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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**x****           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended June 30, 2009**

 

**OR**

 

**o****              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**Forthe transition period from              to                    .**

 

**CommissionFile Number: 0-27596**

 

**CONCEPTUS, INC.**

(Exact name ofRegistrant as specified in its charter)

 

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

 

**331East Evelyn**

**MountainView, CA 94041**

(Address ofPrincipal Executive Offices) (Zip Code)

 

**(650) 962-4000**

(Registrant’sTelephone Number, Including Area Code)

 

 

(Former Name,Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seethe definitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer  o                     |   | Accelerated filer x          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer o                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

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

 

There were 30,571,073shares of Registrant’s Common Stock issued and outstanding as of August 1,2009.

 

 

 

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**CONCEPTUS,INC.**

 

**Form 10-Qfor the Quarter Ended June 30, 2009**

 
| ** **    | ** **                                                                                                          | **Page**   |
|---------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **    | ** **                                                                                                          | ** ** |
| Part I.  | Financial Information                                                                                               | 2          |
|          |                                                                                                                |       |
| Item 1.       | Condensed Consolidated  Financial Statements (Unaudited)                                                            |       |
|          | a) Condensed Consolidated  Balance Sheets as of June 30, 2009 and December 31, 2008                       | 2          |
|          | b) Condensed  Consolidated Statements of Operations for the Three and Six Months Ended  June 30, 2009 and 2008 | 3          |
|          | c) Condensed Consolidated  Statements of Cash Flows for the Three and Six Months Ended June 30,  2009 and 2008 | 4          |
|          | d) Notes to Condensed Consolidated Financial  Statements                                                            | 5          |
|          |                                                                                                                |       |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 20         |
|          |                                                                                                                |       |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 30         |
|          |                                                                                                                |       |
| Item 4.       | Controls and  Procedures                                                                                            | 31         |
|          |                                                                                                                |       |
| Part II. | Other Information                                                                                                   | 32         |
|          |                                                                                                                |       |
| Item 1.       | Legal Proceedings                                                                                                   | 32         |
|          |                                                                                                                |       |
| Item 1A.      | Risk Factors                                                                                                        | 32         |
|          |                                                                                                                |       |
| Item 4.       | Submission of  Matters to a Vote of Security Holders                                                                | 35         |
|          |                                                                                                                |       |
| Item 6.       | Exhibits                                                                                                            | 36         |

 

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**PART I.FINANCIAL INFORMATION**

 

**Item 1.Condensed Consolidated Financial Statements.**

 

**Conceptus, Inc.**

 

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

**(Inthousands)**

** **
| ** **                                          | ** ** | **June 30,** | ** **  | **December 31,**   | ** ** |
|-----------------------------------------------------|------------|-------------------|-------------|-------------------------|------------|
| ** **                                          | ** ** | **2009**          | ** **  | **2008**                | ** ** |
| ** **                                          | ** ** | ** **        | ** **  | **(As Adjusted - (A))** | ** ** |
| **Assets**                                          |       |              |        |                    |       |
| Current  assets:                                    |       |              |        |                    |       |
| Cash  and cash equivalents                          |       | $                 | 63,258      |                    | $          | 54,720 |   |
| Accounts  receivable, net                           |       | 16,876            |        | 14,377                  |       |
| Inventories                                         |       | 2,714             |        | 3,829                   |       |
| Prepaids                                            |       | 3,206             |        | 7,478                   |       |
| Other  current assets                               |       | 1,084             |        | 1,617                   |       |
| Total  current assets                               |       | 87,138            |        | 82,021                  |       |
|                                                |       |              |        |                    |       |
| Property  and equipment, net                        |       | 9,340             |        | 8,635                   |       |
| Debt  issuance costs, net                           |       | 1,219             |        | 1,451                   |       |
| Intangible  assets, net                             |       | 4,892             |        | 5,287                   |       |
| Long-term  investments                              |       | 44,531            |        | 43,177                  |       |
| Put  option                                         |       | 3,730             |        | 5,144                   |       |
| Restricted  cash                                    |       | 355               |        | 351                     |       |
| Goodwill                                            |       | 16,973            |        | 17,105                  |       |
| Other  assets                                       |       | 83                |        | 50                      |       |
| **Total assets**                                    | ** ** | **$**             | **168,261** | ** **              | **$**      | **163,221** | ** ** |
|                                                |       |              |        |                    |       |
| **Liabilities and stockholders’ equity**       |       |              |        |                    |       |
| Current  liabilities:                               |       |              |        |                    |       |
| Accounts  payable                                   |       | $                 | 5,152       |                    | $          | 3,869 |   |
| Accrued  compensation                               |       | 6,402             |        | 6,762                   |       |
| Line  of credit                                     |       | 32,073            |        | 29,944                  |       |
| Other  accrued liabilities                          |       | 5,841             |        | 4,598                   |       |
| Total  current liabilities                          |       | 49,468            |        | 45,173                  |       |
|                                                |       |              |        |                    |       |
| Deferred  tax liability                             |       | 1,344             |        | 1,442                   |       |
| Notes  payable                                      |       | 74,408            |        | 72,344                  |       |
| Other  accrued liabilities                          |       | 632               |        | 394                     |       |
| Total  liabilities                                  |       | 125,852           |        | 119,353                 |       |
|                                                |       |              |        |                    |       |
| Stockholders’  equity:                         |       |              |        |                    |       |
| Common  stock and additional paid-in capital        |       | 290,715           |        | 286,951                 |       |
| Accumulated  other comprehensive loss               |       | (1,130            | )           | (798                    | )          |
| Accumulated  deficit                                |       | (247,176          | )           | (242,285                | )          |
| Treasury  stock, 77,863 shares, at cost             |       | —            |        | —                  |       |
| Total  stockholders’ equity                    |       | 42,409            |        | 43,868                  |       |
|                                                |       |              |        |                    |       |
| **Total liabilities and stockholders’ equity** | ** ** | **$**             | **168,261** | ** **              | **$**      | **163,221** | ** ** |

 

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(A) Adjusted for theretrospective adoption of Financial Accounting Standards Board (FASB) StaffPosition No. APB 14-1, Accounting for Convertible Debt Instruments That May BeSettled in Cash Upon Conversion (Including Partial Cash Settlement) or FSP APB14-1.  See Note 9: Convertible Senior Notes - Adoption of FSP APB 14-1.

 

*Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.*

 

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**Conceptus, Inc.**

 

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

**(Inthousands, except per share amounts)**

 
| ** **                                                                          | ** ** | **Three  months ended** | ** ** | **Six  months ended**  | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                                          | ** ** | **June 30,**       | ** ** | **June 30,**      | ** ** |
| ** **                                                                          | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                          | ** ** | ** **              | ** ** | **As  Adjusted - (A)** | ** ** | ** ** | ** ** | **As  Adjusted - (A)** | ** ** |
| Net  sales                                                                          |       | $                       | 33,049     |                   | $          | 25,680 |   | $ | 60,200 |   | $ | 46,807 |   |
| Cost  of goods sold                                                                 |       | 6,671                   |       | 5,196                  |       | 12,426 |   | 10,641 |   |
| Gross  profit                                                                       |       | 26,378                  |       | 20,484                 |       | 47,774 |   | 36,166 |   |
|                                                                                |       |                    |       |                   |       |   |   |   |   |
| Operating  expenses:                                                                |       |                    |       |                   |       |   |   |   |   |
| Research  and development                                                           |       | 2,008                   |       | 1,644                  |       | 3,415 |   | 3,575 |   |
| Selling,  general and administrative                                                |       | 23,337                  |       | 20,081                 |       | 45,908 |   | 40,183 |   |
| Total  operating expenses                                                           |       | 25,345                  |       | 21,725                 |       | 49,323 |   | 43,758 |   |
|                                                                                |       |                    |       |                   |       |   |   |   |   |
| Operating  profit (loss)                                                            |       | 1,033                   |       | (1,241                 | )          | (1,549 | ) | (7,592 | ) |
|                                                                                |       |                    |       |                   |       |   |   |   |   |
| Interest  income                                                                    |       | 179                     |       | 338                    |       | 535 |   | 1,229 |   |
| Interest  expense                                                                   |       | (1,753                  | )          | (1,585                 | )          | (3,472 | ) | (3,151 | ) |
| Other  income (expense)                                                             |       | 68                      |       | 104                    |       | (182 | ) | (179 | ) |
| Total  interest income and expenses and other expenses, net                         |       | (1,506                  | )          | (1,143                 | )          | (3,119 | ) | (2,101 | ) |
|                                                                                |       |                    |       |                   |       |   |   |   |   |
| Loss  before provision for income taxes                                             |       | (473                    | )          | (2,384                 | )          | (4,668 | ) | (9,693 | ) |
| Provision  for income taxes                                                         |       | 82                      |       | 168                    |       | 223 |   | 168 |   |
| Net  loss                                                                           |       | $                       | (555       | )                      | $          | (2,552 | ) | $ | (4,891 | ) | $ | (9,861 | ) |
| Basic  and diluted net loss per share                                               |       | $                       | (0.02      | )                      | $          | (0.08 | ) | $ | (0.16 | ) | $ | (0.33 | ) |
| Weighted-average  shares used in****computing basic  and diluted net loss per share | ** ** | 30,518                  | ** ** | 30,217                 | ** ** | 30,478 | ** ** | 30,076 | ** ** |

 

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**(A)  **Adjusted for theretrospective adoption of FSP APB 14-1. See Note9: Convertible Senior Notes -Adoption of APB 14-1.

 

*Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.*

 

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**Conceptus, Inc.**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

**(Inthousands)**

 
| ** **                                                                                | ** ** | **Six  months ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                | ** ** | **June 30,**     | ** ** |
| ** **                                                                                | ** ** | **2009**              | ** ** | **2008** | ** ** |
| ** **                                                                                | ** ** | ** **            | ** ** | **(As  Adjusted - (A))** | ** ** |
| **Cash flows from operating activities**                                                  |       |                  |       |   |   |
| Net  loss                                                                                 |       | $                     | (4,891     | ) | $ | (9,861 | ) |
| Adjustments  to reconcile net loss to net cash provided by (used in)operating activities: |       |                  |       |   |   |
| Depreciation  and amortization of property, plant and equipment                           |       | 2,052                 |       | 1,294 |   |
| Amortization  of debt issuance costs                                                      |       | 233                   |       | 232 |   |
| Accretion  of note payable                                                                |       | 2,064                 |       | 1,952 |   |
| Amortization  of intangibles                                                              |       | 366                   |       | 390 |   |
| Loss  on put option                                                                       |       | 1,414                 |       | — |   |
| Unrealized  gain on trading securities                                                    |       | (1,479                | )          | — |   |
| Stock-based  compensation expense                                                         |       | 2,930                 |       | 3,026 |   |
| Loss  on disposal of fixed assets                                                         |       | 4                     |       | — |   |
| Changes  in operating assets and liabilities, net effect of acquisition:                  |       |                  |       |   |   |
| Accounts  receivable                                                                      |       | (2,285                | )          | (491 | ) |
| Inventories                                                                               |       | 988                   |       | (430 | ) |
| Other  current assets                                                                     |       | 4,747                 |       | 1,289 |   |
| Accounts  payable                                                                         |       | 692                   |       | (1,052 | ) |
| Accrued  compensation                                                                     |       | (394                  | )          | 111 |   |
| Other  accrued and long term liabilities                                                  |       | 1,518                 |       | 1,402 |   |
| Net  cash provided by (used in) operating activities                                      |       | 7,959                 |       | (2,138 | ) |
|                                                                                      |       |                  |       |   |   |
| **Cash flows from investing activities**                                                  |       |                  |       |   |   |
| Purchase  of Conceptus SAS, net of cash acquired                                          |       | —                |       | (22,978 | ) |
| Purchase  of investments                                                                  |       | —                |       | (5,000 | ) |
| Sale &  maturities of investments                                                |       | 125                   |       | 22,050 |   |
| Restricted  cash                                                                          |       | (4                    | )          | — |   |
| Capital  expenditures, net                                                                |       | (2,402                | )          | (2,375 | ) |
| Net  cash used in investing activities                                                    |       | (2,281                | )          | (8,303 | ) |
|                                                                                      |       |                  |       |   |   |
| **Cash flows from financing activities**                                                  |       |                  |       |   |   |
| Proceeds  from line of credit                                                             |       | 2,092                 |       | — |   |
| Repayment  of line of credit                                                              |       | (97                   | )          | — |   |
| Proceeds  from issuance of common stock                                                   |       | 874                   |       | 3,030 |   |
| Net  cash provided by financing activities                                                |       | 2,869                 |       | 3,030 |   |
|                                                                                      |       |                  |       |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                             |       | (9                    | )          | 121 |   |
|                                                                                      |       |                  |       |   |   |
| Net  increase (decrease) in cash and cash equivalents                                     |       | 8,538                 |       | (7,290 | ) |
| Cash  and cash equivalents at the beginning of the period                                 |       | 54,720                |       | 28,450 |   |
| Cash  and cash equivalents at end of the period                                           |       | $                     | 63,258     |   | $ | 21,160 |   |

 

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(A) Adjustedfor the retrospective adoption of FSP APB 14-1. See Note9: Convertible SeniorNotes – Adoption of APB 14-1.

 

*Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.*

 

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**Conceptus, Inc.**

 

***NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS***

 

***(Unaudited)***

 

**1.****             ****Basis of Presentation**

 

The accompanyingunaudited condensed consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and pursuant to the instructions to Form 10-Qand Article 10-01 of Regulation S-X.  Accordingly, they do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements. Inthe opinion of management, all adjustments, consisting only of normal recurringadjustments, considered necessary for a fair statement have been included.

 

The condensedconsolidated balance sheet as of December 31, 2008 has been derived fromthe audited consolidated financial statements at that date, but does notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements. Thisfinancial data should be read in conjunction with the audited consolidatedfinancial statements and related notes included in our Annual Report on Form 10-Kfor the year ended December 31, 2008.  The results of operations forthe three and six months ended June 30, 2009 may not necessarily beindicative of the operating results for the full 2009 fiscal year or any otherfuture interim periods.

 

Ourcondensed consolidated financial statements for the three and six months ended June 30,2008 include the financial results of Conceptus SAS starting on the acquisitiondate of January 7, 2008. All significant intercompany accounts and transactionshave been eliminated in consolidation.

 

Wehave a limited history of operations and have incurred significant operatinglosses since inception. In December 2006, we filed a RegistrationStatement on Form S-3, through which we may sell from time to time anycombination of debt securities, common stock, preferred stock and warrants, inone or more offerings, with an initial offering price not to exceed$150,000,000. In February 2007, we issued an aggregate principal amount of$86,250,000 of our 2.25% convertible senior notes due 2027. If the notes areconverted, then upon conversion, holders will receive cash and in certaincircumstances, shares of our common stock based on an initial conversion rate,subject to adjustment, of 35.8616 shares per $1,000 principal amount of notes(which represents an initial conversion price of $27.89 per share). Uponconversion, a holder would receive cash up to the principal amount of the noteand our common stock in respect of such note’s conversion value in excess of suchprincipal amount. This net share settlement feature of the notes would reduceour liquidity, and we may not have sufficient funds to pay in full the cashobligation upon such conversion. In the future, depending upon a variety offactors, we may need to raise additional funds through bank facilities, debt orequity offerings or other sources of capital. Any additional equity financingmay be dilutive to stockholders, and debt financing, if available, may involvecovenants that restrict us. Additional funding may not be available when neededor on terms acceptable to us. If we are unable to obtain additional capital, wemay be required to delay, reduce the scope of or eliminate our research anddevelopment programs or reduce our sales and marketing activities.

 

Wehave evaluated subsequent events through August 7, 2009, the date we filedour quarterly report on Form 10-Q for the quarter ended June 30,2009.

 

*Recent Accounting Pronouncements*

 

InDecember 2007, the FASB issued Statement No. 141 (revised 2007) *Business Combinations,* or SFAS 141(R), and Statement No. 160,*Noncontrolling Interests in Consolidated FinancialStatements*, or SFAS 160, an amendment of Accounting ResearchBulleting No. 51, or ARB 51. SFAS 141(R) will impact financialstatements on the acquisition date and in subsequent periods. Some of thechanges, such as the accounting for contingent consideration, will introducemore volatility into earnings and may impact our acquisition strategy.Additionally, in February 2009, FASB issued FASB Staff Position FAS141(R)-a, *Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies*,which will amend the provisions related to the initial recognition andmeasurement, subsequent measurement and disclosure of assets and liabilitiesarising from contingencies in a business combination under SFAS 141(R).  SFAS 160 will change the accounting andreporting for minority interests, which will be re-characterized as non-controllinginterests and classified as a component of equity. In addition, SFAS 141(R) willbe applied prospectively and SFAS 160 will require retroactive adoption of thepresentation and disclosure requirements for existing minority interests, whilethe remaining requirements of SFAS 160 will be applied prospectively. SFAS 141(R) andSFAS 160 are effective on January 1, 2009. The adoption of SFAS 141(R) and SFAS 160 did not have a materialimpact on our financial condition, results of operations, or cash flows.

 

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EffectiveJanuary 1, 2008, we adopted SFAS No. 157, *Fair Value Measurements*, or SFAS 157, as amended by FSPSFAS 157-1, *Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13*, or FSP SFAS 157-1,and FSP SFAS 157-2, *Effective Date of FASBStatement No. 157*, or FSP SFAS 157-2.  SFAS 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and provides for expanded disclosureabout fair value measurements.  SFAS 157 applies prospectively to allother accounting pronouncements that require or permit fair valuemeasurements.  FSP SFAS 157-1 amended SFAS 157 to exclude from thescope of SFAS 157 certain leasing transactions accounted for under SFAS No. 13,*Accounting for Leases.*  FSPSFAS 157-2 amended SFAS 157 to defer the effective date of SFAS 157 for allnon-financial assets and non-financial liabilities except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis to fiscal years beginning after November 15, 2008, andinterim periods within those fiscal years.  We adopted FSP SFAS 157-2in the first quarter of fiscal 2009.  SeeNote 4 - Fair Value Measurements.

 

InMay 2008, the FASB issued FSP APB 14-1, *Accountingfor Convertible Debt InstrumentsThat May Be Settled in Cash upon Conversion (Including Partial CashSettlement)*, or FSPAPB 14-1, which clarifies the accounting for convertible debt instruments thatmay be settled in cash upon conversion, including partial cash settlement.  FSP APB 14-1 specifies that an issuer of suchinstruments should separately account for the liability and equity componentsof the instruments in a manner that reflect the issuer’s non-convertible debtborrowing rate which interest costs are recognized in subsequent periods.  FSP APB 14-1 is effective for fiscal yearsbeginning after December 15, 2008, and retrospective application isrequired for all periods presented.  Wehave adopted FSP APB 14-1 in the first quarter of fiscal 2009 and as a resulthave made certain adjustments to the presentation of our financial condition,results of operations, and cash flows. See Note 9 — Convertible Senior Notes.

 

In October 2008, theFinancial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)SFAS No. 157-3, *Determining the FairValue of a Financial Asset When the Market for That Asset is Not Active*, or FSP SFAS 157-3*.* FSP SFAS 157-3 clarifies theapplication of SFAS 157, which we have adopted as of January 1, 2008,in situations where the market for a particular financial asset is not active.We have considered the guidance provided by FSP SFAS 157-3 in ourdetermination of estimated fair values, and the impact was not material.

 

In April 2009, theFASB issued FSP SFAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments*, or FSP SFAS 107-1 and APB 28-1*.*  This FSP amends SFAS 107, *Disclosuresabout Fair Value of Financial Instruments*, to requirepublicly-traded companies, as defined in APB Opinion No. 28, *Interim Financial Reporting*, to provide disclosures on thefair value of financial instruments in interim financialstatements.  Prior to the issuance of FSP FAS No. 107-1 and APBOpinion No. 28-1, the fair values of those assets and liabilities weredisclosed only once each year. With the issuance of FSP FAS 107-1 and APB 28-1,we are required to disclose this information on a quarterly basis, providingquantitative and qualitative information about fair value estimates for allfinancial instruments not measured in the Condensed Consolidated Balance Sheetsat fair value. FSP SFAS 107-1 and APB 28-1 are effective for interim periodsending after June 15, 2009. We have adopted the provisions of FSPSFAS 107-1 and APB 28-1 effective the second quarter of fiscal 2009.  See Note 4 - Fair ValueMeasurements and Note 9 — Convertible Senior Notes.

 

In April 2009, theFASB issued FSP SFAS No. 115-2 and SFAS No. 124-2 *Recognition and Presentation of Other-Than-TemporaryImpairments*, or FSP SFAS115-2 and SFAS 124-2*,*which modifiesthe other-than-temporary impairment guidance for debt securities throughincreased consistency in the timing of impairment recognition and enhanceddisclosures related to the credit and noncredit components of impaired debtsecurities that are not expected to be sold. In addition, increased disclosuresare required for both debt and equity securities regarding expected cash flows,credit losses, and an aging of securities with unrealized losses. FSPSFAS 115-2 and SFAS 124-2 are effective for interim and annual reportingperiods that end after June 15, 2009. We have adopted the provisions ofFSP SFAS 115-2 and SFAS 124-2 effective the second quarter of fiscal 2009. Wehave considered the guidance provided by FSP SFAS 115-2 and SFAS 124-2 inour determination of impairment, and the impact was not material.  See Note 9 — ConvertibleSenior Notes.

 

In April 2009, theFASB issued FSP SFAS 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly,*or FSP SFAS 157-4, which provides additional guidance for estimating fair valuein accordance with SFAS 157 when the volume and level of activity for the assetor liability have significantly decreased.  This FSP re-emphasizesthat regardless of market conditions the fair value measurement is an exitprice concept as defined in SFAS 157.  This FSP clarifies andincludes additional 

 

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factors to consider indetermining whether there has been a significant decrease in market activityfor an asset or liability and provides additional clarification on estimatingfair value when the market activity for an asset or liability has declinedsignificantly.  The scope of this FSP does not include assets andliabilities measured under level 1 inputs.  FSP SFAS 157-4 is appliedprospectively to all fair value measurements where appropriate and is effectivefor interim and annual periods ending after June 15, 2009.  Wehave adopted the provisions of FSP SFAS 157-4 effective the second quarter offiscal 2009 which did not have an impact on our condensed consolidatedfinancial statements.

 

In May 2009, theFASB issued SFAS No. 165, *SubsequentEvents,*or SFAS 165. SFAS 165 establishes general accounting for anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued or available to be issued. This statement alsooutlines the circumstances under which an entity would need to recordtransactions occurring after the balance sheet date in the financialstatements. These new disclosures identify the date through which the entityhas evaluated subsequent events. SFAS 165 is effective for interim or annualfinancial periods ending after June 15, 2009. See Note 1 — Basis ofPresentations, for disclosure of the date to which subsequent events aredisclosed.

 

In June 2009,the FASB issued SFAS No. 167, *Amendments to FASBInterpretation No. 46(R) *or SFAS 167, which modifies howwe determines when an entity that is insufficiently capitalized or is notcontrolled through voting (or similar rights) should be consolidated. SFAS 167clarifies that the determination of whether we are required to consolidate anentity is based on, among other things, an entity’s purpose and design andpower to direct the activities of the entity that most significantly impact theentity’s economic performance. SFAS 167 requires an ongoing reassessment ofwhether we are the primary beneficiary of a variable interest entity. SFAS 167also requires additional disclosures about our involvement in variable interestentities and any significant changes in risk exposure due to that involvement.SFAS 167 is effective for fiscal years beginning after November 15, 2009and is effective for us on January 1, 2010. We do not expect SFAS 167 tohave an impact on our financial position and results of operations in futureperiods, but the nature and magnitude of the specific effects will depend uponthe nature, terms and size of the transactions we may consummate in the future.

 

In June 2009,the FASB issued Statement No. 168, *TheFASB Accounting Standards Codification**TM** and the Hierarchy of Generally AcceptedAccounting Principles,* or SFAS 168. SFAS 168 establishes the *FASBAccounting Standards Codification*(the “Codification”)as the source of authoritative accounting principles recognized by the FASB tobe applied by nongovernmental entities in the preparation of financialstatements in conformity with U.S. GAAP. Rules and interpretive releasesof the SEC under authority of federal securities laws are also sources ofauthoritative U.S. GAAP for SEC registrants. All guidance contained in theCodification carries an equal level of authority. SFAS 168 is effective forfinancial statements issued for interim and annual periods ending after September 15,2009. The Codification will supersede all existing non-SEC accounting andreporting standards. All other non-grandfathered, non-SEC accounting literaturenot included in the Codification will become non-authoritative. Following SFAS168, the FASB will not issue new standards in the form of Statements, FASBStaff Positions, or Emerging Issues Task Force Abstracts. Instead, it willissue Accounting Standards Updates. The FASB will not consider AccountingStandards Updates as authoritative in their own right. Accounting StandardsUpdates will serve only to update the Codification, provide backgroundinformation about the guidance and provide the bases for conclusions on thechange(s) in the Codification. We will update our disclosures to conformto the Codification in our Form 10-Q for the third quarter of 2009.

 

**2.****             ****Summary of Significant AccountingPolicies**

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. The primary estimates underlying our financial statementsinclude the write-off of obsolete and slow moving inventory, allowance fordoubtful accounts receivable, product warranty, the fair value of ourinvestment portfolio, assumptions regarding variables used in calculating thefair value of our equity awards, impairment of goodwill, intangibles and otherlong-lived assets, income taxes and contingent liabilities. Actual resultscould differ from those estimates.

 

*Principles of Consolidation*

 

Theconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All significant intercompany accounts andtransactions have been eliminated.

 

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*Functional Currency*

 

OnJanuary 7, 2008 we acquired Conceptus SAS, which sells to customersthroughout Europe.  Sales by ConceptusSAS are denominated in Euros. On December 15, 2008, we incorporatedConceptus Medical Limited (“CML”) as our United Kingdom subsidiary.  In preparing our consolidated financialstatements, we are required to translate the financial statements of ConceptusSAS and CML from the currency in which they keep their accounting records intoU.S. Dollars.  Conceptus SAS and CML bothmaintain their accounting records in the functional currency which is alsotheir local currency. The functional currency of CML is the British Pound andthe functional currency of Conceptus SAS is the Euro.  The functional currency is determined basedon management’s judgment and involves consideration of all relevant economicfacts and circumstances affecting the subsidiary. Generally, the currency inwhich the subsidiary transacts a majority of its transactions, includingbilling, financing, payroll and other expenditures would be considered the functionalcurrency, but any dependency upon the parent and the nature of the subsidiary’soperations must also be considered. Since the functional currency of ConceptusSAS and CML has been determined to be their local currency, any gain or lossassociated with the translation of Conceptus SAS’s and CML’s financialstatements into U.S. Dollars is included as a component of stockholders’equity, in accumulated other comprehensive loss.  If in the future we determine that there hasbeen a change in the functional currency of Conceptus SAS or CML from its localcurrency to the U.S. Dollar, any translation gains or losses arising after thedate of change would be included within our statement of operations.

 

*Goodwill and Other Intangible Assets*

 

Goodwill represents the excess of the purchase price paid over the fairvalue of tangible and identifiable intangible net assets acquired in businesscombinations. We will perform an annual assessment during the fourth quarter of2009 of our goodwill at the reporting unit level or earlier if an event occursor circumstances change that would reduce the fair value of the reporting unitbelow its carrying amount. No impairment charges have been recorded as of June 30,2009.

 

Otherintangible assets include customer relationships, license agreements andnon-compete agreements. They are amortized using the straight-line method overtheir respective estimated useful lives.

 

*Impairment of Long-Lived Assets*

 

Weaccount for the impairment of long-lived assets in accordance with SFAS 144, *Accounting for the Impairment of Disposal of Long-Lived Assets*.  We evaluate the carrying value of ourlong-lived assets, consisting primarily of our property and equipment, the*Essure* license acquired from a patentlitigation settlement in 2003 and intangible assets acquired in connection withour acquisition of Conceptus SAS in 2008, whenever certain events or changes incircumstances indicate that the carrying amount of the assets may not berecoverable. Such events or circumstances include a prolonged industrydownturn, a significant decline in our market value or significant reductionsin projected future cash flows.

 

Significantjudgments and assumptions are required in the forecast of future operatingresults used in the preparation of the estimated future cash flows, includingprofit margins, long-term forecasts of the amounts and timing of overall marketgrowth and our percentage of that market, groupings of assets, discount ratesand terminal growth rates. In addition, significant estimates and assumptionsare required in the determination of the fair value of our tangible long-livedassets, including replacement cost, economic obsolescence, and the value thatcould be realized in orderly liquidation. Changes in these estimates could havea material adverse effect on the assessment of our long-lived assets, therebyrequiring us to write down the assets.

 

**3.  Long-Term Investments**

 

Asof June 30, 2009, we held $48.3 million (par value) in auction ratesecurities, or ARS, backed by federal and state student loans which arevariable rate debt instruments and bear interest rates that reset approximatelyevery 20-30 days. These ARS have a contractual maturity ranging from 2028through 2047.

 

OurARS are long-term debt instruments backed by student loans, a substantialportion of which are guaranteed by the United Statesgovernment.  Prior to 2008, our ARS were highly liquid, using a Dutchauction process that resets the applicable interest rate at predeterminedintervals, typically every 20-30 days, to provide liquidity atpar.  We have experienced failed auctions in 2009 and 2008 on most ofour ARS, having settlements of nominal amounts in 2009.  The failures of these auctions do not affectthe value of the collateral underlying the ARS, and we continue to earn andreceive interest on our ARS at a pre-determined formula with spreads tied toparticular interest rate indexes.

 

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InNovember 2008, we accepted an offer from UBS AG, providing us with rightsrelated to our ARS (the “Rights”).  The Rights permit us torequire UBS to purchase our ARS at par value, which is defined as the priceequal to the liquidation preference of the ARS plus accrued but unpaiddividends or interest, at any time during the period of June 30, 2010through July 2, 2012.  Conversely, UBS has the right, at itsdiscretion, to purchase or sell our ARS at any time until July 2, 2012, solong as we receive payment at par value upon any sale ordisposition.  We expect to sell our ARS under the Rights at parvalue.  However, if the Rights are not exercised before July 2,2012 they will expire and UBS will have no further rights or obligation to buyour ARS.  So long as we hold our ARS, they will continue to accrueinterest as determined by the auction process or the terms of the ARS if theauction process fails.

 

UBS’sobligations under the Rights are not secured by its assets and do not requireUBS to obtain any financing to support its performance obligations under theRights.  UBS has disclaimed any assurance that it will havesufficient financial resources to satisfy its obligations under the Rights.

 

Wehave accounted for the Rights as a freestanding financial instrument andelected to record the value of the Rights under the fair value option of SFAS159, *The Fair Value for Financial Assets and FinancialLiabilities — Including an amendment of FASB Statement No. 19*.  As a result, upon acceptance of the offerfrom UBS, we recorded approximately $5.1 million as the fair value of theRights with a corresponding credit to other expense, net in the fourth quarterof 2008.  As a result of our election torecord the Rights at fair value, unrealized gains and losses will be included inearnings in future periods.  We estimated the fair value of theRights using the expected value that we will receive from UBS which wascalculated as the difference between the anticipated recognized loss and parvalue of the ARS as of the option exercise date. This value was discounted byusing a UBS credit default rate to account for the consideration of UBS creditrisk. For the three and six months ended June 30, 2009, we recorded anadditional unrealized loss of $1.2 million and $1.4 million, respectively whichrepresents the decrease in the fair value of the put option.

 

Althoughthe Rights represent the right to sell the securities back to UBS at par, wewill be required to periodically assess the economic ability of UBS to meetthat obligation in assessing the fair value of the Rights.

 

Priorto accepting the UBS offer, we recorded our ARS as available-for-saleinvestments.  We recorded unrealized gains and losses on ouravailable-for-sale securities in accumulated other comprehensive income (loss)in the stockholders’ equity section of our balance sheets.  Such anunrealized loss did not change net income (loss) for the applicable accountingperiod.

 

Inconnection with our acceptance of the UBS offer in November 2008, resultingin our right to require UBS to purchase our ARS at par value beginning on June 30,2010, we transferred our ARS from available-for-sale to trading securities inaccordance with SFAS 115, *Accounting for CertainInvestments in Debt and Equity Securities*.  The transferto trading securities reflects our intent to exercise our put option during theperiod June 30, 2010 to July 3, 2012.  Prior to ouragreement with UBS, our intent was to hold our ARS until we realized the parvalue.

 

Forthe three and six months ended June 30, 2009, we recorded an unrealizedgain of $1.3 million and $1.5 million, respectively which represents theincrease in the fair value of the ARS. For the three and six months ended June 30, 2008 we had recorded atemporary reduction in carrying value of $0.3 million and $2.6 million,respectively.  We determined that use ofa valuation model was the best available technique for measuring the fair valueof our ARS. We used a trinomial discount model weighting estimated future cashflows, quality of collateral and the probability of future successful auctionsoccurring.  In determining a discountfactor for each ARS, the model weights various factors, including assessmentsof credit quality, duration, insurance wraps, portfolio composition, discountrates, overall capital market liquidity and comparable securities, if any.

 

InNovember 2008, we entered into a revolving credit line agreement with UBS,payable on demand, in an amount equal to 75% of fair value of our auction ratesecurities at net no cost, meaning that the interest we pay on the credit linewill not exceed the interest that we receive on the ARS that we have pledged assecurity for the credit line. Additionally, under the terms of the settlementagreement, if UBS is able to sell our ARS at par, proceeds would be utilized tofirst repay any outstanding balance under the revolving credit line. We arestill able to sell the ARS, but in such a circumstance, if we sold at less thanpar value, we would not be entitled to recover the par value support fromUBS.  See Note 10 — Credit Line.  We had a small settlement of our ARS in thethree months ended June 30, 2009 of $0.1 million at full par value.

 

**4.****             ****Fair Value Measurements**

 

OnJanuary 1, 2008, we adopted the methods of fair value as described in SFAS157 to value our financial assets and liabilities.  As defined in SFAS 157, fair value is basedon the price that would be received to sell an asset or paid to transfer aliability in an orderly transaction between market participants at themeasurement date. In order to increase consistency and comparability in fairvalue measurements, SFAS 157 establishes a fair value hierarchy thatprioritizes observable and unobservable inputs used to measure fair value intothree broad levels, which are described below:

 

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Level1: Quoted prices (unadjusted) in active markets that are accessible at themeasurement date for assets or liabilities. The fair value hierarchy gives thehighest priority to Level 1 inputs.

 

Level2: Observable prices that are based on inputs not quoted on active markets, butcorroborated by market data.

 

Level3: Unobservable inputs are used when little or no market data is available. Thefair value hierarchy gives the lowest priority to Level 3 inputs.

 

Ourcash and cash equivalents are classified within Level 1 of the fair valuehierarchy because they are valued using quoted market prices, broker or dealerquotations, or alternative pricing sources with a reasonable level of pricetransparency. As of June 30, 2009, our Level 1 instruments are solelycomprised of our investments in money market funds.

 

Asa result of continued auction failures, quoted prices for our ARS did not existas of June 30, 2009 and, accordingly, we concluded that Level 1 inputswere not available for these assets. Brokerage statements received from ourbroker-dealer that held our ARS included their estimated market value as of June 30,2009. Our broker-dealer valued our ARS at 89% of par. We made inquiriesrelative to the measurements utilized to derive the estimated market valuesquoted on our brokerage statements, but the broker-dealer declined to providedetailed information relating to their valuation methodologies. Due to the lackof transparency into the methodologies used to determine the estimated marketvalues, we concluded that estimated market values provided on our brokeragestatements did not constitute valid inputs and thus we did not utilize them inmeasuring the fair value of these ARS as of June 30, 2009.

 

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

 

Theput option is a free standing asset separate from the ARS, and represents ourcontractual right to require our broker, UBS, to purchase our ARS at par valueduring the period of June 30, 2010 through July 2, 2012.  See Note 3 — Long-term Investments.

 

Duringthree months ended June 30, 2009 we entered into forward contracts to buyU.S dollars at fixed intervals in the retail market in an over-the-counterenvironment.  As of June 30, 2009,we had foreign currency forward contracts to sell 5.2 million Euros in exchangefor $6.9 million U.S. dollars maturing in July through November 2009.  As of June 30, 2009 these forwardcontracts are recorded at a value of $0.3 million in other accrued liabilitieson our condensed consolidated balance sheet. We have outstanding intercompany receivables from Conceptus SAS of $6.9million as of June 30, 2009.  Weexpect the changes in the fair value of the intercompany receivables to bematerially offset by the changes in the fair value of the derivatives.

 

Thepurpose of these forward contracts is to minimize the risk associated withforeign exchange rate fluctuations.  Wehave developed a foreign exchange policy to govern our forward contracts.  These foreign currency contracts do notqualify as cash flow hedges and all changes in fair value are reported inearnings as part of other income and expenses. We have not entered into any other types of derivative financialinstruments for trading or speculative purpose. Our foreign currency forward contract valuation inputs are based onquoted prices and quoted pricing intervals from public data and do not involve managementjudgment.  Accordingly, we haveclassified our outstanding foreign currency forward contract within Level 2 ofthe fair value hierarchy and have recorded the fair value of the contract inother accrued liabilities on our consolidated balance sheet as of June 30,2009.

 

Forthe six months ended June 30, 2008, we had assumed a forward exchangecontract to hedge U.S. Dollar-denominated estimated accounts payable in 2008 inconnection with the acquisition of Conceptus SAS.  We recorded the changes of the fair value ofthe hedge contract in our results of operations for the six months ended June 30,2008.  The hedge contract was fullyutilized by December 31, 2008.

 

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Assetsand liabilities measured at fair value on a recurring basis at June 30,2009 are as follows (in thousands):

 
| ** **                         | ** ** | ** **       | ** ** | **Fair Value Measurements at Reporting Date**                   | ** ** |
|------------------------------------|------------|------------------|------------|-----------------------------------------------------------------|------------|
| ** **                         | ** ** | **June 30** | ** ** | **Quoted Price in  Active Markets for  Identical  Instruments** | ** ** | **Significant Other  Observable Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| ** **                         | ** ** | **2009**         | ** ** | **Level 1**                                                     | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                               |       |             |       |                                                            |       |   |   |   |   |
| Assets:                            |       |             |       |                                                            |       |   |   |   |   |
| Money market fund                  |       | $                | 57,273     |                                                            | $          | 57,273 |   | $ | — |   | $ | — |   |
| Auction rate securities            |       | 44,531           |       | —                                                          |       | — |   | 44,531 |   |
| Put option                         |       | 3,730            |       | —                                                          |       | — |   | 3,730 |   |
| Total assets                       |       | $                | 105,534    |                                                            | $          | 57,273 |   | $ | — |   | $ | 48,261 |   |
|                               |       |             |       |                                                            |       |   |   |   |   |
| Liabilities:                       |       |             |       |                                                            |       |   |   |   |   |
| Foreign currency  forward contract |       | $                | 326        |                                                            | $          | — |   | $ | 326 |   | $ | — |   |
| Total liabilities                  |       | $                | 326        |                                                            | $          | — |   | $ | 326 |   | $ | — |   |

 

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

 
| ** **              | ** ** | ** **           | ** ** | **Fair Value Measurements at Reporting Data**  | ** ** |
|-------------------------|------------|----------------------|------------|------------------------------------------------|------------|
| ** **              | ** ** | **December 31** | ** ** | **Active Markets  for Identical  Instruments** | ** ** | **Significant Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| ** **              | ** ** | **2008**             | ** ** | **Level 1**                                    | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                    |       |                 |       |                                           |       |   |   |   |   |
| Assets:                 |       |                 |       |                                           |       |   |   |   |   |
| Money market fund       |       | $                    | 47,170     |                                           | $          | 47,170 |   | $ | — |   | $ | — |   |
| Auction rate securities |       | 43,177               |       | —                                         |       | — |   | 43,177 |   |
| Put option              |       | 5,144                |       | —                                         |       | — |   | 5,144 |   |
| Total assets            |       | $                    | 95,491     |                                           | $          | 47,170 |   | $ | — |   | $ | 48,321 |   |

 

Thefollowing table presents a reconciliation of all assets and liabilitiesmeasured at fair value on a recurring basis, excluding accrued interestcomponents, using significant unobservable inputs (Level 3) as of June 30,2009 (in thousands):

 
| ** **                                      | ** ** | ** **     | ** ** | **Auction Rate** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Put Option** | ** ** | **Securities**   | ** ** | **Total**  | ** ** |
| Balance at  December 31, 2008              |       | $              | 5,144      |             | $          | 43,177     |       | $ | 48,321 |   |
| Unrealized gain on  auction rate securities     |       | —         |       | 155              |       | 155        |       |
| Unrealized loss on put  option                  |       | (177           | )          | —           |       | (177       | )          |
| Balance at  March 31, 2009                 |       | $              | 4,967      |             | $          | 43,332     |       | $ | 48,299 |   |
| Sales of auction rate  securities, at par value |       | —         |       | (125             | )          | (125       | )          |
| Realized gains on  auction rate securities      |       | —         |       | 19               |       | 19         |       |
| Unrealized gain on  auction rate securities     |       | —         |       | 1,305            |       | 1,305      |       |
| Unrealized loss on put  option                  |       | (1,237         | )          | —           |       | (1,237     | )          |
| Balance at  June 30, 2009                  |       | $              | 3,730      |             | 44,531     |       | 48,261     |   |

 

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**5.****             ****Goodwilland Intangible Assets**

 

OnJanuary 7, 2008, we acquired all of the outstanding shares of ConceptusSAS.  Our condensed consolidatedfinancial statements include the financial results of Conceptus SAS beginningfrom the acquisition date of January 7, 2008.

 

Thetotal purchase price of $22.5 million included $24.4 million in cashconsideration and $0.3 million in direct transaction costs, less a reduction tothe purchase price of $2.2 million as explained below. On February 27,2007, we entered into an amendment to the Share Purchase and Call OptionAgreement with Conceptus SAS and into an amendment to the DistributionAgreement with Conceptus SAS.  Pursuant to the amendment to the SharePurchase and Call Option Agreement, we agreed not to exercise the call optionto acquire Conceptus SAS in 2007 and agreed to exercise our call option toacquire SAS sometime between January 1, 2008 and January 2, 2009subject to the satisfaction of certain closing conditions.  Pursuant tothe amendment to the Distribution Agreement, Conceptus SAS agreed to increasethe price they pay to us for the*Essure* product.The difference in price of product under the revised Distribution Agreementcompared to the previous agreement was recorded as a current liability in ourconsolidated balance sheet prior to the acquisition. The balance of thiscurrent liability of $2.2 million on the date of acquisition was recorded as areduction of the purchase price of Conceptus SAS.

 

Theaggregate Conceptus SAS purchase price of $22.5 million was allocated to theassets acquired and liabilities assumed based on their estimated fair values atthe date of acquisition.  The estimate ofthe excess of purchase price over the fair value of net tangible assetsacquired was allocated to identifiable intangible assets with the remainder asgoodwill.

 

Goodwillis tested for impairment on an annual bases or more frequent upon theoccurrence of circumstances that indicate that goodwill assets might beimpaired.  We did not record anyimpairment of goodwill during the three and six months ended June 30,2009.

 

Thechanges in carrying amount of goodwill at June 30, 2009 are as follows (inthousands):

 
| Goodwill, at  December 31, 2008 |   | $    | 17,105       |   |
|--------------------------------------|--------|------|--------------|--------|
| Effect of currency  translation      |   | (132 | )            |
| Goodwill, at  June 30, 2009     |   | $    |  16,973 |   |

 

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

 
| ** **              | ** ** | ** **                                     | ** ** | ** **                  | ** **  | ** **                    | ** ** | ** **                                       | ** ** | ** **          | ** ** | **December 31,** | ** ** |
|-------------------------|------------|------------------------------------------------|------------|-----------------------------|-------------|-------------------------------|------------|--------------------------------------------------|------------|---------------------|------------|-----------------------|------------|
| ** **              | ** ** | ** **                                     | ** ** | **June 30, 2009**      | ** **  | **2008**                      | ** ** |
| ** **              | ** ** | **Weighted  average  remaining  life (years)** | ** ** | **Gross  carrying  amount** | ** **  | **Accumulated  amortization** | ** ** | **Cumulative  effect of  currency  translation** | ** ** | **Net book  value** | ** ** | **Net book  value**   | ** ** |
|                    |       |                                           |       |                        |        |                          |       |                                             |       |                |       |                  |       |
| Customer relationships  |       | 7.50                                           |       | $                           |  5,024 |                          | $          |  (801                                       | )          | $                   |  (223 | )                     | $          |  4,000 |   | $ |  4,281 |   |
| Covenant not to compete |       | 1.50                                           |       | 71                          |        | (34                           | )          | (3                                               | )          | 34                  |       | 46                    |       |
| Licenses                |       | 4.20                                           |       | 2,020                       |        | (1,162                        | )          | —                                           |       | 858                 |       | 960                   |       |
| Total intangibles       |       |                                           |       | $                           |  7,115 |                          | $          |  (1,997                                     | )          | $                   |  (226 | )                     | $          |  4,892 |   | $ |  5,287 |   |

 

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

 

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**6.****             ****Inventories**

 

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

 
| ** **       | ** ** | **June 30,** | ** **      | **December 31,** | ** ** |
|------------------|------------|-------------------|-----------------|-----------------------|------------|
| ** **       | ** ** | **2009**          | ** **      | **2008**              | ** ** |
| Raw materials    |       | $                 |  274       |                  | $          |  230 |   |
| Work-in-progress |       | 1,104             |            | 1,225                 |       |
| Finished goods   |       | 1,336             |            | 2,374                 |       |
| **Total**        | ** ** | **$**             | ** 2,714** | ** **            | **$**      | ** 3,829** | ** ** |

 

**7.****             ****Warranty**

 

We offer warranties onour product and record a liability for the estimated future costs associatedwith warranty claims, which is based upon our historical experience and ourestimate of the level of future costs. Warranty costs are reflected in thestatement of operations as a cost of goods sold.  A reconciliation of thechanges in warranty liability for the six months ended June 30, 2009 and2008 are as follows (in thousands):

 
| ** **                                        | ** ** | **Six months ended June 30,** | ** **    |
|---------------------------------------------------|------------|------------------------------------|---------------|
| ** **                                        | ** ** | **2009**                           | ** **    | **2008** | ** ** |
| Balance at the  beginning of the period           |       | $                                  |  272     |   | $ |  208 |   |
| Accruals for warranties  issued during the period |       | 207                                |          | 115 |   |
| Settlements made in  kind during the period       |       | (215                               | )             | (126 | ) |
| **Balance  at the end of the period**             | ** ** | **$**                              | ** 264** | ** ** | **$** | ** 197** | ** ** |

 

**8.****             ****Stock-Based Compensation**

 

Net loss for the threeand six months ended June 30, 2009 included stock-based compensationexpense under SFAS No. 123(R), *Share-Based Payment,*or SFAS 123(R), of approximately $1.5 million and $2.9 million,respectively,  which consisted ofstock-based compensation expense of approximately $1.3 million and $2.5 millionrespectively related to employee stock options, employee stock purchase planand stock appreciation rights and stock-based compensation expense of approximately$0.2 million and $0.4 million respectively related to employee restricted stockand restricted stock units.

 

Netloss for the three and six months ended June 30, 2008 included stock-basedcompensation expense under SFAS 123(R) of approximately $1.4 million and$2.9 million, respectively, which consisted of stock-based compensation expenseof approximately $1.2 million and $2.5 million, respectively, related toemployee stock options, employee stock purchase plan and stock appreciationrights and stock-based compensation expense of approximately $0.2 millionand $0.4 million, respectively, related to employee restricted stock andrestricted stock units.

 

Stock-based compensationarrangements to non-employees are accounted for in accordance with EITF Issue No. 96-18,*Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services*, which requires that these equity instruments arerecorded at their fair value on the measurement date. The measurement ofstock-based compensation is subject to adjustment as the underlying equityinstruments vest. Stock-based compensation expense relating to non-employeeswas approximately $56,000 and $59,000 for the three months ended June 30,2009 and 2008, respectively, and $48,000 and $114,000 for the six months ended June 30,2009 and 2008, respectively.

 

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For the three and six months ended June 30, 2009and 2008, we calculated the fair value of each stock appreciation right on thedate of grant using the Black-Scholes model as prescribed by SFAS 123(R). Theassumptions used were as follows:

 
| ** **                       | ** ** | **Three Months**             | ** ** | **Six Months**               | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **ended June 30, 2009** | ** ** | **ended June 30, 2009** | ** ** |
| Expected term (in  years)        |       | 4.39                         |       | 4.35                         |       |
| Average risk-free  interest rate |       | 2.03                         | %          | 1.65                         | %          |
| Average volatility  factor       |       | 51.9                         | %          | 52.6                         | %          |
| Dividend yield                   |       | —                       |       | —                       |       |

 
| ** **                       | ** ** | **Three Months**             | ** ** | **Six Months**               | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **ended June 30, 2008** | ** ** | **ended June 30, 2008** | ** ** |
| Expected term (in  years)        |       | 4.66                         |       | 4.66                         |       |
| Average risk-free  interest rate |       | 3.07                         | %          | 2.71                         | %          |
| Average volatility  factor       |       | 46.3                         | %          | 47.7                         | %          |
| Dividend yield                   |       | —                       |       | —                       |       |

 

*StockAppreciation Rights*:During the three and six months ended June 30, 2009, we granted stockappreciation rights for 82,096 and 924,153 shares of common stock, with anestimated total grant date fair value of approximately $0.6 million and $4.8million, respectively and a grant date weighted-average fair value of $6.90 and$5.16  per share, respectively.  During the three and sixmonths ended June 30, 2008, we granted stock appreciation rights for115,616 and 832,410 shares of common stock, respectively, with an estimatedtotal grant date fair value of approximately $0.9 million and $6.3 million,respectively and a grant date weighted-average fair value of $7.73 and $7.55per share, respectively.

 

*RestrictedStock Units*: Inconnection with restricted stock units, we recorded stock compensationrepresenting the fair market value of our common shares on the dates the awardswere granted. Compensation expense is being recorded on a straight-line basisover the vesting periods of the underlying stock awards. During the three andsix months ended June 30, 2009, we granted 58,250 and 82,739 restrictedstock units, with a grant-date fair value of approximately $0.7 million and$1.0 million, respectively, and a grant-date weighted-average fair value of$11.88 and $11.99, respectively.  Duringthe three and six months ended June 30, 2008, we granted zero and 41,000shares of restricted stock units, respectively, with a grant-date fair value ofapproximately $0.7 million, and a grant-date weighted average fair value of$17.45.

 

**9.****             ****Convertible Senior Notes**

 

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

 

Thenotes will mature on February 15, 2027, unless earlier redeemed,repurchased or purchased by us or converted, and are convertible into cash and,if applicable, shares of our common stock based on an initial conversion rate,subject to adjustment, of 35.8616 shares per $1,000 principal amount of notes(which represents an initial conversion price of approximately $27.89 pershare), in certain circumstances. Upon conversion, a holder would receive cashup to the principal amount of the note and our common stock in respect of suchnote’s conversion value in excess of such principal amount. The notes areconvertible only in the following circumstances: (1) if the closing saleprice of our common stock exceeds 120% of the conversion price during a periodas defined in the indenture; (2) if the average trading price per $1,000principal amount of the notes is less than or equal to 97% of the averageconversion value of the notes during a period as defined in the indenture; (3) uponthe occurrence of specified corporate transactions; (4) if we call thenotes for redemption and (5) at any time on or after December 15,2011 up to and including February 15, 2012 and anytime on or after February 15,2025. Upon a change in control or termination of trading, holders of the notesmay require us to repurchase all or a portion of their notes for cash at arepurchase price equal to 100% of the principal amount, plus any accrued andunpaid interest. We may not have sufficient funds to pay the interest, purchaseprice, repurchase price or principal return when conversion is triggered or anote becomes payable under the above terms.

 

Weconcluded that the embedded stock conversion option is not considered aderivative under SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities,* or SFAS 133,because the embedded stock conversion option would be recorded in stockholders’equity if it were a freestanding instrument per Emerging Issues Task Force EITFIssue No. 00-19, *Accounting forDerivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,* or EITF 00-19.

 

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Inconnection with the offering, we entered into convertible note hedgetransactions with affiliates of the initial purchasers. These transactions areintended to reduce the potential dilution to our Company’s stockholders uponany future conversion of the notes. The call options, which cost an aggregate$19.4 million, were recorded as a reduction of additional paid-in capital. Wealso entered into warrant transactions concurrently with the offering, pursuantto which we sold warrants to purchase approximately 3.1 million shares of ourcommon stock to the same counterparties that entered into the convertible notehedge transactions. The convertible note hedge and warrant transactionseffectively increased the conversion price of the convertible notes toapproximately $36.47 per share of our common stock. Proceeds received from theissuance of the warrants totaled approximately $10.7 million and were recordedas an addition to additional paid-in capital.

 

EITF00-19 provides that contracts are initially classified as equity if (1) thecontract requires physical settlement or net-share settlement, or (2) thecontract gives the company a choice of net-cash settlement or settlement in itsown shares (physical settlement or net-share settlement). The settlement termsof our purchased call options and sold warrant contracts require net-sharesettlement. Based on the guidance in EITF 00-19 and SFAS 133, thepurchased call option contracts were recorded as a reduction of equity and thewarrants were recorded as an addition to equity as of the trade date. SFAS 133states that a reporting entity shall not consider contracts to be derivativeinstruments if the contract issued or held by the reporting entity is bothindexed to its own stock and classified in stockholders’ equity in its statementof financial position. We concluded the purchased call option contracts and thewarrant contracts should be accounted for in stockholders’ equity.

 

*Adoption of FSP APB 14-1*

 

InMay 2008, the FASB issued FSP APB 14-1, *Accountingfor Convertible Debt InstrumentsThat May Be Settled in Cash upon Conversion (Including Partial CashSettlement)*, or FSPAPB 14-1, which clarifies the accounting for convertible debt instruments thatmay be settled in cash upon conversion, including partial cash settlement.  FSP APB 14-1 specifies that an issuer of suchinstruments should separately account for the liability and equity componentsof the instruments in a manner that reflect the issuer’s non-convertible debtborrowing rate which interest costs are recognized in subsequent periods.  FSP APB 14-1 is effective for fiscal yearsbeginning after December 15, 2008, and retrospective application isrequired for all periods presented.  Wehave adopted FSP APB 14-1 in our first quarter of fiscal 2009 and adjusted ourfinancial statements as follows in connection with our outstanding convertiblesenior notes.

 

Theeffect of the adoption of FASB APB 14-1 was to bifurcate the debt and equitycomponents of our convertible notes. The note payable principal balance at thedate of issuance of $86.3 million in February 2007 was bifurcated into thedebt component of $65.1 million and the equity component of $21.2 million.  The difference between the note payableprincipal balance of $86.3 million and the $65.1 million value of the debt componentwill be accreted to interest expense over a period of 5 years, which is theexpected term of our notes payable.  Theadjusted outstanding notes payable balance at December 31, 2008 is $72.3million.   In addition, we reclassified$0.8 million of debt issuance costs to additional paid in capital.  The debt component was recognized at thepresent value of its cash flows discounted using a 5.51% discount rate, ourborrowing rate at the date of the issuance of the Debenture for a similar debtinstrument without the conversion feature.

 

Interest expenseassociated with the Convertible Senior Notes consisted of the following (inthousands):

 
| ** **                                   | ** ** | **Three months ended June 30,** | ** **  | **Six months ended June 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------|-------------|------------------------------------|------------|
| ** **                                   | ** ** | **2009**                             | ** **  | **2008 (1)**                       | ** ** | **2009** | ** ** | **2008 (1)** | ** ** |
| Contractual  coupon rate of interest         |       | $                                    |  488   |                               | $          |  485 |   | $ |  966 |   | $ |  968 |   |
| Accretion of note  payable                   |       | 1,039                                |        | 982                                |       | 2,064 |   | 1,951 |   |
| Interest  expense - convertible senior notes |       | $                                    |  1,527 |                               | $          |  1,467 |   | $ |  3,030 |   | $ |  2,919 |   |

 

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(1) Adjustedfor the retrospective adoption of FSP APB 14-1.

 

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Amounts comprising thecarrying amount of the Convertible Senior Notes and the estimated fair value ofthe Convertible Senior Notes are as follows (in thousands):

 
| ** **                 | ** ** | **June 30,** | ** **   | **December 31,** | ** ** |
|----------------------------|------------|-------------------|--------------|-----------------------|------------|
| ** **                 | ** ** | **2009**          | ** **   | **2008 (1)**          | ** ** |
| Principal balance          |       | $                 |  65,101 |                  | $          |  65,101 |   |
| Accretion of note  payable |       | 9,307             |         | 7,243                 |       |
| Carrying amount            |       | $                 |  74,408 |                  | $          |  72,344 |   |
|                       |       |              |         |                  |       |
| Estimated fair value  (2)  |       | $                 |  75,900 |                  | $          |  55,200 |   |

 

----

(1) Adjustedfor the retrospective adoption of FSP APB 14-1.

(2) Estimatedfair value is estimated based on the quoted market price of the underlyingbond.

 

Theimpact of the adoption of FSP APB 14-1 on the Condensed Consolidated BalanceSheet as of December 31, 2008 (in thousands) is as follows:

 
| ** **                                   | ** ** | **As   Previously  Reported** | ** **  | **Incremental  Impact of   Adoption of   FSP APB 14-1** | ** ** | **As  Adjusted** | ** ** |
|----------------------------------------------|------------|-------------------------------|-------------|---------------------------------------------------------|------------|------------------|------------|
| Debt issuance costs,  net                    |       | $                             |  1,935 |                                                    | $          |  (484       | )          | $ |  1,451 |   |
| Total liabilities                            |       | 133,259                       |        | (13,906                                                 | )          | 119,353          |       |
| Common stock and  additional paid in capital |       | 266,576                       |        | 20,375                                                  |       | 286,951          |       |
| Accumulated deficit                          |       | (235,332                      | )           | (6,953                                                  | )          | (242,285         | )          |
|                                              |            |                               |             |                                                         |            |                  |            |  |  |  |

 

Theimpact of the adoption of FSP APB 14-1 on the Condensed Consolidated Statementof Operations (in thousands, except per share amount) is as follows:

 

**Threemonths ended June 30, 2008**

 
| ** **                                                | ** ** | **As  Previously  Reported** | ** ** | **Incremental  Impact of Adoption   of FSP APB 14-1** | ** ** | **As  Adjusted** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-------------------------------------------------------|------------|------------------|------------|
| Total interest income  and expense and other expense, net |       | $                            |  (199 | )                                                     | $          |  (944       | )          | $ |  (1,143 | ) |
| Net loss                                                  |       | (1,608                       | )          | (944                                                  | )          | (2,552           | )          |
| Basic and diluted net  loss per share                     |       | (0.05                        | )          | (0.03                                                 | )          | (0.08            | )          |
|                                                           |            |                              |            |                                                       |            |                  |            |  |  |  |

 

**Sixmonths ended June 30, 2008**

 
| ** **                                                | ** ** | **As  Previously  Reported** | ** ** | **Incremental  Impact of Adoption  of FSP APB 14-1** | ** ** | **As  Adjusted** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|------------------------------------------------------|------------|------------------|------------|
| Total interest income  and expense and other expense, net |       | $                            |  (227 | )                                                    | $          |  (1,874     | )          | $ |  (2,101 | ) |
| Net loss                                                  |       | (7,987                       | )          | (1,874                                               | )          | (9,861           | )          |
| Basic and diluted net  loss per share                     |       | (0.27                        | )          | (0.06                                                | )          | (0.33            | )          |
|                                                           |            |                              |            |                                                      |            |                  |            |  |  |  |

 

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Theimpact of the adoption of FSP APB 14-1 on the Condensed Consolidated Statementof Cash Flows for the six months ended June 30, 2008 (in thousands) is asfollows:

 

**Six months ended June 30, 2008**

 
| ** **                           | ** ** | **As   Originally  Reported** | ** **   | **Incremental  Impact of   Adoption of   FSP APB 14-1** | ** ** | **As  Adjusted** | ** ** |
|--------------------------------------|------------|-------------------------------|--------------|---------------------------------------------------------|------------|------------------|------------|
| Net loss                             |       | $                             |  (7,987 | )                                                       | $          |  (1,874     | )          | $ |  (9,861 | ) |
| Amortization of debt  issuance costs |       | 310                           |         | (78                                                     | )          | 232              |       |
| Accretion of note  payable           |       | —                        |         | 1,952                                                   |       | 1,952            |       |
|                                      |            |                               |              |                                                         |            |                  |            |  |  |  |

 

**10.****      ****Credit Line**

 

InNovember 2008 we entered into a revolving credit line agreement with UBS,payable on demand, in an amount equal to 75% of the fair value of our ARS at anet no cost, meaning that the interest we pay on the credit line will notexceed the interest that we receive on the ARS that we have pledged as securityfor the credit line. Additionally, if UBS is able to sell our ARS at par value,proceeds would be utilized to first repay any outstanding balance under therevolving credit line. We are still able to sell the ARS, but in such acircumstance, if we sold at less than par, we would not be entitled to recoverthe par value support from UBS.  Duringthe six months ended June 30, 2009 we have borrowed an additional $2.1million under this line of credit.  Ourloan balance as of June 30, 2009 is $32.1 million.  Our line of credit is payable on demand andwe classify as short term; therefore, we believe the fair value equal thebalance sheet value.  See Note 3 —Long-term Investments.

 

**11.****      ****Income Taxes**

 

Oureffective tax rate was 5% for the six months ended June 30, 2009 and 2%for the six months ended June 30, 2008.  The Company’s effective ratefor the six months ended June 30, 2009 is primarily related to our foreignoperations.

 

Weadopted the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*,or FIN 48, on January 1, 2007.  The adoption of the provisions of FIN48 did not have a material impact on our financial position and results ofoperations.   We have not been audited by the Internal RevenueService or any state income or franchise tax agency.   As of June 30,2009, our federal returns for the years ended 2005 through the current periodand most state returns for the years ended 2004 through the current period arestill open to examination.  In addition,all of the net operating losses and research and development creditcarryforwards that may be used in future years are still subject to inquirygiven that the statute of limitation for these items would be from the year ofthe utilization.

 

Forthe three and six months ended June 30, 2009, we recorded approximately$0.1 million and $0.2 million of income tax expense, respectively, attributableto Conceptus SAS.   For the three and six months ended June 30,2008, we recorded approximately $0.2 million of income tax expense,respectively, attributable to Conceptus SAS.   The tax returns forConceptus SAS for the years ended 2005 to 2007 were examined and closed by theFrench tax authorities in 2008.

 

Theamount of unrecognized tax benefits at June 30, 2009 was approximately$2.4 million, of which, if ultimately recognized, approximately$0.5 million would decrease the effective tax rate in the period in whichthe benefit is recognized. The remaining amount would be offset by the reversalof related deferred tax assets on which a valuation allowance is placed.

 

Wedo not expect our unrecognized tax benefits to change significantly over thenext 12 months.  In connection with the adoption of FIN 48, we recognizeinterest and penalties accrued on any unrecognized tax benefits as a componentof income tax expense.

 

**12.****      ****Computation of Net Loss Per Share**

 

Basicnet loss per share excludes any potential dilutive effects of options, unvestedrestricted shares and restricted stock units and common stock shares subject torepurchase.  Diluted net loss per share includes the impact of potentiallydilutive securities.  In net loss periods presented, basic and diluted netloss per share are both computed using the weighted average number of commonshares outstanding.

 

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Thefollowing table provides a reconciliation of weighted-average number of commonshares outstanding to the weighted-average number common shares outstanding usedin computing basic and diluted net loss per common share (in thousands):

 
| ** **                                                                                                        | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                        | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                                                                        | ** ** | **2009**               | ** ** | **2008**             | ** ** | **2009** | ** ** | **2008** | ** ** |
| Denominator:                                                                                                      |       |                   |       |                 |       |   |   |   |   |
| Weighted-average number  of common shares oustanding                                                              |       | 30,521                 |       | 30,232               |       | 30,481 |   | 30,092 |   |
| Less: Weighted-average  unvested and restricted common shares                                                     |       | (3                     | )          | (15                  | )          | (3 | ) | (16 | ) |
| Weighted-average number  common shares outstanding used in computing basic and diluted net loss per  common share |       | 30,518                 |       | 30,217               |       | 30,478 |   | 30,076 |   |

 

The following outstandingoptions, warrants, stock appreciation rights, restricted stock units and shareswere excluded from the computation of diluted net loss per share, as theireffect would have been antidilutive (in thousands):

 
| ** **                                                | ** ** | **At June 30,** | ** ** |
|-----------------------------------------------------------|------------|----------------------|------------|
| ** **                                                | ** ** | **2009**             | ** ** | **2008** | ** ** |
| Outstanding options and  stock appreciation rights        |       | 4,810                |       | 4,223 |   |
| Restricted stock awards                                   |       | —               |       | 9 |   |
| Restricted stock units                                    |       | 150                  |       | 103 |   |
| Warrants issued in  connection with our convertible notes |       | 3,093                |       | 3,093 |   |
| Total                                                     |       | 8,053                |       | 7,428 |   |

 

InFebruary 2007, we issued an aggregate principal amount of $86.3 million ofour 2.25% convertible senior notes due 2027. The notes are not included in the calculation of net loss per sharebecause their effect is anti-dilutive. In addition, our senior convertiblenotes were excluded from the diluted net income per share calculation becausethe conversion price was greater than the average market price of our stockduring the period.

 

**13.****      ****Comprehensive Income (Loss)**

 

Comprehensive income(loss) represents all changes in stockholders’ equity except those resultingfrom investments or contributions by stockholders. Our comprehensive income(loss) consists of unrealized losses on available-for-sale securities andcumulative translation adjustments. A summary of the comprehensive income(loss) for the periods indicated is as follows (in thousands):

 
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                  | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                                  | ** ** | **2009**               | ** ** | **2008 (1)**         | ** ** | **2009** | ** ** | **2008 (1)** | ** ** |
| Net loss                                                    |       | $                      |  (555 | )                    | $          |  (2,552 | ) | $ |  (4,891 | ) | $ |  (9,861 | ) |
| Other comprehensive income  (loss)                          |       |                   |       |                 |       |   |   |   |   |
| Foreign currency  translation adjustment, net of tax        |       | 1,151                  |       | 2                    |       | (332 | ) | 59 |   |
| Change to unrealized  loss on available-for-sale securities |       | —                 |       | (268                 | )          | — |   | (2,615 | ) |
| Comprehensive income  (loss)                                |       | $                      |  596  |                 | $          |  (2,818 | ) | $ |  (5,223 | ) | $ |  (12,417 | ) |

 

----

(1) Adjusted for theretrospective adoption of FSP APB 14-1.

 

The balance of eachcomponent of accumulated other comprehensive loss, net of taxes, as of June 30,2009 and December 31, 2008 consist of the following (in thousands):

 
| ** **                               | ** ** | **Foreign  Currency  Translation** | ** **   | **Accumulated  Other  Comprehensive**

**Loss** | ** ** |
|------------------------------------------|------------|------------------------------------|--------------|-------------------------------------------------|------------|
| Balance as of  December 31, 2008    |       | $                                  |  (798   | )                                               | $          |  (798 | ) |
| Net change during the  six months period |       | (332                               | )            | (332                                            | )          |
| Balance as of  June 30, 2009        |       | $                                  |  (1,130 | )                                               | $          |  (1,130 | ) |

 

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**14.****      ****Segment Information**

 

We operate in onebusiness segment, which encompasses all geographical regions. We use onemeasurement of profitability and do not segregate our business for internalreporting.

 

Net sales by geographicregion, based on shipping location of our customer, are as follows (inthousands, except percentages):

 
| ** **                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  sales (in thousands) |       | $                                    | 33,049     |                               | $          | 25,680 |   | $ | 60,200 |   | $ | 46,807 |   |
|                      |       |                                 |       |                               |       |   |   |   |   |
| United  States of America |       | 78                                   | %          | 78                                 | %          | 79 | % | 77 | % |
| France                    |       | 13                                   | %          | 14                                 | %          | 14 | % | 14 | % |
| Rest  of Europe           |       | 7                                    | %          | 7                                  | %          | 6 | % | 8 | % |
| Other                     |       | 2                                    | %          | 1                                  | %          | 1 | % | 1 | % |
|                           |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |

 

No customer accounted formore than 10% of total revenue for the three and six months ended June 30,2009 and 2008. Accounts receivable from one customer accounted for 11% of ournet accounts receivable balance at June 30, 2009.  Nocustomer had a balance in excess of 10% of our net accounts receivable at June 30,2008.

 

**15.  Litigation**

 

On May 22, 2009, wefiled a lawsuit in the United States District Court, Northern District ofCalifornia against Hologic, Inc., (“Hologic”) seeking declaratory judgmentby the Court that Hologic’s planned importation, use, sale or offer to sell ofits forthcoming Adiana Permanent Contraception system will infringe severalU.S. patents owned by us including U.S. Patent Nos. 6,634,361, 6,709,667,7,237,552, 7,428,904 and 7,506,650, and an injunction prohibiting Hologic fromimporting, using, selling or offering to sell its Adiana system in the UnitedStates.  Upon FDA approval of the AdianaPermanent Contraception system, we filed an Amended Complaint in July 2009seeking a judgment that Hologic’s importation, use, sale and/or offer to sellthe system infringes the same patents mentioned above and an injunction againstsuch activity.  We also filed a motion for preliminary injunction,requesting the Court to enjoin the Adiana system pending final judgment in theaction.  As of August 7, 2009, the Court has not ruled on the motionfor preliminary injunction.

 

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

 

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with our condensed consolidated financialstatements and related notes thereto. This discussion contains forward-lookingstatements, including references to 2009 revenues and gross margins, increasedproduct adoption, product improvements, expanded sales force and otherforecasted items that involve risks and uncertainties such as our limitedoperating and sales history; the uncertainty of market acceptance of ourproduct; dependence on obtaining and maintaining reimbursement; effectivenessand safety of our product over the long-term; our ability to obtain and maintainthe necessary governmental clearances or approvals to market our product; ourability to develop and maintain proprietary aspects of our technology; ourability to manage our expansion; our dependence on single sourcesuppliers, third party manufacturers and co-marketers; intense competition inthe medical device industry and in the contraception market; the impact of anew competitor in the hysteroscopic sterilization segment,   the inherent risk of exposure to productliability claims and product recalls and other factors referenced in this Form 10-Q. Ouractual results could differ materially from those expressed or implied in theseforward-looking statements as a result of various factors, including thosediscussed in our Annual Report on Form 10-K for the year ended December 31,2008 filed with the Securities and Exchange Commission on March 13, 2009and those included elsewhere in this Form 10-Q.*

 

**Overview**

 

Wedevelop, manufacture and market the*Essure*® permanentbirth control system, an innovative and proprietary medical device for womenthat was approved for marketing in the United States in November 2002 bythe U.S. Food and Drug Administration, or FDA. The*Essure* system uses a soft and flexible micro-insert that isdelivered into a woman’s fallopian tubes to provide permanent birth control bycausing a benign tissue in-growth that blocks the fallopian tubes. Asuccessfully placed*Essure*micro-insert and the subsequent tissue growth prohibits the egg from travelingthrough the fallopian tubes and therefore prevents fertilization. Theeffectiveness rate of the*Essure*system is 99.80% after four years of follow-up.

 

OnJanuary 7, 2008, we acquired all of the outstanding shares of ConceptusSAS, which markets *Essure* directlyin France and utilizes distributors to market *Essure* in other European markets.  As a result of this transaction, ConceptusSAS became our wholly-owned subsidiary. We believe the acquisition of ConceptusSAS expands our presence in international markets and will increase our revenuesas we will recognize sales at end user pricing as compared to the price atwhich we previously sold the *Essure*product directly to Conceptus SAS.  Ourconsolidated financial statements include the financial results of ConceptusSAS beginning from the acquisition date of January 7, 2008.  For financial information about geographicareas and for segment information with respect to net sales, refer to theinformation set forth in Note 14 — Segment Information to our condensedconsolidated financial statements.

 

Wewere incorporated in the state of Delaware on September 18, 1992.  We maintain three websites located atwww.conceptus.com, www.essuremd.com and www.essure.com. We make available freeof charge on or through our www.conceptus.com website, our annual report on Form 10-K,our quarterly reports on Form 10-Q, current reports on Form 8-K andamendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act as soon as reasonably practicable after weelectronically file or furnish such material to the Securities and ExchangeCommission (SEC).

 

*TheEssure Procedure*

 

The*Essure* procedure is typically performedin the office setting and is intended to be a less invasive and a less costlysolution to tubal ligation, the leading form of permanent birth control in theUnited States and worldwide. Laparoscopic tubal ligation and tubal ligation bylaparotomy typically involve abdominal incisions and/or punctures, general orregional anesthesia, four to ten days of normal recovery time and the risksassociated with an incisional procedure. The*Essure* procedure does not require cutting or penetrating theabdomen, which lowers the likelihood of pre- and post-operative pain due to theincisions/punctures, and it can be performed in an outpatient setting.Currently, the majority of the*Essure*procedures are performed using conscious sedation, such as IV sedation with alocal anesthesia or a regional anesthetic such as a paracervical block. Generalanesthesia is not typically used unless required by hospital protocol, ifrequested by the patient, or based on the experience and comfort level of thephysician.   In the Pivotal trial of the*Essure* system, the average hysteroscopicprocedure time was 13 minutes. A patient is typically discharged approximately45 minutes after the*Essure*procedure. No overnight hospital stay is required. Furthermore, the*Essure* system is effective without drugsor hormones. There is a three-month waiting period after the procedure duringwhich the woman must use another form of birth control while tissue in-growthoccurs. At 90 days following the procedure, U.S. patients complete aconfirmation test called a hysterosalpingogram, or HSG, which can determinewhether the device was placed successfully and whether the fallopian tubes areoccluded. Outside of the United States, patients are required to return for apelvic X-ray at three months post-procedure with a subsequent HSG if devicelocation on the initial radiographic image appears suspicious.

 

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Webelieve that the *Essure* system is a betteralternative to tubal ligation for physicians, hospitals and payers. The Essuresystem is a less invasive permanent birth control option for physicians tooffer to their patients; hospitals are able to utilize their facilities morecost effectively with the *Essure*procedure compared with tubal ligation; and payers are able to experience costreductions resulting from the elimination of overhead and procedural costsrelated to anesthesia and post-operative hospital stays associated with tuballigations.  In addition, we believe the *Essure* procedure is superior to other non-incisional tuballigation alternatives because, unlike other device designs, the *Essure* procedure does not rely on radio frequency (RF)thermal tissue injury as its mechanism of action, which can subject the patientto the risks of expanded thermal damage, bowel injury and dilutionalhyponatremia.  Published reports estimatethat approximately 700,000 tubal ligation procedures are performed each year inthe United States. We intend to capture the majority share of this market andestablish the *Essure* procedure as the goldstandard for permanent birth control.  Wealso believe the *Essure* system is a solution forwomen whose family is complete but are using temporary methods of birthcontrol. In addition, payers may also benefit from the reduction of unplannedpregnancies associated with non-permanent birth control methods used bypatients who have chosen to avoid the drawbacks of traditional permanent birthcontrol methods but who may otherwise elect to use the *Essure*system.

 

*Effectivenessof the Essure System*

 

InJuly 2005, we received approval from the FDA to extend effectiveness dataon the*Essure* product labeling.The Premarket Approval, or PMA, supplement filed in late January 2005supports an extension of the effectiveness rate of the*Essure* system to 99.80% after four yearsand 99.74% after five years, from the previously approved 99.80% at threeyears. The five-year effectiveness was demonstrated in a small portion ofclinical trial subjects who had completed five year follow up at the time ofthe FDA submission.  Five year follow upof all patients in clinical trials is currently complete.  A PMA supplement to update the productlabeling incorporating the results of the follow-up data will be submitted tothe FDA.

 

InSeptember 2005, we received approval from the FDA to terminate ourpost-approval study with physicians who were newly trained in performing the*Essure* procedure due to the positiveplacement data obtained. The purpose of the post-approval study, required bythe FDA as a condition of the November 2002 approval of the*Essure* system, was to determine the rateof successful bilateral placements of the*Essure* micro-inserts at first attempt with a large number of newlytrained physicians who were not part of the previous clinical studies. Althoughtreatment of the total number of patients required by the FDA had not beencompleted, the data obtained to date provided us with the opportunity torequest that the FDA permit an early termination of the study. Because of theFDA ruling, the PMA Supplement submitted in March 2005 has beenre-classified as a Final Report. The results of the post-approval studydemonstrated an improvement in placement rates from those obtained in thepivotal study. In November 2005, we filed a PMA supplement with the FDA inorder to obtain approval to modify the*Essure* Physician and Patient labeling to reflect a 94.6% firstprocedure bilateral placement rate based on results of the post-approval study.In October 2006, we received such approval from the FDA. In March 2006,we filed a PMA supplement with the FDA in order to obtain approval for amodified delivery system and micro-insert, and new valved introducer.  We received such approval from the FDA in June 2007.A post-approval study has been conducted to investigate the bilateral placementrate at first attempt for the modified delivery system and micro-insert.  In March 2009, we received approval fromthe FDA to terminate our post-approval study with physicians who were newlytrained in performing the*Essure*procedure due to the positive placement data obtained.  A PMA supplement to update the productlabeling incorporating the results of the post-approval study will be submittedto the FDA.

 

*Physician Penetration*

 

Werequire physicians to be preceptored for between 3 and 5 cases by a certifiedtrainer before being able to perform the procedure independently. We continueto see an increase in the number of physicians becoming trained or who are inthe process of training to perform the *Essure*procedure. The level of sales for the*Essure*system, is highly dependent on the number of physicians trained to perform theprocedure. However, we understand that a strong base of trained physicians doesnot necessarily correlate to an increase in revenue proportionately.Furthermore, there are no revenues associated with the training activities. Wedo not charge a fee for the activity and no commitment arises for the physicianfrom the preceptorship. Physician training is provided upfront and we have noobligation subsequent to the initial training.

 

*Reimbursement of the EssureProcedure*

 

Marketacceptance of the*Essure* systemdepends in part upon the availability of reimbursement within prevailinghealthcare payment systems. We believe that physician advocacy of ourproduct will be required to continue to obtain reimbursement. As of June 30,2009, we have received positive reimbursement decisions for the *Essure* procedure from most privateinsurers and from 46 of the 51 Medicaid programs in the United States. Wecontinue to receive positive responses relating to reimbursement, which webelieve will help increase the adoption of the *Essure*device by doctors and patients. We intend to continue our effort toeducate payers of the cost-effectiveness of our product and to establishfurther programs to help physicians to navigate reimbursement issues. As withall healthcare plans, coverage will vary and is dependent upon the individual’sspecific benefit plan.

 

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EffectiveJanuary 1, 2009, the Centers for Medicare and Medicaid Service (CMS), theMedicare Physician Fee Schedule national average payment for hysteroscopicsterilization (CPT code) is $427 when performed in a hospital (facility) and$1,862 (non-facility) when performed in a physician’s office. In addition, inthe CMS Final Rule for the 2009 Outpatient Prospective Payment System, orOPPS, which assigns hospital outpatient reimbursement amounts, CPT 58565 mapsto APC 202 which is assigned a Medicare National Average of $2,888, which underMedicare includes the cost of the implant. In 2009, the Medicare national average payment for hysteroscopicsterilization in the ambulatory surgery center is $1,535, which includes thecost of the implant. We believe these values are very favorable for the *Essure* procedure and will help in establishing increasedutilization of the device amongst doctors.

 

EffectiveMay 15, 2008, California’s state fee-for-service Medicaid programannounced coverage of the *Essure*procedure for beneficiaries that are 21 years of age or older. Physicians mayperform the *Essure*procedure in the physician’soffice, the ambulatory surgery center or the hospital outpatient department.Medi-Cal is to pay $2,282 as a global fee for an in-office procedure.  We believe these values are very favorablefor the *Essure* procedure and will continue beadvantageous in establishing increased utilization for devices amongst doctors.

 

Reimbursementsystems vary significantly by country and sometimes by region, andreimbursement approvals must be obtained on a country-by-country basis. Manyinternational markets have government-managed healthcare systems that determinereimbursement for new devices and procedures. In most markets, there areprivate insurance systems as well as government-managed systems.

 

Duringthe last several years, we received several positive responses from governmentand private agencies relating to reimbursement, which we believe will help usto speed up the acceptance of the*Essure*procedureby doctors and patients. In Europe, we are developing a strategic plan toobtain reimbursement in a number of European countries. In France, we haveobtained official reimbursement with the Haute Autorité de Santé, or HAS. The *Essure* procedure is covered in France for allage-appropriate women,  regardless oftheir medical status.  In addition, theCentre of European Policy Studies (CEPS) in France ruled in November 2007that the reimbursement for the *Essure* devicewill remain at the then current levels of 663 Euros for the next five years.

 

*Adoptionof the Essure System*

 

Webelieve the*Essure* system to bethe gold standard in permanentbirth control because of its unparalleled effectiveness, safety, and low cost.  The *Essure* system is becomingincreasingly well established among physicians and patients and is routinelytaught to new physicians in residency programs. As a result, we believe thatrecommendations and endorsements by physicians that are essential for marketacceptance of our product will continue to grow. Physicians are traditionallyslow to adopt new products and treatment practices, partly because of perceivedliability risks. Our biggest challenge is to accelerate the adoption process tomake the*Essure* procedure thestandard of care for permanent birth control. The following discussionsummarizes our programs to increase adoption of the*Essure* procedure.

 

First, we will continueto drive office-based procedures. The *Essure*procedure**can be easily performed in the office, which is the mostcomfortable and convenient setting for the patient and the place where thephysician is most productive from economic and logistical perspectives.  The physician’s office is also the lowestcost site of service for the payer and the patient and the setting whereutilization rates can grow the fastest.

 

Second, we expect tospend approximately $14 million in 2009 on further building consumer andreferral physician awareness.  We believethat once consumers and referring physicians are made aware of the benefits ofthe *Essure*procedure, they will no longerlook to other methods of birth control currently available. In 2009, we havebroadened this campaign to target 15% of the U.S. population.  All of our awareness initiatives are alsoaimed at enabling us to compete for a larger share of the 7.5 million U.S.families who have completed their families but rely on temporary forms of birthcontrol with lower efficacy.

 

Third, we will continueto expand our business in targeted international markets. We established adirect sales presence in the United Kingdom in December 2008 and in early2009, we received approval for the *Essure*procedure from the Brazilian National Health Service. We also plan to hireadditional distributors during the year. Surgical tubal ligation is the primary form of permanent birth controlworldwide, and thus we believe that the *Essure*systemaddresses a global clinical need.

 

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Last, we are committed tocontinuing to improve the *Essure*device.  In 2009, we plan to make an FDAsubmission for marketing approval of our fourth-generation *Essure*device, which is designed to further reduce the already rapid procedure timeand improve the precision of device deployment. We are also working on our fifth-generation *Essure*device, which will be designed to set a new standard in hysteroscopicsterilization.

 

Wehave experienced significant operating losses since inception and, as of June 30,2009, had an accumulated deficit of $247.2 million. Although we were profitablein the third and fourth quarters of 2008, we experienced a net loss in thefirst half of 2009 and there is a risk that we may not achieve sustainedprofitability.  We will continue toexpend substantial resources in the selling and marketing of the*Essure* system in the United States andabroad. We will be in a net loss position unless sufficient revenues can begenerated to offset expenses.

 

**Resultsof Operations — Three and Six Months Ended June 30, 2009 and 2008**

**(inthousands, except percentages)**

 
| ** **                                    | ** ** | **Three  Months Ended June 30,** | ** **   | **Six  Months Ended June 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|--------------|-------------------------------------|------------|
| ** **                                    | ** ** | **2009**                              | ** **   | **2008  (a)**                       | ** ** | **2009  -2008** | ** ** | **2009** | ** ** | **2008  (a)** | ** ** | **2009 -2008** | ** ** |
| ** **                                    | ** ** | **Amount**                            | ** **   | **% (b)**                           | ** ** | **Amount** | ** ** | **% (b)** | ** ** | **%  Change** | ** ** | **Amount** | ** ** | **% (b)** | ** ** | **Amount** | ** ** | **% (b)** | ** ** | **%  Change** | ** ** |
| Net sales                                     |       | $                                     |  33,049 |                                | 100        | % | $ |  25,680 |   | 100 | % | 29 | % | $ | 60,200 |   | 100 | % | $ |  46,807 |   | 100 | % | 29 | % |
| Gross profit                                  |       | 26,378                                |         | 80                                  | %          | 20,484 |   | 80 | % | 29 | % | 47,774 |   | 79 | % | 36,166 |   | 77 | % | 32 | % |
| Research and development  expenses            |       | 2,008                                 |         | 6                                   | %          | 1,644 |   | 6 | % | 22 | % | 3,415 |   | 6 | % | 3,575 |   | 8 | % | -4 | % |
| Selling, general and  administrative expenses |       | 23,337                                |         | 71                                  | %          | 20,081 |   | 78 | % | 16 | % | 45,908 |   | 76 | % | 40,183 |   | 86 | % | 14 | % |
| Net loss                                      |       | (555                                  | )            | -2                                  | %          | (2,552 | ) | -10 | % | -78 | % | (4,891 | ) | -8 | % | (9,861 | ) | -21 | % | -50 | % |
|                                               |            |                                       |              |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a) Adjustedfor the retrospective adoption of FSP APB 14-1. See Note 9: Convertible Senior Notes - Adoption of FSP APB 14-1 of theNotes to Condensed Consolidated Financial Statements.

(b) Expressedas a percentage of total net sales

 

*Net Sales*

 

Netsales were $33.0 million for the three months ended June 30, 2009 ascompared to $25.7 million for the three months ended June 30, 2008,representing an increase of approximately $7.4 million or 29%.  Net sales were $60.2 million for the sixmonths ended June 30, 2009 as compared to $46.8 million for the six monthsended June 30, 2008, representing an increase of approximately$13.4 million or 29%.  The increaseis the result of continued commercialization and marketing of the*Essure* system worldwide and reflects theincreasing numbers of physicians entering and completing training in the use ofthe procedure.

 

Net sales by geographicregion, based on shipping location of our customer, are as follows (inthousands, except percentages):

 
| ** **                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  sales (in thousands) |       | $                                    | 33,049     |                               | $          | 25,680 |   | $ | 60,200 |   | $ | 46,807 |   |
|                      |       |                                 |       |                               |       |   |   |   |   |
| United  States of America |       | 78                                   | %          | 78                                 | %          | 79 | % | 77 | % |
| France                    |       | 13                                   | %          | 14                                 | %          | 14 | % | 14 | % |
| Rest  of Europe           |       | 7                                    | %          | 7                                  | %          | 6 | % | 8 | % |
| Other                     |       | 2                                    | %          | 1                                  | %          | 1 | % | 1 | % |
|                           |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |

 

No customer accounted formore than 10% of total revenue for the three and six months ended June 30,2009 and 2008. Accounts receivable from one customer accounted for 11% of ournet accounts receivable balance at June 30, 2009.  Nocustomer had a balance in excess of 10% of our net accounts receivable at June 30,2008.

 

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Weexpect our net sales for 2009 to be in the range of approximately $130.0million to $133.0 million, which would represent 27% to 30% growth from netsales in 2008 as we continue to increase the number of physicians performingthe*Essure* procedure. We willalso continue our programs aimed at raising consumer awareness of the*Essure* procedure, such as radio, printand television advertising. We believe our revenue growth in 2009 and beyondwill be significantly influenced by how successful we are in achieving ourconsumer awareness objectives and physicians entering and completing training.However, as we have noted elsewhere in this Form 10-Q and risk factorsfrom our Form 10-K, our expected revenue growth involves many riskfactors, some of which are not entirely within our control, such as marketacceptance of the*Essure* systemand third party reimbursement for the device.

 

*Gross Profit*

 

Costof goods sold for thethree months ended June 30, 2009 was $6.7 million as compared to $5.2million for the three months ended June 30, 2008, this represents anincrease of $1.5 million, or 28%.  Grossmargin for the three months ended June 30, 2009 and 2008 was 80%.   For the six months ended June 30,2009, gross margin was 79%, which represents an improvement from a gross marginof 77% for the six months ended June 30, 2008.  The year-over-year increasein gross margin is related to lower manufacturing costs associated with higherunit volume and a domestic price increase implemented during the first quarterof 2009.  Margins in the second quarterof 2009 were negatively impacted by the lower international average sellingprices due to the stronger U.S. dollar in the second quarter of 2009 ascompared to the second quarter of 2008. Our gross profit margin will vary as our sales mix changes. Increases insales of our devices through distributors in international markets will tend todecrease our overall gross profit margin.

 

*Research and Development Expenses*

 

Research and developmentexpenses, which include expenditures related to product development, clinicalresearch and regulatory affairs, were $2.0 million and $1.6 million for thethree months ended June 30, 2009 and 2008, respectively, which representsan increase of $0.4 million, or 22%. The primary reason for the increase is dueto higher consulting and expensed demonstration units, offset by a minordecreased related to payroll.  Research anddevelopment expenses were $3.4 million and $3.6 million for the six monthsended June 30, 2009 and 2008, respectively, which represents a decrease of $0.2 million, or 4%.  The decrease results primarily from payroll,consulting, and clinical trials of $0.7 million, offset by increased inventoryand project prototype expenses of $0.5 million.

 

Research and developmentexpenses reflect clinical expenditures and product development, which aresubstantially related to the ongoing development and associated regulatoryapprovals of our technology. Our goal is to continue our product enhancementsover the coming years, which are intended to result in improved ease of use andclinical performance. We expect to identify and hire additional research anddevelopment personnel in the future to staff our planned research anddevelopment activities, and we expect that these costs will increase as we seekto maintain our leading position in the market for permanent female birthcontrol.

 

*Selling, General and AdministrativeExpenses*

 

Selling, general andadministrative spending for the three months ended June 30, 2009 was $23.3million as compared to $20.1 million for the three months ended June 30,2008, which represents an increase of $3.2 million, or 16%. The increase isprimarily due to increased domestic advertising expenditures of $1.3 millionprimarily for our consumer-awareness campaign. This campaign involves television, radio and print media and is intendedto drive consumer awareness of the *Essure*procedure. The increase also reflects, increased consulting expenses of $1.2million and increases in payroll, travel, bank fees of approximately 1.0million.  These increases were offset bya decrease in demo units and depreciation of $0.3 million.

 

Selling,general and administrative spending for the six months ended June 30, 2009were $45.9 million as compared to $40.2 million for the six months ended June 30,2008, which represents an increase of $5.7 million, or 14%.  The increases were primarily the result ofpayroll and payroll related expenditures of $1.1 million, consulting expensesof $1.9 million, advertising expenses of $2.1 million, demo units, insurance,and professional education of $0.6 million. We expect selling, general and administrative expenses to decrease inthe third quarter of 2009 as we expect to spend less on our consumer awarenesscampaign as compared to the second quarter of 2009.

 

*Total interest income and expenses and other expenses, net*

 

Totalinterest income and expenses and otherexpenses, net for the three months ended June 30, 2009 was a netexpense of $1.5 million as compared to a net expense of $1.1 million for thethree months ended June 30, 2008, which represents an increase of $0.4million or 32%. Total interest incomeand expenses and other expenses, net for the six months ended June 30,2009 was a net expense of $3.1 million as compared to a net expense of $2.1million for the six months ended June 30, 2008, which represents anincrease of $1.0 million or 48%. Interest income in the threeand six months ended June 30, 2009 was lower by $0.2 million and $0.7million compared with the three and six months ended June 30, 2008,respectively. Interest income was negatively impacted due to lower interestrates on the Company’s investment portfolio, which consists of auction ratesecurities and money market funds that are currently earning lower interestrates compared to 2008.

 

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InMay 2008, the FASP issued FSP APB 14-1, *Accountingfor Convertible DebtInstruments That May Be Settled in Cash upon Conversion (Including PartialCash Settlement)*, orFSP APB 14-1, which clarifies the accounting for convertible debt instrumentsthat may be settled in cash upon conversion, including partial cashsettlement.  FSP APB 14-1 specifies thatan issuer of such instruments should separately account for the liability andequity components of the instruments in a manner that reflect the issuer’snon-convertible debt borrowing rate which interest costs are recognized insubsequent periods.  FSP APB 14-1 iseffective for fiscal years beginning after December 15, 2008, andretrospective application is required for all periods presented.  We have adopted FSP APB 14-1 with our firstquarter of fiscal 2009.  The adoptionresulted in an increase of interest expense of $1.0 million and $2.1 millionfor each of the three and six months ended June 30, 2009 and an increaseof interest expense of $0.9 million and $1.9 million for each of the three andsix months ended June 30, 2008.   See Note 9 — Convertible Senior Notes.

 

*Provision for income taxes*

 

 Inaccordance with SFAS No. 109, *Accounting for IncomeTaxes*, the provision for income taxes is computed using the assetand liability method, under which deferred tax assets and liabilities arerecognized for the expected future tax consequences of temporary differencesbetween the financial reporting and tax bases of assets and liabilities, andfor operating losses and tax credit carryforwards.  Deferred tax assetsand liabilities are measured using the currently enacted tax rates that applyto taxable income in effect for the years in which those tax assets areexpected to be realized or settled.  The Company records a valuationallowance to reduce deferred tax assets to the amount that is believed morelikely than not to be realized. We evaluate the need for a valuation allowancefor our deferred tax assets. Due to our cumulative pre-tax U.S. losses and the currentuncertainty of our ability to realize our U.S. deferred tax assets, a valuationallowance in an amount equal to our U.S. deferred tax assets has been recorded.

 

Weadopted the provisions of FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*, or FIN 48, on January 1,2007.  The adoption of the provisions of FIN 48 did not have a materialimpact on our financial position and results of operations.   We havenot been audited by the Internal Revenue Service or any state income or franchisetax agency.   As of June 30, 2009, our federal returns for theyears ended 2005 through the current period and most state returns for theyears ended 2004 through the current period are still open to examination. Inaddition, all of the net operating losses and research and development creditcarryforwards that may be used in future years are still subject to inquirygiven that the statute of limitation for these items would be from the year ofthe utilization.

 

Forthe three and six months ended June 30, 2009, we recorded approximately$0.1 million and $0.2 million of income tax expense, respectively, attributableto Conceptus SAS.   For the three and six months ended June 30,2008, we recorded approximately $0.2 million of income tax expense, respectively,attributable to Conceptus SAS.   The tax returns for Conceptus SASfor the years ended 2005 to 2007 were examined and closed by the French taxauthorities in 2008.

 

Oureffective tax rate was 5% for the six months ended June 30, 2009, and 2%for the six months ended June 30, 2008, respectively.  The Company’seffective rate for the six months ended June 30, 2009 is primarily relatedto our foreign operations.

 

Theamount of unrecognized tax benefits at June 30, 2009 was approximately$2.4 million, of which, if ultimately recognized, approximately$0.5 million would decrease the effective tax rate in the period in whichthe benefit is recognized. The remaining amount would be offset by the reversalof related deferred tax assets on which a valuation allowance is placed.

 

Wedo not expect our unrecognized tax benefits to change significantly over thenext 12 months.  In connection with the adoption of FIN 48, we recognizeinterest and penalties accrued on any unrecognized tax benefits as a componentof income tax expense.

 

**Liquidity and Capital Resources**

 

Wehave experienced significant operating losses since inception and, as of June 30,2009, had an accumulated deficit of $247.2 million. Although we were profitablein the third and fourth quarters of 2008, we experienced a net loss in thefirst half of 2009 and there is a risk that we may not sustainprofitability.  We will continue toexpend substantial resources in the selling and marketing of the *Essure* system in the United States andabroad.  We will be in a net lossposition unless sufficient revenues can be generated to offset expenses.

 

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InDecember 2006, we filed a shelf Registration Statement on Form S-3,through which we may sell from time to time any combination of debt securities,common stock, preferred stock and warrants, in one or more offerings. After thesale of our senior convertible notes described below, we had $63,750,000remaining available for sale under this shelf registration statement.

 

InFebruary 2007, we issued and sold under the shelf Registration Statementan aggregate principal amount of $86,250,000 of our 2.25% convertible senior notesdue 2027. These notes bear a 2.25% interest per annum on the principal amount,payable semiannually in arrears on February 15 and August 15 of eachyear, beginning on August 15, 2007. Interest accrual on the notescommenced on February 12, 2007. The notes will mature on February 15,2027, unless earlier redeemed, repurchased or purchased by us or converted.

 

Thenotes are convertible into cash and, if applicable, shares of our common stockbased on an initial conversion rate, subject to adjustment, of 35.8616 sharesper $1,000 principal amount of notes (which represents an initial conversionprice of approximately $27.89 per share), in certain circumstances. Uponconversion, a holder would receive cash up to the principal amount of the noteand our common stock in respect of such note’s conversion value in excess ofsuch principal amount.   We mayrepurchase such securities from time to time.

 

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

 

Inaddition, in connection with the issuance of the notes, we entered intoseparate convertible note hedge transactions and separate warrant transactionsto reduce the potential dilution upon conversion of the notes (“Call SpreadTransactions”).  As a result of the CallSpread Transactions, we do not anticipate experiencing an increase in the totalshares outstanding from the conversion of the notes unless the price of ourcommon stock appreciates above $36.47 per share, effectively increasing theconversion premium to us to $36.47. We purchased call options to coverapproximately 3.1 million shares of our common stock, which is the numberof shares underlying the notes. In addition, we sold warrants permitting thepurchasers to acquire up to approximately 3.1 million shares of our commonstock.

 

Asof June 30, 2009, we held $48.3 million (par value) in auction ratesecurities (“ARS”) backed by federal and state student loans which are variablerate debt instruments and bear interest rates that reset approximately every 20-30days. These ARS have a contractual maturity ranging from 2028 through 2047.

 

OurARS are long-term debt instruments backed by student loans, a substantialportion of which are guaranteed by the United Statesgovernment.  Prior to 2008, our ARS were highly liquid, using a Dutchauction process that resets the applicable interest rate at predeterminedintervals, typically every 20-30 days, to provide liquidity atpar.  We have experienced failed auction in 2009 and 2008 on most ofour ARS having settlements of nominal amounts in 2009.   The failures of these auctions do not affectthe value of the collateral underlying the ARS, and we continue to earn andreceive interest on our ARS at a pre-determined formula with spreads tied toparticular interest rate indexes.

 

InNovember 2008, we accepted an offer from UBS AG, providing us with rightsrelated to our ARS (the “Rights”).  The Rights permit us torequire UBS to purchase our ARS at par value, which is defined as the priceequal to the liquidation preference of the ARS plus accrued but unpaiddividends or interest, at any time during the period of June 30, 2010through July 2, 2012.  Conversely, UBS has the right, in itsdiscretion, to purchase or sell our ARS at any time until July 2, 2012, solong as we receive payment at par value upon any sale ordisposition.  We expect to sell our ARS under the Rights at parvalue.  However, if the Rights are not exercised before July 2,2012 they will expire and UBS will have no further rights or obligation to buyour ARS.  So long as we hold our ARS, they will continue to accrueinterest as determined by the auction process or the terms of the ARS if theauction process fails. We had a small settlement of our ARS in the three monthsended June 30, 2009 of $0.1 million at full par value.

 

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UBS’sobligations under the Rights are not secured by its assets and do not requireUBS to obtain any financing to support its performance obligations under theRights.  UBS has disclaimed any assurance that it will havesufficient financial resources to satisfy its obligations under the Rights.

 

InNovember 2008, we entered into a revolving credit line agreement with UBS,payable on demand, in an amount equal to 75% of fair value of our ARS at net nocost, meaning that the interest we pay on the credit line will not exceed theinterest that we receive on the ARS that we have pledged as security for thecredit line. Additionally, under the terms of the settlement agreement, if UBSis able to sell our ARS at par value, proceeds would be utilized to first repayany outstanding balance under the demand revolving credit line. We are stillable to sell the ARS, but in such a circumstance, if we sold at less than parvalue, we would not be entitled to recover the par value support from UBS.   As of June 30, 2009 our loan balancewas $32.1 million and during the six months ended June 30, 2009 we borrowedan additional $2.1 million under this line of credit.

 

Asof June 30, 2009, we had cash and cash equivalents of $63.3 million,compared to $54.7 million at December 31, 2008. The increase of $8.5million is primarily due to cash proceeds from operating and financingactivities offset by cash used in investing activities.   We believe that our existing cash and cashequivalents will be sufficient to meet our cash requirements for at least thenext twelve months.

 

Inthe future, depending on a variety of factors, we may need to raise additionalfunds through bank facilities, debt or equity offerings or other sources ofcapital.  Additional financing may not beavailable when needed or on terms acceptable to us.

 

*Operating Activities*

 

Net cash provided by operatingactivities was $8.0 million in the six months ended June 30, 2009, ascompared to $2.1 million used in the six months ended June 30, 2008.  Net cash provided by operating activities inthe six months ended June 30, 2009 was primarily related to a net loss of$4.9 million, impacted by:

 

·                  $7.6 million increase corresponding to the accretion of notespayable, stock based compensation, depreciation and amortization of fixedassets, debt issuance costs and intangible amortization;

·                  Increase in accounts receivable of $2.3 million as a resultof our increase in sales;

·                  Net decrease of other assets and other current assets of$4.7 million primarily due toutilization of prepayments for our advertising, primarily in the UnitedStates;

·                  A decrease in inventories of $1.0 million; and

·                  An increase in other accrued and longterm liabilities of $1.5 million primarilyfor 2009 incentive plans.

 

Wemonitor our accounts receivable turnover closely to ensure that receivables arecollected timely and have established a credit and collection policy tofacilitate our collection process and reduce our credit loss exposure. Weexpect to grow our business and increase our revenues and to continue to usecash received from collection of outstanding receivables to fund our operations;

 

*Investing Activities*

 

Net cash used ininvesting activities for the six months ended June 30, 2009 was $2.3million, primarily due to capital expenditures primarily related topurchases of additional hysteroscopy equipment.

 

*Financing Activities*

 

Net cash provided byfinancing activities in the six months ended June 30, 2009 was $2.9million from the issuance of common stock for our stock option programs andproceeds from our revolving credit line agreement with UBS.  See Note 10 — Credit Line of our Notes toCondensed Consolidated Financial Statements.

 

We believe that ourexisting cash, cash equivalents, investments and credit facility will besufficient to meet our cash requirements for the foreseeable future.

 

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**CRITICAL ACCOUNTING ESTIMATES ANDPOLICIES**

 

The preparation offinancial statements in conformity with accounting principles generally acceptedin the United States requires management to make estimates and assumptions incertain circumstances that affect amounts reported in the accompanyingconsolidated financial statements and related footnotes. A description of ourcritical accounting estimates and policies is included in our Annual Report on Form 10-Kfor the year ended December 31, 2008. In preparing these financialstatements, management has made its best estimates and judgments of certainamounts included in the financial statements, giving due consideration tomateriality. The primary estimates underlying our financial statements includereserves for obsolete and slow moving inventory, allowance for doubtfulaccounts receivable, product warranty, impairment for long-lived assets, incometaxes, stock-based compensation and contingent liabilities. Other accountingpolicies are described in section “Critical Accounting Estimates and Policies”in our Financial Statements included in our Annual Report on Form 10-K forthe year ended December 31, 2008. Application of these policies involvesthe exercise of judgment and use of assumptions as to future uncertainties and,as a result, actual results could differ from these estimates.

 

*Recent Accounting Pronouncements*

 

InDecember 2007, the FASB issued Statement No. 141 (revised 2007) *Business Combinations,* or SFAS 141(R), and Statement No. 160,*Noncontrolling Interests in Consolidated FinancialStatements*, or SFAS 160, an amendment of Accounting ResearchBulleting No. 51, or ARB 51. SFAS 141(R) will impact financialstatements on the acquisition date and in subsequent periods. Some of thechanges, such as the accounting for contingent consideration, will introducemore volatility into earnings and may impact our acquisition strategy.Additionally, in February 2009, FASB issued FASB Staff Position FAS141(R)-a, *Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies*,which will amend the provisions related to the initial recognition andmeasurement, subsequent measurement and disclosure of assets and liabilitiesarising from contingencies in a business combination under SFAS 141(R).  SFAS 160 will change the accounting andreporting for minority interests, which will be re-characterized as non-controllinginterests and classified as a component of equity. In addition, SFAS 141(R) willbe applied prospectively and SFAS 160 will require retroactive adoption of thepresentation and disclosure requirements for existing minority interests, whilethe remaining requirements of SFAS 160 will be applied prospectively. SFAS 141(R) andSFAS 160 are effective on January 1, 2009. The adoption of SFAS 141(R) and SFAS 160 did not have a materialimpact on our financial condition, results of operations, or cash flows.

 

EffectiveJanuary 1, 2008, we adopted SFAS No. 157, *Fair Value Measurements*, or SFAS 157, as amended by FSPSFAS 157-1, *Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13*, or FSP SFAS 157-1,and FSP SFAS 157-2, *Effective Date of FASBStatement No. 157*, or FSP SFAS 157-2.  SFAS 157defines fair value, establishes a framework for measuring fair value in generallyaccepted accounting principles and provides for expanded disclosure about fairvalue measurements.  SFAS 157 applies prospectively to all otheraccounting pronouncements that require or permit fair valuemeasurements.  FSP SFAS 157-1 amended SFAS 157 to exclude from thescope of SFAS 157 certain leasing transactions accounted for under SFAS No. 13,*Accounting for Leases.*  FSPSFAS 157-2 amended SFAS 157 to defer the effective date of SFAS 157 for allnon-financial assets and non-financial liabilities except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis to fiscal years beginning after November 15, 2008, andinterim periods within those fiscal years.  We adopted FSP SFAS 157-2in the first quarter of fiscal 2009.  SeeNote 4 - Fair Value Measurements.

 

InMay 2008, the FASB issued FSP APB 14-1, *Accountingfor Convertible DebtInstruments That May Be Settled in Cash upon Conversion (Including PartialCash Settlement)*, orFSP APB 14-1, which clarifies the accounting for convertible debt instrumentsthat may be settled in cash upon conversion, including partial cashsettlement.  FSP APB 14-1 specifies thatan issuer of such instruments should separately account for the liability andequity components of the instruments in a manner that reflect the issuer’snon-convertible debt borrowing rate which interest costs are recognized insubsequent periods.  FSP APB 14-1 iseffective for fiscal years beginning after December 15, 2008, andretrospective application is required for all periods presented.  We have adopted FSP APB 14-1 in the firstquarter of fiscal 2009 and as a result have made certain adjustments to thepresentation of our financial condition, results of operations, and cashflows.  See Note 9 — Convertible SeniorNotes.

 

In October 2008, theFinancial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)SFAS No. 157-3, *Determining the FairValue of a Financial Asset When the Market for That Asset is Not Active*, or FSP SFAS 157-3*.* FSP SFAS 157-3 clarifies theapplication of SFAS 157, which we have adopted as of January 1, 2008,in situations where the market for a particular financial asset is not active.We have considered the guidance provided by FSP SFAS 157-3 in our determinationof estimated fair values, and the impact was not material.

 

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In April 2009, theFASB issued FSP SFAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments*, or FSP SFAS 107-1 and APB 28-1*.*  This FSP amends SFAS 107, *Disclosuresabout Fair Value of Financial Instruments*, to requirepublicly-traded companies, as defined in APB Opinion No. 28, *Interim Financial Reporting*, to provide disclosures on thefair value of financial instruments in interim financialstatements.  Prior to the issuance of FSP FAS No. 107-1 and APBOpinion No. 28-1, the fair values of those assets and liabilities weredisclosed only once each year. With the issuance of FSP FAS 107-1 and APB 28-1,we are required to disclose this information on a quarterly basis, providingquantitative and qualitative information about fair value estimates for allfinancial instruments not measured in the Condensed Consolidated Balance Sheetsat fair value. FSP SFAS 107-1 and APB 28-1 are effective for interim periodsending after June 15, 2009. We have adopted the provisions of FSPSFAS 107-1 and APB 28-1 effective the second quarter of fiscal 2009.  See Note 4 - Fair ValueMeasurements and Note 9 — Convertible Senior Notes.

 

In April 2009, theFASB issued FSP SFAS No. 115-2 and SFAS No. 124-2 *Recognition and Presentation of Other-Than-TemporaryImpairments*, or FSP SFAS115-2 and SFAS 124-2*,*which modifiesthe other-than-temporary impairment guidance for debt securities throughincreased consistency in the timing of impairment recognition and enhanceddisclosures related to the credit and noncredit components of impaired debtsecurities that are not expected to be sold. In addition, increased disclosuresare required for both debt and equity securities regarding expected cash flows,credit losses, and an aging of securities with unrealized losses. FSPSFAS 115-2 and SFAS 124-2 are effective for interim and annualreporting periods that end after June 15, 2009. We have adopted theprovisions of FSP SFAS 115-2 and SFAS 124-2 effective the second quarter offiscal 2009. We have considered the guidance provided by FSP SFAS 115-2and SFAS 124-2 in our determination of impairment, and the impact was notmaterial.  See Note 9 — ConvertibleSenior Notes.

 

In April 2009, theFASB issued FSP SFAS 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly,* or FSPSFAS 157-4, which provides additional guidance for estimating fair value inaccordance with SFAS 157 when the volume and level of activity for the asset orliability have significantly decreased.  This FSP re-emphasizes thatregardless of market conditions the fair value measurement is an exit priceconcept as defined in SFAS 157.  This FSP clarifies and includesadditional factors to consider in determining whether there has been asignificant decrease in market activity for an asset or liability and providesadditional clarification on estimating fair value when the market activity foran asset or liability has declined significantly.  The scope of thisFSP does not include assets and liabilities measured under level 1inputs.  FSP SFAS 157-4 is applied prospectively to all fair valuemeasurements where appropriate and is effective for interim and annual periodsending after June 15, 2009.  We have adopted the provisions ofFSP SFAS 157-4 effective the second quarter of fiscal 2009 which did not havean impact on our condensed consolidated financial statements.

 

In May 2009, theFASB issued SFAS No. 165, *SubsequentEvents,*or SFAS 165. SFAS 165 establishes general accounting for anddisclosure of events that occur after the balance sheet date but beforefinancial statements are issued or available to be issued. This statement alsooutlines the circumstances under which an entity would need to recordtransactions occurring after the balance sheet date in the financialstatements. These new disclosures identify the date through which the entityhas evaluated subsequent events. SFAS 165 is effective for interim or annualfinancial periods ending after June 15, 2009. See Note 1 — Basis ofPresentations for disclosure of the date to which subsequent events aredisclosed.

 

In June 2009,the FASB issued SFAS No. 167, *Amendments to FASBInterpretation No. 46(R) *or SFAS 167, which modifies howwe determines when an entity that is insufficiently capitalized or is notcontrolled through voting (or similar rights) should be consolidated. SFAS 167clarifies that the determination of whether we are required to consolidate anentity is based on, among other things, an entity’s purpose and design and powerto direct the activities of the entity that most significantly impact theentity’s economic performance. SFAS 167 requires an ongoing reassessment ofwhether we are the primary beneficiary of a variable interest entity. SFAS 167also requires additional disclosures about our involvement in variable interestentities and any significant changes in risk exposure due to that involvement.SFAS 167 is effective for fiscal years beginning after November 15, 2009and is effective for us on January 1, 2010. We do not expect SFAS 167 tohave an impact on our financial position and results of operations in futureperiods, but the nature and magnitude of the specific effects will depend uponthe nature, terms and size of the transactions we may consummate in the future.

 

In June 2009,the FASB issued Statement No. 168, *TheFASB Accounting Standards Codification**TM** and the Hierarchy of Generally AcceptedAccounting Principles,* or SFAS 168. SFAS 168 establishes the *FASBAccounting Standards Codification*(the “Codification”)as the source of authoritative accounting principles recognized by the FASB tobe applied by nongovernmental entities in the preparation of financialstatements in conformity with U.S. GAAP. Rules and interpretive releasesof the SEC under authority of federal securities laws are also sources ofauthoritative U.S. GAAP for SEC registrants. All guidance contained in theCodification carries an equal level of authority. SFAS 168 is effective forfinancial statements issued for interim and annual periods ending after September 15,2009. The Codification will supersede all existing non-SEC accounting andreporting standards. All other non-grandfathered, non-SEC accounting literaturenot included in the Codification will become non-authoritative. Following SFAS168, the FASB will not issue new standards in the form of Statements, FASBStaff Positions, or Emerging Issues Task Force Abstracts. Instead, it willissue Accounting Standards Updates. The FASB will not consider AccountingStandards Updates as authoritative in their own right. Accounting StandardsUpdates will serve only to update the Codification, provide backgroundinformation about the guidance and provide the bases for conclusions on thechange(s) in the Codification. We will update our disclosures to conformto the Codification in our Form 10-Q for the third quarter of 2009.

 

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**Item3. Quantitative and Qualitative Disclosures About Market Risk**

 

Thefollowing discusses our exposure to market risk related to changes in interestrates and foreign currency exchange rates. These exposures may change over timeas business practices evolve and could have a material adverse impact on ourfinancial results.

 

*Interest Rate Risk*:  We have been exposedto interest rate risk through interest earned on holdings of available-for-saleand trading marketable securities. We have experienced failed auctions in 2009and 2008 of most all of our ARS and there is no assurance that auctions onthese ARS in our investment portfolio will succeed in the future. As a result,our ability to liquidate our investments in the near term may be limited, andour ability to fully recover the carrying value of our investments may belimited or non-existent. An auction failure means that the parties wishing tosell securities could not carry out the transaction. If the issuers of thesesecurities are unable to successfully close future auctions or their creditratings deteriorate, we may be required to record further impairment charges onthese investments. It could take until the final maturity of the underlyingnotes (up to 38 years) to realize our investments’ recorded value. As of June 30,2009 we held $48.3 million (par value) in ARS which are variable rate debtinstruments and bear interest rates that are due to reset approximately every20-30 days. All of these ARS are classified as long term investments inour consolidated balance sheet at June 30, 2009 with an expected maturityof greater than one year. Due in part to these factors, our future investmentincome may fall short of expectations due to changes in interest rates or wemay suffer losses in principal if forced to sell securities that have declinedin market value due to changes in interest rates. Interest rates that mayaffect these items in the future will depend on market conditions and maydiffer from the rates we have experienced in the past.

 

*Foreign Currency Exchange Risk:*    Historically,all of our expenses and our revenues were typically denominated in U.S.Dollars. On January 7, 2008, we acquired all the outstanding shares ofConceptus SAS.  As a result of thistransaction, Conceptus SAS became a wholly owned subsidiary and its results ofoperations have been consolidated with our results of operations for financialreporting purposes as of the acquisition date. The functional currency ofConceptus SAS is the Euro; therefore, we are now exposed to changes in foreignexchange rates.

 

OnDecember 15, 2008, we incorporated Conceptus Medical Limited (“CML”) asour United Kingdom subsidiary.  Weestablished CML to serve as our direct sales office in the United Kingdom afterthe termination of our distributor agreement during the fourth quarter of2008.  We believe the establishment ofCML continues to expand our direct presence in international markets and willincrease our revenues as we will recognize sales at end user pricing ascompared to the price at which we previously sold to the distributor.  The functional currency of CML is the BritishPound; therefore, we are now further exposed to changes in foreign exchangerates. To date, sales from CML have not been material; hence we believe theexposure to the British Pound to be minimal.

 

Weare exposed to foreign exchange rate fluctuations as we translate the financialstatements of our foreign subsidiaries into U.S. Dollars in consolidation. Ifthere is a change in foreign currency exchange rates, the translation of theforeign subsidiaries’ financial statements into U.S. Dollars will lead totranslation gains or losses which are recorded net as a component ofaccumulated other comprehensive loss. We will seek to manage our foreignexchange risk through operational means, including managing same currencyrevenues in relation to same currency expenses, and same currency assets inrelation to same currency liabilities. During three months ended June 30, 2009 we entered into forwardcontracts to buy U.S dollars at fixed intervals in the retail market in anover-the-counter environment.  As of June 30,2009, we had foreign currency forward contracts to sell 5.2 million Euros inexchange for $6.9 million U.S. dollars maturing in July through November 2009.  As of June 30, 2009 these forwardcontracts are recorded at a value of $0.3 million in other accrued liabilitieson our condensed consolidated balance sheet. We have outstanding intercompany receivables from Conceptus SAS of $6.9million as of June 30, 2009.  Weexpect the changes in the fair value of the intercompany receivables to bematerially offset by the changes in the fair value of the derivatives.

 

Thepurpose of these forward contracts is to minimize the risk associated withforeign exchange rate fluctuations.  Wehave developed a foreign exchange policy to govern our forward contracts.  These foreign currency contracts do notqualify as cash flow hedges and all changes in fair value are reported inearnings as part of other income and expenses. We have not entered into any other types of derivative financialinstruments for trading or speculative purpose. Our foreign currency forward contract valuation inputs are based onquoted prices and quoted pricing intervals from public data and do not involvemanagement judgment.  Accordingly, wehave classified our outstanding foreign currency forward contract within Level2 of the fair value hierarchy and have recorded the fair value of the contractin other accrued liabilities on our consolidated balance sheet as of June 30,2009.

 

Forthe six months ended June 30, 2008, we had assumed a forward exchangecontract to hedge U.S. Dollar-denominated estimated accounts payable in 2008 inconnection with the acquisition of Conceptus SAS.  We recorded the changes of the fair value ofthe hedge contract in our results of operations for the six months ended June 30,2008.  The hedge contract was fullyutilized by December 31, 2008.

 

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AtJune 30, 2009, our intercompany receivable balance with foreignsubsidiaries is $6.9 million, with Conceptus SAS whose functional currencyis Euro, and the potential loss in fair value resulting from a hypothetical10 percent strengthening in the value of the U.S. dollar/local currencyexchange rate would be approximately $0.7 million.

 

**Item4. Controls and Procedures**

 

*Evaluation of Disclosure Controlsand Procedures:*

 

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in our Exchange Act reports is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow for timely decisions regardingrequired disclosure. In designing and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, and in reaching a reasonable level of assurance,management is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As of June 30, 2009,the end of our most recent fiscal quarter, we carried out an evaluation, underthe supervision and with the participation of our management, including ourChief Executive Officer and our Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures. Based onthe foregoing, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective.

 

*Changes in Internal Control OverFinancial Reporting:*

 

There was no change inour internal control over financial reporting during our most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

*Inherent Limitations of InternalControls*

 

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

 

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**PART II. OTHER INFORMATION**

 

**Item1. Legal Proceedings**

 

On May 22, 2009, wefiled a lawsuit in the United States District Court, Northern District ofCalifornia against Hologic, Inc., (“Hologic”) seeking declaratory judgmentby the Court that Hologic’s planned importation, use, sale or offer to sell ofits forthcoming Adiana Permanent Contraception system will infringe severalU.S. patents owned byus, including U.S. Patent Nos. 6,634,361, 6,709,667,7,237,552, 7,428,904 and 7,506,650, and an injunction prohibiting Hologic fromimporting, using, selling or offering to sell its Adiana system in the UnitedStates.  Upon FDA approval of the AdianaPermanent Contraception system, we filed an Amended Complaint in July 2009seeking a judgment that Hologic’s importation, use, sale and/or offer to sellthe system infringes the same patents mentioned above and an injunction againstsuch activity.  We also filed a motion for preliminary injunction,requesting the Court to enjoin the Adiana system pending final judgment in theaction.  As of August 7, 2009, the Court has not ruled on the motionfor preliminary injunction.

 

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

 

**Item 1A. Risk Factors**

 

*The risk factors included in ourAnnual Report as of December 31, 2008 on Form 10-K filed with theSecurities and Exchange Commission on March 13, 2009 should be consideredwhile evaluating Conceptus and our business. In addition to those factors andto other information in this Form 10-Q, the following updates to the riskfactors as of June 30, 2009 should be considered carefully whileevaluating the Company and our business.*

 

**A portion of our investmentportfolio is in auction rate securities.**

 

As of June 30,2009, we held approximately $48.3 million (par value) of investmentsconsisting entirely of auction rate securities backed by federal and statestudent loans securities.  These auctionrate securities have contractual maturities ranging from 2028 through 2047.  These investments have characteristicssimilar to short-term investments, because at pre-determined intervals,generally ranging from 20 to 30 days, there is a new auction processat which the interest rates for these securities are reset to current interestrates. At the end of each such period, we historically have either chosen toroll-over these securities or redeem the securities for cash.

 

During 2008, we experienced failed auctions of ourauction rate securities and there is no assurance that auctions on thesesecurities in our investment portfolio will succeed in the future. On December 3,2008, we accepted an offer from UBS, thefund manager with whom we hold our auction rate securities, pursuant to whichUBS issued to us Series C-2 Auction Rate Securities Rights, or Rights,which allow us to sell the auction rate securities to UBS at par value duringthe period beginning June 30, 2010 and ending July 2, 2012. Inexchange, the Company released UBS from claims that it may have for damagesrelated to the auction rate securities (other than consequential damages), andwe granted UBS the right to sell or otherwise dispose of the auction ratesecurities on its behalf (so long as we are paid the par value of the auctionrate securities upon any disposition).

 

The Rightsare subject to a number of risks. Given the substantial dislocation in thefinancial markets and among financial services companies, we cannot assure youthat UBS will ultimately have the ability to repurchase our auction ratesecurities at par, or at any other price during the put period describedabove.  We will be required to periodically assess theeconomic ability of UBS to meet that obligation in assessing the fair value ofthe Rights. Moreover,if we choose to not exercise the Rights or if UBS is unable to honor theRights, our ability to liquidate our investments in the near term may belimited, and our ability to fully recover the carrying value of our investmentsmay be limited or non-existent. If issuers of these securities are unable tosuccessfully close future auctions or their credit ratings deteriorate, we mayin the future be required to record further impairment charges on theseinvestments. It could take until the final maturity of the underlying notes (upto 38 years) to realize our investments’ recorded value. Based on ourability to access our cash and cash equivalents, expected operating cash flows,and our other sources of cash, we do not anticipate that the current lack ofliquidity on these investments will affect our ability to continue to operateour business in the ordinary course. However, we can provide no assurance as towhen these investments will again become liquid or as to whether we mayultimately have to recognize additional impairment charges in our results ofoperations with respect to these investments.

 

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

 

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Themedical device industry is highly competitive and is characterized by rapid andsignificant technological change.  Tocompete successfully, we will need to continue to demonstrate the advantages ofour *Essure* products and technologies overwell-established alternative procedures, products and technologies, andconvince physicians and other healthcare decision makers of the advantages ofour products and technologies. As we commercialize and market the*Essure* system, we expect to compete with:

 

·                  other methods of permanent contraception, inparticular tubal ligation;

 

·                  other methods of non-permanent contraception,including devices such as intrauterine devices, or IUDs, vaginal rings, condomsand prescription drugs such as the birth control pill, injectable andimplantable contraceptives and patches; and

 

·                  other companies that may be developingpermanent contraception devices that are similar to or otherwise compete withthe*Essure* system.

 

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

 

Asof June 30, 2009, we were aware of one company, Hologic, Inc. whichis attempting to bring a transcervical sterilization device to the market.  In January 2009, Hologic received CEmarking approval for its permanent contraception system, allowing it to marketits product in the 27 countries of the European Union (EU) and three of thefour member states of the European Free Trade Associations (EFTA).  In July 2009, the FDA approved Hologic’spermanent contraception system for sale in the United States.  Hologic is in the process of registering itsproduct in Canada and Australia.  Weexpect that these developments will intensify competition in the industry.

 

Manyof our competitors possess a larger women’s health focused sales force and haveaccess to the greater resources required to develop and market a competitiveproduct than we do. In addition, new competition and products may arise due toconsolidation within the industry and other companies may develop products thatcould compete with the *Essure* system.Our competitive position also depends on:

 

·                  widespread awareness, acceptance and adoptionof our *Essure*product;

 

·                  our ability to respond promptly to medicaland technological changes through the development and commercialization of newproducts;

 

·                  availability of coverage and reimbursementfrom third-party payors, insurance companies and others for the *Essure*procedure;

 

·                  the manufacture and delivery of our productsin sufficient volumes on time, and accurately predicting and controlling costsassociated with manufacturing, installation, warranty and maintenance of theproducts;

 

·                  our ability to attract and retain qualifiedpersonnel;

 

·                  the extent of our patent protection or ourability to otherwise develop proprietary products and processes; and

 

·                  securing sufficient capital resources toexpand our sales and marketing efforts.

 

Theseand other competitive factors may render the *Essure*system obsolete or noncompetitive or reduce demand for the *Essure*system.

 

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**Future changes in financialaccounting standards or practices may adversely affect our financial results.**

 

Changes in accountingstandards or practices, particularly changes related to convertible debtinstruments such as our senior convertible notes, may have a significant effecton our reported results and may affect our reporting of transactions completedbefore the change is effective. New accounting pronouncements and varyinginterpretations of accounting pronouncements have occurred and may occur in thefuture. For example, we recently adopted FSP APB 14-1 in the first quarter offiscal 2009. The adoption resulted in an increase of interest expense of $1.0million and $2.1 million for each of the three and six months ended June 30,2009 and a retrospective increase of interest expense of $0.9 million and $1.9million for each of the three and six months ended June 30, 2008.  Similar changes to existing rules or thequestioning of current practices may adversely affect our reported financialresults or the way we conduct our business.

 

**Thecurrent outbreak of H1N1 Flu (“Swine Flu”) may disrupt the manufacture of ourproducts and our ability to conduct clinical trials in Mexico.**

 

Ourmanufacturing operations in Mexico may be impacted by the April 2009outbreak of H1N1 Flu (“Swine Flu”).  Ourproduct is manufactured by Accellent, Inc., or Accellent, which is athird-party subcontractor located in Mexico. In addition, we are in the process of developing manufacturingcapabilities at Avail, another third-party subcontractor located inMexico.  Recently, the Mexican governmentasked that all non-essential services shut down for a five day period beginningon May 1, 2009.  Accellent and Availhave remained open, but they may be forced to temporarily shut down theiroperations if the Swine Flu outbreak worsens. If Accellent and Avail temporarily shut down their operations, we maynot be able to supply products sufficient to meet demand, which may harm ourbusiness.  Currently, we are unable tostockpile additional inventory to mitigate the risk of a shortfall in oursupply of products.

 

Inaddition, if the Swine Flu outbreak in Mexico worsens, we may also be forced todelay our planned clinical trials which are conducted in Mexico or re-locatethem to another location.  This delay mayhave an adverse effect on our planned clinical trials which in turn could delayfuture product offerings. We have constructed a Swine Flu contingency plan forour manufacturing operations and planned clinical trials in Mexico, but wecannot assure you that this contingency plan will be successful or that theSwine Flu outbreak will not adversely impact our operations.

 

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**Item 4. Submission of Matter to a Vote of SecurityHolders**

 

OnJune 5, 2009, the Annual Meeting of Stockholders of Conceptus, Inc.was held in Mountain View, California. The matters voted upon and approved at the meeting, and the number ofaffirmative and negative votes cast with respect of each matter were asfollows:

 
|                                |   | **Votes  for** |   | **Votes**    |   |   |   |   |   |   |
|-------------------------------------|--------|----------------|--------|--------------|--------|--------|--------|--------|--------|--------|
|                                |   | **Nominee**    |   | **Withheld** |   |   |   |   |   |   |
| Proposal  I                         |   |           |   |         |   |   |   |   |   |   |
| Election  of Class I Directors |   |           |   |         |   |   |   |   |   |   |
| Elected:                            |   |           |   |         |   |   |   |   |   |   |
| -  Kathryn A. Tunstall              |   | 28,940,321     |   | 613,143      |   |   |   |   |   |   |
| -  Robert V. Toni                   |   | 28,998,280     |   | 555,184      |   |   |   |   |   |   |

 
| ** **                                                                                                                                                                       | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **No-Vote** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Proposal  II                                                                                                                                                                     |       |       |       |        |       |        |       |        |       |
| To  ratify the appointment of PricewaterhouseCoopers LLP as the independent  registered public accounting firm of the Company for the fiscal year ending  December 31, 2009 |       | 29,543,149 |       | 5,297       |       | 5,018       |       | 0           |       |

 

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**Item 6.Exhibits**

** **
| **Number** | ** ** | **Description**                                                                                                            |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------|
| 10.1       |       | Supply Agreement, dated June 1, 2009, between  Accellent Inc. and Conceptus Incorporated.*                            |
| 10.2       |       | Amended and Restated Change in Control Agreement,  dated January 1, 2009, between the Company and Katherine Tunstall. |
| 31.1       |       | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                  |
| 31.2       |       | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                  |
| 32.1       |       | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                  |
| 32.2       |       | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                  |

 

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* Portions of this agreementhave been requested to be omitted pursuant to a confidential treatmentrequest.  The redacted information hasbeen filed separately with the SEC.

 

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**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

Date: August 07, 2009

 

Conceptus, Inc.

 
| /s/ Gregory E. Lichtwardt           |   |
|-------------------------------------|--------|
| Gregory E. Lichtwardt               |   |
| Executive Vice President, Treasurer |   |
| and Chief Financial Officer         |   |

 

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