UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Fiscal Quarter Ended March 31, 2004

For the transition period from                     to                    .

Commission file number: 0-27596

CONCEPTUS, INC.

1021 Howard Avenue
San Carlos, CA 94070
(Address of principal executive offices)

Registrant’s telephone number, including area code: (650) 628-4700

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

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

As of April 30, 2004, 25,500,988 shares of the registrant’s Common Stock were outstanding.

CONCEPTUS, INC.

FORM 10-Q for the Quarter Ended March 31, 2004

INDEX

2

PART I: FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

Conceptus, Inc.

Condensed Consolidated Balance Sheets

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

3

Conceptus, Inc.

Condensed Consolidated Statements of Operations

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

4

Conceptus, Inc.

Condensed Consolidated Statements of Cash Flows

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

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation have been included.

     The condensed consolidated balance sheet at December 31, 2003 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. This financial data should be reviewed in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. The results of operations for the three months ended March 31, 2004 may not necessarily be indicative of the operating results for the full 2004 fiscal year or any other future interim periods.

2. Organization, Ownership and Business

     In January 2004, the Company has completed the sale of its wholly owned French subsidiary for a nominal amount to an investor group comprised of its former French management team and signed a long-term exclusive distribution agreement for Essure with the acquiring group for the European, Middle East and African markets. The sale agreement includes a long-term call option that is intended to enable the Company to repurchase the French company at predetermined prices and time periods that are typical for a distribution company. The transaction did not have any material financial impact to the Company’s condensed consolidated financial statements.

3. Summary of Significant Accounting Policies

     The Company’s significant accounting policies are disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 that was filed with the Securities and Exchange Commission on March 15, 2004. The Company’s significant accounting policies have not materially changed since December 31, 2003.

4. Inventories, net

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

5. Intangible Assets

     Intangible assets as of March 31, 2004 comprise of a technology license obtained as a result of the settlement of the patent litigation with Ovion, Inc. The license was acquired at a cost of $2.0 million payable in the

6

Company’s common stock and has an expected useful life of ten years from the date of settlement. The license fee is amortized based on the straight-line method over the useful life of ten years. An amortization expense of $50,000 has been classified on the Company’s condensed consolidated statement of operations for the three months ended March 31, 2004 as cost of goods sold. Estimated future amortization expenses for each of the years ended December 31, 2004 through 2012 are $200,000 per year and $150,000 for the year ended December 31, 2013.

6. Other Assets

     Other assets as of March 31, 2004 are principally comprised of the carrying value, of $1.9 million, of a $2.0 million payment that the Company made to Ovion, Inc., as a result of the settlement of a patent litigation suit. In accordance with the terms of the settlement agreement, the Company’s prepaid royalties will be fully amortized when its cumulative net sales reach $136,500,000 thereby resulting in an effective royalty rate of 1.47%. The Company is amortizing the prepayment to cost of goods sold over its net sales using this effective rate.

7. Warranty

     The Company offers warranties on its product and records a liability for the estimated future costs associated with warranty claims, which is based upon historical experience and the Company’s estimate of the level of future costs. Warranty costs are reflected in the statement of operations as a cost of goods sold. A reconciliation of the changes in the Company’s warranty liability for the three months ended March 31, 2004 and 2003 follows (in thousands):

8. Stock-based compensation

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

     The Company granted 273,000 shares of restricted stock to its employees during the first three months ended March 31, 2004. The restricted stock shares have zero exercise price and three years of cliff vesting with the potential of acceleration if certain company objectives are met. The Company is amortizing the total restricted stockexpense of $2.4 million, calculated based on the fair market value of the stock on the date of the grant, over the vesting term of three years on a straight-line basis. Future restricted stock expense shall be $0.7 million, $0.8 million, $0.8 million and $0.1 million for the years 2004, 2005, 2006 and 2007, respectively. Of the total restricted stock expense of $2.4 million, $0.3 million and $0.3 million is related to cost of sales and research and development, respectively and $1.8 million is related to selling, general and administrative expenses. For the three months ended March 31, 2004, $80,000 of restricted stock employee compensation expense is included in the net loss as reported and no restricted stock employee compensation expenses is included in the net loss reported for the three months ended March 31, 2003.

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

7

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

     To comply with pro forma reporting requirements of SFAS No. 123, compensation cost is also estimated for the fair value of the Company’s Employee Stock Purchase Plan (ESPP) rights, which are included in the pro forma totals above.

     The fair value of the ESPP rights is calculated at each reporting date using the following assumptions:

     The weighted-average fair value per share of options, excluding ESPP rights, granted was $6.57 and $4.63, respectively, for the three months ended March 31, 2004 and 2003.

     Stock-based compensation arrangements to non-employees are accounted for in accordance with SFAS No. 123 and Emerging Issues Task Force Issue (EITF) No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” which requires that these equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is subject to periodic adjustment as the underlying equity instruments vest. Stock-based compensation expense relating to non-employees was $135,000 and $1,000 for the three months ended March 31, 2004 and 2003, respectively.

8

     The fair value of the stock options granted is calculated at each reporting date using the following assumptions:

9. Computation of Net Loss Per Share

     Basic net loss per share is computed using the weighted-average number of common shares outstanding during each period. Diluted net loss per share is computed using the weighted-average number of common and potential dilutive shares outstanding during each period. Under the requirements for calculating basic net loss per share, the effect of potentially dilutive securities such as stock options, restricted stock grants, common stock shares subject to repurchase, warrants and convertible securities are excluded. Basic and diluted net loss per share is equivalent for all periods presented due to the Company’s net loss position.

     During all periods presented, the Company had securities outstanding, which could potentially dilute basic earnings per share in the future, but were excluded from the computation of diluted net loss per share, as their effect would have been antidilutive. Potentially dilutive outstanding securities were 4,084,000 and 3,449,000 as of March 31, 2004 and December 31, 2003, respectively.

10. Comprehensive Loss

     Total comprehensive loss for the three months ended March 31, 2004 consisted of foreign currency translation gains of $2,000 and net loss of $7,128,000 as unrealized gains and losses on available-for-sale securities were immaterial. For the three months ended March 31, 2003, total comprehensive loss consisted of foreign currency translation losses of $13,000 and net loss of $11,025,000 as unrealized gains and losses on available-for-sale securities were immaterial.

11. Stockholder’s Equity

     On February 25, 2004, the Company completed a private placement of approximately 3,000,000 shares of common stock at $8.50 per share. The net proceeds to the Company, after fees and other offering costs totaling $1,600,000, were approximately $23,900,000.

12. Legal Proceedings

     From time to time the Company is involved in legal proceedings arising in the ordinary course of business. The Company believes there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on its financial position, result of operations or cash flow.

13. Recent Accounting Pronouncements

     In December 2003, the FASB issued a revised FASB Interpretation No. 46 (“FIN 46R”), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” The FASB published the revision to clarify and amend some of the original provisions of FIN 46, which was issued in January 2003, and to exempt certain entities from its requirements. A variable interest entity (“VIE”) refers to an entity subject to consolidation according to the provisions of this Interpretation. FIN 46R applies to entities whose equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support provided by any parties, including equity holders, or where the equity investors (if any) do not have a controlling financial interest. FIN 46R provides that if an entity is the primary beneficiary of a VIE, the assets, liabilities, and results of operations of the VIE should

9

be consolidated in the entity’s financial statements. In addition, FIN 46R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE provide additional disclosures. The provisions of FIN 46R were effective for the Company’s fiscal 2004 first quarter. The adoption of FIN 46R did not have a material impact on the Company’s financial position or results of operations.

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in Part I-Item 1 of this quarterly report. In addition, the following discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. We wish to alert readers that the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2003, as well as other factors, including those set forth in the following discussion and under “Risk Factors” below, could in the future affect, and in the past have affected, our actual results and could cause our results for future periods to differ materially from those expressed or implied in any forward-looking statements made by us.

Overview

     We develop, manufacture and market Essure™, an innovative and proprietary non-incisional permanent birth control device for women that was approved for marketing in the United States in November 2002 by the United States Food and Drug Administration (FDA). Essure is a soft and flexible micro-insert delivered into a woman’s fallopian tubes designed to provide permanent birth control by causing a benign tissue in-growth that blocks the fallopian tubes. A successfully placed Essure micro-insert prohibits the egg from traveling through the fallopian tubes and therefore prevents fertilization.

     The Essure Procedure

     The Essure placement procedure is typically performed as an outpatient procedure and is intended to be a less invasive and a less costly alternative to tubal ligation, the leading form of birth control in the United States and worldwide. Laparoscopic tubal ligation and tubal ligation by laparotomy typically involve abdominal incisions and/or punctures, general or regional anesthesia, four to ten days of normal recovery time and the risks associated with an incisional procedure. The Essure placement procedure does not require cutting or penetrating the abdomen, which lowers the likelihood of post-operative pain due to the incisions/punctures, and is typically performed in an outpatient setting without general or regional anesthesia. In the Pivotal trial of Essure, the total procedure time averaged 35 minutes, with an average of 13 minutes of hysteroscopic time to place the Essure micro-insert. A patient is typically discharged approximately 45 minutes after the Essure placement procedure. No overnight hospital stay is required. Furthermore, Essure is effective without drugs or hormones. There is a three-month waiting period after the procedure during which the woman must use another form of birth control while tissue in-growth occurs. At 90 days following the procedure, the patient completes a follow-up examination called a hysterosalpingogram (HSG), which can determine that the device was placed successfully and that the fallopian tubes are occluded.

     We believe that the Essure procedure is an attractive alternative to tubal ligation for physicians, hospitals and payors. Essure is a less invasive permanent birth control option for physicians to offer to their patients; hospitals are able to utilize their facilities more cost effectively with the Essure placement procedure compared with tubal ligation and payors are experiencing cost reductions resulting from the elimination of overhead and procedural costs related to anesthesia and post-operative hospital stays associated with tubal ligations. In addition, payors may also benefit from the reduction of unplanned pregnancies associated with non-permanent methods of birth control used by patients who have chosen to avoid the drawbacks of traditional permanent birth control methods but who may elect to use Essure.

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

     Essure is currently being marketed in multiple countries. In November 2002, we received from the FDA, approval to market Essure in the United States. In 2001, we were given approval to affix the CE Mark to Essure, indicating that Essure is certified for sale throughout the European Union, subject to compliance with local regulations such as registration with health ministries and/or particular requirements regarding labeling or distribution. In 1999, Essure was listed with Australia’s Therapeutic Goods Administration, which allows us to

11

market and sell Essure in Australia. In Canada, we received clearance from Health Canada to market Essure in Canada in November 2001. We also have distributors in Singapore, Indonesia, Morocco, Turkey and New Zealand.

     Effectiveness of Essure

     Based on clinical trial data filed with the FDA in November 2003, Essure has been demonstrated to be 99.8% effective at three years of follow-up. We have submitted data to the FDA to support a change in this effectiveness rate to 99.8% at three years of follow-up. We are working with the FDA to finalize the exact wording of the labeling, as well as other changes that are part of the FDA’s continuing effort to standardize contraceptive labeling. We expect to complete the labeling changes to the FDA’s satisfaction by the end of the second quarter of 2004.

     Penetration

     As of March 31, 2004, Conceptus has trained or is in the process of training 969 physicians on the Essure procedure. Doctors are required to be preceptored for between 3 and 5 cases by a certified trainer before they can perform procedures independently. This represents an increase of 177 physicians over the number of physicians at December 31, 2003. The level of sales for Essure, particularly in this early period of adoption, is highly dependent on the number of physicians trained to perform the procedure.

     Reimbursement of Essure

     Market acceptance of Essure will also depend in part upon the availability of reimbursement within prevailing healthcare payment systems. We believe that physician advocacy of our product will be required to obtain reimbursement. As of March 31, 2004, we received positive reimbursement decisions for Essure from private insurers covering an additional 9 million covered lives in the United States, bringing the total to 134 million covered lives, which represents more than 63% of all the insured, non-Medicare population of the United States. We intend to continue our effort to educate payors of the cost-effectiveness of our product, and to further establish programs to help physicians to navigate issues with reimbursement.

     In the first quarter of 2004, we received several positive responses from government and private agencies, which we believe will help us to speed up the acceptance of Essure by doctors and patients.

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

     In March 2004, the Committee for Medicare and Medicaid Services (CMS) established a temporary Healthcare Common Procedure Coding System (HCPCS) code for separate payment of the Essure device. The HCPCS code became effective on April 1, 2004 and will be used in office settings and outpatient/ambulatory surgery centers as appropriate for private payors and Medicaid. 2004. CMS issues temporary codes while permanent codes are being established, a process that typically takes six to 12 months. CMS issues permanent HCPCS codes for use in procedures that may be covered by Medicare and Medicaid. Private insurance companies use the CMS issued codes and payment levels as a baseline for establishing their own coverage systems and levels. We believe the CMS reimbursement code helps create an avenue to have the product reimbursed when used in the physician’s office and surgery centers.

     Utilization of Essure

     We are attempting to introduce a novel product into the contraception market, which is dominated by procedures that are well established among physicians and patients and are routinely taught to new physicians. As a result, we believe that recommendations and endorsements by physicians will be essential for market acceptance of

12

our product. Physicians are traditionally slow to adopt new products and treatment practices, partly because of perceived liability risks. Our biggest challenge is to speed up the adoption process to make the Essure procedure the standard of care for permanent birth control.

     Utilization, which is the average number of procedures performed per physician, declined again this quarter to 0.8 from an average of 0.9 in the fourth quarter of 2003 and 1.1 in the third quarter of 2003. This decline, which has been occurring continuously since the commercial launch of the product, is directly attributable to the difficult reimbursement environment faced by physicians who otherwise want to utilize the Essure device. Either it has been difficult to obtain a favorable payment decision from third party payers or those that have given favorable coverage decisions frequently but inadvertently decline a reimbursement request or pay incorrect amounts. The uncertainty that this creates for the physician who wants to be paid for services performed causes doctors to be hesitant to perform procedures in the future and has caused the decline in utilization for Essure.

     In order to increase utilization, our strategy in the near term is to focus on the earlier adopters who have already been trained by our professional education group. We intend to help those doctors to build their practices so that they will perform more Essure procedures on a monthly basis. We will increase our call frequency to those doctors by our field representatives, strengthen referral programs to get women who are interested in the Essure procedure to those doctors, and continue with our marketing programs to increase Essure awareness among women and the medical community. We have also built strategic alliances with other businesses to help to promote Essure and to train new doctors.

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

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

     We maintain a website located at www.conceptus.com. We make available free of charge on or through our website, our annual report on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information contained on our website is not incorporated by reference into and does not form a part of this Form 10-Q.

Results of Operations - Three Months Ended March 31, 2004 and 2003

     Net Sales

     Net sales were $2.41 million for the three months ended March 31, 2004 as compared to $1.2 million for the three months ended March 31, 2003. The increase of $1.2 million, or 100%, in net sales is due to increased sales in the United States. After we received FDA approval to market Essure in the United States in November of 2002, we have launched an aggressive marketing campaign to increase awareness of Essure among physicians and patients while at the same time increase our customer base by establishing physicians training programs. The revenue increase is a direct result of our continuous effort in the selling and marketing of Essure in the United States.

     We expect net sales to increase on a quarterly basis for the remainder of fiscal 2004 and have put in place sales, marketing and reimbursement programs to help us to reach our revenue goal. However, as we have noted

13

elsewhere in this Form 10-Q, our expected revenue growth is dependant on market acceptance of Essure and third party reimbursement for the device, which involves factors that are outside of our control.

     For the three months ended March 31, 2004, net sales to one distributor accounted for 14% of our total consolidated net sales. Accounts receivable from one distributor accounted for 19% of our total net accounts receivables outstanding as of March 31, 2004. For the three months ended March 31, 2003, net sales to two distributors accounted for 15% and 12% of our total consolidated net sales. Accounts receivable from three distributors accounted for 22%, 15% and 15%, respectively, of our total net accounts receivables outstanding as of March 31, 2003.

     Net product sales by geographic region as a percentage of net sales in tabular form is as follows:

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

     Gross Profit

     Cost of goods sold for the three months ended March 31, 2004 were $2.1 million as compared to $1.2 million for the three months ended March 31, 2003. The increase of $0.9 million, or 75%, is primarily due to higher sales volume. Gross profit margin also improved from less than 1% to 13%, which represents improved efficiency in our manufacturing processes and the result of our outsourcing effort. We have reduced per unit production cost by increasing production volume without increasing fixed cost. In April 2004, we received FDA approval to begin manufacturing at UTI Venusa, Ltd, in Ciudad Juarez, Mexico. We expect to transition generally all manufacturing activities to our third party subcontractor in Mexico and maintain only limited production capability for research and development of new manufacturing processes in San Carlos. We expect this change will result in significant further decreases in manufacturing costs in future periods and we expect our gross profit margin to improve significantly once the transition is complete. Cost of goods sold for the three months ended March 31, 2003 represented the costs of early stage product introduction and limited production volumes.

     Operating Expenses

     Research and development expenses, which includes expenditures related to product development, clinical research and regulatory affairs, decreased to $1.3 million for the three months ended March 31, 2004 from $1.6 million for the three months ended March 31, 2003. The decline of $0.3 million, or 19%, reflects the reduction in clinical research and regulatory affairs expenses in payroll ($0.2 million) and consulting ($0.1 million). The reduction in spending reflects the decline of clinical research and regulatory affair activities after FDA approval of Essure in November 2003. We expect research and development expenses for the remaining quarters of fiscal 2004 to trend down slightly from the level of the first quarter of fiscal 2004.

     Selling, general and administrative spending for the three months ended March 31, 2004 was $6.2 million as compared to $9.6 million for the three months ended March 31, 2003. The decrease of $3.4 million, or 34%, is primarily a result of reduced spending in training and marketing expenses. In early 2003, we had focused on group training physicians to attain an aggressive training goal within a relatively short period of time. As a result, we successfully reached our goal of training more than 700 doctors in 2003. Our current goal is to help our trained physicians to build their practices so that they can increase the number of procedures performed, which is benefited by one on one training. The decrease in marketing spending is primarily due to the reduction in spending related to the initial cost of building our marketing infrastructure such as concept design, development of videos, marketing brochures and other marketing medias. In addition to the marketing and training expense reductions, we also

14

decreased spending as a result of the spin-off of our former French subsidiary in January 2004. In order to focus our resource domestically, we are also in the process of negotiating an asset sale agreement of our wholly owned Australia subsidiary to our Australian management team along with a long-term distribution agreement and a call option to repurchase the subsidiary. We expect to complete the agreement by the end of second quarter of 2004. We expect selling, general and administrative expenses for the remaining quarters of 2004 to increase over the levels of first quarter of 2004.

     Net interest and other income decreased by $0.2 million for the three months ended March 31, 2004 as compared to the three months ended March 31, 2003. The decrease was a result of the sale of our former French subsidiary at a net loss and lower interest income earned due to lower average cash, cash equivalent and short-term investments balances.

     We have experienced significant operating losses since inception and, as of March 31, 2004, had an accumulated deficit of $164.4 million. We expect our operating losses to continue at least through 2004 as we continue to expend substantial resources in the selling and marketing of Essure in the United States. Due to the unpredictable nature of these activities, we do not know whether we will achieve or sustain profitability in the future.

Liquidity and Capital Resources

     As of March 31, 2004, we had cash, cash equivalents, restricted cash and short-term investments of $48.2 million, compared with $30.9 million at December 31, 2003. The increase of $17.3 million is due to net proceeds of $23.9 million received from issuance of approximately 3.0 million shares of our common stock in a private placement in February 2004 and $0.8 million received from exercises of stock options, partially offset by $7.3 million of cash used in operating activities and $0.1 million used in capital and investment expenditures.

     In April 2004, we received FDA approval to begin manufacturing the Essure product at UTI Venusa, LTD, our third-party subcontractor located in Mexico. This will substantially decrease our production cost and we expect the transition of the manufacturing activities to reduce our operating cash requirements in the remaining quarters of 2004.

     We are at the early stage of marketing our products and have incurred significant operating losses since inception. We have historically financed our operations primarily through equity financing. Although we expect our existing cash will be sufficient to fund us through profitability, if our expected revenue growth does not materialize, we may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital.

     Operating Activities

     Net cash used in operating activities was $7.3 million in the three months ended March 31, 2004, primarily as a result of our net loss of $7.1 million adjusted for non-cash related items of $1.3 million relating to depreciation and amortization, stock compensation expenses, provisions for bad debt allowance and inventories. Other major items that contributed to net cash used in operating activities were related to an increase in other assets of $0.7 million primarily from prepaid insurance premiums and pay down of accounts payable and other liabilities of $1.0 million, offset by changes in other assets and liabilities such as accounts receivable, inventories, other non-current assets and long-term liabilities of $0.3 million. We expect cash usage in operating activities to decrease sequentially from quarter to quarter as we expect moderate revenue growth on a quarterly basis.

     The increase in provision for inventories of $0.7 million was related to cost adjustments to inventory value to reflect lowered production costs due to the transition of manufacturing activities to an outsourced third-party vendor.

     The changes in accounts receivable were negligible because we did not experience a material fluctuation in revenues and collections activities. As of March 31, 2004, our worldwide days sales outstanding was 60 days as compared to 62 days as of December 31, 2003. We have credit policies that help us to monitor our collection activities and reduce our credit loss exposure. We continue to improve and modify those policies as our business evolves. Our goal is to consistently improve our days sales outstanding to the best of our ability. We may not be

15

able to maintain our current ratio or we may experience less than satisfactory performance in collection due to factors outside of our control such as changes in economic climates.

     The changes in other accrued liability consisted of decreased in accrued compensation of $0.5 million related primarily to compensation liability relieved after the divestiture of our former French subsidiary, offset by increase in liability of approximately $0.5 million due to the financing of our Director and Officer’s insurance premium.

     Net cash used in operating activities for the three months ended March 31, 2003 was $11.1 million consisting primarily of our net loss of $11.0 million, adjusted for non-cash related items of $0.4 million related to depreciation expenses, stock compensation expenses and provision for bad debt allowance. Net cash used in operating activities also consisted of increases in accounts receivable of $0.3 million related to increases in revenue and increases in other current assets of $0.5 million, which were primarily related to prepaid insurance premiums. Net cash used in operating activities was offset by decreases in inventories of $0.3 million due to increased number of units shipped.

     Investing Activities

     Net cash used by investing activities for the three months ended March 31, 2004 was $17.5 million, primarily from purchases of short-term investments. Net cash provided by investing activities for the three months ended March 31, 2003 was $3.5 million primarily from the maturity of investments of $9.6 million, partially offset by purchases of investments of $6.0 million and $0.1 million of capital expenditures.

     Financing Activities

     Net cash provided by financing activities was $24.7 million for the three months ended March 31, 2004, primarily from the issuance of our common stock in a private placement completed in February 2004. Our net proceeds from the issuance of approximately 3.0 million shares of our common stock at $8.50 per share in the private placement were approximately $23.9 million, after deducting offering costs and commissions totaling $1.6 million. We also received $0.8 million from the exercises of stock options in the first quarter of 2004. Net cash provided by financing activities was $0.1 million for the three months ended March 31, 2003, primarily from the exercise of stock options.

     We expect to have negative cash flows from operations into at least 2005 and we estimate that our existing capital resources will be sufficient to meet our cash requirements for at least the next 12 months. The successful achievement of our business objectives may require additional financing and therefore, we may in the future seek to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Additional funding may not be available when needed or on terms acceptable to us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our sales and marketing activities. Our future liquidity and capital requirements will depend upon many factors, including, among others:

•		Resources devoted to establish sales, marketing and distribution capabilities;
•		Resources devoted to increasing our manufacturing capacity;
•		The rate of product adoption by doctors and patients; and
•		The insurance payor community’s acceptance of and reimbursement for the Essure procedure.

Recent Accounting Pronouncements

     In December 2003, the FASB issued a revised FASB Interpretation No. 46 (“FIN 46R”), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” The FASB published the revision to clarify and amend some of the original provisions of FIN 46, which was issued in January 2003, and to exempt certain entities from its requirements. A variable interest entity (“VIE”) refers to an entity subject to consolidation according to the provisions of this Interpretation. FIN 46R applies to entities whose equity investment at risk is insufficient to finance

16

that entity’s activities without receiving additional subordinated financial support provided by any parties, including equity holders, or where the equity investors (if any) do not have a controlling financial interest. FIN 46R provides that if an entity is the primary beneficiary of a VIE, the assets, liabilities, and results of operations of the VIE should be consolidated in the entity’s financial statements. In addition, FIN 46R requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE provide additional disclosures. The provisions of FIN 46R were effective for the Company’s fiscal 2004 first quarter. The adoption of FIN 46R did not have a material impact on the Company’s financial position or results of operations.

Risk Factors

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

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

     We have a limited history of operation with Essure and have incurred significant operating losses since our inception in 1992, including operating losses of $7.2 million for the three months ended March 31, 2004, $40.2 million in 2003, $33.1 million in 2002 and $18.8 million in 2001. We expect to continue to incur significant operating expenses and net losses as we continue sales and marketing efforts in the United States. Our net losses may continue until sufficient revenues can be generated to offset these expenses. We may not be able to generate these revenues, and we may never achieve profitability. Our failure to achieve and sustain profitability would negatively impact the market price of our common stock.

     If our product fails to gain market acceptance, our business will suffer.

     We are attempting to introduce a novel product into the contraception market, which is dominated by procedures that are well established among physicians and patients and are routinely taught to new physicians. As a result, we believe that recommendations and endorsements by physicians will be essential for market acceptance of our product. We do not know whether physicians and patients will accept our product or whether we will be able to obtain their recommendations or endorsements in sufficient amounts to be profitable. We believe that physicians will not use a product unless they determine, based on clinical data and other factors, that it is an attractive alternative to other means of contraception and that it offers clinical utility in a cost-effective manner. Physicians are traditionally slow to adopt new products and treatment practices, partly because of perceived liability risks. If Essure does not achieve significant market acceptance among physicians, patients and healthcare payors, even if reimbursement levels are sufficient and necessary United States and international regulatory approvals are maintained, we may never achieve significant revenues or profitability.

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

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

17

and level of reimbursement in the United States and targeted international markets. We may be unable to obtain or maintain reimbursement in any country within a particular time frame, for a particular amount, or at all, which would limit our future product revenues and delay or prevent our profitability.

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

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

Our Co-Promotion Agreement with GYNECARE may not be successful

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

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

     In order to market, sell and distribute Essure, we w