscope
sleeve and the STARRT products were marketed by the Company's direct sales force
in the U.S. and Europe.  The T-TAC and FUTURA  products  were  distributed  by a
network of distributors in the U.S., Europe, and Australia. In 1998, the Company
did not have any shipments to its major distribution  partners for the T-TAC and
FUTURA  products.  The  absence  of  shipments  to  these  distributors  and the
elimination  of the  Company's  sales force  resulted in a $977,000  decrease in
sales from 1997. In 1997 and 1996,  sales to major  distributors as a group were
90% and 65% of total sales,  respectively.  Until the Company is  successful  in
establishing  alternate  distribution  and marketing  partners to distribute the
Microgyn,  T-TAC,  and STARRT  products,  revenues are expected to decrease from
1998 to a very low level.  There can be no assurance  that any of the  Company's
existing or future distribution  partners will successfully market the Company's
products  for  applications  in  radiology,  gynecology,  or urology.  See "Risk
Factors-Limited Sales, Marketing and Distribution Experience; Emerging Market."

         In July 1996, the Company  entered into an agreement with  Mallinckrodt
Group, Inc.  ("Mallinckrodt"),  a major supplier of radiological contrast media.
Pursuant to this agreement,  Conceptus granted Mallinckrodt marketing rights for
radiology  applications of the T-TAC system in North, Central and South America.
In June 1996, the Company appointed Schering Health Care, Ltd., a major supplier
of reproductive  pharmaceuticals  to the  interventional  gynecology  market, as
Conceptus'  exclusive  distributor in the United Kingdom. In September 1997, the
Company  entered  into a  marketing  and  distribution  agreement  with  Imagyn,
formerly  UroHealth,  Inc.,  granting Imagyn an exclusive,  worldwide license to
distribute  products for urological  applications  of the  resectoscope  sleeve.
These distribution  agreements are currently dormant. In March 1998, the Company
received notification that Schering Health Care Ltd. terminated the distribution
agreement with the Company, effective May 1999.

         The Company  believes  that  interventional  gynecology  is an emerging
market,  thus there is no proven  distribution  channel  in the  United  States.
Penetrating   this   emerging   market  is  a   challenge   due  to   structural
characteristics  associated with the interventional  gynecology  market.  Unlike
many other physician specialty markets, the interventional  gynecology market is
characterized  by a large number of  office-based  physicians  (7,500) who often
practice  alone or with one other  physician.  Thus,  the number of sales  "call
points"  is large.  In  addition,  interventional  gynecologists  do not tend to
sub-specialize in a particular  procedure within  interventional  gynecology and
thus  perform a large  variety  of  clinical

                                       10
<PAGE>

procedures,  with each  individual  procedure  representing  a relatively  small
amount of the  physician's  total  professional  fees.  Yet, the  interventional
gynecologist   requires   the  same   level  of   in-servicing,   training   and
clinically-based  selling  activities  that  are  required  in  other  physician
specialty markets.  These market  dimensions:  a large,  diffusely-  distributed
custromer  base,  with  no  real   concentration  of  medical  procedures  makes
distribution to the interventional gynecologists a challenge.

         Prior to its July, 1998 restructuring,  Conceptus had sought to license
or acquire products that were  complementary to its products in order to develop
a  "critical  mass" of  medical  devices  to  justify  the  hiring  of a direct,
specialty  sales force.  The Company  believes there are several  companies with
such  products  which  to date  have  been  unable  to  establish  an  effective
distribution  channel for them.  Failing to build a line of products  that would
enable cost effective, direct marketing to the interventional gynecology market,
the Company  eliminated  its sales and  marketing  and  manufacuring  functions,
initiated   discussions  with  potential  marketing  partners  and  focused  its
remaining   internal  resources  on  the  development  of  its  S/TOP  permanent
contraception device. In conjunction with the restructuring, the Company decided
to no longer maintain  compliance with CE Mark  requirements,  which is required
for all products to be sold in the European  Community.  Accordingly,  effective
January 1, 1999, the Company's  current  products cannot be sold directly by the
Company into the European Community.

         The Company generally  operates under written  distribution  agreements
with its  distributors  which grant the  distributor the exclusive right to sell
the Company's  products  within a defined  territory.  These  distributors  also
typically  market other medical  products,  although the Company seeks to obtain
covenants from its distributors  prohibiting them from marketing medical devices
that compete directly with the Company's  products.  The Company's  distributors
typically  purchase  the  Company's  products at a discount  from list price and
resell the products to hospitals, clinics and physicians. Sales to international
distributors  are usually  denominated  in United States  dollars.  The end-user
price is determined by the distributor  and varies from country to country.  See
"Risk Factors Dependence Upon International Distributors and Sales."

Patents, Trade Secrets and Licenses

         The  Company's  policy  is  to  aggressively  protect  its  proprietary
position  by,  among other  things,  filing  United  States and  foreign  patent
applications  to  protect  technology,  inventions  and  improvements  that  are
important to the development of its business.  The Company's  strategy  includes
extending the patent  protection of its in-licensed  technology (from Target) by
filing  procedure-specific  method patents wherever  possible for the use of the
Company's  products  in new  clinical  applications,  as  well  as  aggressively
pursuing patents for all its other inventions and developments.

         As of February 28,  1999,  Conceptus  had applied for 19 United  States
patents,  seven of which  have  been  issued  to the  Company,  and has filed 25
foreign  patents,  two of which have been issued to the Company.  The  Company's
issued  patents  contain  claims  regarding  guidewire  manipulation,   a  novel
guidewire  design and a delivery  mechanism for a tubal  occlusion  device.  The
pending  applications  cover various aspects of the Company's  proprietary tubal
access platform  technology,  including  certain claims specific to falloposcopy
products,  as  well  as  the  Company's  S/TOP  device,  allowing  the  use of a
physiologic  solution during operative  hysteroscopy and other products that are
currently,  or in the  future may be,  used in  conjunction  with the  Company's
product systems.  Conceptus is also the licensee (from Target) for exclusive use
in the field of reproductive physiology,  of substantial technology developed by
Target as described  below,  and has granted to Target an

                                       11
<PAGE>

exclusive  license in certain fields of  interventional  medicine outside of the
field of reproductive  physiology to certain Conceptus  technology.  Conceptus's
exclusive  license  of  Target's  technology  is  applicable  to all  technology
available  to the Company as of February  1, 1996.  Conceptus  does not have any
preferential  rights for Target technology  developed following that date. As of
February 28, 1999, Target held, and Conceptus  exclusively  licensed from Target
within the field of  reproductive  physiology,  78 issued United States patents,
numerous United States patent  applications  and numerous foreign patents issued
and  applications  pending  covering  various  aspects of its  products and core
technology.   Target's   issued   patents  relate  to  the  design  of  Target's
micro-catheters,  the  initial  patent for which  expires in June 2006,  certain
aspects  of   guidewire   design  and  other   important   aspects  of  Target's
micro-catheter,  guidewire and micro-coil  technologies.  In the event that such
Target patents are at any time invalidated,  the Company's  proprietary position
in the marketplace would be severely compromised. In addition, should the Target
technology  licensed to the Company be found to  infringe  upon a third  party's
technology,  the  Company's  sale of products  based on such  infringing  Target
technology could be limited.  Finally,  in the event that the Company materially
breaches  the terms of its license  from  Target,  Target will have the right to
terminate the license.  Any such  termination  of this license would deprive the
Company  of the  right  to  develop  or  sell  products  based  on the  licensed
technology,  which  would  have a  material  adverse  effect  on  the  Company's
business,  financial  condition  and results of  operations.  See "Risk  Factors
Reliance on Patents and Protection of Proprietary Technology."

Government Regulation

United States

         The research,  development,  manufacture,  labeling,  distribution  and
marketing  of the  Company's  products  are subject to  extensive  and  rigorous
regulation by the FDA and, to varying degrees,  by state and foreign  regulatory
agencies.  The Company's  products are regulated in the United States as medical
devices by the FDA under the Federal  Food,  Drug,  and  Cosmetic  Act (the "FDC
Act")  and  most   require   clearance   or   approval   by  the  FDA  prior  to
commercialization.  In addition,  material  changes or  modifications to medical
devices also are subject to regulatory  review and clearance or approval.  Under
the FDC Act, 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 testing for,  preparation
of and  subsequent  review of  applications  by the FDA and  foreign  regulatory
authorities is an expensive,  lengthy and uncertain process.  The failure by the
Company to comply with FDA requirements could result in warning letters,  fines,
injunctions,  civil penalties,  recall or seizure of products,  total or partial
suspension of production,  the government's refusal to grant premarket clearance
or premarket approval for devices, and criminal  prosecution.  Accordingly,  the
Company  has   invested  in  building   an   experienced   team  of   regulatory
professionals.  For  example,  the  Company's  Senior Vice  President,  Clinical
Research,  Regulatory  Affairs and Quality Assurance was appointed by the FDA to
its OB/GYN Advisory Panel.

         The FDA also has the authority to require  clinical  testing of certain
medical  devices.  If clinical testing of a device is required and if the device
presents a  "significant  risk," an IDE  application  must be approved  prior to
commencing  clinical  trials.  The IDE  application  must be  supported by data,
typically  including the results of laboratory  and animal  testing.  If the IDE
application  is  approved  by the FDA,  clinical  trials may begin at a specific
number of investigational  sites with a maximum number of patients,  as approved
by the agency.  Sponsors of clinical  trials are permitted to sell those devices
distributed  in the  course  of the  study  provided  such  costs do not  exceed
recovery of the costs of manufacture,  research,

                                       12
<PAGE>

development  and  handling.  The  clinical  trials must be  conducted  under the
auspices of an IRB pursuant to FDA regulations.

         Generally, before a new device can be introduced into the market in the
United  States,   the   manufacturer  or  distributor   must  obtain   premarket
notification  clearance  under  Section  510(k) of the Federal Food,  Drug,  and
Cosmetic Act ("510(k)") or a premarket approval ("PMA").  In addition,  material
changes to medical  devices  are also  subject  to FDA review and  clearance  or
approval.  If a medical device manufacturer or distributor can establish,  among
other things,  that a device is  "substantially  equivalent" in intended use and
technological characteristics to certain legally marketed devices, for which the
FDA has not required a PMA, the  manufacturer  or distributor may seek clearance
from the FDA to market the device by filing a 510(k).  Though generally believed
to be a shorter,  less costly regulatory path than a PMA, the 510(k) may need to
be supported by appropriate data establishing to the satisfaction of the FDA the
claim of substantial  equivalence to the predicate device. In addition,  the FDA
may require  review by an advisory  panel as a condition for 510(k)  clearances,
which can further lengthen the regulatory  process. In recent years, the FDA has
been requiring a more rigorous demonstration of substantial equivalence.

         Following submission of the 510(k), the manufacturer or distributor may
not place the device into commercial  distribution  unless and until an order is
issued  by the FDA  finding  the  product  to be  substantially  equivalent.  In
response  to a 510(k),  the FDA may  declare  that the  device is  substantially
equivalent to another  legally  marketed device and allow the proposed device to
be  marketed  in the  United  States.  The FDA,  however,  may  require  further
information,   including  clinical  data,  to  make  a  determination  regarding
substantial  equivalence,  or may  determine  that the  proposed  device  is not
substantially  equivalent  and  require  a PMA.  Such a request  for  additional
information or  determination  that the device is not  substantially  equivalent
would delay  market  introduction  of the  products  that are the subject of the
510(k).

         If a manufacturer  or distributor of medical  devices cannot  establish
that a proposed device is substantially equivalent to a legally marketed device,
the  manufacturer  or distributor  must seek premarket  approval of the proposed
device through  submission of a PMA. A PMA must be supported by extensive  data,
including,  laboratory,  preclinical and clinical trial data to prove the safety
and effectiveness of the device as well as extensive manufacturing  information.
Following  receipt  of a PMA,  if the FDA  determines  that the  application  is
sufficiently  complete to permit a substantive  review,  the FDA will "file" the
application.  The PMA approval process can be lengthy,  expensive and uncertain.
FDA review of a PMA  generally  takes  approximately  two years or more from the
date of filing to  complete.  If  granted,  the  approval of the PMA may include
significant  limitations  on the  indicated  uses  for  which a  product  may be
marketed.  The PMA  process  can take  several  years  from  initial  filing and
requires the submission of extensive  supporting data and clinical  information.
There can be no assurance that any future products or applications  developed by
the Company will not require  approval  under the more lengthy and expensive PMA
process. If the Company is required to obtain approval for any products pursuant
to the PMA procedure  or, if the 510(k)  process with respect to any products is
extended for a considerable length of time, the commencement of commercial sales
of the Company's products will be delayed substantially.

         As  of  February  28,  1999,  the  Company  has  received  five  510(k)
clearances  for certain  diagnostic  and  therapeutic  indications  of its T-TAC
system.  In addition,  the Company has received  two 510(k)  clearances  for its
STARRT Falloposcopy system and its Stargate Catheter,  both for the diagnosis of
PTO.  Conceptus has also received two 510(k)

                                       13
<PAGE>

clearances for its FUTURA Sleeve in urology  applications  and its ERA Sleeve in
gynecology applications.

         The  Company  is  also  required  to  register  as  a  medical   device
manufacturer  with the FDA and state agencies,  such as the CDHS and to list its
products with the FDA. As such,  the Company will be  periodically  inspected by
both the FDA and CDHS for compliance with GMP and other applicable  regulations.
These regulations require that the Company manufacture its products and maintain
its  documents in a prescribed  manner.  In July 1994,  the Company's San Carlos
facility  was  inspected by the CDHS with no  observations,  and the Company was
subsequently  granted a California  medical  device  manufacturing  license.  In
February 1997, the Company's San Carlos  facility was inspected by the CDHS, and
granted a California drug manufacturing  license. In March 1997, the Company was
inspected by the FDA, with no action indicated.

         The Company is required to provide  information  to the FDA on death or
serious  injuries that its medical devices have allegedly  caused or contributed
to, as well as product  malfunctions  that would likely cause or  contribute  to
death or serious injury if the malfunction  were to recur. In addition,  the FDA
strictly  prohibits the marketing of approved  devices for uses other than those
specifically  cleared  for  marketing  by the FDA.  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.  Failure to comply with the regulatory  requirements
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

         The promotion of most products  regulated by the FDA is subject to both
FDA and Federal Trade Commission  jurisdictions.  The Company is also subject to
regulation by the  Occupational  Safety and Health  Administration  and by other
government  entities.  Regulations  regarding  the  manufacture  and sale of the
Company's  products  are subject to change.  The  Company  cannot  predict  what
impact, if any, such changes might have on its business,  financial condition or
results of operations. See "Risk Factors Government Regulations."

International

         Export sales of investigational  PMA devices or devices not cleared for
commercial distribution in the United States to certain countries are subject to
FDA export permit  requirements.  In order to obtain such a permit,  the Company
must  provide  the FDA with  documentation  from the medical  device  regulatory
authority  of the country in which the  purchaser  is located,  stating that the
sale of the device is not a violation  of that  country's  medical  device laws.
Recent regulations  eliminate export approval  requirements for  investigational
devices  subject  to an  approved  IDE  which are being  imported  into  certain
countries.

         The European Union has promulgated rules that 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. The ISO 9000 series of
standards for quality  operations  has been  developed to ensure that  companies
know the  standards  of quality to which  they must  adhere to receive  European
Union certification.  ISO 9000 certification is one of the CE mark certification
requirements.  Failure to receive  the right to affix the CE Mark will  prohibit
the Company from selling the product in member  countries of the European  Union
after December 31, 1998. The Company received ISO certification in January 1998,
but since

                                       14
<PAGE>

eliminating  its  manufacturing   function  the  Company  has  allowed  its  ISO
certification to lapse.  Thus the Company is no longer able to affix a "CE Mark"
to its products.

         Many  countries in which the Company  currently  operates or intends 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 which could adversely affect the Company's  ability to
market its products.  In addition,  significant costs and requests by regulators
for additional  information  may be encountered by the Company in its efforts to
obtain  regulatory  approvals.  Any such  events  could  substantially  delay or
preclude  the  Company  from  marketing  its  products  in the United  States or
internationally. See "Risk Factors Government Regulations."

Third-Party Reimbursement

         Market  acceptance of the Company's  products in international  markets
may  be  dependent  in  part  upon  the  availability  of  reimbursement  within
prevailing  healthcare payment systems.  Reimbursement  systems in international
markets vary significantly by country, and by region within some countries,  and
reimbursement  approvals must be obtained on a  country-by-country  basis.  Many
international markets have government-managed health care systems that determine
reimbursement for new devices and procedures. In most markets, there are private
insurance  systems  as  well as  government-managed  systems.  As in the  United
States,  the Company expects that ERA and FUTURA products will be covered within
the  hysteroscopy   procedure   reimbursement   framework.   Large-scale  market
acceptance of the Company's tubal catheterization,  falloposcopy,  sterilization
and other products will depend on the availability and level of reimbursement in
international markets targeted by the Company.  Currently,  the Company has been
informed by its international distributors that the tubal catheterization system
has been approved for  reimbursement  in countries in which the Company  markets
its  products.   The  Company's   falloposcopy  system  has  been  approved  for
reimbursement only in Australia.  Obtaining  reimbursement approvals can require
12 to 18 months or  longer.  There can be no  assurance  that the  Company  will
obtain  reimbursement  in any country within a particular time, for a particular
amount,  or at all.  Failure  to obtain  such  approvals  could  have a material
adverse  effect  on  market   acceptance  of  the  Company's   products  in  the
international markets in which the Company is seeking approvals and could have a
material adverse effect on the Company's sales,  business,  financial  condition
and results of operations.

         Regardless of the type of  reimbursement  system,  the Company believes
that   physician   advocacy  of  its   products   will  be  required  to  obtain
reimbursement.  Availability  of  reimbursement  will  depend  on  the  clinical
efficacy  and cost of the  Company's  systems.  There can be no  assurance  that
reimbursement for the Company's  products will be available in the United States
or in  international  markets under either  government or private  reimbursement
systems,  or that physicians will support and advocate  reimbursement for use of
the Company's  systems for all indications  intended by the Company.  Failure by
physicians,  hospitals  and  other  users of the  Company's  products  to obtain
sufficient   reimbursement  from  health  care  payors  or  adverse  changes  in
government and private  third-party  payors' policies toward  reimbursement  for
procedures employing the Company's products would have a material adverse effect
on the Company's business,  financial  condition and results of operations.  See
"Risk Factors Uncertainty Relating to Third Party Reimbursement."

                                       15
<PAGE>

Competition

         Currently,  fallopian  tubes are ligated by cutting or cauterizing  the
tubes,  or by mechanical  occlusion of the tubal lumen using clips or rings in a
surgical procedure such as a laparoscopy or laparotomy.  The Company is aware of
several   competitors   attempting  to  provide   alternate   methods  of  tubal
sterilization  including  radio  frequency  coagulation,   intratubal  cyrogenic
freezing,   polymeric  embolic  agents,  nitenol  stents,  silicone  plugs,  and
hydrogelic plugs.

         In the infertility  segment,  the Company  believes its primary current
competition  to be existing  methods for  diagnosing  and treating  diseases and
disorders  of the  fallopian  tubes.  Accordingly,  the  Company  competes  with
manufacturers  of products  that are used in other  methods for  diagnosing  and
treating tubal diseases and disorders, such as manufacturers of laparoscopic and
hysteroscopic  devices and other  products that provide more invasive  access to
the fallopian tubes. The Company also competes with certain other companies that
manufacture catheters and guidewires for tubal catheterization and falloposcopic
devices.  Additionally,  certain  smaller  companies are developing  alternative
catheter-based  systems for the diagnosis  and treatment of female  reproductive
disorders which may compete directly with the Company's systems.

         In the therapeutic  hysteroscopy market, there are four major endoscope
companies (Karl Storz Endoscopy,  Inc.,  Olympus,  Inc., Circon  Corporation and
Richard Wolf Medical  Instruments  Corporation) that account for the majority of
sales  of the  equipment  and  instruments  used to  perform  these  procedures.
Although  the  Company  believes  it  has  significant   intellectual   property
protection for its products,  there can be no assurance that these  companies or
others  (e.g.   electrosurgical   generator   manufacturers)  will  not  develop
technology to enable  electrosurgical  therapeutic  hysteroscopy to be performed
with isotonic  solution.  The major  endoscope  companies and others also market
cutting loops and coagulating  roller balls which would be directly  competitive
with those manufactured and marketed by the Company.  There are also a number of
companies  developing  devices to perform  endometrial  ablation using different
energy sources.

         The Company  believes that its products have distinct  advantages  over
those  of  its  competitors   based  on  the  Company's   advanced   proprietary
micro-catheter  and  guidewire  technologies  and its  proprietary  resectoscope
safety  sheath  technology.  However,  many of the  Company's  competitors  have
substantially  greater name recognition and financial resources than the Company
and have greater resources and expertise in research and development,  obtaining
regulatory  approvals,  manufacturing and marketing.  Certain of these companies
are  developing  and  marketing  devices  for the  diagnosis  and  treatment  of
disorders of the female  reproductive system and others may choose to enter this
market  at  a  later  date.  See  "Risk   Factors-Competition;   Uncertainty  of
Technological  Change" and  "-Reliance on Patents and  Protection of Proprietary
Technology."

Product Liability and Insurance

         The manufacture and sale of medical  products  involve an inherent risk
of  exposure  to product  liability  claims and product  recalls.  Although  the
Company has not experienced any product  liability  claims to date, there can be
no  assurance  that  the  Company  will  be able to  avoid  significant  product
liability claims and potential related adverse publicity.  The Company currently
maintains  product  liability  insurance with coverage  limits of $5,000,000 per
occurrence  and an annual  aggregate  maximum of  $5,000,000,  which the Company
believes 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 the Company's
products  will not exceed such  insurance  coverage 

                                       16
<PAGE>

limits,  which could have a material adverse effect on the Company, or that such
insurance will continue to be available on commercially  reasonable terms, or at
all. In addition,  the Company may require increased product liability  coverage
as more of its products are  commercialized.  Such 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  the  Company in
excess of its insurance coverage,  or a recall of the Company's products,  could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations. See "Risk Factors-Product Liability Risk and Recalls;
Limited Insurance Coverage."

Employees

         As of February 28, 1999 the Company employed 22 individuals, 17 of whom
were engaged directly in research, development, regulatory and quality assurance
affairs.  The Company is dependent  upon several key  management  and  technical
personnel.  The loss of the services of one or more key  employees  could have a
material  adverse  effect on the  Company's  business,  financial  condition and
results of operations.  The Company's success will also depend on its ability to
attract  and  retain  additional  highly  qualified   management  and  technical
personnel.  The Company faces intense competition for qualified personnel,  many
of whom are often subject to competing  employment  offers,  and there can be no
assurance  that the Company  will be able to attract and retain such  personnel.
None of the Company's employees is covered by a collective bargaining agreement.
Conceptus  believes that it maintains good  relations  with its  employees.  See
"Risk Factors-Dependence Upon Key Personnel."

Executive Officers of the Company

         The executive  officers of the Company,  and their ages, as of February
28, 1999, are as follows:

     Name                          Age   Position

Kathryn A. Tunstall..............   48   President, Chief Executive Officer
                                              and Director

Steve Bacich.....................   37   Vice President, Research and
                                              Development

Cynthia M. Domecus...............   39   Senior Vice President, Clinical
                                              Research, Regulatory
                                              Affairs and Quality Assurance

         Ms.  Tunstall  joined  Conceptus  in  July  1993  as  President,  Chief
Executive Officer and a director. Prior to joining Conceptus, Ms. Tunstall spent
seven years as an  executive  officer and in senior  marketing  positions of the
Edwards Less Invasive Surgery  Division of Baxter  International  ("Baxter"),  a
division engaged in the research and development, manufacturing and marketing of
cardiovascular  catheters,  serving as President from June 1990 to June 1993 and
serving as Vice  President and Director of Worldwide  Sales and  Marketing  from
November  1986 to June  1990.  From  1980 to 1986,  Ms.  Tunstall  held  various
positions in manufacturing and marketing of McGaw Laboratories, a pharmaceutical
and  medical  device  company,  serving  most  recently  as  Vice  President  of
Marketing.  Ms.  Tunstall  also serves as a director of  RESOLVE,  a  non-profit
infertility support,  education and advocacy organization.  Ms. Tunstall holds a
B.A. in Economics  from the  University  of  California  and has also  completed
graduate level studies in Business and Healthcare Administration.

                                       17
<PAGE>

         Mr. Bacich joined  Conceptus in March 1997 as Vice President,  Research
and Development.  Prior to joining Conceptus,  Mr. Bacich spent seven years as a
Co-founder and Director of New Product  Development for Imagyn Medical,  Inc., a
medical  device  manufacturer  of  gynecological  products for  infertility  and
enodscopic  procedures.  From August 1987 to  September  1989,  Mr.  Bacich held
engineering  positions in research and  development and serving most recently as
Senior  Staff  Engineer,  Business  Development  for the Edwards  Less  Invasive
Surgery  Division of Baxter.  From 1985 to 1987,  Mr.  Bacich held  research and
development  positions  at Mentor  Corporation,  a  reconstructive  surgery  and
urology  company.  From 1983 to 1985,  Mr. Bacich held research and  development
positions at American Medical Optics, an ophthalmic medical device  manufacturer
and Division of American Hospital Supply Corporation. Mr. Bacich holds a B.S. in
Biomedical Engineering from the University of California, San Diego.

         Ms.  Domecus has served as Senior Vice  President,  Clinical  Research,
Regulatory Affairs and Quality Assurance of Conceptus since May 1994. From March
1992 to May 1994 she served as Senior  Director and Director of  Regulatory  and
Quality  Affairs for Systemix,  a  biotechnology  firm.  From 1986 to 1992,  Ms.
Domecus  served  in  varying   regulatory   affairs   capacities  with  Collagen
Corporation, a biomedical device manufacturer, serving most recently as Director
of  Regulatory  Affairs from January  1991 to March 1992.  Ms.  Domecus has been
certified  by the  Regulatory  Affairs  Certification  Board  of the  Regulatory
Affairs  Professional  Society. In 1995, Ms. Domecus was appointed by the FDA to
its OB/GYN  Advisory Panel as the industry  representative.  Ms. Domecus holds a
B.A. in Psychology from the University of the Pacific.

ITEM 2.  PROPERTIES

         The Company is currently occupying  approximately 14,000 square feet in
San Carlos,  California.  The  facility  is subject to a lease which  expires in
December,  1999.  The  Company  has  leased  additional  space in the  amount of
approximately  16,397  square  feet,  also in San  Carlos,  California  which is
subject to a lease which  expires in May,  2002.  The larger  facility  has been
sub-leased at amounts  greater than the Company's lease  obligation  through the
entire  lease  period.  The  Company  believes  that it  will  be able to  lease
additional space or renew its existing leases as necessary.

ITEM 3.  LEGAL PROCEEDINGS

         A complaint  alleging  sexual  harassment was filed against the Company
and certain  named  officers of the Company in the Superior  Court of San Mateo,
California  on December  17,  1997.  As of March 1, 1999,  the Company  does not
believe  that the  outcome  of this  case  will  have a  material  effect on the
operations or financial condition of the Company.  The Company from time to time
is involved in routine legal matters incident to its business.

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

         No matters  were  submitted  to a vote of  stockholders  of the Company
during the fourth quarter of the fiscal year ended December 31, 1998.

                                       18
<PAGE>

                                     PART II


ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         The  Company's  Common  Stock has been  traded on the  Nasdaq  National
Market under the symbol CPTS since the effective  date of the Company's  initial
public offering on February 1, 1996.  Prior to the initial public  offering,  no
public market  existed for the Common Stock.  The following  table  presents the
high and low closing sale prices for the  Company's  Common Stock as reported in
the Nasdaq National Market for the period indicated.

                                                   High           Low
                                                   ----           ---
     January 1, 1998 through March 31, 1998       $ 5.250        $3.500
     April 1, 1998 through June 30, 1998          $ 3.500        $1.250
     July 1, 1998 through September 30, 1998      $ 1.750        $0.530
     October 1, 1998 through December 31, 1998    $ 2.250        $0.660

     January 1, 1997 thorugh March 31, 1997       $14.250        $9.375
     April 1, 1997 through June 30, 1997          $12.750        $8.500
     July 1, 1997 through September 30, 1997      $10.250        $6.625
     October 1, 1997 through December 31, 1997    $11.000        $4.125

         As of February 28, 1999, the Company had approximately 114 stockholders
of record.  The Company has never paid cash  dividends  on its Common  Stock and
does not anticipate paying cash dividends in the foreseeable future. The Company
intends to retain any future  earnings for  reinvestment  in its  business.  Any
future  determination  to pay cash  dividends  will be at the  discretion of the
Board of Directors and will be dependent upon the Company's financial condition,
results of operations,  capital requirements and such other factors as the Board
of Directors deems relevant.

         In October 1998, the Company  received  notification  from the National
Association of Securities  Dealer's Inc. ("NASD") that due to the decline of the
Company's stock price,  the Company was not in compliance,  throughout the third
quarter of 1998,  with certain  listing  maintenance  requirements of the Nasdaq
National  Market.  In November 1998, the Company's  Common Stock satisfied these
maintenance  requirements  with a closing  bid price of at least $1.00 per share
for ten consecutive  trading days.  While these  maintenance  requirements  were
satisfied within the required  ninety-day period required by the NASD, there can
be no  assurance  that  Company's  Common  Stock  will  stay in  compliance  the
maintenance  requirements.  If delisting were to occur, the Company expects that
trading of its Common Stock would be  conducted on the OTC Bulletin  Board or in
the  over-the-market  in what is commonly referred to as the "pink sheets".  The
closing price of the  Company's  Common Stock on December 31, 1998 was $2.25 per
share.

                                       19
<PAGE>

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
     The following table presents  selected  consolidated  financial data of the
Company.  This historical  data should be read in conjunction  with the attached
consolidated   Financial   Statements   and  the  related   notes   thereto  and
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" appearing in Item 7 of this Form 10-K.

<CAPTION>
                                                                                     Year Ended December 31,
                                                         ---------------------------------------------------------------------------
                                                         1994             1995             1996             1997            1998
                                                         ----             ----             ----             ----            ----
<S>                                                    <C>              <C>              <C>              <C>              <C>     
Statement of Operations Data:
Net sales                                              $    389         $    243         $    664         $  1,426         $    449
Cost of sales                                               718            1,021            1,208            3,516            1,702
                                                       --------         --------         --------         --------         --------
Gross profit (loss)                                        (329)            (778)            (544)           (2090)          (1,253)

Operating costs and expenses:
   Research and development                               1,778            2,589            8,509            5,429            4,317
   Selling, general and  admin                            1,894            2,805            4,824            6,323            5,349
                                                       --------         --------         --------         --------         --------
        Total operating expenses                          3,672            5,394           13,333           11,752            9,666
                                                       --------         --------         --------         --------         --------
Loss from operations                                     (4,001)          (6,172)         (13,877)         (13,842)         (10,919)
Interest & investment income, net                           125              323            2,185            1,784            1,254
                                                       --------         --------         --------         --------         --------
        Net loss                                       $ (3,876)        $ (5,849)        $(11,692)        $(12,058)        $ (9,665
                                                       ========         ========         ========         ========         ========

Basic and diluted net loss per share                                                     $  (1.39)        $  (1.29)        $  (1.01)
                                                                                         ========         ========         ========
Shares used in computing basic
and diluted net loss per share                                                              8,396            9,381            9,562
                                                                                         ========         ========         ========
</TABLE>


<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                      --------------------------------------------------------------------
                                                         1994          1995            1996         1997          1998
                                                      -----------   ------------    -----------  ------------  -----------
<S>                                                     <C>            <C>           <C>           <C>          <C>
        Balance Sheet Data:
        Cash, cash equivalents and short-term
           investments...............................   $5,253         $5,082        $39,021       $27,058      $17,071
        Working capital..............................    5,089          4,407         37,078        26,608       16,500
        Total assets.................................    6,221          6,092         40,093        29,480       19,031
        Long-term portion of debt and capital lease
           obligations...............................      264            153             34             1            -

        Redeemable convertible preferred stock.......   11,453         16,624          -                 -            -
        Accumulated deficit..........................   (6,132)       (11,981)       (23,673)      (35,731)     (45,396)
        Total stockholders' equity...................   (6,125)       (11,877)        37,595        27,504       18,014
</TABLE>

         Basic  and  diluted  net loss per share  have  also been  retroactively
restated to apply the requirements of Staff  Accounting  Bulletin No. 98, issued
by the SEC in February 1998 ("SAB 98").  Under SAB 98,  certain shares of common
stock and options and  warrants to  purchase  shares of common  stock  issued at
prices  substantially  below the per share price of shares sold in the Company's
initial  public  offering,  previously  included  in the  computation  of shares
outstanding  pursuant to Staff  Accounting  Bulletin  Nos. 55, 62 and 83 are now
excluded from the  computation as their effect is  antidilutive  under Financial
Accounting Standards Board Statement 128.

                                       20
<PAGE>

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

Overview

         Since its  inception  on  September  18,  1992,  the  Company  has been
primarily engaged in the design, development and marketing of minimally invasive
devices for reproductive medical applications. The Company's current focus is on
providing a  non-surgical  approach to fallopian  tube  sterilization,  the most
commonly  performed  contraceptive  procedure  worldwide,  while  continuing  to
support its diagnostic and therapeutic  gynecology  products.  The Company has a
limited history of operations and has experienced  significant  operating losses
since inception. Operating losses are expected to continue for at least the next
several years as the Company continues to expend  substantial  resources to fund
clinical trials in support of regulatory and reimbursement approvals, to conduct
research and development,  and to partner with  appropriate  marketing and sales
partners.

         The  Company's  initial  commercial  products,  the  T-TAC  and  STARRT
Falloposcopy  systems,  have generated  limited sales to date. Prior to the July
1998  restructuring,  the Company had sought to license or acquire products that
were  complementary  to its  products  in order to  develop a  critical  mass of
medical  devices  to  justify  the hiring of a direct,  specialty  sales  force.
Failing to build a line of products  that would  enable cost  effective,  direct
marketing to the interventional  gynecology  market,  the Company  implemented a
restructuring  plan in July 1998 when the Company  assessed  that the  near-term
market  potential  of  these  products  did  not  justify  a  direct,  specialty
salesforce.  This restructuring reduced the number of employees by approximately
fifty from seventy-two at the beginning of the year by eliminating all sales and
marketing  personnel,   the  manufacturing  function,  and  most  administrative
personnel.  As a result of these  actions the  Company  reduced  fourth  quarter
operating losses to $1.3 million in the fourth quarter of 1998 from $4.3 million
in the fourth quarter of 1997.

         In conjunction with the restructuring, the Company decided to no longer
maintain  compliance  with CE  Mark  requirements,  which  is  required  for all
products to be sold in the European  Union.  Accordingly,  effective  January 1,
1999, the Company's current products cannot be sold directly by the Company into
the  European  Union.  The  Company  is  actively  engaged in  discussions  with
potential  marketing  and  manufacturing  partners  in order to bring the T-TAC,
STARRT, and Microgyn products to the gynecology market. The failure to establish
and maintain effective distribution  partnerships and channels for the Company's
products  resulted in a  significant  decrease  in  revenues in 1998.  Until the
Company is successful in establishing marketing and sales partners to distribute
the Microgyn, STARRT, and T-TAC products, revenues are expected to decrease from
1998 to a very low level.

         Prior  to  the   restructuring   the  Company   sold  its  products  to
international  markets  through a limited number of  distributors  who resell to
physicians and hospitals.  Sales to  distributors  are made on open credit terms
and may  include  purchase  discounts.  General  marketing  of the T-TAC  system
commenced upon the receipt of a 510(k) clearance for diagnosis of proximal tubal
occlusion in August 1995.  Sales in 1996 were through a small direct sales force
and two significant distributors on open credit terms and consisted primarily of
commercial  shipments of T-TAC  products.  Sales in 1997 and 1998 were through a
small direct sales force (which was eliminated in July, 1998) and  distributors,
on open credit terms and consisted of commercial shipments of T-TAC, STARRT, ERA
and FUTURA products.

                                       21
<PAGE>

         In the fourth  quarter of 1996 the Company  presented  results from the
IMSF study of its STARRT Falloposcopy  system. Study data showed that use of the
STARRT  Falloposcopy  system  altered  infertility  diagnosis in the majority of
cases versus conventional  infertility diagnosis.  In February 1998, the Company
received 510(k) clearance of its second generation STARRT catheter, the Stargate
Catheter,  a component of the  Company's  STARRT  Falloposcopy  System,  for the
diagnosis of PTO. The Stargate Catheter is a modification of the VS Falloposcopy
Catheter, which was previously cleared for marketing in the United States by the
FDA. The Stargate Catheter is designed to improve visualization of the fallopian
tube by maintaining  sufficient space between the wall of the fallopian tube and
a micro endoscope. Limited marketing of the STARRT product line occurred in 1998
to three  customers  in the  United  States and in  Europe,  one large  customer
purchased a moderate  evaluation  quantity  of this new  Stargate  catheter  and
related products.

         On  November  26,  1996,  the  Company  completed  the  acquisition  of
Microgyn,  a privately held medical device company developing  products designed
to improve the safety and  performance  of  resectoscope  procedures,  including
therapeutic  hysteroscopy.  The Company  acquired all of the outstanding  common
stock of Microgyn,  Inc. in exchange for $3.0 million in cash on the acquisition
date and $1.0  million in the form of 104,708  shares of common stock issued six
months after the  acquisition  date,  plus $752,000 due to assumption of certain
liabilities and related acquisition expenses.  The acquisition was accounted for
using the  purchase  method  and $4.8  million  was  written-off  as  in-process
research and development in 1996.  Future earn-out  payments in the form of cash
or stock, at the option of Conceptus,  is payable to the former  shareholders of
Microgyn based upon meeting  certain future  milestones.  The Company  completed
product development of the Microgyn product portfolio in 1998.

         In the second  half of 1997 the  Company  began  marketing  the ERA and
FUTURA  Resectoscope  Sleeve  products from the Microgyn  technology  portfolio.
These  products  allow  the  use  of   physiologic   solution  when   performing
hysteroscopic procedures,  which increases the safety of resection procedures by
eliminating the risk of dilutional hyponatremia, a complication that can lead to
serious heart, lung, and brain disorders.  The Company received 510(k) clearance
for its FUTURA Resectoscope Sleeve for urology applications in the first quarter
of 1997. In September 1997, the Company  received  510(k)  clearance for its ERA
Resectoscope  Sleeve for gynecological  procedures.  Also in September 1997, the
Company  entered  into a  marketing  and  distribution  agreement  with  Imagyn,
formerly  UroHealth,  Inc.,  granting Imagyn an exclusive,  worldwide license to
distribute  products for urological  applications  of the  resectoscope  sleeve.
Since December 31, 1997, Imagyn has not purchased any of the Company's products.
In March  1998,  Imagyn  notified  the  Company of its intent to  terminate  the
distribution  agreement  between the parties as of June 30,  1998.  Although the
Company and Imagyn are currently  renegotiating the terms of their relationship,
there can be no  assurance  that the  parties  will reach an  agreement  on such
terms.  There  can be no  assurance  that the  Company  will be able to obtain a
suitable  alternate  distributor  for its products for urological  applications.
Unit sales of the Microgyn sleeve products in 1998 were significantly  below the
levels required to meet agreed upon milestones.  The Company is actively seeking
sales and  marketing  partners to  distribute  the ERA  Resectoscope  Sleeve for
gynecologic applications in the United States and internationally.

         Certain  of  the  Company's  products  were  manufactured  by  original
equipment  manufacturers  while  others were  manufactured  by  Conceptus at its
location in San Carlos,  California.  In the fourth quarter of 1997, the Company
acquired the exclusive  manufacturing rights from Medical Scientific,  Inc., the
supplier of the Company's ERA and FUTURA Resectoscope Sleeves. The manufacturing
know-how related to the ERA and FUTURA Resectoscope Sleeves has been transferred
to the Company's  facility in San Carlos.

                                       22
<PAGE>

If  the  volume  of  T-TAC,   STARRT,   ERA,  and  FUTURA   products   increases
significantly,  as a result of securing marketing partners,  the Company expects
to contract with original  equipment  manufacturers in order to maintain product
supply.

         Future  revenues and results of operations may fluctuate  significantly
from quarter to quarter and will depend upon,  among other factors,  the rate at
which  the  Company  establishes  domestic  and  international  distributors  or
marketing  partners,  actions relating to regulatory and reimbursement  matters,
the extent to which the Company's  products gain market  acceptance,  the timing
and size of  distributor  purchases,  the progress of clinical  trials,  and the
introduction  of competitive  products for diagnosis and treatment of the female
reproductive system. The Company believes that development of the T-TAC, STARRT,
and ERA and FUTURA  products has reached a logical  stage  sufficient  to enable
distribution  to the  marketplace.  Therefore,  the  Company  does not expect to
expend significant  resources on further  development of these products nor does
the Company plan on expending  significant  resources  marketing  these products
without a significant  marketing and distribution  partner.  Future sales of the
T-TAC,  STARRT, ERA, and FUTURA products are expected to be very low or decrease
from current levels until effective distribution partners are secured.

         The  Company  continues  to  devote  significant  financial  and  human
resources on the development of the S/TOP device, a non-surgical  alternative to
surgical tubal  ligation,  the most commonly used method of  sterilization.  The
system utilizes a unique  micro-coil  designed to be permanently  implanted into
the  fallopian  tube in order to obtain  effective  sterilization.  Hysterectomy
patients have  participated  in trials to determine  the tissue  response to the
implanted  microcoil.  In July 1997,  the Company  commenced a Phase II efficacy
study of the S/TOP  system in  Australia.  The  Phase II study  involves  device
placement in fertile women who desire  permanent  sterilization.  Study patients
will be monitored for a minimum of two years. In 1998, the Phase II was expanded
to include an additional  site in Australia and two sites in the United  States.
In  response  to early  Phase II results in which  S/TOP  device  expulsion  and
migration were noted,  device and procedural  modifications  were implemented in
mid-1998.  Since that time,  there have been no reported  device  expulsions  or
migrations.  The Company has also been conducting a proof-of-principal  study in
which patients  scheduled for a  hysterectomy  in six to twelve weeks consent to
have S/TOP  devices  implanted and removed at  hysterectomy,  in order to enable
hystological  evaluation of the devices  in-situ in the fallopian  tube. In this
study,  an  independent  laboratory  has  reported  findings of an acute  tissue
response at the site of S/TOP device  implantation,  tissue  in-growth  into the
S/TOP  device and a tubal  environment  that is  "hostile  to  conception".  The
Company  believes  that these are  important  components  of the S/TOP  device's
method of action of  contraception.  As of December 31, 1998,  fourteen patients
with proven fertility,  have been relying on the device for contraception and no
pregnancies have been reported.  Based on theses  preliminary  findings from the
Phase II trial,  the Company is in the process of developing plans to expand the
clinical  testing  of the S/TOP  device  into a Phase III  clinical  trial.  The
Company is seeking a significant  clinical partner to assist in the planning and
execution  of a large  clinical  trial of the S/TOP device and plans to actively
seek and secure such a partner.  There can be no  assurance  that the  Company's
efforts to find an appropriate clinical partner will be successful.

         In  November  1998,  the  Company   announced  that  it  retained  CIBC
Oppenheimer  Corporation  to evaluate  strategic  alternatives  for the Company,
including  inquiries that have been received by the Company  regarding  possible
business  alliances.  The  Company  intends to review  opportunities  in women's
health, its traditional market focus, as well as other areas of medicine.

         In October 1998, the Company  received  notification  from the National
Association of Securities  Dealer's Inc. ("NASD") that due to the decline of the
Company's stock price,  the

                                       23
<PAGE>

Company  was not in  compliance,  throughout  the third  quarter  of 1998,  with
certain  listing  maintenance  requirements of the Nasdaq  National  Market.  In
November  1998,  the  Company's   Common  Stock  satisfied   these   maintenance
requirements  with a  closing  bid  price of at least  $1.00  per  share for ten
consecutive  trading days. While these  maintenance  requirements were satisfied
within the  required  ninety-day  period  required by the NASD,  there can be no
assurance  that Company's  Common Stock will stay in compliance the  maintenance
requirements.  If delisting were to occur,  the Company  expects that trading of
its  Common  Stock  would  be  conducted  on the OTC  Bulletin  Board  or in the
over-the-market in what is commonly referred to as the "pink sheets".

Results of Operations

Years Ended December 31, 1998, 1997 and 1996

         Sales  decreased  by $1.0  million  in 1998 to $0.4  million  from $1.4
million in 1997 as a result of the lack of orders from significant  distribution
partners combined with the elimination, in July 1998, of all sales and marketing
personnel.  Sales  increased  115% to $1.4  million in 1997 from $0.7 million in
1996. This increase was due to increased  commercial  shipments of the Company's
T-TAC  products to a  significant  domestic  distributor,  as well as commercial
shipments of the Company's FUTURA products to a new domestic distributor.  Sales
to domestic customers  represented 33%, 83%, and 68% of sales in 1998, 1997, and
1996,  respectively.  The  decrease  in  domestic  sales  in  1998 is due to the
elimination of all sales and marketing personnel in July 1998.


         Cost of sales  decreased $1.8 million in 1998 to $1.7 million from $3.5
million in 1997 due to the  absence of  approximately  $1.1  million of expenses
incurred  in 1997 for the  purchase  of  manufacturing  rights for the  Microgyn
sleeve products combined with the elimination of all manufacturing activities in
July  1998.  Cost of sales  increased  191% to $3.5  million  in 1997  from $1.2
million in 1996. This increase was primarily due to  approximately  $1.1 million
associated with the purchase of exclusive  manufacturing rights of the Company's
ERA and FUTURA  products from MSI,  combined with  increased  unit  shipments of
T-TAC and FUTURA products.

         Research and development  ("R&D") expenses,  which include clinical and
regulatory  expenses,  decreased  $1.1 million to $4.3 million in 1998 from $5.4
million in 1997 due to significantly reduced development and clinical activities
associated with the Microgyn, T-TAC, and STARRT products. R&D expenses increased
to $5.4  million  in 1997 from $3.8  million  in 1996  (net of $4.8  million  of
acquired in-process  research and development).  The increase of $1.6 million in
1997  was  primarily  attributable  to the  increased  number  of  research  and
development  employees  and related use of  supplies,  prototype  materials  and
inventory,  and increased  expenses  associated with supporting various clinical
trials.

         As  discussed  above,  the Company  expensed  $4.8  million of acquired
in-process  research and  development  in  connection  with the  acquisition  of
Microgyn in 1996.

         Selling,  general and  administrative  ("SG&A")  expenses  decreased by
approximately  $1.0  million to $5.3 million in 1998 due to  elimination  of all
sales and marketing personnel and significant  administrative  personnel in July
1998. SG&A increased to $6.3 million in 1997 from $4.8 million in 1996. The $1.5
million  increase in 1997 was primarily due to the growth in marketing  expenses
associated with promoting the Company's products and growth of United States and
European sales and marketing personnel,  increased administrative costs required
to support expanding  operations and increased  administrative  costs of being a
public company,

                                       24
<PAGE>

         Net interest and  investment  income were $1.3 million and $1.8 million
in 1998 and 1997, respectively.  The decrease was a result of lower average cash
balances due to the utilization of cash for operations.

         As a result of the items  discussed  above,  net loss decreased to $9.7
million in 1998 from $12.1 million in 1997. Net loss was $11.7 million in 1996.

         The Company's  restructuring in July 1998 reduced operating loss in the
fourth quarter of 1998 to $1.3 million from $4.3 million in 1997.

         At December 31, 1998 the Company had net operating  loss  carryforwards
for federal and state income tax  purposes of  approximately  $38.0  million and
$13.5  million,  respectively.  In  addition,  the Company had  research  credit
carryforwards  of  approximately  $600,000  as of  December  31,  1998.  The net
operating  loss and credit  carryforwards  described  above will expire,  if not
utilized, at various dates beginning in the years 2006 through 2013. Utilization
of the net operating  losses and credits may be subject to a substantial  annual
limitation  due to the change of ownership  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.  See "Risk  Factors-Limited
Operating History; Anticipated Future Losses."

Accounting Pronouncements

         Please see footnotes to financial statements.

Liquidity and Capital Resources

         Since inception,  the Company's cash  expenditures  have  significantly
exceeded its sales,  resulting  in an  accumulated  deficit of $45.4  million at
December 31, 1998. At December 31, 1998,  Conceptus had cash,  cash  equivalents
and investments of  approximately  $17.1 million  compared with $27.1 million at
December 31, 1997.  The decrease in 1998 was  primarily due to $8.9 million used
in  operations,  to fund  increasing  levels of research and  development of the
Company's  S/TOP  contraception  product  and  expansion  of the S/TOP  Phase II
clinical trial.

         Capital  expenditures  in 1998 were  $0.9  million  and were  primarily
leasehold improvements and related furniture and fixtures for a new building. As
a result of the Company's restructuring in July 1998, the Company subleased this
new building and related  funiture and  fixtures,  for the entire lease term, at
amounts  greater  than  the  cost of  improvements  and  related  furniture  and
fixtures.  Capital expenditures in 1997 were $1.0 million compared with $375,000
in 1996. This increase was primarily due to the implementation of a new computer
system, the acquisition of machinery and equipment  necessary to manufacture the
ERA and  FUTURA  Resectoscope  Sleeves  and the  leasehold  improvements  on the
Company's  new  facility.  The  Company  plans  to  finance  its  capital  needs
principally from its existing capital  resources,  and to the extent  available,
bank and lease financing.

         Conceptus   believes  that  its  existing  capital  resources  will  be
sufficient to fund its S/TOP research and development  activities  through 1999.
The Company has  determined  that its cash  resources  are greater  than what is
expected  to be used in 1999 for the S/TOP  development  and  clinical  efforts.
However,  the Company's  future liquidity and capital  requirements  will depend
upon numerous factors, including the progress of the Company's clinical research
and product  development  programs,  execution and  implementation of partnering
arrangements,  the  receipt  of and  the  time  required  to  obtain  regulatory
clearances and approvals, and the resources devoted to developing, manufacturing
and  marketing the

                                       25
<PAGE>

Company's products. Accordingly, there can be no assurance that the Company will
not require additional  financing within this time frame and, therefore,  may in
the future seek to raise  additional  funds  through  bank  facilities,  debt or
equity offerings or other sources of capital. Furthermore, 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 the  Company,  which  would  have a  material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

RISK FACTORS

         In addition to the other  information  in this Form 10-K, the following
factors  should be  considered  carefully  in  evaluating  the  Company  and its
business. This Form 10-K contains forward-looking  statements that involve risks
and  uncertainties.  The Company's  actual results could differ  materially from
those  anticipated  in these  forward-looking  statements as a result of certain
factors, including those set forth below and elsewhere in this Form 10-K.

         Early State of STOP  Development - Uncertainty  of Product  Development
and  Lack of  Long  Term  Follow-Up  Data.  The  Company  has not yet  completed
development of the STOP  contraception  device and expects to increase  research
and development expenditures as the Company implements design changes in pursuit
of a  commercially  viable design.  To obtain  revenues from the STOP device the
Company must successfully develop,  obtain regulatory approval,  manufacture and
market the STOP  device.  The  Company has not yet  completed  Phase II clinical
trials of the STOP device and  anticipates  significantly  more  expenditures to
complete a large Phase III pivotal clinical trial,  prior to  commercialization.
There can be no assurance that the Company's  research and  development  efforts
will be successfully completed. Additionally, until the development and clinical
testing  processes are complete,  there can be no assurance the STOP device will
perform in the manner  anticipated,  or that the results  observed in animal and
human  clinical  trials will be experienced in long-term use. The first Phase II
placement of the device was in July 1997, and as of December 31, 1998 a total of
twenty-three  patients have been implanted with the device, thus the Company has
obtained  limited  clinical  data on the safety  and  efficacy  of the  product.
Because the Company has not yet obtained any  long-term  safety or efficacy data
there can be no assurance that long-term safety and efficacy data when collected
will be consistent  with the results  obtained in early Phase II clinical trials
nor can there be any assurance that the STOP device can be successfully  used by
a  wide  range  of  patients  on a  long-term  basis  as a  safe  and  effective
contraceptive method.

         Uncertainty of Market Acceptance. The Company's products have generated
limited  revenue to date.  There can be no assurance  that any of the  Company's
existing  or  future  products  will  gain  any  significant  degree  of  market
acceptance  among   physicians,   patients  and  healthcare   payors,   even  if
reimbursement and necessary international and United States regulatory approvals
are obtained.  The Company  believes that  recommendations  and  endorsements by
physicians  will be essential for market  acceptance of the Company's  products,
and there can be no assurance that any such recommendations or endorsements will
be obtained.  The Company  believes that  physicians  will not use the Company's
products unless they determine,  based on clinical data and other factors,  that
these systems are an  attractive  alternative  to other means of diagnosing  and
treating diseases and disorders of the female  reproductive  system and that the
products offer clinical  utility in a  cost-effective  manner.  Acceptance among
physicians will also depend upon the Company's  ability to train  interventional
gynecologists  and  other  potential  users  of the  Company's  products  in new

                                       26
<PAGE>

interventional  techniques  and upon the  willingness  of such  persons to learn
these new techniques.  Failure of the Company's products to achieve  significant
market  acceptance  would  have a  material  adverse  effect  on  the  Company's
business, financial condition and results of operations.

         Limited Sales, Marketing and Distribution Experience;  Emerging Market.
The Company has only limited  experience  marketing  and selling its products in
commercial quantities.  Interventional  gynecology is an emerging medical market
with  widely  varying  practice   patterns.   Therefore,   there  is  no  proven
distribution  channel for marketing the Company's current and future products in
the  United  States  or  internationally.  While the  Company  is  committed  to
establishing an effective distribution channel for its products, there can be no
assurance  that the  Company  will be  successful  in doing so.  The  failure to
establish  and maintain an effective  worldwide  distribution  for the Company's
current or future  products,  or to retain  qualified sales personnel to support
commercial sales of the Company's products, would have a material adverse effect
on the Company's business, financial condition and results of operations.

         Dependence  Upon   Transcervical   Tubal  Access  and   Catheterization
Products.  The  Company's  initial  commercial  products,  the T-TAC and  STARRT
Falloposcopy systems, have generated limited sales to date. Current applications
for these  systems  include  accessing,  diagnosing  and  treating  diseases and
disorders of the fallopian tubes. Expanding the number of applications for these
products will require  additional  development  and, in certain cases,  clinical
trials and regulatory approvals.  The Company will experience a material adverse
effect on its business,  financial condition, and results of operations if these
products   are  not   successfully   commercialized   for   existing  or  future
applications.

         Limited Operating History; Anticipated Future Losses. The Company has a
limited  history of  operations.  Since its  inception  in September  1992,  the
Company has been engaged  primarily in research  and  development  of its T-TAC,
STARRT  Falloposcopy  and S/TOP  systems  and,  since  1996,  the ERA and FUTURA
product  lines.  The Company has  generated  only limited  revenues and has only
limited  experience  in  manufacturing,  marketing  or selling  its  products in
commercial quantities.  The Company has experienced significant operating losses
since  inception  and, as of December 31, 1998,  had an  accumulated  deficit of
$45.4 million. The Company expects its operating losses to continue for at least
the next  several  years as it  continues  to expend  substantial  resources  in
funding  clinical trials in support of regulatory and  reimbursement  approvals,
expansion of  manufacturing,  marketing  and sales  activities  and research and
product development or acquisition.  Due to the expense and unpredictable nature
of these activities,  there can be no assurance that the Company will achieve or
sustain profitability in the future. Whether the Company can successfully manage
the transition to a large-scale  commercial enterprise will depend upon a number
of factors, including obtaining selected regulatory and reimbursements approvals
for  its   existing  or  potential   products,   establishing   its   commercial
manufacturing capability, developing its U.S. marketing and selling capabilities
and  establishing an  international  network.  Failure to make such a transition
successfully  would have a material  adverse  effect on the Company's  business,
financial condition and results of operations.

         Reliance on Patents  and  Protection  of  Proprietary  Technology.  The
Company's  ability to  compete  effectively  will  depend  substantially  on its
ability to develop and maintain proprietary aspects of its technology. There can
be no assurance that the Company's seven issued patents, any future patents that
may be issued as a result  of the  Company's  United  States or  foreign  patent
applications,  or the patents under which the Company has license  rights,  will
offer any degree of  protection to the Company's  products  against  competitive
products.  There  can be no  assurance  that any  patents  that may be issued or
licensed to the Company or any of the Company's patent  applications will not be
challenged, invalidated or circumvented in the future. In addition, there can be
no assurance that competitors,  many of whom have substantial resources and have
made substantial investments in competing

                                       27
<PAGE>

technologies,  will not seek to apply for and obtain  patents that will prevent,
limit or interfere with the Company's  ability to make, use or sell its products
either in the United States or in international markets.

         The  medical  device  industry  has  been  characterized  by  extensive
litigation  regarding  patents  and  other  intellectual  property  rights,  and
companies in the industry have employed intellectual property litigation to gain
a competitive advantage.  There can be no assurance that the Company will not in
the future  become  subject to patent  infringement  claims  and  litigation  or
interference  proceedings  declared by the United  States  Patent and  Trademark
Office  ("USPTO")  to  determine  the  priority of  inventions.  The defense and
prosecution of intellectual  property suits, USPTO interference  proceedings and
related legal and administrative proceedings are both costly and time consuming.
Litigation may be necessary to enforce patents issued to the Company, to protect
the  Company's  trade  secrets or know-how or to determine  the  enforceability,
scope and validity of the proprietary rights of others.

         Any litigation or interference  proceedings  involving the Company will
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. An adverse determination in
litigation or  interference  proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties or require
the  Company  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.
Furthermore,  there  can  be no  assurance  that  necessary  licenses  would  be
available  to  the  Company  on   satisfactory   terms,   if  at  all.   Adverse
determinations in a judicial or  administrative  proceeding or failure to obtain
necessary  licenses could prevent the Company from manufacturing and selling its
products,  which would have a material adverse effect on the Company's business,
financial condition and results of operations.

         A patent  issued to Target  Therapeutics,  a unit of Boston  Scientific
Corporation  ("BSC"),  and subject to  Target's  license to the  Company,  which
contains  claims  relating  to the  design of the  Company's  Variable  Softness
micro-catheters   (the   "Target   patent"),   has  been  the  subject  of  four
reexamination proceedings in the USPTO. Following the completion of the first of
such proceedings, the USPTO issued a reexamination certificate and confirmed the
patentability.  After the USPTO's  review of  petitions  for  second,  third and
fourth  re-examinations,  Target  received  notice  from the  USPTO  that it had
reaffirmed the patentability of the claims of the Target patent. In addition, in
November  1994,  Target filed a lawsuit in United States  District Court against
SciMed  Life  Systems,  Inc.  ("SciMed"),   a  subsidiary  of  BSC,  and  Cordis
Endovascular Systems, Inc. ("Cordis"),  a subsidiary of Johnson & Johnson, Inc.,
alleging  infringement  of a Target  patent  relating to variable  stiffness  in
microcatheters,  and seeking damages and  preliminary  and permanent  injunctive
relief against sales of such companies'  products  believed to be infringing the
Target  patent.  The  defendants  responded by  challenging  the validity of the
Target patent, denying infringement and raising other defenses. In May 1996, the
District  Court  granted  Target's  motion  for an  injunction  prohibiting  the
defendants from continuing to sell the products  alleged to infringe the patent.
In July 1996, the United States Court of Appeals for the Federal  Circuit stayed
the  injunction  pending an appeal by the  defendants.  Upon the merger  between
Target by BSC, the lawsuit has been  dismissed as to SciMed.  Subsequently,  the
Court of Appeals vacated the preliminary injuction. The lawsuit was dismissed as
to Cordis  pursuant  to a  settlement  agreement  signed in  January  1998.  Any
invalidation  of the Target patent could have a material  adverse  effect on the
Company's business, financial condition and results of operations.

                                       28
<PAGE>

         Legislation  is pending in  Congress  that,  if enacted in its  present
form,  would 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.  While the
Company cannot predict  whether the  legislation  will be enacted,  or precisely
what  limitations  will  result  from  the law if  enacted,  any  limitation  or
reduction in the  patentability  of medical and surgical  methods and procedures
could have a material  adverse  effect on the  Company's  ability to protect its
proprietary methods and procedures.

         In  addition  to  patents,  the  Company  relies on trade  secrets  and
technical  know-how  and  continuing  technological  innovation  to develop  and
maintain its competitive position. The Company typically requires its employees,
consultants and advisors to execute  appropriate  confidentiality and assignment
of  inventions  agreements in connection  with their  employment,  consulting or
advisory relationship with the Company.  These agreements generally provide that
all  confidential  information  developed or made known to the individual by the
Company during the course of the individual's  relationship  with the Company is
to be kept  confidential and not disclosed to third parties,  except in specific
circumstances.  The  agreements  also  generally  provide  that  all  inventions
conceived by the  individual in the course of rendering  services to the Company
shall be the  exclusive  property  of the  Company.  There can be no  assurance,
however,  that these  agreements  will not be breached or that the Company  will
have adequate  remedies for any breach.  Furthermore,  no assurance can be given
that  competitors  will  not  independently  develop  substantially   equivalent
proprietary information and techniques or otherwise gain access to the Company's
proprietary technology, or that Conceptus can meaningfully protect its rights in
unpatented proprietary technology.

         Government  Regulation.  The manufacture  and sale of medical  devices,
including the medical devices used in the Company's STOP,  T-TAC, and STARRT and
Microgyn  resectoscope  sleeves, are subject to extensive regulation by numerous
government  authorities,  both in the United States and internationally.  In the
United  States,  the  principal  regulatory  authorities  are the  Food and Drug
Administration ("FDA") and corresponding state agencies,  such as the California
Department of Health Services ("CDHS"). The process of obtaining and maintaining
required  regulatory  clearances is lengthy,  expensive and  uncertain.  The FDA
requires  companies  that wish to  market a new  medical  device or an  existing
medical  device  for use for a new  indication  to  obtain  either  a  premarket
notification  clearance  under  Section  510(k) of the Federal Food,  Drug,  and
Cosmetic  Act  ("510(k)")  or  a  premarket   approval   ("PMA")  prior  to  the
introduction of such product into the market.  In addition,  material changes to
medical  devices are also subject to FDA review and clearance or approval.  If a
medical device  manufacturer or distributor  can establish,  among other things,
that a device is  "substantially  equivalent" in intended use and  technological
characteristics  to certain legally marketed devices,  for which the FDA has not
required a PMA, the  manufacturer or distributor may seek clearance from the FDA
to market  the  device by filing a 510(k).  Though  generally  believed  to be a
shorter,  less  costly  regulatory  path than a PMA,  the  510(k) may need to be
supported by appropriate  data  establishing to the  satisfaction of the FDA the
claim of substantial  equivalence to the predicate device. In addition,  the FDA
may require  review by an advisory  panel as a condition for 510(k)  clearances,
which can further lengthen the regulatory process.  The PMA approval process can
take several years from initial  filing and requires the submission of extensive
supporting  data and clinical  information.  There can be no assurance  that any
future  products  or  applications  developed  by the  Company  will not require
approval  under the more lengthy and  expensive  PMA process.  If the Company is
required to obtain  approval for any products  pursuant to the PMA procedure or,
if  the  510(k)  process  with  respect  to  any  products  is  extended  for  a
considerable  length  of  time,  the  commencement  of  commercial  sales of the
Company's products will be delayed substantially.

                                       29
<PAGE>

         There  can be no  assurance  that the  Company  will be able to  obtain
necessary 510(k) clearances or PMA or other approvals to market its products for
the  intended  uses on a timely  basis,  if at all,  and delays in receipt of or
failure to receive such clearances or approvals, the loss of previously received
clearances or approvals, or failure to comply with existing or future regulatory
requirements  could have a material  adverse  effect on the Company's  business,
financial condition and results of operations.  Moreover, regulatory clearances,
if granted, may include significant  limitations on the indicated uses for which
a product may be marketed.

         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.

         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. The ISO 9000 series of
standards for quality  operations  has been  developed to ensure that  companies
know the  standards  of quality to which  they must  adhere to receive  European
Union certification.  ISO 9000 certification is one of the CE mark certification
requirements.  Failure to receive  the right to affix the CE mark will  prohibit
the Company from selling such product in member  countries of the European Union
after 1998. In conjunction  with the Company's  restructuring  in July 1998, the
Company  elected to let its  ISO9000  certification  lapse.  Accordingly,  as of
January 1, 1999, the Company  cannot sell its products  directly in the European
Union.

         Regulatory approvals,  if granted, may include significant  limitations
on the  indicated  uses for which the  Company's  products may be  marketed.  In
addition,  in order for companies to obtain such approvals,  the FDA and certain
foreign  regulatory  authorities  impose numerous  additional  requirements with
which medical device  manufacturers must comply. FDA enforcement policy strictly
prohibits  the promotion of approved  medical  devices for uses other than those
specifically  cleared for  marketing by the FDA. The Company will be required to
adhere to applicable  FDA  regulations  regarding Good  Manufacturing  Practices
("GMP") and similar  regulations  in other  countries,  which  include  testing,
control and documentation  requirements.  Ongoing  compliance with GMP and other
applicable   regulatory   requirements   will  be  monitored   through  periodic
inspections by federal and state  agencies,  including the FDA and the CDHS, and
by comparable  agencies in other  countries.  Failure to comply with  applicable
regulatory  requirements,  could result in, 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 premarket
clearance  or  premarket  approval for  devices,  withdrawal  of  approvals  and
criminal  prosecution.  Changes  in  existing  regulations  or  adoption  of new
government regulations or policies could prevent or delay regulatory approval of
the Company's  products.  The Company  cannot  predict the impact,  if any, such
changes  might  have  on  its  business,   financial  condition  or  results  of
operations.

         Uncertainty  Relating  to  Third-Party  Reimbursement.  In  the  United
States,  hospitals,  physicians  and other  healthcare  providers  that purchase
medical  devices  generally rely on third-party  payors,  such as private health
insurance  plans,  to  reimburse  all or part of the  cost  associated  with the
treatment  of  patients.   Although   reimbursement  for   catheterization   and
hysteroscopy procedures has generally been available in the United States, there
can be no assurance that such  reimbursement  will continue to be available.  If
FDA   clearance   or  approval  is  received  for  new   products,   third-party
reimbursement  for these products will be dependent

                                       30
<PAGE>

upon decisions by individual health maintenance organizations,  private insurers
and other payors. However, the Company believes that procedures using its STARRT
Falloposcopy  system may be  reimbursed  in the  United  States  under  existing
procedure codes for diagnosis and  re-establishment  of patency of the fallopian
tubes  and,  if  applicable,  for  related  interpretation  of such  procedures.
However,  there  can be no  assurance  that such  procedure  codes  will  remain
available or that the  reimbursement  under these codes will be adequate.  Given
the efforts to control and decrease health care costs in recent years, there can
be no assurance that any reimbursement  will be sufficient to permit the Company
to  achieve or  maintain  profitability.  The  Company  could also be  adversely
affected  by  changes  in  reimbursement   policies  of  government  or  private
healthcare  payors,  particularly  to the extent  that any such  changes  affect
reimbursement  for  therapeutic  or  diagnostic  catheterization  procedures  or
hysteroscopy  procedures  in which the Company's  products are used.  Failure by
physicians,  hospitals  and  other  users of the  Company's  products  to obtain
sufficient  reimbursement  from  healthcare  payors for  procedures in which the
Company's  products  are used,  or adverse  changes in  government  and  private
third-party  payors' policies toward  reimbursement  for such procedures,  could
have a material adverse effect on the Company's  business,  financial  condition
and results of operations.

         Market  acceptance of the Company's  products in international  markets
may  be  dependent  in  part  upon  the  availability  of  reimbursement  within
prevailing  healthcare payment systems.  Reimbursement  systems in international
markets vary significantly by country, and include both government-sponsored and
private healthcare insurance.  Obtaining  reimbursement approvals can require 12
to 18 months or longer.  There can be no assurance  that the Company will obtain
reimbursement in any country within a particular time, for a particular  amount,
or at all. Failure to obtain such approvals could have a material adverse effect
on market acceptance of the Company's  products in the international  markets in
which the Company is seeking  approvals and could have a material adverse effect
on the Company's sales, business, financial condition and results of operations.

         Competition;  Uncertainty of Technological  Change.  The medical device
industry is highly  competitive.  The Company expects competition for devices to
diagnose  and treat  female  reproductive  disorders  to  increase.  Many of the
Company's  competitors have substantially greater name recognition and financial
resources than the Company and have greater  resources and expertise in research
and development,  obtaining regulatory  approvals,  manufacturing and marketing.
Certain  of  these  companies  are  developing  and  marketing  devices  for the
diagnosis  and  treatment  of disorders  of the female  reproductive  system and
others may choose to enter this  market at a later date.  Additionally,  certain
smaller  companies are  developing  alternative  catheter-based  systems for the
diagnosis  and  treatment  of female  reproductive  disorders  that may  compete
directly  with  the  Company's  systems.  There  can be no  assurance  that  the
Company's  competitors will not succeed in developing  technologies and products
that are more  effective  or less costly than those  developed by the Company or
that  would  render  the   Company's   products   obsolete  or   noncompetitive.
Additionally, there can be no assurance that the Company will be able to compete
effectively  against such  competitors  based on its  abilities to  manufacture,
market and sell its products.

         As the Company  commercializes  its S/TOP system, it expects to compete
against  other  surgical  procedures  for  permanent  contraception,  mechanical
devices and other  contraceptive  methods.  The Company also competes with other
companies for clinical sites to conduct  trials.  The medical device industry is
characterized by rapid and significant  technological change. The length of time
required for product development and regulatory approval plays an important role
in a company's  competitive position.  Consequently,  the Company's success will
depend in part on its ability to respond  quickly to medical  and  technological
changes through the development and  commercialization of new products.  Product
development  involves a high degree of risk and there can be no  assurance  that
the

                                       31
<PAGE>

Company's   research  and  development   efforts  will  result  in  commercially
successfully  products.  The Company  believes that it competes  favorably  with
respect  to these  factors,  although  there  can be no  assurance  that it will
continue to do so and that  competition  will not have a material adverse effect
on the Company's business, financial condition and results of operations.

         Limited   Manufacturing   Experience   and   Reliance  on  Third  Party
Manufacturers.  The Company has limited experience in manufacturing its products
in  commercial  quantities.   In  restructuring,   the  Company  eliminated  its
manufacturing  function. If the Company is successful in estabilishing alternate
distribution  partners for its products the Company plans to utilize third party
manufacturers to manufacture the products. The Company has identified candidates
that it believes  could  adequately  produce the products  with the  appropriate
quality  and  sufficient  volumes.  However,  third  party  manufacturers  often
encounter  difficulties  in scaling up  production  of new  products,  including
problems involving production yields,  quality control and assurance,  component
supply and shortages of qualified personnel.  There can be no assurance that the
Company  and its third  party  manufacturers  will not  encounter  manufacturing
difficulties,  which  could  have a  material  adverse  effect on the  Company's
business, financial condition and results of operations.

         Dependence   Upon   Sole   Source   Suppliers;   Lack  of   Contractual
Arrangements.  Conceptus  purchases  both raw materials used in its products and
finished  goods from various  suppliers and relies on single sources for most of
these items.  The Company does not have formal supply contracts with several key
vendors and, accordingly, no assurance can be made that such firms will continue
to supply the Company with such raw  materials or finished  goods in  sufficient
quantities,  or at all.  Delays  associated  with any  future raw  materials  or
finished goods shortages  could have a material  adverse effect on the Company's
business,  financial  condition and results of operations,  particularly  as the
Company  scales up its  manufacturing  activities  in support  of  international
commercial  sales and, to the extent that FDA  approvals  are  received,  United
States commercial sales.
         Possible  Future  Capital  Requirements.  Conceptus  believes  that its
existing  capital  resources will be sufficient to fund its  operations  through
1999.  However,  the Company's  future liquidity and capital  requirements  will
depend upon numerous factors,  including the progress of the Company's  clinical
research and product development programs,  the receipt of and the time required
to obtain  regulatory  clearances  and approvals,  and the resources  devoted to
developing,  manufacturing and marketing the Company's  products.  The Company's
capital  requirements  will also depend on, among other  things,  the  resources
required to expand  manufacturing  capacity and facilities  requirements and the
extent to which the Company's  products  generate market  acceptance and demand.
Accordingly,  there  can be no  assurance  that the  Company  will  not  require
additional  financing within this time frame and,  therefore,  may in the future
seek to raise additional funds through bank facilities, debt or equity offerings
or other sources of capital. Furthermore, 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 the Company,  which would have a material adverse effect on
the Company's business, financial condition and results of operations.

         Product  Liability Risk and Recalls;  Limited Insurance  Coverage.  The
manufacture and sale of medical products involve an inherent risk of exposure to
product  liability  claims and  product  recalls.  Although  the Company has not
experienced any product liability claims to date, there can be no assurance that
the  Company  will be able to avoid  significant  product  liability  claims and
potential related adverse  publicity.  The Company  currently  maintains product
liability  insurance  with coverage  limits of $5,000,000  per occurrence and an
annual

                                       32
<PAGE>

aggregate  maximum of  $5,000,000,  which the Company  believes 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 the  Company's  products  will not exceed such
insurance  coverage  limits,  which could have a material  adverse effect on the
Company,  or that such insurance  will continue to be available on  commercially
reasonable  terms,  or at all. In  addition,  the Company may require  increased
product liability coverage as its products are commercialized. Such 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 the
Company  in  excess of its  insurance  coverage,  or a recall  of the  Company's
products,  could  have a  material  adverse  effect on the  Company's  business,
financial condition and results of operations.

         Dependence  Upon Key Personnel.  The Company is dependent upon a number
of key  management and technical  personnel.  The loss of the services of one or
more key  employees  could  have a  material  adverse  effect  on the  Company's
business,  financial condition and results of operations.  The Company's success
will also  depend  on its  ability  to  attract  and  retain  additional  highly
qualified  management  and  technical  personnel.   The  Company  faces  intense
competition for qualified personnel, many of whom are often subject to competing
employment  offers,  and there can be no assurance that the Company will be able
to attract and retain such  personnel.  Furthermore,  the Company  relies on the
services of several medical and scientific consultants, all of whom are employed
on a full-time  basis by  hospitals or academic or research  institutions.  Such
consultants  are  therefore not available to devote their full time or attention
to the Company's affairs.

         Reliance on Target Therapeutic's  License. As of February 28, 1999, BSC
beneficially  owned  approximately  14.34% of the Company's  outstanding  Common
Stock. Accordingly,  BSC may be able to exercise influence over the business and
financial  affairs of the Company.  In April 1997, BSC completed the acquisition
of  Target,  by  merging  Target as a wholly  owned  subsidiary.  Certain of the
Company's  products  are based  upon  patents  and other  intellectual  property
licensed  from Target,  on an exclusive  basis within the field of  reproductive
physiology.  In the event that such Target patents are at any time  invalidated,
the  Company's  proprietary  position  in  the  marketplace  would  be  severely
compromised and the Company's  competitors could have the ability to incorporate
the  Target  technology  in their  products.  In  addition,  should  the  Target
technology  licensed to the Company be found to  infringe  upon a third  party's
technology,  the  Company's  sale of products  based on such  infringing  Target
technology could be limited.  Finally,  in the event that the Company materially
breaches  the terms of its license  from  Target,  Target will have the right to
terminate the license.  Any such  termination  of this license would deprive the
Company  of the  right  to  develop  or  sell  products  based  on the  licensed
technology,  which  would  have a  material  adverse  effect  on  the  Company's
business, financial condition and results of operations.

         Potential Fluctuations in Future Quarterly Results. Future revenues and
results of operations  may fluctuate  significantly  from quarter to quarter and
will depend  upon,  among other  factors,  actions  relating to  regulatory  and
reimbursement  matters,  the extent to which the Company's  products gain market
acceptance,   progress  of  clinical  trials  and  introduction  of  competitive
products.

         Volatility  of Stock  Price.  The  stock  market  has from time to time
experienced  significant price and volume fluctuations that are unrelated to the
operating performance of particular companies.  The Company's stock price has in
the past  been,  and may in the future be,  subject to  significant  volatility,
particularly  on a quarterly  basis.  Any  shortfall in revenue or earnings from
levels  expected by securities  analysts could have an immediate and significant
adverse  effect on the trading price of the Company's  Common Stock in any given

                                       33
<PAGE>

period.  Additionally,  the  Company  may not learn  of, or be able to  confirm,
revenue or earnings  variations from estimates until late in the fiscal quarter,
which could result in an even more  immediate and adverse  effect on the trading
price of the Company's  Common Stock.  Finally,  the Company  participates  in a
highly  dynamic  industry,  which  often  results  in  significant  stock  price
volatility. In October 1998, the Company received notification from the National
Association of Securities  Dealer's Inc. ("NASD") that due to the decline of the
Company's stock price,  the Company was not in compliance,  throughout the third
quarter of 1998,  with certain  listing  maintenance  requirements of the Nasdaq
National  Market.  In November 1998, the Company's  Common Stock satisfied these
maintenance  requirements  with a closing  bid price of at least $1.00 per share
for ten consecutive  trading days.  While these  maintenance  requirements  were
satisfied within the required  ninety-day period required by the NASD, there can
be no  assurance  that  Company's  Common  Stock  will  stay in  compliance  the
maintenance  requirements.  If delisting were to occur, the Company expects that
trading of its Common Stock would be  conducted on the OTC Bulletin  Board or in
the over-the-market in what is commonly referred to as the "pink sheets".

         In addition,  the market  prices of the common  stock of many  publicly
held medical  device  companies  have in the past been, and can in the future be
expected  to be,  especially  volatile.  Factors  such  as  fluctuations  in the
Company's operating results,  announcements of technological  innovations or new
products by the Company or its  competitors,  FDA and  international  regulatory
actions,  changes in reimbursement levels,  developments with respect to patents
or proprietary rights,  public concern as to the safety of products developed by
the Company or others,  changes in  healthcare  policy in the United  States and
internationally,  changes in stock market analyst recommendations  regarding the
Company,  its competitors or the medical device industry generally,  and changes
in general market  conditions may have a significant  impact on the market price
of the Company's Common Stock.

         Effect of Certain  Charter  and Bylaw  Provisions;  Shareholder  Rights
Plan.  Certain  provisions of the Company's  Certificate  of  Incorporation  and
Bylaws  may have the  effect of making it more  difficult  for a third  party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company.  Such provisions could limit the price that certain investors might
be  willing  to pay in the future  for  shares of the  Company's  Common  Stock.
Certain of these  provisions  allow the Company to issue Preferred Stock without
any vote or further action by the  stockholders,  provide for a classified board
of directors,  eliminate  the right of  stockholders  to act by written  consent
without a meeting and eliminate  cumulative voting in the election of directors.
In addition,  the Company has adopted a stockholder rights plan. The stockholder
rights plan, and the charter and bylaw  provisions  described above, may make it
more difficult for stockholders to take certain corporate actions and could have
the effect of delaying or preventing a change in control of the Company.

         Absence of Dividends.  The Company has never paid cash dividends on its
Common Stock and does not anticipate  paying cash  dividends in the  foreseeable
future.  The Company intends to retain any future  earnings for  reinvestment in
its business.  Any future  determination  to pay cash  dividends  will be at the
discretion  of the Board of Directors  and will be dependent  upon the Company's
financial condition, results of operations,  capital requirements and such other
factors as the Board of Directors deems relevant.

         Year 2000  Compliance.  "Year 2000 issue" arises  because most computer
systems and  programs  were  designed to handle  only a  two-digit  year,  not a
four-digit  year.  These computers may interpret "00" as the year 1900 and could
either  stop  processing   date-related   computations  or  could  process  them
incorrectly.  The Company was informed by appropriate vendors that the Company's
information systems are able to process the year 2000 accurately and the Company
has  completed  testing  of such  systems.  Accordingly,  the

                                       34
<PAGE>

Company  does not  anticipate  any Year  2000  issues  from its own  information
systems,  databases, or programs. The costs associated with this assessment were
not  material.  As a result of the  Company's  restructuring  in July 1998,  the
Company  has  determined  that its  level  of  reliance  on major  distributors,
suppliers,  vendors, and customers has been significantly reduced such that Year
2000  specific  issues faced by these third  parties  should not have a material
effect on the  Company's  operations  or financial  conditions.  With respect to
various  financial  services  institutions that the Company relies on to conduct
its  financial  transactions,  the  Company  has  determined  that all its major
financial   services   institutions  are  actively  engaged  in  bringing  their
information systems into compliance with Year 2000 issues. However, their can be
no  assurance  that such  plans will be able to address  fully,  or at all,  the
impact  of the Year 2000  issue on the  Company,  which  could  have a  material
adverse effect upon the Company's financial condition.

                                       35
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company's cash balances in excess of short-term operating needs are
invested in highly  liquid,  short-term  government  securities and high quality
commercial  paper.  However,  due to the  short-term  and high quality nature of
these instruments,  the Company believes these financial instruments are exposed
to a low level of interest rate risk.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Company's  financial  statements are set forth in this Annual Report on
Form 10-K beginning on page 53.

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

     None.

                                       36
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
The names of directors and their ages, as of February 28, 1999 and certain other
information about them are set forth below:

<CAPTION>
                                                                                             Director
Name                         Age   Position                                         Class      Since
----                         ---   --------                                         -----      -----
<S>                           <C>  <C>                                               <C>       <C> 
Howard D. Palefsky (1)        52   Chairman of the Board of Directors                II        1997
Kathryn A. Tunstall           48   President, Chief Executive Officer & Director     III       1993
Sanford Fitch                 58   Director                                          III       1994
Florence Comite               46   Director                                          III       1997
Robert F. Kuhling (2)         50   Director                                           I        1992
Richard D. Randall (1)(2)     47   Director                                           I        1992
Thomas C. McConnell (2)       44   Director                                          II        1992
<FN>
---------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
</FN>
</TABLE>

         The Board of  Directors is divided  into three  classes.  Each class of
directors consists of two or three directors, and each class of directors serves
for a staggered three year term or until a successor is elected and qualified.

Class I Directors (terms expire 2001):

         Mr.  Kuhling  has served as a director of the  Company  since  December
1992. Mr. Kuhling has been a general partner of venture capital funds managed by
ONSET  Ventures  since  1987.  Prior to 1987,  he served as  Director  of Design
Automation  Marketing at Sun Microsystems,  Inc., a computer  manufacturer,  and
Vice President of Marketing and a division manager at General  ElectricCalma,  a
software and computer systems company.  Mr. Kuhling currently also serves on the
Board of Directors of Euphonix,  Inc. Mr.  Kuhling  received an M.B.A.  from the
Harvard University Graduate School of Business.

         Mr.  Randall  has served as a director of the  Company  since  December
1992. Mr. Randall served as the Company's  President and Chief Executive Officer
from December 1992 to July 1993 and Chief  Financial  Officer from December 1992
to January 1995. Mr. Randall has served as President,  Chief  Executive  Officer
and Director of Innovasive Devices,  Inc., a medical device manufacturer,  since
January 1994.  Mr. Randall  served as President and Chief  Executive  Officer of
Target Therapeutics,  Inc. ("Target") from June 1989 to May 1993. He also served
as a director of Target from June 1989 to April 1997.  Prior to joining  Target,
Mr. Randall served in various capacities with Trimedyne,  Inc., a cardiovascular
laser company, Baxter International and the U.S.C.I. Division of C.R. Bard, Inc.
Mr. Randall holds a B.S. in Biology  Education from State University of New York
College at Buffalo.

                                       37
<PAGE>

Class II Directors (terms expire 1999):

         Mr.  McConnell has served as a director of the Company  since  December
1992. Mr. McConnell has been with New Enterprise  Associates  ("NEA"), a venture
capital  investment firm, since 1985 and has served as a General Partner of that
firm since 1989.  Prior to joining NEA, Mr.  McConnell was a Product  Manager at
Apple Computer,  Inc. and a consultant  with the Boston  Consulting  Group.  Mr.
McConnell is also a director of Applied  Imaging Corp.,  Cardiothoracic  Systems
and Innovasive  Devices,  Inc. Mr.  McConnell holds an M.B.A.  from the Stanford
University Graduate School of Business.

         Mr. Palefsky was elected to the Company's Board of Directors in October
1997 and was  appointed to serve as Chairman of the Board in November  1997.  He
currently  serves  as a  consultant  to the  Company  pursuant  to a  consulting
agreement.  Mr.  Palefsky  is  a  corporate  director,  consultant  and  private
investor.  From 1995 to 1997, Mr.  Palefsky  served as Chairman of the Board and
Chief  Executive  Officer  of  Collagen  Corporation.  Mr.  Palefsky  served  as
President,  Chief Executive  Officer and Director of Collagen  Corporation  from
1978 to 1995. Mr.  Palefsky is also a director of Innovasive  Devices,  Inc. Mr.
Palefsky holds an M.B.A. from Stanford University Graduate School of Business.

Class III Directors (terms expire 2000):

         Dr. Comite was elected to the Company's Board of Directors in September
1997 and also serves as a  consultant  to the Company  pursuant to a  consulting
agreement.  In 1992, Dr. Comite founded Women's Health at Yale University School
of Medicine.  She  currently  serves as Clinical  Director of Women's  Health at
Yale, as well as Associate  Professor in Endocrinology,  Departments of Internal
Medicine  and  Pediatrics  and  in  Reproductive  Endocrinology,  Department  of
Obstetrics and Gynecology at Yale  University  School of Medicine.  From 1994 to
1997, Dr. Comite served as Deputy Medical Director of Time Life  Medical/Patient
Education  Media,  Inc.  In 1994 and  1995,  Dr.  Comite  also  served as Senior
Clinical and Research  Advisor to the National  Institutes of Health  Offices of
Alternative  Medicine and Research in Women's  Health.  Dr. Comite  received her
M.D. from Yale University School of Medicine.

         Mr. Fitch was elected to the  Company's  Board of Directors in December
1994,  served as Vice  President,  Finance and  Operations  and Chief  Financial
Officer from December 1994 to October 31, 1998,  and was promoted to Senior Vice
President in February 1997. From January 1994 to December 1994, Mr. Fitch served
as Vice President,  Finance and Operations and Chief Financial Officer of Voyant
Corporation, a video technology company. From December 1990 to January 1994, Mr.
Fitch served as Chief  Financial  Officer of SanDisk Corp.,  a  manufacturer  of
flash memory devices.  From 1983 through 1989, Mr. Fitch was the Chief Financial
Officer  of Komag  Inc.,  a  manufacturer  of  rigid  media  for the disk  drive
industry.  Mr.  Fitch  holds a B.S. in  Chemistry  and an M.B.A.  from  Stanford
University.

         Ms.  Tunstall has served as President,  Chief  Executive  Officer and a
director  of the Company  since July 1993.  Prior to joining  the  Company,  Ms.
Tunstall  spent seven  years as an  executive  officer  and in senior  marketing
positions of the Edwards Less Invasive Surgery Division of Baxter International,
a division engaged in the research and development,  manufacturing and marketing
of  cardiovascular  catheters,  serving as President from June 1990 to June 1993
and serving as Vice President and Director of Worldwide Sales and Marketing from
November  1986 to June  1990.  From  1980 to 1986,  Ms.  Tunstall  held  various
positions in manufacturing and marketing of McGaw Laboratories, a pharmaceutical
and  medical  device  company,  serving  most  recently  as  Vice  President  of
Marketing.  Ms.  Tunstall  also serves as a director of  RESOLVE,  a  non-profit
infertility support,  education and

                                       38
<PAGE>

advocacy  organization.  Ms.  Tunstall  holds  a  B.A.  in  Economics  from  the
University  of  California  and has also  completed  graduate  level  studies in
Business and Healthcare Administration.

Board Meetings and Committees

         The  Board of  Directors  has an  Audit  Committee  and a  Compensation
Committee,  of which there is a Stock Option Subcommittee.  The Company does not
have a  nominating  committee  or a  committee  performing  the  functions  of a
nominating committee.

         The Audit Committee of the Board of Directors  consists of Mr. Palefsky
and Mr.  Randall.  The Audit  Committee  recommends  engagement of the Company's
independent auditors, reviews the scope of the audit, considers comments made by
the  independent  auditors  with  respect  to  the  Company's  internal  control
structure,  including systems,  procedures and internal  accounting controls and
the consideration given thereto by management,  and reviews the Company's system
of internal  controls,  including  systems,  procedures and internal  accounting
controls, with the Company's financial and accounting staff.

         The Compensation Committee of the Board of Directors currently consists
of Messrs. Kuhling,  McConnell and Randall. The Stock Option Subcommittee of the
Compensation Committee currently consists of Messrs. Kuhling and McConnell.  The
Compensation Committee, or a subcommittee thereof, where necessary,  administers
the Company's  incentive  compensation and benefit plans (including stock plans)
and,  in  conjunction  with  the  Board  of  Directors,   establishes  salaries,
incentives and other forms of  compensation  for  directors,  officers and other
employees.  The Stock Option  Subcommittee  makes  recommendations  and approves
option grants to employees,  officers, directors and consultants pursuant to the
Company's 1993 Stock Plan.

Director Compensation

         The Company paid each of Mr.  Palefsky,  Dr.  Comite,  and Mr.  Randall
$1,000 for  attendance  at each meeting of the Board of Directors and a retainer
of $2,500 per  quarter of fiscal  1998.  The  Company  reimbursed  each  outside
director for  out-of-pocket  expenses  incurred in connection with attendance at
meetings of the Board of  Directors  or a committee  thereof.  The one  employee
director,  Ms.  Tunstall is not  separately  compensated  for their  services as
directors.

         Nonemployee  directors of the Company are automatically granted options
to purchase  shares of the Company's  Common Stock  pursuant to the terms of the
Company's 1995 Directors' Stock Option Plan (the "Directors' Plan").  Under such
plan,  each person who was a  nonemployee  director on the date of the Company's
initial  public  offering  was  granted an option to purchase  10,000  shares of
Common Stock on the date of such offering  (unless such director had  previously
been granted an option to purchase  shares of Common  Stock) and each person who
thereafter becomes a nonemployee  director will be granted an option to purchase
10,000  shares  of Common  Stock on the date on which he or she first  becomes a
non-employee  director  (the "First  Option").  Thereafter,  on the date of each
annual meeting of the Company's  stockholders,  each non-employee director shall
be automatically granted an additional option to purchase 3,000 shares of Common
Stock (a  "Subsequent  Option") if, on such date, he or she shall have served on
the Company's  Board of Directors for at least six months.  The Directors'  Plan
provides that the First Option shall become  exercisable in  installments  as to
1/36th of the total number of shares subject to the

                                       39
<PAGE>

First  Option  on each  monthly  anniversary  of the date of grant of the  First
Option and that each Subsequent Option shall become  exercisable in installments
as to 1/12th of the total number of shares subject to the  Subsequent  Option on
each monthly anniversary of the date of grant of the Subsequent Option beginning
on  the  second  anniversary  of the  grant  date.  Options  granted  under  the
Directors'  Plan have an exercise  price  equal to the fair market  value of the
Company's Common Stock on the date of grant, and a term of ten years.

         There are no family  relationships  among the  directors  or  executive
officers of the Company.

         Dr. Comite provides  consulting  services to the Company  pursuant to a
consulting  agreement,  dated  September  10, 1997.  The Company paid Dr. Comite
$84,000 in consulting fees for services  rendered during the year ended December
31,  1998.  In July 1998,  7,500  options  that were  granted  to Dr.  Comite in
September  1997,  under the 1993 Stock Plan with an exercise  price of $7.00 per
share were repriced to the closing price ($1.25) of the Common Stock on July 21,
1998.

         Mr. Palefsky provides  consulting services to the Company pursuant to a
consulting agreement, dated October 15, 1997. During the year ended December 31,
1998, the Company paid Mr. Palefsky $99,993.96 in consulting fees. In July 1998,
90,000 options that were granted to Mr. Palefsy in September 1997 under the 1993
Stock  Plan  with an  exercise  price of $7.00 per share  were  repriced  to the
closing price ($1.25) of the Common Stock on July 21, 1998.

                                       40
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION

         The following table sets for the compensation in the fiscal years ended
December 31, 1998,  1997, and 1996 by (i) the Company's Chief Executive  Officer
and (ii) the Company's  other most highly paid executive  officers who earned in
excess of $100,000  during the fiscal year ended  December  31, 1998 (the "Named
Executive Officers").

<TABLE>
                                           SUMMARY COMPENSATION TABLE

<CAPTION>
                                                                                    Long Term
                                                                                  Compensation
                                             Annual Compensation                     Awards
                                   ------------------------------------------     ------------
                                                                 Other Annual      Securities       All Other
                                             Salary       Bonus  Compensation      Underlying      Compensation
Name and Principal Position        Year        ($)       ($) (1)      $ (2)        Options (#)         $
---------------------------------------------------------------------------------------------------------------
<S>                                <C>       <C>          <C>         <C>             <C>           <C>
Kathryn A. Tunstall ...........    1998      177,685        --        1,218           60,000        
     President & CEO               1997      199,992        --        1,178          140,000        41,000 (3)
                                   1996      173,106      36,500        690          
                                                                                  
Steven Bacich .................    1998      158,461        --          370           75,000        55,956 (4)
     Vice President Research       1997      104,923        --          245           75,000        89,701 (4)
     and Development                                                              
                                                                                  
Cynthia M. Domecus ............    1998      162,152        --          383           70,000        25,500 (5)
     Senior Vice President,        1997      164,808        --          364           40,000        
     Clinical Research,            1996      144,906        --          194       
     Regulatory Affairs, and                                                      
     Quality Assurance                                                            
                                                                                  
Sanford Fitch .................    1998      158,698        --        1,776           15,000        92,430 (6)
     Senior Vice President and     1997      159,994        --        2,350           60,000
     Chief Financial Officer       1996      145,350        --        1,398          
                                                                                  
James J. Messemer .............    1998       55,095        --          128           10,000       117,700 (6)
     Vice President,               1997      140,005        --          294           25,000
     Business Development          1996      134,400      19,800        186       
                                                                                  
Susan Schneider ...............    1998       94,235        --         --             46,000        71,385 (6)
     Vice President, Operations                                              
     andd Quality Assurance

<FN>
-----------------------------

1.   Bonuses are paid at the discretion of the Board of Directors.

2.   Amounts set forth represent premiums paid by the Company for group term life insurance.

3.   Amount represents compensation attributable to disqualifying dispositions of stock options.

4.   Mr. Bacich was hired as Vice  President,  Research and  Development  in March 1997.  Pursuant to his 1997
     employment  agreement with the Company,  Mr. Bacich,  "Other  Compensation"  represents payments totaling
     $89,701  for  relocation  assistance.  Other  Compensation  in 1998  includes a payment of $24,750  for a
     retention bonus  implemented in connection with the Company's  restructuring in July 1998 and forgiveness
     of $31,206 of the relocation loan.

5.   Amount represents retention bonus earned by Ms. Domecus as a part of the restructuring implemented by the
     Company in July 1998.

                                       41
<PAGE>

6.   Figures represent amounts to be paid pursuant to severance  arrangements made between the officer and the
     Company.  Mr.  Fitch and Ms.  Schneider  were  severed in  connection  with the  Company's  restructuring
     implemented in July 1998.  Termination dates for Mr. Fitch and Ms. Schneider were October 31 and December
     31, 1998, respectively. Mr. Messemmer resigned from the Company effective on May 31, 1998.
</FN>
</TABLE>

                Option Grants During Year Ended December 31, 1998

         The following table provides certain  information with respect to stock
options  granted to the Named  Executive  Officers in the last fiscal  year.  In
addition,  as required by Securities and Exchange  Commission  rules,  the table
sets forth  hypothetical gains that would exist for the options based on assumed
rates of annual compound stock price appreciation during the option term.

<TABLE>
                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

<CAPTION>
                                         Individual Grants (1)
                           ---------------------------------------------------------
                                          Percent
                                          of Total
                            Number of   Options/SARs                                       Potential Realizable Value at
                            Securities   Granted to      Exercise                          Assumed Annual Rates of Stock
                            Underlying    Employees        or Base                        Appreciation For Option Term (2)
                           Options/SARs   in Fiscal         Price         Expiration      --------------------------------
Name                        Granted (#)   Year (%) (3)   ($/sh) (4)          Date              5% ($)              10% ($)
--------------------------------------------------------------------------------------------------------------------------
<S>                           <C>            <C>            <C>            <C>                 <C>                 <C>    
Tunstall, Kathryn             60,000         8.72%          4.63           1/20/2008           174,518             442,264

Bacich, Steve                 50,000         7.27%          1.25           7/21/2008            39,306              99,609
                              25,000         3.63%          4.63           1/20/2008            72,716             184,276
                              ------                                                           -------             -------
                              75,000                                                           112,022             283,885

Domecus, Cindy                40,000         5.82%          1.25           7,21/2008            31,445              79,687
                              30,000         4.36%          4.63           1/20/2008            87,259             221,132
                              ------                                                           -------             -------
                              70,000                                                           118,704             300,819

Fitch, Sanford (5)            15,000         2.18%          4.63           1/20/2008            43,630             110,566

Messmer, Jim (6)              10,000         1.45%          4.63           7/31/1998             1,142               2,257

Schneider, Susan (7)          40,000         5.82%          1.50           2/28/1999             3,618               7,270
                               6,000         0.87%          3.50           2/28/1999             1,266               2,545
                              ------                                                           -------             -------
                              46,000                                                             4,884               9,815
<FN>
------------------------------------

1.   No stock appreciation  rights were granted to the Named Executive Officers in the last fiscal year. Options generally
     vest at the rate of 1/8th of the shares on the six-month  anniversary of the vesting  commencement date and 1/48th of
     the shares granted on each monthly anniversary of the vesting commencement date thereafter.

2.   The 5% and 10% assumed  annual  rates of  compounded  stock price  appreciation  are mandated by the  Securities  and
     Exchange  Commission.  There is no assurance  provided to any executive  officer or any other holder of the Company's
     securities that the actual stock price  appreciation  over the ten year option term will be at the assumed 5% and 10%
     levels or at any other defined level.  Unless the market price of the Common Stock appreciates over the long term, no
     value will be realized from the option  grants made to the  executive  officers.  Potential  Realizable  Value is not
     calculated for options that were canceled during the fiscal year ended December 31, 1998.

3.   The Company granted stock options representing 687,758 shares to employees during the fiscal year.

                                       42
<PAGE>

4.   The exercise price may be paid in cash, in shares of Common Stock valued at fair market value on the exercise date or
     through a cashless exercise procedure involving a same-day sale of the purchased shares. The Company may also finance
     the option exercise by loaning the optionee  sufficient  funds to pay the exercise price for the purchased shares and
     the federal and state income tax liability incurred by the optionee in connection with such exercise.

5.   Mr. Fitch was  terminated  from the  Company in connection with the Company's  restructuring  in July 1998. Mr. Fitch
     continues  to serve as a director of the Company and pursuant to his  severance  agreement  his options  converted to
     non-qualified options and continue to vest under the same terms of the original grant.

6.   Mr.  Messemmer  resigned from the Company  effective May 31, 1998.  Pursuant to the terms of the Company's 1993 Stock
     Option Plan, vested options lapse sixty days from the termination date.

7.   Ms. Schneider was severed from the Company effective  October 31, 1998 as a result of the Company's  restructuring in
     July 1998.  Pursuant to the terms of the Company's  1993 Stock Option Plan,  vested options lapse sixty days from the
     termination date.
</FN>
</TABLE>


         The  following  table  sets  forth  certain  information  for the Named
Executive  Officers  with respect to the exercise of options to purchase  Common
Stock during the fiscal year ended December 31, 1998.

<TABLE>
                                            Aggregate Option Exercises in the Year Ended
                                         December 31, 1998 and Fiscal year-end Option Values

<CAPTION>
                                                                 Number os Shares of Common               Value of Unexercised
                                Shares         Value            Stock Underlying Unexercised              In-the-Money Options
                              Acquired on     Realized           Options at December 31, 1998            at December 31, 1998 (1)
Name                          Exercise (#)     ($) (2)         Exercisable        Unexercisable        Exercisable    Unexercisable
------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>            <C>              <C>                 <C>                 <C>            <C>     
Kathryn Tunstall                   --             --             212,055             169,444             $175,965       $118,458

Steven Bacich                      --             --               --                150,000             $   --         $125,000

Cynthia Domescu                    --             --              72,639             102,917             $ 79,375       $100,726

Sanford Fitch (3)                  --             --              91,682              58,317             $ 73,749       $ 40,000

Jim Messemmer (4)                63,333         42,623              --                  --               $   --         $   --  

Susan Schnneider (5)               --             --              21,302                --               $  3,750       $   --

<FN>
---------------------

1.   Calculated using the difference between the closing price of the Company's Common Stock as of December 31, 1998 ($2.25) and the
     exercise price of the options.

2.   Calculated  using the  difference  between the fair market value of the Company's  Common Stock on the date of exercise and the
     exercise price of the options.

3.   Mr. Fitch was severed from the Company effective October 31, 1998 as a result of the Company's  restructuring in July 1998. Mr.
     Fitch  continues  to serve as a director of the

                                       43
<PAGE>

     Company and pursuant to his severance  agreement his options converted to non-qualified  options and continue to vest under the
     same terms of the original grant.

4.   Mr. Messemmer resigned from the Company effective May 31, 1998.  Pursuant to the terms of the Company's 1993 Stock Option Plan,
     vested options lapse sixty days from the termination date.

5.   Ms. Schneider was severed from the Company effective October 31, 1998 as a result of the Company's  restructuring in July 1998.
     Pursuant to the terms of the Company's 1993 Stock Option Plan, vested options lapse sixty days from the termination date.
</FN>
</TABLE>

         Effective May 31, 1998, Mr. Messemmer resigned from the Company and the
Company  entered  into a  termination  agreement  which  provided  for  payments
totaling $112,000 which is equal to nine months of base salary to be paid over a
nine month period.  The Company also paid $2,152 of medical  insurance  premiums
and provided $2,500 of outplacment service.

         In  connection  with  the  July  1998  restructuring,   Mr.  Fitch  was
terminated from the Company effective October 31, 1998. The Company entered into
a termination  agreement which provided for severance  payments totaling $88,130
which is equal to six months of base salary to be over six  months.  The Company
also  paid  $4,423 of  medical  insurance  premiums  and  provided  outplacement
assistance of $2,500.  The agreement  calls for contingent  additional  payments
totaling  $46,277  which is equal to three  months of base pay to be paid over a
three month period if Mr.  Fitch has not found  alternate  employment  by May 1,
1999. Mr. Fitch  continues to serve as a director of the Company and pursuant to
his  severance  agreement  his options  converted to  non-qualified  options and
continue to vest under the same terms of the original grant.

         In  connection  with the July 1998  restructuring,  Ms.  Schneider  was
terminated  from the Company  effective  December 31, 1998. The Company  entered
into a termination  agreement  which  provided for severance  payments  totaling
$27,885  which  is equal to ten  weeks  of base  pay and a lump sum  payment  of
$43,500 paid in January 1999.

         In May 1997, the Company  entered into an agreement  with Ms.  Tunstall
that provides, in the event of certain change-in-control  transactions,  for the
acceleration  of options held by her whereby each such option shall become fully
vested and immediately  exercisable.  In the event of an involuntary termination
prior to two  years  after  the  change-in-control  transaction,  the  agreement
provides for (i) her to be paid  according  to the  Company's  standard  payroll
procedure for a period of 18 months;  (ii) the  continuation  of health and life
insurance  benefits for a period of 18 months;  (iii) monthly severance payments
equal to 1/12th of the  "target  bonus" she would have  received  for the fiscal
year in which the  termination  occurs;  and (iv)  outplacement  services not to
exceed a value of $15,000.

         In May  1997,  the  Company  entered  into  agreements  with its  other
executive officers  including Steven Bacich and Cynthia Domecus,  which provide,
in the event of certain change-in-control  transactions, for the acceleration of
options held by such officers whereby in the event of a "hostile  takeover" each
such option shall become fully  vested and  immediately  exercisable;  provided,
however,  in the event of any other type of "change of control" each such option
shall  become  vested as to 50% of the  option  shares  that have not  otherwise
vested on the effective date of the change of control transaction.  In the event
of an  involuntary  termination  prior to two years after the  change-in-control
transaction, the agreement provides for (i) each of the above mentioned officers
to be paid according to the Company's standard payroll procedure for a period of
12 months;  (ii) the  continuation  of

                                       44
<PAGE>

health and life  insurance  benefits  for a period of 12 months;  (iii)  monthly
severance  payments  equal to 1/12th  of the  "target  bonus"  each  would  have
received for the fiscal year in which the termination  occurs; (iv) acceleration
of all options to become  fully  vested and  immediately  exercisable;  and (iv)
outplacement  services not to exceed a value of $15,000.  The Company  otherwise
does not have any employment agreements with any of the executive officers.

                                       45
<PAGE>

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT

<TABLE>
         The  following  table  sets  forth  the  beneficial  ownership  of  the
Company's  Common  Stock as of  February  28,  1999 as to (i) each person who is
known by the Company to beneficially own more than five percent of the Company's
Common Stock,  (ii) each member of the Company's Board of Directors,  (iii) each
of the continuing  executive officers named in the Summary Compensation Table on
page 40, and (iv) all directors and executive officers as a group.

<CAPTION>
                                                                 Shares Beneficially Owned
                                                                 --------------------------
Name and Address of Beneficial Owner (1)                           Number       Percent (2)
-------------------------------------------------------------------------------------------
<S>                                                              <C>                 <C>   
 (3) Boston Scientific Corporation ............................. 1,418,856           14.34%
          One Boston Scientific Place
          Natick, MA 01760-1537

 (4) Entities affiliated with New Enterprise Associates ........   552,154            5.58%
          2490 Sand Hill Road
          Menlo Park, CA 94025

 (5) Entities affiliated with St. Paul Venture Capital .........   524,324            5.30%
          385 Washington Street
          St. Paul, MN 55102

 (6) Floreence D. Comite, M.D. ..................................   12,500     Less than 1%
          15 Spencer Place
          New Haven, CT 06515

 (7) Sanford Fitch .............................................   188,591            1.91%
          52 Flood Circle
          Atherton, CA 94027

 (8) Robert F. Kuhling, Jr .....................................   427,709            4.32%
          2490 Sand Hill Road
          Menlo Park, CA 94025

 (9) Thomas C. McConnell ....................................... 1,035,833           10.47%
          2490 Sand Hill Road
          Menlo Park, CA 94025

(10) Howard D. Palefsky .........................................   67,084     Less than 1%
          2800 Sand Hill Road, Suite 120
          Menlo Park, CA 94025

(11) Richard D. Randall .........................................   29,416     Less tnan 1%
          734 Forest
          Marborough, MA 01752

(12) Kathryn A. Tunstall .......................................   395,799            4.00%

(13) Steven Bacich .............................................    71,888     Less than 1%

(14) Cynthia M. Domecus ........................................   127,523            1.29%

(15) All directors and officers as a group (11 Persons) ........ 2,397,393           24.10%

                                       46
<PAGE>

<FN>
---------------------------------

1.   Except as otherwise indicated in the footnotes to this table and pursuant to applicable
     community property laws, the persons named in the table have sole voting and investment
     power with respect to all shares of Common Stock.

2.   Percentage  ownership  is based on  9,869,567  share of  Common  Stock  outstanding  on
     February 28, 1999. The number of shares of Common Stock beneficially owned includes the
     shares  issuable  pursuant  to stock  options  that are  exercisable  within 60 days of
     February 28, 1999. Shares issuable pursuant to stock options are deemed outstanding for
     computing the percentage of the person holding such options but are not outstanding for
     computing the percentage of any other person.

3.   Boston  Scientific  Corporation  Acquired Target  Therapeutics,  Inc. on April 8, 1997.
     Target Therapeutics is now a separate business unit of Boston Scientific Corporation.

4.   Represents 450,980 shares held by New Enterprise Associates V, Limited Partnership, and
     91,112  shares  held  by  Chemicals  and  Materials  Enterprise   Associates,   Limited
     Partnership.  Also includes 10,062 shares issuable upon exercise of options exercisable
     by NEA Development Corp. within 60 days of February 28, 1999.

5.   St. Paul Venture Capital is an affiliate of St. Paul Fire and Marine Insurance  Company
     ("St.  Paul"),  which is the owner of record of these shares and includes  7,312 shares
     issuable  upon exercise of options  exercisable  by St. Paul within 60 days of February
     28, 1999.

6.   Represents  shares  issuable  upon  exercise of options  exercisable  within 60 days of
     February 28, 1999.

7.   Includes  130,258  shares  issuable  upon  exercise of options  exercisable
     within 60 days of February 28, 1999.

8.   Includes  417,647 shares held by ONSET Enterprise  Associates,  L.P., and 10,062 shares
     issuable upon exercise of options exercisable by ONSET Venture Services Corp. within 60
     days of February 28, 1999, all of which Mr. Kuhling may be deemed to benefically own by
     virtue of his status as a general partner of OEA Management, L.P., a general partner of
     ONSET Enterprise  Associates,  L.P. Mr. Kuhling disclaims  beneficial  ownership of the
     shares  held by such  entity  except  to the  extent of his  proportionate  partnership
     interest therein.

9.   Represents  450,980  shares held by New Enterprise  Associates V, Limited  Partnership,
     91,112  shares  held  by  Chemicals  and  Materials  Enterprise   Associates,   Limited
     Partnership,  and 10,062 shares  issuable upon exercise of options  exercisable  by NEA
     Development  Corp.  within 60 days of February 28, 1999, all of which Mr. McConnell may
     be  deemed to  benefically  own by virtue  of his  status as a general  partner  of NEA
     Partners V, Limited  Partnership  (the  general  partner of New  Enterprise  V, Limited
     Partnership,  a general  partner of  Chemicals  and  Materials  Enterprise  Associated,
     Limited Partnership). Also includes 417,647 shares held by ONSET Enterprise Associates,
     Limited  Partnership,  all of which Mr.  McConnell may be deemed to beneficially own by
     virtue of his status as a general partner of NEA Onset Partners, Limited Partnership, a
     general partner of ONSET  Enterprise  Associates,  Limited  Partnership.  Mr. McConnell
     disclaims  beneficial  ownership of the shares held by such entity except to the extent
     of his proportionate partnership interest therein.

                                             47
<PAGE>

10.  Represents  shares  issuable  upon  exercise of options  exercisable  within 60 days of
     February 28, 1999.

11.  Includes 21,083 shares issuable upon exercise of options  exercisable within 60 days of
     February 28, 1999.

12.  Includes 312,366 shares issuable upon exercise of options exercisable within 60 days of
     February 28, 1999.

13.  Represents  shares  issuable  upon  exercise of options  exercisable  within 60 days of
     February 28, 1999.

14.  Represents  shares  issuable  upon  exercise of options  exercisable  within 60 days of
     February 28, 1999.

15.  Includes 1,397,510 shares  beneficially owned by entities affiliated with Mr. McConnell
     and Mr. Kuhling, both of whom disclaim beneficial ownership other than to the extent of
     their  proportionate  interest  therein.  Also,  includes  548,791 shares issuable upon
     exercise of options exercisable within 60 days of February 28, 1999.
</FN>
</TABLE>

Compensation Committee Interlocks and Insider Participation

         For the year ended December 31, 1998, the following  individuals served
on the Company's Compensation Committee:  Robert F. Kuhling, Thomas C. McConnell
and Richard D. Randall.  Messrs.  McConnell and Kuhling also served on the Stock
Option  Subcommittee  and have never  served as  officers  or  employees  of the
Company.  Mr. Randall served as the Company's Chief Executive  Officer and Chief
Financial Officer from December 1992 until July 1993.

                                       48
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In December  1992,  the  Company  issued to Target  Therapeutics,  Inc.
("Target")  666,666  shares of Series A Preferred  Stock with value of $0.75 per
share along with a warrant to purchase up to 1,000,000 shares of Common Stock at
an exercise price of $1.50 per share,  in exchange for the grant of an exclusive
license to technology  and certain  supply  commitments.  Target  converted this
warrant into 892,857  shares of Common Stock in  connection  with the  Company's
initial public  offering.  Mr.  Randall served as President and Chief  Executive
Officer  of Target  from June 1989 until May 1993 and as  Chairman  of the Board
from April 1993 until May 1994 and served on Target's  Board of Directors  until
April 1997 when Target was acquired by Boston  Scientific  Corporation  ("BSC").
Pursuant to a license  agreement  between  the Company and Target (the  "License
Agreement"), Target granted to the Company an exclusive, worldwide, royalty-free
license, with the right to sublicense, to use any of Target's technology, and to
use, make and sell products incorporating the Target technology, in the field of
reproductive  physiology  (the "Conceptus  field").  The Company granted back to
Target  an  exclusive,  worldwide,  royalty-free  license,  with  the  right  to
sublicense,  to use Conceptus technology (made up of the Company's  improvements
on Target technology and the Company's own developments for use in the Conceptus
field),  and  to  use,  make  and  sell  products  incorporating  the  Conceptus
technology,  in the  fields  of  interventional  neuroradiology,  interventional
radiology,  interventional cardiology and interventional  electrophysiology (but
excluding the Conceptus  field).  These license  grants apply to any  technology
existing on the date of the agreement or subsequently developed through February
1, 1996.  This License  Agreement will terminate upon the later of December 2002
or the  expiration  of all patent rights in the Target  technology.  The License
Agreement also includes  provisions  preventing  Target from engaging in certain
research,  marketing,  sales or  acquisition  activities in the Conceptus  field
during the life of the agreement.  In connection with such  transaction,  Target
and  Conceptus  also  agreed  that  during  the two year  period  following  the
Company's  initial  public  offering  of  securities,  Target  would not acquire
Conceptus  capital  stock to the  extent  that  doing so  would  cause  Target's
ownership  interest  in  the  Company  to  exceed  the  greater  of  20%  of the
outstanding  voting stock prior to such  acquisition or the  percentage  held by
Target  immediately  prior to the  effectiveness of the  registration  statement
covering the Company's initial public offering.

         In March 1994,  Target extended to the Company a $300,000 lease line of
credit for the lease of test,  production  or other  machinery and equipment and
computer hardware,  fixtures and furniture,  on a sale and leaseback basis, with
payment  terms  varying  between  three and four years  depending on the type of
equipment involved.  Conceptus drew down the entire amount of the lease line and
fully  repaid all amounts due as of December 31, 1998.  In  connection  with the
extension  of the lease line,  Target  also loaned to the Company an  additional
$209,000  pursuant to two promissory notes secured by certain tangible  property
of the Company  similar in type to that  subject to the lease line.  These notes
are  payable  over a three to four year period  (depending  on the nature of the
collateral  involved),  and  bear  interest  at the  rate  of  8.5%  per  annum,
compounded  monthly.  As of December 31, 1998 both notes were repaid in full. In
connection with this lease line and secured loan transaction, the Company issued
to Target a warrant to  purchase  up to an  additional  12,000  shares of Common
Stock at an  average  exercise  price of $4.05  per  share,  which  warrant  was
exercised  in  connection  with the  Company's  initial  public  offering  at an
aggregate price of $48,600.

         In March 1994 and May 1995, as part of the  Company's  third and fourth
rounds of financing,  Target purchased an additional aggregate of 101,102 shares
of  Preferred  Stock for a total of  $500,000.  The Company has also  reimbursed
Target for certain employee benefit expenses incurred by Target on the Company's
behalf.  For the year ended December 31, 1996,  approximately  $177,000 was paid
and no  additional  payments  are due to

                                       49
<PAGE>

Target under this  arrangement.  This agreement was discontinued at December 31,
1996.  Upon  the  closing  of  the  Company's  initial  public  offering,   each
outstanding  share of  Preferred  Stock was  converted  into one share of Common
Stock.

         On April 8, 1997, Target completed a merger with BSC, pursuant to which
a wholly  owned  subsidiary  of BSC merged with and into Target (the  "Merger").
Pursuant to the  Agreement  and Plan of Merger  Agreement,  each share of common
stock of Target was  converted  into the right to receive  1.07 shares of common
stock of BSC. As a result of the Merger,  BSC now holds all rights,  preferences
and privileges to the stock,  license fees and technology  agreements which were
previously  held by Target in  connection  with the  Company.  The  Merger was a
tax-free  stock-for-stock exchange for federal income tax purposes and a pooling
of interests for accounting purposes.

         With the approval of a majority of the Board of Directors, on April 24,
1997,  the Company  loaned to Steve  Bacich  $100,000  pursuant to an  unsecured
promissory  note in connection  with his relocation and hiring by the Company as
its Vice  President of Research and  Development.  The note bears  interest at a
rate of 9.5% per annum,  compounded  annually.  In connection with the Company's
retention  agreement  entered  into with Mr.  Bacich in July  1998,  all  unpaid
principal and interest on the loan will be forgiven if Mr. Bacich is employed by
the Company on July 1, 1999.  On March 26, 1998,  the first  anniversary  of the
loan,  $31,206 of the loan balance of $116,667 was  forgiven.  Under the orginal
terms of the loan,  the loan was  previously due in full on the earlier of March
26, 2001 or the  termination of Mr. Bacich's  employment  with the Company.  The
Company has further agreed that if Mr.  Bacich's  employment with the Company is
involuntarily terminated without cause in connection with a change of control of
the Company,  the remaining  balance of the  principal,  plus accrued but unpaid
interest,  shall  be  forgiven  in  full  by the  Company  on the  date  of such
termination. At December 31, 1998, $85,461 was outstanding and payable by Mr.
Bacich.

         Dr. Comite provides  consulting  services to the Company  pursuant to a
consulting  agreement,  dated  September  10, 1997.  The Company paid Dr. Comite
$84,000 in consulting fees for services  rendered during the year ended December
31, 1998.  In July 1998,  7,500 to the fair market  value  ($1.25) of the Common
Stock on July 21, 1998.  These options were repriced when the remaining  term of
the original option was nine years and two months.

         Mr. Palefsky provides  consulting services to the Company pursuant to a
consulting agreement, dated October 15, 1997. During the year ended December 31,
1998, the Company paid Mr. Palefsky $99,993.96 in consulting fees. In July 1998,
90,000  options  granted in September  1997 with an exercise  price of $7.00 per
share were repriced to the fair market value ($1.25) of the Common Stock on July
21, 1998.  These options were  repriced when the remaining  term of the original
option was nine years and two months.

         All future  transactions,  including  any loans from the Company to its
officers, directors, principal stockholders or affiliates, will be approved by a
majority of the Board of Directors,  including a majority of the independent and
disinterested  members  of the Board of  Directors  or, if  required  by law,  a
majority of disinterested  stockholders,  and will be on terms no less favorable
to the Company than could be obtained from unaffiliated third parties.

         The  Company  has  entered  into  indemnification  agreements  with its
officers  and  directors  containing  provisions  which may require the Company,
among other  things,  to indemnify its officers and  directors  against  certain
liabilities  that may arise by reason of their  status or service as officers or
directors (other than liabilities  arising from willful misconduct of a culpable
nature) and to advance  their  expenses  incurred as a result of any  proceeding
against them as to which they could be indemnified.

                                       50
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
              FORM 8-K

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

         (1)      Consolidated  Financial Statements and Report of Ernst & Young
                  LLP, Independent Auditors

                  Consolidated Balance Sheets at December 31, 1998 and 1997

                  Consolidated Statements of Operations Years Ended December 31,
                  1998, 1997 and 1996

                  Consolidated  Statements  of Changes in  Stockholders'  Equity
                  Years Ended December 31, 1998, 1997 and 1996

                  Consolidated Statements of Cash Flows Years Ended December 31,
                  1998, 1997, and 1996

                  Notes to Consolidated Financial Statements

         (2)      Financial Statement Schedules

                  Schedules have been omitted because the  information  required
                  to be set forth  therein is not  applicable or is shown in the
                  financial statements or notes thereto.

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


         Exhibit        
         Number         Description
         ------         -----------

         3.1(1)         Amended and Restated  Certificate  of  Incorporation  of
                        Registrant.

         3.2(1)         Bylaws of Registrant.

         10.1(1)        Form of  Indemnification  Agreement  for  directors  and
                        officers.

         10.2(2)(12)    1993 Stock Plan and forms of agreements thereunder.

         10.3(1)(2)     1995   Employee   Stock   Purchase   Plan  and  form  of
                        subscription agreement.

         10.4(2)(4)     1995  Directors'  Stock  Option  Plan  and form of stock
                        option agreement.

         10.6(1)(3)     Supplier  Agreement  dated  March 29,  1995  between the
                        Registrant and Advanced Cardiovascular Systems, Inc.

         10.7(1)(3)     License  Agreement  dated  December 28, 1992 between the
                        Registrant and Target Therapeutics, Inc.

         10.8(1)        Secured  Note  Purchase  Agreement  dated March 30, 1994
                        between the Registrant and Target Therapeutics, Inc.

         10.9(1)        Master Lease  Agreement dated March 30, 1994 between the
                        Registrant and Target Therapeutics, Inc.

                                       51
<PAGE>

         10.10(1)       Second Amended and Restated  Rights  Agreement dated May
                        26, 1995.

         10.11(1)(2)    Sun Life Assurance Company of Canada Standardized 401(K)
                        Profit Sharing Plan and Trust, as amended.

         10.12(3)(5)    Distribution  Agreement  dated July 1, 1996  between the
                        Registrant and Mallinckrodt Group, Inc.

         10.13(6)       Lease Agreement with Dani Investment Partners.

         10.14(7)       Agreement and Plan of  Reorganization  dated October 29,
                        1996  between the  Registrant,  Microgyn,  Inc. and CPTS
                        Acquisition  Corporation (a  wholly-owned  subsidiary of
                        the Registrant), as amended November 7, 1996.

         10.15(8)       Preferred Shares Rights Agreement,  dated as of February
                        27,  1997,   between  the  Registrant  and   ChaseMellon
                        Shareholder Services,  L.L.C., including the Certificate
                        of Designation of Rights,  Preferences and Privileges of
                        Series  A  Participating  Preferred  Stock,  the form of
                        Rights  Certificate  and the Summary of Rights  attached
                        thereto as Exhibits A, B and C, respectively.

         10.16(9)       Third Addendum to Lease  Agreement with Dani  Investment
                        Partners.

         10.17(9)       Lease  Agreement  with Three Sisters  Ranch  Enterprises
                        dated April 15, 1997

         10.18(10)      Change of Control  Agreement dated as of May 13, 1997 by
                        and between Registrant and Kathryn A. Tunstall.

         10.19(10)      Change of Control  Agreement dated as of May 13, 1997 by
                        and between Registrant and Sanford Fitch.

         10.20(10)      Form of Senior Management Change of Control Agreement

         10.21(11)      Marketing  and  Distribution  Agreement,   dated  as  of
                        September 16, 1997,  between the  Registrant  and Imagyn
                        Medical Technologies.

         10.22(13)      Loan Agreement with Steve Bacich dated April 24, 1997.

         10.23(13)      Promissory Note with Steve Bacich dated April 24, 1997.

         10.24(2)       Master  Consulting  Agreement with Florence Comite dated
                        September 10, 1997.

         10.25(13)      Manufacturing    Transition   Agreement   with   Medical
                        Scientific, Inc. dated October 1, 1997.

         10.26(13)      Royalty  Agreement with Medical  Scientific,  Inc. dated
                        October 1, 1997.

         10.27(2)       Master  Consulting  Agreement with Howard Palefsky dated
                        October 15, 1997.

         10.28          Sublease Agreement with Avio Digital, Inc. dated October
                        1, 1998.

         10.29(2)       Severance  Agreement  dated  May 29,  1998  between  the
                        Registrant and James Messemer.

         10.30(2)       Severance  Agreement  dated October 21, 1998 between the
                        Registrant and Sanford Fitch.

         11.1(1)        Statement of computation of net loss per share.

         23.1           Consent of Ernst & Young LLP,  Independent Auditors

         24.1           Power of Attorney (See Page 75 of this Report).

         27.1           Financial Data Schedule.
 ----------------

                                       52
<PAGE>

         (1)  Incorporated by reference to identically  numbered  exhibits filed
              in  response  to  Item   16(a),"Exhibits,"   of  the  Registrant's
              Registration   Statement  on  Form  SB-2,   as  amended  (File  No
              33-99890-LA), which became effective on February 1, 1996.

         (2)  Management contract or compensatory plan or arrangement.

         (3)  Confidential  treatment  has been  granted with respect to certain
              portions of this Exhibit by order from the Securities and Exchange
              Commission or requested.

         (4)  Incorporated by reference to an identically numbered exhibit filed
              in response  to Item 14(a) of the  Registrant's  Annual  Report on
              Form 10-K for the year ended December 31, 1995.

         (5)  Incorporated by reference to an identically numbered exhibit filed
              in response to Item 6(a) of the  Registrant's  Quarterly Report on
              Form 10-Q for the quarter ended June 30, 1996.

         (6)  Incorporated by reference to an identically numbered exhibit filed
              in response to Item 6(a) of the  Registrant's  Quarterly Report on
              Form 10-Q for the quarter ended September 30, 1996.

         (7)  Incorporated by reference to Exhibit 2.1 filed in response to Item
              7(c) of the Registrant's  Report on Form 8-K filed on December 10,
              1996.

         (8)  Incorporated by reference to Exhibit 1 filed in response to Item 2
              of the Registrant's Form 8-A filed on February 28, 1997.

         (9)  Incorporated by reference to an identically numbered exhibit filed
              in response to Item 6(a) of the  Registrant's  Quarterly Report on
              Form 10-Q for the quarter ended April 30, 1997.

         (10) Incorporated by reference to an identically numbered exhibit filed
              in response to Item 6(a) of the  Registrant's  Quarterly Report on
              Form 10-Q for the quarter ended June 30, 1997.

         (11) Incorporated  by reference  to Exhibit  10.16 filed in response to
              Item 6(a) of the  Registrant's  Quarterly  Report on Form 10-Q for
              the quarter ended September 30, 1997.

         (12) Incorporated by reference to an identically numbered exhibit filed
              in response  to item 14(a) of the  registrant's  Annual  Report on
              Form 10-K for the year ended December 31, 1996.

         (13) Incorporated by reference to an identically numbered exhibit filed
              in response  to item 14(a) of the  registrant's  Annual  Report on
              Form 10-K for the year ended December 31, 1997.

(b)      Reports on Form 8-K

         No reports on Form 8-K were filed during the quarter ended December 31,
         1998.

                                       53
<PAGE>

                                 CONCEPTUS, INC.
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors .............................................  55

Audited Financial Statements
Consolidated Balance Sheets ................................................  56
Consolidated Statement of Operations .......................................  57
Consolidated Statement of Stockholders' Equity .............................  58
Consolidated Statements of Cash Flows ......................................  59
Consolidated Notes to Financial Statements .................................  60

                                       54
<PAGE>

                REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Conceptus, Inc.

         We  have  audited  the  accompanying  consolidated  balance  sheets  of
Conceptus,  Inc. as of December 31, 1998 and 1997, and the related  consolidated
statements  of  operations,  stockholders'  equity  and cash flows for the three
years in the period ended December 31, 1998. These financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Conceptus,  Inc. at December 31, 1998 and 1997, and the consolidated  results of
its  operations  and its cash  flows for the  three  years in the  period  ended
December 31, 1998 in conformity with generally accepted accounting principles.


                                          Ernst & Young, LLP


Palo Alto, California
January 16, 1999

                                       55
<PAGE>

<TABLE>
                                                      Conceptus, Inc.

                                                Consolidated Balance Sheets
                                    (In thousands, except share and per share amounts)

<CAPTION>
                                                                        December 31, 1998            December 31, 1997
                                                                        -----------------            -----------------
<S>                                                                             <C>                          <C>
Assets
  Current assets:
    Cash and cash equivalents                                           $         11,503             $       $  9,250
    Short-term investments                                                         5,568                       17,808
    Accounts receivable, net of allowance for doubtful accounts
      of $661 and $577 at December 31, 1998 and 1997, respectively                   139                          540
    Inventories                                                                     --                            355
    Other current assets                                                              65                          290
                                                                        -----------------            ----------------
  Total current assets                                                            17,275                       28,243
  Property and equipment, net                                                      1,391                        1,090
  Other assets                                                                       365                          147
                                                                        -----------------            ----------------
                                                                        $         19,031             $         29,480
                                                                        ================             ================

Liabilities and stockholders' equity
  Current liabilities:
    Accounts payable                                                    $            165             $            699
    Accrued compensation                                                             421                          670
    Other accrued liabilities                                                         92                          135
    Current portion of deferred revenue                                               97                           97
    Current portion of debt and capital lease obligations                           --                             34
                                                                        -----------------            ----------------
  Total current liabilities                                                          775                        1,635

  Long-term portion of debt and capital lease obligations                           --                              1

  Long-term portion of deferred revenue                                              242                          340

  Commitments

  Stockholders' equity:
    Common stock, $0.003 par value, 30,000,000 shares authorized,
      9,620,205 and 9,495,053 shares issued and outstanding at
      December 31, 1998 and 1997, respectively                                    63,570                       63,505
    Stockholder notes receivable                                                     (54)                         (54)
    Deferred compensation                                                           (106)                        (216)
    Accumulated deficit                                                          (45,396)                     (35,731)
                                                                        -----------------            ----------------
  Total stockholders' equity                                                      18,014                       27,504
                                                                        -----------------            ----------------
                                                                        $         19,031             $         29,480
                                                                        ================             ================

<FN>
                                                  See accompanying notes.
</FN>
</TABLE>

                                                         56

<PAGE>

<TABLE>
                                                 Conceptus, Inc.

                                      Consolidated Statements of Operations
                                    (In thousands, except per share amounts)


<CAPTION>
                                                                         Years Ended December 31,
                                                          ---------------------------------------------------
                                                            1998                 1997                 1996
                                                          --------             --------             ---------     
<S>                                                       <C>                 <C>                   <C> 
Net sales                                                 $    449             $  1,426             $    664
Cost of sales                                                1,702                3,516                1,208
                                                          --------             --------             --------

Gross profit (loss)                                         (1,253)              (2,090)                (544)

Operating expenses:
  Research and development                                   4,317                5,429                3,757
  Selling, general and administrative                        5,349                6,323                4,824
  Acquired in-process research and development                --                   --                  4,752
                                                          --------             --------             --------
Total operating expenses                                     9,666               11,752               13,333
                                                          --------             --------             --------

Operating loss                                             (10,919)             (13,842)             (13,877)

Interest and investment income, net                          1,259                1,797                2,211
Interest expense                                                (5)                 (13)                 (26)
                                                          --------             --------             --------

Net loss                                                  $ (9,665)            $(12,058)            $(11,692)
                                                          ========             ========             ========

Basic and diluted net loss per share                      $  (1.01)            $  (1.29)            $  (1.39)
                                                          ========             ========             ========

Shares used in computing basic
  and diluted net loss per share                             9,562                9,381                8,396
                                                          ========             ========             ========

<FN>
                                             See accompanying notes.
</FN>
</TABLE>

                                                         57
<PAGE>

<TABLE>
                                                          Conceptus, Inc.
                                                 Statement of Stockholders' Equity
                                         (In thousands, except share and per share amounts)
<CAPTION>
                                                                                                   Stockholders' Equity
                                                                                          ------------------------------------------

                                                                      Redeemable              Series A
                                                                     Convertible             Convertible
                                                                    Preferred Stock         Preferred Stock      Common Stock
                                                                -----------------------   ------------------ -----------------------
                                                                 Shares        Amount       Shares    Amount   Shares      Amount
                                                                ----------   ----------   ----------  ------ ---------- ------------
<S>                                                             <C>          <C>            <C>        <C>   <C>        <C>
Balances at December 31, 1995                                    3,853,957   $   16,624      666,666   $--     196,248  $      931
Conversion of redeemable preferred stock exercised to common
  stock                                                         (3,853,957)     (16,624)        --      --   3,853,957      16,624
Series A convertible preferred stock converted to common stock        --           --       (666,666)   --     666,666        --
Initial Public Offering common stock shares issued in
  February at $14.00 per share, net of issuance costs of $4.3
    million                                                           --           --           --      --   3,450,000      43,992
Issuance of common stock for cash in 1996 at $0.30 to $9.15
  per share, pursuant to exercise of options                          --           --           --      --     116,543          98
Issuance of common stock for cash in 1996 at $8.7125 to $11.90
  pursuant to the employee stock purchase plan                        --           --           --      --      18,524         182
Issuance of common stock for cash in 1996 at $3.00 and $4.80
  per share, pursuant to exercisable warrants                         --           --           --      --      12,000          49
Net exercise of warrants                                              --           --           --      --     892,857        --
Amortization of deferred compensation                                 --           --           --      --        --          --
Net loss                                                              --           --           --      --        --          --
                                                                ----------   ----------   ----------  ----- ----------  ----------
Balances at December 31, 1996                                         --     $     --           --     $--   9,206,795  $   61,876
Issuance of common stock for cash in 1997 at $0.30 to $10.50
  per share, pursuant to exercise of options                          --           --           --      --     158,265         172
Issuance of common stock for cash in 1997 at $4.25 to $7.86
  per share, pursuant to employee stock purchase plan                 --           --           --      --      25,285         140
Issuance of common stock to former shareholders of
  Microgyn Inc.                                                       --           --           --      --     104,708       1,000
Extension of stockholder note receivable                              --           --           --      --        --          --
Amortization of deferred compensation, net of reversal of
  forfeited shares                                                    --           --           --      --        --           317
Net loss                                                              --           --           --      --        --          --
                                                                ----------   ----------   ----------  ----- ----------  ----------
Balances at December 31, 1997                                         --     $     --           --     $--   9,495,053  $   63,505
Issuance of common stock for cash at $0.30 - $.075
  per share, pursuant to exercise of options                          --           --           --      --      95,785          44
Issuance of common stock for cash at $1.22 - $1.381
  per share, pursuant to the employee stock purchase plan             --           --           --      --      29,367          37
Amortization of deferred compensation, net of reversal of
  forreited shares                                                    --           --           --      --        --           (16)
Net loss                                                              --           --           --      --        --          --
                                                                ==========   ==========   ==========  ===== ==========  ==========
Balances at December 31, 1998                                         --     $     --           --     $--   9,620,205  $   63,570
                                                                ==========   ==========   ==========  ===== ==========  ==========
</TABLE>


<TABLE>
<CAPTION>
                                                                                  Stockholder's Equity                       
                                                                       ----------------------------------------------------- 
                                                                                                    Deficit          Total   
                                                                                                   Accumulated  Stockholders'
                                                                       Stockholder                  During the    Equit (Net 
                                                                          Note       Deferred      Development    Capital    
                                                                        Receivable  Compensation     Stage       Deficiency) 
                                                                       -----------  ------------   -----------  ------------ 
<S>                                                                    <C>            <C>            <C>            <C> 
Balances at December 31, 1995                                          ($    49)      ($   778)      ($11,981)      ($11,877)
Conversion of redeemable preferred stock exercised to common                                                                 
  stock                                                                    --             --             --           16,624 
Series A convertible preferred stock converted to common stock                                                      -------- 
Initial Public Offering common stock shares issued in                                                                        
  February at $14.00 per share, net of issuance costs of $4.3 million      --             --             --           43,992 
Issuance of common stock for cash in 1996 at $0.30 to $9.15                                                                  
  per share, pursuant to exercise of options                               --             --             --               98 
Issuance of common stock for cash in 1996 at $8.7125 to $11.90                                                               
  pursuant to the employee stock purchase plan                             --             --             --              182 
Issuance of common stock for cash in 1996 at $3.00 an d$4.80                                                                 
  per share, pursuant to exercisable warrants                              --             --             --               49 
Net exercise of warrants                                                                                                     
Amortization of deferred compensation                                      --              219           --              219 
Net loss                                                                   --             --          (11,692)       (11,692)
                                                                       --------       --------       --------       -------- 
Balances at December 31, 1996                                          ($    49)      ($   559)      ($23,673)      $ 37,595 
Issuance of common stock for cash in 1997 at $0.30 to $10.50                                                                 
  per share, pursuant to exercise of options                               --             --             --              172 
Issuance of common stock for cash in 1997 at $4.25 to $7.86                                                                  
  per share, pursuant to employee stock purchase plan                      --             --             --              140 
Issuance of common stock to former shareholders of
  Microgyn Inc.                                                            --             --             --            1,000 
Extension of stockholder note receivable                                     (5)          --             --               (5)
Amortization of deferred compensation, net of reversal of
  forfeited shares                                                         --              343           --              660 
Net loss                                                                   --             --          (12,058)       (12,058)
                                                                       --------       --------       --------       -------- 
Balances at December 31, 1997                                          ($    54)      ($   216)      ($35,731)      $ 27,504 
Issuance of common stock for cash at $0.30 - $.075                                                                  -------- 
  per share, pursuant to exercise of options                               --             --             --               44 
Issuance of common stock for cash at $1.22 - $1.381                                                                          
  per share, pursuant to the employee stock purchase plan                  --             --             --               37 
Amortization of deferred compensation, net of reversal of                                                                    
  forreited shares                                                         --              110           --               94 
Net loss                                                                   --             --           (9,665)        (9,665)
                                                                       ========       ========       ========       ======== 
Balances at December 31, 1998                                          ($    54)      ($   106)      ($45,396)      $ 18,014 
                                                                       ========       ========       ========       ======== 

<FN>
                                                      See accompanying notes.
</FN>
</TABLE>

                                                              58
<PAGE>

<TABLE>
                                               Conceptus, Inc.
                                    Consolidated Statements of Cash Flows
                               Increase (Decrease) in Cash and Cash Equivalents
                                                (In thousands)
<CAPTION>
                                                                              Years Ended December 31,
                                                                      1998              1997              1996
                                                                    --------          --------          --------
<S>                                                                 <C>               <C>               <C> 
Cash flows used in operating activities
Net loss                                                            $ (9,665)         $(12,058)         $(11,692)
Adjustments to reconcile net loss to net
   cash used in operating activities:
   Charge for in-process research and development                       --                --               4,752
   Depreciation and amortization                                         599               498               305
   Allowance for doubtful accounts                                       444                39               136
   Amortization of deferred compensation                                  94               523               219
   Recognition of deferred revenue                                       (98)              (48)             --
   Changes in operating assets and liabilities
     Accounts receivable                                                 (43)             (474)             (228)
     Inventories                                                         355              (173)             (128)
     Other current assets                                                225               (56)              216
     Account payable                                                    (534)              111              (397)
     Accrued compensation                                               (249)              215               154
     Other accrued liabilities                                           (43)              (30)            1,150
                                                                    --------          --------          --------
Net cash used in operating activities                                 (8,915)          (11,453)           (5,513)
                                                                    --------          --------          --------

Cash flows used in investing activities
   Purchase of investments                                            (4,555)          (61,785)          (34,469)
   Maturities of investments                                          16,795            64,078            14,621
   Sales of investments                                                 --               1,981              --
   Purchase of Microgyn net of cash acquired                            --                --              (4,343)
   Capital expenditures                                                 (875)           (1,030)             (375)
   Investment in Advanced Reproductive                                  (256)             --                --
   Change in other assets                                                 13              (154)               12
                                                                    --------          --------          --------
Net cash provided by (used in) investing activities                   11,122             3,090           (24,554)
                                                                    --------          --------          --------

Cash flows provided by financing activities
   Proceeds from distributor agreement                                  --                 485              --
   Proceeds from issuance of common stock                                 81               312            44,321
   Increase in stockholders notes                                       --                  (5)             --
   Principal payments on debt and capital lease obligations              (35)             (118)             (163)
                                                                    --------          --------          --------
Net cash provided by financing activities                                 46               674            44,158
                                                                    --------          --------          --------

Net (decrease) increase in cash and cash equivalents                   2,253            (7,689)           14,091
Cash and cash equivalents at beginning of year                         9,250            16,939             2,848
                                                                    --------          --------          --------
Cash and cash equivalents at end of year                            $ 11,503          $  9,250          $ 16,939
                                                                    ========          ========          ========

Supplemental disclosure of cash flow information
Cash paid for interest                                              $      5          $     13          $     26
                                                                    ========          ========          ========

Supplemental schedule of noncash financing activities
Issuance of common stock to Microgyn shareholders                   $   --            $  1,000          $   --
                                                                    ========          ========          ========
<FN>
                                            See accompanying notes
</FN>
</TABLE>

                                                    59


<PAGE>

                                Conceptus, Inc.

                          Notes to Financial Statements
                                December 31, 1998

1. Summary of Significant Accounting Policies

Organization, Ownership and Business

Conceptus,  Inc. ("Conceptus" or the "Company") was incorporated in the State of
Delaware on September 18, 1992 to design,  develop and market minimally invasive
devices for reproductive medical applications. The Company's focus is to provide
a  non-surgical  approach to fallopian  tube  sterilization,  the most  commonly
performed   contraceptive   procedure  worldwide.   The  Company  has  developed
proprietary  micro-catheter  and  guidewire  systems  that allow  physicians  to
transcervically  (through the cervix) access and navigate the full length of the
fallopian tubes in a nonsurgical  approach.  The Company's  catheter systems are
based on technology  initially developed and used by Target  Therapeutics,  Inc.
("Target"),  a  business  unit of Boston  Scientific  Corporation  ("BSC"),  and
licensed exclusively to Conceptus in the field of reproductive physiology.

Consolidation

The consolidated  financial  statements  include the accounts of the Company and
its wholly owned  subsidiary,  Microgyn,  Inc.  ("Microgyn").  All  intercompany
accounts and transactions have been eliminated.

Use of Estimates

The  preparation  of the  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect  amounts  reported  in the  financial  statements  and
accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes  revenue at the time products are shipped.  In 1998, 1997
and 1996, net sales include  direct sales within the United  States,  as well as
through  international  and  domestic  distributors.  These  customers  have  no
contractual right of return or stock rotation privileges.

                                       60
<PAGE>

                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

Net Loss Per Share

Basic and  diluted  net loss per share is computed  using the  weighted  average
number of common shares outstanding. Common equivalent shares from stock options
and warrants are excluded in the net loss per share  calculation  because  their
inclusion would be antidilutive.

Stock-Based Compensation

The  Statement  of  Financial  Accounting  Standards  No. 123,  "Accounting  for
Stock-Based   Compensation"   ("Statement  123"),  provides  an  alternative  to
Accounting  Principles  Board's Opinion No. 25 ("APB 25")  "Accounting for Stock
Issued to  Employees",  in accounting  for  stock-based  compensation  issued to
employees.  The Company  has  elected to  continue  to account  for  stock-based
compensation  using the intrinsic value method  prescribed in APB 25 and related
Interpretations.  Accordingly,  compensation  costs for stock options granted to
employees and directors is measured as the excess,  if any, of the quoted market
price of the  Company's  stock  at the date of the  grant  over  the  amount  an
employee must pay to acquire the stock.

Cash, Cash Equivalents and Investments

The Company considers all highly liquid investments with a maturity from date of
purchase of three months or less to be cash  equivalents.  The Company maintains
deposits with a financial institution in the U.S. and invests its excess cash in
U.S. government obligations and U.S. corporate notes, which bear minimal risk.

Management    considers   all   their    investments   as    available-for-sale.
Available-for-sale  securities  are carried at  estimated  fair value,  with the
unrealized  gains and losses reported in stockholders'  equity.  The fair values
for marketable  debt  securities are based on quoted market prices.  At December
31, 1998 and 1997, the fair value of  investments  approximates  cost.  Realized
gains and losses and  declines  in value  judged to be  other-than-temporary  on
available-for-sale  securities are included in interest and  investment  income.
The cost of  securities  sold is based on the  specific  identification  method.
Interest and  dividends  on  securities  classified  as  available-for-sale  are
included in interest and investment income.

                                       61
<PAGE>

                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

Concentration of Credit Risk

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

The Company's  revenues to date consist of product  revenues  from  distributors
located in Europe,  Australia and the United States, and direct sales within the
United  States.  The  Company  does not  require  collateral  and  provides  for
estimated credit losses based on a customer credit assessment.  During the years
ended  December  31,  1998,  1997,  and 1996,  the Company  added  approximately
$444,000, $39,000 and $136,000 to its bad debt reserves respectively. During the
same periods,  write-off of uncollectible accounts totaled $18,000,  $4,000, and
$3,000, respectively.

Customers comprising more than 10% of net sales at December 31 are as follows:

                                   Percentage of Net Sales
                 ---------------------------------------------------------------
                       1998                  1997                 1996
                 --------------------- -------------------- --------------------
Customer 1              18%                   --                   --
Customer 2              11%                   --                  11%
Customer 3              --                   63%                  46%
Customer 4              --                   27%                   --
Customer 5              --                    --                  19%

Export  sales were  $147,000,  $239,000  and  $188,000  during  the years  ended
December 31, 1998, 1997 and 1996, respectively.

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.

                                       62
<PAGE>

                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

Property and Equipment

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

Reporting Comprehensive Income (Loss)

Conceptus  adopted  Statement  of  Financial   Accounting   Standards  No.  130,
"Reporting Comprehensive Income,"("Statement 130) in the year ended December 31,
1998.  Statement  130  establishes  new rules for the  reporting  and display of
comprehensive  income  (loss)  and its  components;  however,  the  adoption  of
Statement 130 had no impact on the Company's net income (loss) or  stockholders'
equity.  Statement  130  requires  unrealized  gains or losses on the  Company's
available for-sale securities,  which prior to adoption were reported separately
in the  stockholders'  equity,  to be  included  in other  comprehensive  income
(loss).

Segment Information

The Company  adopted FAS 131,  "Disclosure  about  Segments of an Enterprise and
Related  Information,"  at December 31,  1998.  FAS 131  establishes  annual and
interim reporting  standards for an enterprise's  operating segments and related
disclosures about its products, services,  geographic areas and major customers.
Under FAS 131, the Company's  operations are treated as one operating segment as
it only  reports  profit and loss  information  on an  aggregate  basis to chief
operating decision makers of the Company.

2. Acquisition

On November 26, 1996,  the Company  completed  the  acquisition  of Microgyn,  a
privately held medical device company  developing  products  designed to improve
the safety and performance of  resectoscope  procedures,  including  therapeutic
hysteroscopy.  The  Company  acquired  all of the  outstanding  common  stock of
Microgyn in exchange for $3.0 million in cash on the  acquisition  date and $1.0
million in cash or stock (at the option of  Conceptus)  payable six months after
the acquisition date, plus $752,000 due to assumption of certain liabilities and
related  acquisition  expenses.  In May 1997,  the  Company  satisfied  the $1.0
million  accrued  acquisition

                                       63
<PAGE>
                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

cost by  issuing  104,708  shares  of the  Company's  Common  Stock.  Additional
contingent  consideration  in cash or  stock,  at the  option of  Conceptus,  is
payable to the former shareholders of Microgyn based upon meeting certain future
milestones. No additional consideration has been paid subsequent to the May 1997
stock issuance.

The acquisition was accounted for using the purchase method.  Under the purchase
method,   the  results  of  operations   of  acquired   companies  are  included
prospectively from the date of acquisition,  and the aggregate  acquisition cost
is allocated to the acquiree's  assets,  liabilities,  and intangibles,  if any,
based upon the fair market  values on the date of  acquisition.  An  independent
valuation, utilizing accepted valuation techniques, was obtained which allocated
the $4,572,000 aggregate acquisition cost as purchase of in-process research and
development.   Consequently,   the   $4,572,000  was  charged  to  research  and
development  expense in the month of  acquisition.  Based on the valuation,  the
Company concluded that technological  feasibility has not been reached and there
was no alternative use of the technology.

The  following  unaudited  pro forma  financial  summary is  presented as if the
operations of the Company and Microgyn were combined as of January 1, 1996.  The
unaudited  pro forma  combined  results are not  necessarily  indicative  of the
actual results that would have occurred had the acquisition  been consummated at
that date, or of the future  operations of the combined  entities.  Nonrecurring
charges,  such as the  write-off  of  approximately  $4.8  million  of  acquired
in-process  research and  development,  are not  reflected in the  following pro
forma financial summary.

Unaudited Pro Forma Financial Summary

                                              Year ended December 31, 1996
                                              ----------------------------
                                        (In thousands, except per share amounts)

Net sales                                               $   623
Net loss                                                 (7,794)
Basic and diluted net loss per share                    $ (0.93)

In October 1997, the Company purchased the exclusive manufacturing rights to the
Microgyn product line from the Company's supplier, Medical Scientific,  Inc. The
manufacturing know-how related to the Microgyn product line has been transferred
to the  Company's  facility  as of the end of the  first  quarter  of 1998.  The
purchase and transfer of these manufacturing  rights resulted in additional cost
of goods expenditures approximating $1.1 million.

                                       64
<PAGE>
                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

3. Related Party Transactions

Financing Arrangement

In March 1994, the Company entered into an equipment lease line (see Note 6) and
secured loan agreement with Target,  which allows for borrowings of $300,000 and
$209,000, respectively. The borrowings are secured by capital equipment and bear
interest at 8.5% per year.  The notes are payable  over a 36-month  and 48-month
period. As of December 31, 1998 both notes were paid in full. As of December 31,
1997  $40,000 was payable on one note.  In  connection  with these  secured loan
agreements,  Target  was  issued a  warrant  to  purchase  12,000  shares of the
Company's  Common Stock.  The exercise price for 5,000 of these shares was $3.00
per share and the  remaining  7,000  shares had an  exercise  price of $4.80 per
share. As a result of the Company's  initial public  offering,  Target exercised
its warrant at an aggregate price of $48,600.

Operations and Facilities

In  December  1992,  the Company  entered  into a supply  agreement  with Target
whereby  Target agreed to supply to and/or  manufacture  products and components
necessary for the Company to proceed with its research and development  activity
under the license agreement  described above. In 1998, 1997 and 1996, no amounts
were paid to Target under this supply agreement.

In addition,  the Company paid to Target certain employee  benefits  incurred by
Target on the  Company's  behalf.  In 1998 and 1997, no amounts were paid due to
the  discontinuance of the agreement as of December 31, 1996. In 1996,  $177,000
was paid, under this agreement.

                                       65
<PAGE>
                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

<TABLE>
4. Balance Sheet Information
<CAPTION>
                                                                  December 31,
                                                   -----------------------------------------------
                                                          1998                   1997
                                                   -----------------------------------------------
                                                                 (In thousands)
<S>                                                       <C>                   <C>
Inventories:
   Raw materials                                          $   160               $    89
   Finished goods and work-in-process                         673                   266
   Reserves                                                  (833)                 --
                                                   -----------------------------------------------
                                                          $  --                 $   355
                                                   ===============================================
Property and equipment:
   Machinery and equipment                                $   719               $   643
   Office equipment and furniture and fixtures              1,591                 1,319
   Leasehold improvements - construction in
     progress                                                 625                    98
                                                   -----------------------------------------------
                                                            2,935                 2,060
   Less accumulated depreciation and                       (1,544)                 (970)
     amortization
                                                   -----------------------------------------------
   Property and equipment, net                             $1,391                $1,090
                                                   ===============================================
</TABLE>

                                       66
<PAGE>

                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

5. Investments

<TABLE>
The following is a summary of available-for-sale securities as of:
<CAPTION>
                                                                        Estimated Fair Value
                                                              ---------------------------------------------
                                                                            December 31,
                                                                     1998                  1997
                                                              ---------------------------------------------
                                                                           (In thousands)
<S>                                                                 <C>                <C>         
          Cash                                                      $     491          $        395
          Cash equivalents:
             Money market funds                                        10,008                   882
             Commercial paper                                            --                   3,492
             Corporate notes                                            1,004                 2,086
             U.S. government obligations                                 --                   2,395
                                                              ---------------------------------------------
                                                                    $  11,503               $ 9,250
                                                              =============================================
          Short-term investments:
             U.S. government obligations                           $     --                 $ 8,353
             Corporate notes                                            5,568                 8,443
             Certificates of deposit                                     --                   1,012
                                                              ---------------------------------------------
                                                                      $ 5,568               $17,808
                                                              =============================================
</TABLE>

6. Commitments

The Company leases its current  facility under an operating  lease which expires
in December  1999.  The Company has also leased an additional  facility under an
operating  lease,  effective May 1997, which expires May 2002. The total minimum
annual  rental  commitments  under the  leases as of  December  31,  1998 are as
follows:

                                                    (In thousands)
Year ending December 31,

   1999                                                   $499
   2000                                                    232
   2001                                                    242
   2002                                                    102
   2003                                                   --
                                                --------------------------
Total minimum rental commitment                         $1,075
                                                ==========================

                                       67
<PAGE>

                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

As of October 15, 1998 the Company  entered  into a sublease  agreement  for its
additional  facility  which expires May 2002.  The total  minimum  annual rental
commitments  will be  offset  by the  following  sublease  rental  income in the
following years:
                                                    (In thousands)
Year ending December 31,

   1999                                                 $  398
   2000                                                    418
   2001                                                    438
   2002                                                    189
   2003                                                   --
                                                --------------------------
Total minimum sublease commitment                       $1,443
                                                ==========================

Rent expense for the years ended December 31, 1998,  1997 and 1996 was $515,000,
$347,000, and $129,000, respectively.

At December  31, 1998 and 1997,  assets  acquired  under  noncancelable  capital
leases  with  Target  consist  of office  equipment  with an  aggregate  cost of
$322,000 at both 1998 and 1997. The accumulated  amortization at the end of 1997
was $284,000. The assets were fully depreciated in 1998.


7. Stockholder's Equity

1993 Stock Plan

The 1993  Stock  Plan  ("1993  Plan")  was  adopted  in July 1993 and allows the
granting of options and restricted stock purchases for up to 1,575,000 shares of
Common Stock to employees,  distributors,  consultants and directors.  Effective
May 1997,  the shares of Common Stock  reserved for issuance  were  increased by
1,000,000 shares to 2,575,000 shares.  The Company has reserved 2,033,158 shares
of its Common Stock which may be issued with respect to  outstanding  options at
December 31, 1998 under the 1993 Plan.

Stock options granted under the 1993 Plan may be either  incentive stock options
or  nonqualified  stock  options.  Incentive  stock  options  may be  granted to
employees  with  exercise  prices of no less than the fair  market  value of the
Common  Stock on the date

                                       68
<PAGE>

                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

of grant and  nonqualified  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.  The
options  expire no more than 10 years  after the date of grant.  Options  may be
granted with different vesting terms from time to time but generally provide for
vesting of at least 25% of the total number of shares per year.  The options may
include provisions  permitting exercise of the option prior to full vesting. Any
unvested  shares so purchased  shall be subject to  repurchase by the Company at
the original  exercise price of the option.  Such  repurchase  rights  generally
lapse at a minimum rate of 25% per year from the date the option was granted.

<TABLE>
Activity under the 1993 Plan is as follows:
<CAPTION>
                                                 Options                  Options Outstanding
                                                                -------------------------------------------
                                                Available           Number of              Price
                                                for Grant            Shares              Per Share
                                            ---------------------------------------------------------------
<S>                                                 <C>                <C>             <C>
Balance at December 31, 1995                          497,185            906,566         $0.30-$9.15
   Options granted                                   (439,707)           439,707        $9.25-$19.75
   Options exercised                                     --             (116,543)        $0.30-$9.15
   Options cancelled                                  165,315           (165,315)       $0.30-$10.50
                                            ---------------------------------------------------------------
Balance at December 31, 1996                          222,793          1,064,415        $0.30-$19.75
   Additional authorized                            1,000,000               --                  --
   Options granted                                   (755,000)           755,000       $7.00-$13.625
   Options exercised                                     --             (158,265)       $0.30-$10.50
   Options canceled                                   172,388           (172,388)       $0.30-$19.75
                                            ---------------------------------------------------------------
Balance at December 31, 1997                          640,181          1,488,762        $0.30-$19.75
   Options granted                                 (1,228,082)         1,228,082         $1.25-$4.63
   Options exercised                                     --              (95,785)       $0.30-$10.50
   Options canceled                                 1,207,777         (1,207,777)       $0.30-$19.75
                                            ---------------------------------------------------------------
Balance at December 31, 1998                          619,876          1,413,282        $0.30-$19.75
                                            ===============================================================
</TABLE>

At December 31, 1998, 1997 and 1996,  options to purchase  576,736,  652,982 and
447,953 common shares, respectively,  were exercisable. There were no restricted
stock  issuances for 1998,  1997 and 1996.  At December 31, 1998,  there were no
common shares  subject to repurchase by the Company  (12,500  shares  subject to
repurchase  at  December  31,  1997).  There  were no common  shares  subject to
repurchase in 1996.

On July 21, 1998, all employee grants of stock options under the 1993 Stock Plan
issued were repriced (a total of 486,932  options) to reflect an exercise  price
of $1.25.

                                       69
<PAGE>

                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

Any option holder who elected to reprice an option was not permitted to exercise
the repriced  option,  even if vested,  for one year.  The repriced  options are
reflected as both granted and forfeited options in the 1993 Plan table.

On April 7, 1998,  employee  grants of stock  options  under the 1993 Stock Plan
issued were repriced (a total of 63,300 options) to reflect an exercise price of
$3.50. The repriced options are reflected as both granted and forfeited  options
in the 1993 Plan table.

On August 1, 1996, all  non-officer  employee  grants of stock options under the
1993 Stock Plan issued  between  the date of the public  offering  (February  1,
1996) and June 3, 1996 were  repriced (a total of 93,666  options) to reflect an
exercise price of $10.50. Any option holder who elected to reprice an option was
not permitted to exercise the repriced option,  even if vested, for 90 days. The
repriced options are reflected as both granted and forfeited options in the 1993
Plan table.

1995 Directors Stock Option Plan

On November 29, 1995, the board approved the 1995  Director's  Stock Option Plan
("Directors'  Plan"),  which  allows the  granting  of options for up to 100,000
shares of Common  Stock to outside  directors.  Stock  options may be granted to
outside  directors with exercise  prices of no less than fair market value.  The
options  expire no more than 10 years after the date of grant.  Options  granted
under the  Directors'  Plan will vest over one or three  years.  The options are
only exercisable  while the outside  director  remains a director.  During 1998,
1997 and 1996, 7,500, 32,000 and 12,000 options, respectively, were granted.

1995 Employee Stock Purchase Plan

On November 29, 1995,  the board  approved the 1995 Employee Stock Purchase Plan
("ESPP"),  under which  employees may purchase  shares of the  Company's  Common
Stock, subject to certain  limitations,  at no less than 85% of the lower of the
fair market value at the beginning or end of a six-month purchase period.  Under
the terms of the ESPP, employees can choose each year to have up to 10% of their
annual base  earnings  withheld to purchase the Company's  Common Stock.  During
1998, 1997 and 1996, 29,367 25,285 and 18,524 shares, respectively, were issued.
The Company has reserved  200,000  shares of Common Stock for issuance under the
ESPP.

                                       70
<PAGE>

                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

Pro Forma Valuation of Options

The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its  plans  (see  Note  1).  Accordingly,  no  compensation  cost  has  been
recognized for its fixed stock option plans and its stock purchase plan.

Pro forma  information  regarding net loss and net loss per share is required by
Statement  123 and has been  determined  as if the Company had accounted for its
employee  stock options  granted  subsequent to December 31, 1994 under the fair
value method of Statement  123. The fair value of each option grant is estimated
on the date of grant  using  the  Black-Scholes  option-pricing  model  with the
following weighted-average  assumptions used for option grants in 1998, 1997 and
1996:  dividend  yield of zero,  expected  volatility  factor  of .6,  risk-free
interest rate of 6% and an expected life of 4 years.  In 1997 and 1996, the fair
value  of each  option  grant  is  estimated  on the  date of  grant  using  the
Black-Scholes   option-pricing   model  with  the   following   weighted-average
assumptions used for option grants:  dividend yield of zero, expected volatility
factor of .6,  risk-free  interest  rate of 6% and an expected  life of 5 years.
Compensation  cost is recognized for the fair value of the  employees'  purchase
rights,  which was estimated  using the  Black-Scholes  model with the following
assumptions  for 1998:  dividend  yield of zero, an expected life of four years,
expected  volatility factor of .4 and risk-free interest rate of 6%. In 1997 and
1996,  compensation  cost is  recognized  for the fair  value of the  employees'
purchase  rights,  which was estimated  using the  Black-Scholes  model with the
following  assumptions:  dividend  yield of zero,  an expected life of one year,
expected volatility factor of .4 and risk-free interest rate of 5%. The weighted
average fair values of those purchase rights granted in 1998, 1997 and 1996 were
$0.87,  $3.09 and  $4.32,  respectively.  The  effects of  applying  FAS 123 for
recognizing  compensation  expense and providing pro forma  disclosures in 1998,
1997 and 1996 are not likely to be representative of the effects on reported net
income in future years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded  options which have no vesting  restrictions  and are fully
transferable.  In addition,  option valuation models require the input of highly
subjective  assumptions  including the expected stock price volatility.  Because
the  Company's  employee  stock  options  have   characteristics   significantly
different from those of traded  options,  and because  changes in the subjective
input assumptions can materially affect the fair value

                                       71
<PAGE>

                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

estimate,  in  management's  opinion,  the existing  model does not  necessarily
provide a  reliable  single  measure  of the fair  value of its  employee  stock
options. For purposes of pro forma disclosures,  the estimated fair value of the
options is amortized to expense over the option's vesting period.  The Company's
pro forma  information  follows (in thousands  except for the net loss per share
information):

<TABLE>
<CAPTION>
                                                                  1998          1997           1996
                                                                  ----          ----           ----
<S>                                                            <C>            <C>            <C>      
Proforma net loss                                              $(10,229)      $(12,908)      $(12,463)
Proforma basic and diluted net loss per share                   $(1.06)        $(1.38)        $(1.48)
</TABLE>


<TABLE>
A summary of the activity of the Company's 1993 Plan and the Directors' Plan for
the years ended December 31, are as follows:

<CAPTION>
                                                             1998                            1997
                                                  ---------------------------        ----------------------
----
                                                                Weighted-Avg                      Weighted-Avg
Fixed Options                                     Shares       Exercise Price        Shares      Exercise Price
-------------                                     ------       --------------        ------      --------------
<S>                                             <C>                <C>             <C>               <C>   
Outstanding at beginning of year                1,532,796          $ 7.96          1,076,415         $ 5.72
Granted                                           685,850          $ 2.15            787,000         $ 9.29
Exercised                                         (95,785)         $ 0.46           (158,265)        $ 1.09
Forfeited                                        (442,657)         $ 8.93           (172,388)        $ 6.93
                                              ------------                         ---------
Outstanding at end of year                      1,680,200          $ 3.22          1,532,792         $ 7.96

Options exercisable at year-end                   576,736                            652,982

Weighted-average  fair  value  of  option
granted during the year                            $ 5.01                             $ 4.96
</TABLE>

                                       72
<PAGE>

                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

<TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:

<CAPTION>
                                           Weighted-Avg.
                             Number          Remaining    Weighted-Avg.      Number
Range of Exercise         Outstanding at     Contractual    Exercise       Exercisable    Weighted-Avg.
     Prices                  12/31/98       Life (years)      Price        at 12/31/98    Exercise Price
------------------------ ---------------- --------------- --------------- -------------- ----------------
<S>                          <C>               <C>          <C>              <C>           <C>     
$0.300-$0.510                230,747           5.61         $  0.43          223,437       $   0.43
$1.250-$1.250                925,296           8.71         $  1.25            6,999       $   1.25
$1.313-$4.625                201,229           9.39         $  2.76          138,056       $   2.76
$7.000-$9.150                 27,601           8.34         $  8.11           20,859       $   8.11
$9.625-$9.625                188,882           8.36         $  9.63          105,737       $   9.63
$9.630-$11.130                70,496           7.59         $ 10.20           50,909       $  10.20
$11.625-$11.625               10,332           7.85         $ 11.63           10,302       $  12.75
$12.750-$12.750                  200           8.17         $ 12.75               87       $  12.75
$19.250-$19.250               20,408           7.35         $ 19.25           15,350       $  19.25
$19.750-$19.750                5,009           7.16         $ 19.75            5,000       $  19.75
                         ----------------                                                ----------------

$0.300-$19.750             1,680,200           7.85         $ 5.010          576,736       $  5.010
</TABLE>

8. Income Taxes

As of December 31, 1998,  the Company had net operating loss  carryforwards  for
federal  and  state  income  tax  purposes  of  approximately   $38,000,000  and
$13,500,000,  respectively.  In addition,  at December 31, 1998, the Company had
research credit carryforwards of approximately  $900,000. The net operating loss
and credit carryforwards  described above will expire at various dates beginning
in the  years  2006  through  2013,  if not  utilized.  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.

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

                                       73
<PAGE>

                                 Conceptus, Inc.

                    Notes to Financial Statements (continued)
                                December 31, 1998

<TABLE>
Significant  components of the  Company's  deferred tax assets as of December 31
are as follows:

<CAPTION>
                                                            1998                  1997
                                                     ---------------------------------------------
                                                                  (In thousands)
<S>                                                        <C>                 <C>      
Net operating loss carryforwards                           $ 13,800            $  10,700
Research credits (expiring 2006-2013)                           900                  700
Capitalized R&D                                                 900                  800
Other - net                                                    --                    700
                                                     ---------------------------------------------
Total deferred tax assets                                    15,600                12,900
Valuation allowance for deferred tax assets                 (15,600)              (12,900)
                                                     ---------------------------------------------
Net deferred tax assets                                    $   --              $     --
                                                     =============================================
</TABLE>

Because of the Company's lack of earnings history,  the deferred tax assets have
been fully  offset by a  valuation  allowance.  The  increase  in the  valuation
allowance was approximately $5,335,00 during 1997.

9.   Restructuring Accrual

In July 1998, the Company  announced a restructuring  to  significantly  reduced
spending   levels   through  the   elimination   of  all  sales  and  marketing,
manufacturing,  and most  administrative  personnel.  The Company has eliminated
fifty-three positions worldwide since January 1, 1998, through natural attrition
and employee layoffs. At December 31, 1998, $46,000 remains related primarily to
severance  and cobra  payments.  This  restructuring  resulted in an  additional
charge to operating  expense of $920,000  comprised of $725,  000 related to the
reduction in workforce and $195,000 to fully reserve all remaining inventory.

10.  Litigation

The Company is also subject to other legal  proceedings and claims that arise in
the ordinary course of its business.  While  management  currently  believes the
amount of ultimate  liability,  if any,  with respect to these  actions will not
materially affect the financial position, results of operations, or liquidity of
the Company,  the  ultimate  outcome of any  litigation  is  uncertain.  Were an
unfavorable outcome to occur, the impact could be material to the Company.

                                       74
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized  in the City of San
Carlos, California on this 30th day of March 1999.
                           CONCEPTUS, INC.

                           By:__________________________________________________
                                  Kathryn A. Tunstall,
                                  President and Chief Executive Officer

                                POWER OF ATTORNEY

<TABLE>
         KNOW ALL PERSONS BY THESE  PRESENTS,  that each person whose  signature
appears  below  constitutes  and  appoints  Kathryn  A.  Tunstall,  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

<CAPTION>
       Signature                                    Title                                Date
       ---------                                    -----                                ----
<S>                                   <C>                                             <C>
/s/ Kathryn A. Tunstall               President, Chief Executive Officer and
----------------------------          Director (Principal Excutive Officer)
(Kathryn A. Tunstall)                                                                 March 30, 1999

/s/ Oliver Brouse                     Director Finance, (Principal Financial
----------------------------          and Accounting Employee)
(Oliver Brouse)                                                                       March 30, 1999

/s/  Florence Comite
----------------------------
(Florence Comite)                     Director                                        March 30, 1999

/s/  Sanford Fitch
----------------------------
(Sanford Fitch)                       Director                                        March 30, 1999

/s/  Robert F. Kuhling
----------------------------
(Robert F. Kuhling)                   Director                                        March 30, 1999

/s/  Thomas C. McConnell
----------------------------
(Thomas C. McConnell)                 Director                                        March 30, 1999

/s/  Howard D. Palefsky
----------------------------
(Howard D. Palefsky)                  Director                                        March 30, 1999

/s/  Richard D. Randall
----------------------------
(Richard D. Randall)                  Director                                        March 30, 1999
</TABLE>