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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 SECURITIES  EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

** **

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

** **

**OR**

 
| **o** | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES**

**EXCHANGE 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 30,727,588shares of Registrant’s Common Stock issued and outstanding as of November 1,2009.

 

 

 

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**CONCEPTUS,INC.**

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

 
| ** **    | ** **                                                                                                                | **Page** |
|---------------|---------------------------------------------------------------------------------------------------------------------------|----------|
|          |                                                                                                                      |     |
| Part I.  | Financial Information                                                                                                     | 2        |
|          |                                                                                                                      |     |
| Item 1.       | Condensed Consolidated  Financial Statements (Unaudited)                                                                  |     |
|          | a) Condensed Consolidated Balance Sheets as of  September 30, 2009 and December 31, 2008                        | 2        |
|          | b)  Condensed Consolidated Statements of Operations for the Three and Nine Months  Ended September 30, 2009 and 2008 | 3        |
|          | c) Condensed Consolidated Statements of Cash Flows for  the Nine Months Ended September 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                               | 21       |
|          |                                                                                                                      |     |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                               | 31       |
|          |                                                                                                                      |     |
| Item 4.       | Controls and  Procedures                                                                                                  | 32       |
|          |                                                                                                                      |     |
| Part II. | Other Information                                                                                                         | 33       |
|          |                                                                                                                      |     |
| Item 1.       | Legal Proceedings                                                                                                         | 33       |
|          |                                                                                                                      |     |
| Item 1A.      | Risk Factors                                                                                                              | 33       |
|          |                                                                                                                      |     |
| 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)**

 
| ** **                                           | ** ** | **September 30,** | ** **  | **December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------|-------------|-----------------------|------------|
| ** **                                           | ** ** | **2009**               | ** **  | **2008 (a)**          | ** ** |
| **Assets**                                           |       |                   |        |                  |       |
| Current assets:                                      |       |                   |        |                  |       |
| Cash and cash equivalents                            |       | $                      | 52,186      |                  | $          | 54,720 |   |
| Short-term investments and put option                |       | 43,841                 |        | —                |       |
| Accounts receivable, net                             |       | 16,521                 |        | 14,377                |       |
| Inventories                                          |       | 3,923                  |        | 3,829                 |       |
| Prepaids                                             |       | 2,237                  |        | 7,478                 |       |
| Other current assets                                 |       | 1,168                  |        | 1,617                 |       |
| Total current assets                                 |       | 119,876                |        | 82,021                |       |
|                                                 |       |                   |        |                  |       |
| Property and equipment, net                          |       | 9,576                  |        | 8,635                 |       |
| Debt issuance costs, net                             |       | 1,103                  |        | 1,451                 |       |
| Intangible assets, net                               |       | 28,583                 |        | 5,287                 |       |
| Long-term investments and put option                 |       | —                 |        | 48,321                |       |
| Restricted cash                                      |       | 357                    |        | 351                   |       |
| Goodwill                                             |       | 17,630                 |        | 17,105                |       |
| Other assets                                         |       | 86                     |        | 50                    |       |
| **Total assets**                                     | ** ** | **$**                  | **177,211** | ** **            | **$**      | **163,221** | ** ** |
|                                                 |       |                   |        |                  |       |
| **Liabilities and stockholders’  equity**       |       |                   |        |                  |       |
| Current liabilities:                                 |       |                   |        |                  |       |
| Accounts payable                                     |       | $                      | 5,901       |                  | $          | 3,869 |   |
| Accrued compensation                                 |       | 7,565                  |        | 6,762                 |       |
| Line of credit                                       |       | 29,500                 |        | 29,944                |       |
| Other accrued liabilities                            |       | 4,028                  |        | 4,598                 |       |
| Total current liabilities                            |       | 46,994                 |        | 45,173                |       |
|                                                 |       |                   |        |                  |       |
| Deferred tax liability                               |       | 1,348                  |        | 1,442                 |       |
| Notes payable                                        |       | 75,462                 |        | 72,344                |       |
| Other accrued liabilities                            |       | 1,078                  |        | 394                   |       |
| Total liabilities                                    |       | 124,882                |        | 119,353               |       |
|                                                 |       |                   |        |                  |       |
| Stockholders’ equity:                           |       |                   |        |                  |       |
| Common stock and additional paid-in capital          |       | 293,745                |        | 286,951               |       |
| Accumulated other comprehensive loss                 |       | (472                   | )           | (798                  | )          |
| Accumulated deficit                                  |       | (240,944               | )           | (242,285              | )          |
| Treasury stock, 77,863 shares, at cost               |       | —                 |        | —                |       |
| Total stockholders’ equity                      |       | 52,329                 |        | 43,868                |       |
|                                                 |       |                   |        |                  |       |
| **Total liabilities and  stockholders’ equity** | ** ** | **$**                  | **177,211** | ** **            | **$**      | **163,221** | ** ** |

 

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(a) Adjustedfor the retrospective adoption of ASC 470-20 *Debtwith Conversion and Other Options,*or ASC 470-20 (formally FinancialAccounting Standards Board (FASB) Staff Position No. APB 14-1 (FSP APB14-1)) See Note 9: Convertible Senior Notes - Adoption of ASC 470-20.

 

*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** | ** ** | **Nine  months ended** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **September 30,**  | ** ** | **September 30,** | ** ** |
| ** **                                                  | ** ** | **2009**                | ** ** | **2008  (a)**          | ** ** | **2009** | ** ** | **2008  (a)** | ** ** |
| Net sales                                                   |       | $                       | 34,247     |                   | $          | 26,645 |   | $ | 94,447 |   | $ | 73,452 |   |
| Cost of goods sold                                          |       | 5,044                   |       | 5,090                  |       | 17,470 |   | 15,731 |   |
| Gross profit                                                |       | 29,203                  |       | 21,555                 |       | 76,977 |   | 57,721 |   |
|                                                        | * *   | * *                | * *   | * *               |       |   |   |   |   |
| Operating expenses:                                         |       |                    |       |                   |       |   |   |   |   |
| Research and development                                    |       | 1,734                   |       | 1,611                  |       | 5,149 |   | 5,186 |   |
| Selling, general and administrative                         |       | 19,472                  |       | 16,363                 |       | 65,380 |   | 56,546 |   |
| Total operating expenses                                    |       | 21,206                  |       | 17,974                 |       | 70,529 |   | 61,732 |   |
|                                                        |       |                    |       |                   |       |   |   |   |   |
| Operating profit (loss)                                     |       | 7,997                   |       | 3,581                  |       | 6,448 |   | (4,011 | ) |
|                                                        |       |                    |       |                   |       |   |   |   |   |
| Interest income                                             |       | 125                     |       | 361                    |       | 661 |   | 1,590 |   |
| Interest expense                                            |       | (1,768                  | )          | (1,601                 | )          | (5,240 | ) | (4,751 | ) |
| Other income (expense)                                      |       | 28                      |       | (211                   | )          | (155 | ) | (390 | ) |
| Total interest income and expenses and other expenses,  net |       | (1,615                  | )          | (1,451                 | )          | (4,734 | ) | (3,551 | ) |
|                                                        |       |                    |       |                   |       |   |   |   |   |
| Income (loss) before provision for income taxes             |       | 6,382                   |       | 2,130                  |       | 1,714 |   | (7,562 | ) |
| Provision for income taxes                                  |       | 150                     |       | 113                    |       | 373 |   | 281 |   |
| Net income (loss)                                           |       | $                       | 6,232      |                   | $          | 2,017 |   | $ | 1,341 |   | $ | (7,843 | ) |
|                                                        |       |                    |       |                   |       |   |   |   |   |
| Basic income (loss) per share:                              |       |                    |       |                   |       |   |   |   |   |
| Net income (loss)                                           |       | $                       | 0.20       |                   | $          | 0.07 |   | $ | 0.04 |   | $ | (0.26 | ) |
| Shares used in per share amounts                            |       | 30,599                  |       | 30,342                 |       | 30,519 |   | 30,165 |   |
|                                                        |       |                    |       |                   |       |   |   |   |   |
| Diluted income (loss) per share:                            |       |                    |       |                   |       |   |   |   |   |
| Net income (loss)                                           |       | $                       | 0.20       |                   | $          | 0.06 |   | $ | 0.04 |   | $ | (0.26 | ) |
| Shares used in per share amounts                            |       | 31,503                  |       | 31,207                 |       | 31,116 |   | 30,165 |   |

 

----

**(a)   **Adjusted for theretrospective adoption of ASC 470-20. See Note 9:  Convertible SeniorNotes - Adoption of ASC 470-20.

 

*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)**

 
| ** **                                                                                | ** ** | **Nine  months ended** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                | ** ** | **September 30,** | ** ** |
| ** **                                                                                | ** ** | **2009**               | ** ** | **2008  (a)** | ** ** |
| **Cash flows from operating  activities**                                                 |       |                   |       |   |   |
| Net income (loss)                                                                         |       | $                      | 1,341      |   | $ | (7,843 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                   |       |   |   |
| Depreciation and amortization of property, plant  and equipment                           |       | 2,977                  |       | 1,947 |   |
| Amortization of debt issuance costs                                                       |       | 349                    |       | 348 |   |
| Accretion of note payable                                                                 |       | 3,118                  |       | 2,948 |   |
| Amortization of intangibles                                                               |       | 557                    |       | 591 |   |
| Loss on put option                                                                        |       | 1,838                  |       | — |   |
| Gain on trading securities                                                                |       | (1,933                 | )          | — |   |
| Stock-based compensation expense                                                          |       | 4,556                  |       | 4,414 |   |
| Loss on disposal of fixed assets                                                          |       | 4                      |       | 1 |   |
| Changes in operating assets and liabilities, net of  acquisition:                         |       |                   |       |   |   |
| Accounts receivable                                                                       |       | (1,746                 | )          | (1,452 | ) |
| Inventories                                                                               |       | (231                   | )          | (404 | ) |
| Other current assets and prepaids                                                         |       | 5,658                  |       | 675 |   |
| Accounts payable                                                                          |       | 1,025                  |       | (823 | ) |
| Accrued compensation                                                                      |       | 698                    |       | 501 |   |
| Other accrued and long term liabilities                                                   |       | 203                    |       | 1,434 |   |
| Net cash provided by operating activities                                                 |       | 18,414                 |       | 2,337 |   |
|                                                                                      |       |                   |       |   |   |
| **Cash flows from investing  activities**                                                 |       |                   |       |   |   |
| Purchase of Conceptus SAS, net of cash acquired                                           |       | —                 |       | (22,978 | ) |
| Purchase of investments                                                                   |       | —                 |       | (5,000 | ) |
| Sale & maturities of investments                                                 |       | 4,575                  |       | 22,050 |   |
| Restricted cash                                                                           |       | (6                     | )          | — |   |
| Purchase of intellectual property assets from  Ovion, Inc.                           |       | (23,729                | )          | — |   |
| Capital expenditures                                                                      |       | (3,487                 | )          | (4,149 | ) |
| Net cash used in investing activities                                                     |       | (22,647                | )          | (10,077 | ) |
|                                                                                      |       |                   |       |   |   |
| **Cash flows from financing  activities**                                                 |       |                   |       |   |   |
| Proceeds from line of credit                                                              |       | 4,357                  |       | — |   |
| Repayment of line of credit                                                               |       | (5,043                 | )          | — |   |
| Proceeds from issuance of common stock                                                    |       | 2,296                  |       | 3,191 |   |
| Net cash provided by financing activities                                                 |       | 1,610                  |       | 3,191 |   |
|                                                                                      |       |                   |       |   |   |
| Effect of exchange rate changes on cash and cash  equivalents                             |       | 89                     |       | (97 | ) |
|                                                                                      |       |                   |       |   |   |
| Net decrease in cash and cash equivalents                                                 |       | (2,534                 | )          | (4,646 | ) |
| Cash and cash equivalents at the beginning of the  period                                 |       | 54,720                 |       | 28,450 |   |
| Cash and cash equivalents at end of the period                                            |       | $                      | 52,186     |   | $ | 23,804 |   |

 

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**(a)   **Adjusted for theretrospective adoption of ASC 470-20. See Note 9:  Convertible SeniorNotes - Adoption of ASC 470-20.

 

*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 nine months ended September 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 nine months endedSeptember 30, 2008 include the financial results of Conceptus SAS startingon the acquisition date of January 7, 2008. All significant intercompanyaccounts and transactions have 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 (“net shares settlement”), holders will receivecash and in certain circumstances, shares of our common stock based on aninitial conversion rate, subject to adjustment, of 35.8616 shares per $1,000principal amount of notes (which represents an initial conversion price of$27.89 per share). Upon conversion, a holder would receive cash up to theprincipal amount of the note and our common stock in respect of such note’sconversion value in excess of such principal amount. This net share settlementfeature of the notes would reduce our liquidity, and we may not have sufficientfunds to pay in full the cash obligation upon such conversion. In the future,depending upon a variety of factors, we may need to raise additional fundsthrough bank facilities, debt or equity offerings or other sources of capital.Any additional equity financing may be dilutive to stockholders, and debtfinancing, if available, may involve covenants that restrict us. Additionalfunding may not be available when needed or on terms acceptable to us. If weare unable to obtain additional capital, we may be required to delay, reducethe scope of or eliminate our research and development programs or reduce oursales and marketing activities.

 

Wehave evaluated subsequent events through November 6, 2009, the date wefiled our quarterly report on Form 10-Q for the quarter ended September 30,2009.

 

*Recent Accounting Pronouncements*

 

In June 2009, AccountingStandards Codification (“ASC”) ASC 105 *Generally AcceptedAccounting Principles* or (“ASC 105”) was issued.  ASC 105 (formerly SFAS 168, *The FASB Accounting Standards Codification**TM** and the Hierarchy of Generally AcceptedAccounting Principles*) became the single official source of authoritative, nongovernmentalgenerally accepted accounting principles (“GAAP”) in the UnitedStates.  The historical GAAP hierarchy was eliminated and the ASCbecame the only level of authoritative GAAP, other than guidance issued by theSecurities and Exchange Commission.  Our accounting policies were notaffected by the conversion to ASC.  However, references to specificaccounting standards in the footnotes to our consolidated financial statementshave been changed to refer to the appropriate section of ASC.

 

InDecember 2007, FASB issued ASC 805 *Business Combinations*or (“ASC 805”).  ASC 805 (formerly SFAS141(R),*Business Combinations*) will impactfinancial statements on the acquisition date and in subsequent periods. Some ofthe changes, such as the accounting for contingent consideration, may introducemore volatility into our earnings and may impact 

 

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ouracquisition strategy.  Additionally, in February 2009FASB issued an amendment to ASC 805 which amends the provisions related to theinitial recognition and measurement, subsequent measurement and disclosure ofassets and liabilities arising from contingencies in a business combinationunder ASC 805.  ASC 810 *Consolidations* or**(“ASC 810”)(formerly SFAS 160, *Noncontrolling Interestsin Consolidated Financial Statements*) changes the accounting andreporting for minority interests, which are re-characterized as non-controllinginterests and classified as a component of equity. ASC 805 is appliedprospectively and ASC 810 requires retroactive adoption of the presentation anddisclosure requirements for existing minority interests, while the remainingrequirements of ASC 810 are applied prospectively.  ASC 805 and ASC 810 become effective on January 1,2009.  We adopted ASC 805 and ASC 810 inthe first quarter of fiscal 2009 and their adoption did not have a materialimpact on our financial condition, results of operations, or cash flows.

 

Effective January 1,2008, we adopted ASC 820, *Fair ValueMeasurements and Disclosures*or**(“ASC 820”) withrespect to its financial assets and liabilities. ASC 820 (formerly SFAS 157, *Fair Value Measurements*) defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles and provides for expanded disclosure about fair valuemeasurements.  ASC 820 appliesprospectively to all other accounting pronouncements that require or permitfair value measurements.  ASC 820 excludes certain leasingtransactions accounted for under ASC 840, *Leases* (“ASC840”)**(formerly SFAS 13).  ASC 820 defers the effective date of ASC 820for all non-financial assets and non-financial liabilities except those thatare recognized 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 ASC 820 in thefirst quarter of fiscal 2009.  See Note 4- Fair Value Measurements.

 

In May 2008, FASBissued ASC 470-20, *Debt with Conversion andOther Options* or (“ASC 470”). On January 1, 2009, we adopted the Cash Conversion Subsections ofASC 470-20 (formerly FSP APB 14-1, *Accounting for Convertible**Debt Instruments That May Be Settled in Cash upon Conversion (IncludingPartial Cash Settlement)**)*, whichclarify the accounting for convertible debt instruments that may be settled incash (including partial cash settlement) upon conversion.  ASC 470-20clarifies the accounting for convertible debt instruments that may besettled in cash upon conversion, including partial cash settlement.  ASC 470-20 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.  ASC 470 is effective for fiscal yearsbeginning after December 15, 2008, and retrospective application isrequired for all periods presented.  Perthe adoption of ASC 470 we have made certain adjustments to the presentation ofour financial condition, results of operations, and cash flows.  See Note 9 — Convertible Senior Notes.

 

In October 2008,FASB issued ASC 820 *Fair Value Measurement andDisclosure*or (“ASC 820”).  * *ASC 820 (formerly FSPSFAS 157-3,*Determining the Fair Valueof a Financial Asset When the Market for That Asset is Not Active*)clarifies the application of fair value measurement and disclosures, which wehave adopted as of January 1, 2008, in situations where the market for aparticular financial asset is not active. We have considered the guidanceprovided by ASC 820 in our determination of estimated fair values, and theimpact was not material.

 

In April 2009, FASBissued ASC 825 *Financial Instruments* or (“ASC825”) and ASC 270 *Interim Reporting* or**(“ASC 270”).  ASC 825(formerly FSP SFAS 107-1,*Interim Disclosures aboutFair Value of Financial Instruments*,) and ASC 270 (formerly APB28-1) requires us 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.   ASC 825 and ASC 270 areeffective for interim periods ending after June 15, 2009. We haveadopted the provisions of ASC 825 and ASC 270 effective the second quarter offiscal 2009.  See Note 4 - Fair ValueMeasurements and Note 9 — Convertible Senior Notes.

 

In April 2009, FASBissued ASC 320 *Investments — Debt and Equity Securities*or**(“ASC 320”).  ASC 320 (formerly FSP SFAS No. 115-2,*Recognition and Presentation of Other-Than-TemporaryImpairments*) modifies the other-than-temporary impairment guidancefor debt securities through increased consistency in the timing of impairmentrecognition and enhanced disclosures related to the credit and noncreditcomponents of impaired debt securities that are not expected to be sold. In addition,increased disclosures are required for both debt and equity securitiesregarding expected cash flows, credit losses, and an aging of securities withunrealized losses. ASC 320 is effective for interim and annual reportingperiods that end after June 15, 2009. We have adopted the provisions ofASC 320 effective the second quarter of fiscal 2009. We have considered theguidance provided by ASC 320 in our determination of impairment, and havedetermined that the impact was not material. See Note 9 — Convertible Senior Notes.

 

InApril 2009, FASB issued ASC 820 *Fair Value Measurement andDisclosure* or (“ASC 820”) was issued.  ASC 820 (formerly FSP SFAS 157-4, *Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significantly Decreased and Identifying TransactionsThat Are Not Orderly)* provides additional guidance for estimatingfair 

 

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value when the volume andlevel of activity for the asset or liability have significantlydecreased.  ASC 820 re-emphasizes that regardless of marketconditions the fair value measurement is an exit price concept.  ASC820 clarifies and includes additional factors to consider in determiningwhether there has been a significant decrease in market activity for an assetor liability and provides additional clarification on estimating fair valuewhen the market activity for an asset or liability has declinedsignificantly.  The scope of ASC 820 does not include assets andliabilities measured under level 1 inputs.  ASC 820 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 ASC 820 effective the second quarter of fiscal2009, and have determined that the adoption did not have an impact on ourcondensed consolidated financial statements.

 

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 167has not been codified.  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.

 

**2.    Summaryof Significant Accounting Policies**

 

*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.

 

*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 incorporated ConceptusMedical 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 based onmanagement’s judgment and involves consideration of all relevant economic factsand circumstances affecting the subsidiary. Generally, the currency in whichthe subsidiary transacts a majority of its transactions, including billing,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.

 

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*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 September 30,2009.

 

Otherintangible assets include patents, customer relationships, license agreementsand non-compete agreements. They are amortized using the straight-line methodover their respective estimated useful lives.

 

*Impairment of Long-Lived Assets*

 

Weaccount for the impairment of long-lived assets in accordance with ASC 360 *Property,**Plant and Equipment*(formerlySFAS 144, *Accounting for the Impairment of Disposal ofLong-Lived Assets)*.  Weevaluate the carrying value of our long-lived assets, consisting primarily ofour property and equipment, the**patents acquired in connection with ourpurchase of the intellectual property assets from Ovion Inc, andintangible assets acquired in connection with our acquisition of Conceptus SASin 2008, whenever certain events or changes in circumstances indicate that thecarrying amount of the assets may not be recoverable. (See Note 5 — Goodwilland Intangible Assets)**Suchevents or circumstances include a prolonged industry downturn, a significantdecline in our market value or significant reductions in projected future cashflows.

 

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.    Short-TermInvestments**

 

Asof September 30, 2009, we held $43.9 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 short-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.   The failures of these auctionsdo not affect the value of the collateral underlying the ARS, and we continueto earn and receive interest on our ARS at a pre-determined formula withspreads tied to particular 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 2010 through July 2012.  Conversely,UBS has the right, at its discretion, to purchase or sell our ARS at any timeuntil July 2012, so long as we receive payment at par value upon any saleor disposition.  We expect to sell our ARS under the Rights at parvalue.  However, if the Rights are not exercised before July 2012they will expire and UBS will have no further rights or obligation to buy ourARS.  So long as we hold our ARS, they will continue to accrue interestas determined by the auction process or the terms of the ARS if the auctionprocess 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.

 

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.

 

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Wehave accounted for the Rights as a freestanding financial instrument andelected to record the value of the Rights under the fair value option of ASC825 *Financial Instruments*(formerly SFAS159, *The Fair Value for Financial Assets and FinancialLiabilities).   *As a result,upon acceptance of the offer from UBS, we recorded approximately $5.1 millionas the fair value of the Rights with a corresponding credit to other expense,net in the fourth quarter of 2008.  As aresult of our election to record the Rights at fair value, unrealized gains andlosses will be included in earnings in future periods.   Weestimated the fair value of the Rights using the expected value that we willreceive from UBS which was calculated as the difference between the anticipatedrecognized loss and par value of the ARS as of the option exercise date. Thisvalue was discounted by using a UBS credit default rate to account for theconsideration of UBS credit risk. For the three and nine months ended September 30,2009, we recorded an additional loss of $0.4 million and $1.8 million,respectively which represents the decrease in the fair value of the put option.

 

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 loss in thestockholders’ 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,resulting in our right to require UBS to purchase our ARS at par valuebeginning on June 2010, we transferred our ARS from available-for-sale totrading securities in accordance with ASC 320 *Investments —Debt and Equity Securities*(formerly SFAS 115, *Accountingfor Certain Investments in Debt and Equity Securities)*.  Thetransfer to trading securities reflects our intent to exercise our put optionduring the third quarter of 2010.  Prior to our agreement with UBS,our intent was to hold our ARS until we realized the par value.

 

InSeptember 2009 we reclassified the ARS and the associated put option fromlong-term investments to short-term investments because we intend to sell ourARS under the Rights at the inception of the Rights period in June 2010.

 

Forthe three and nine months ended September 30, 2009, we recorded a gain of$0.5 million and $1.9 million, respectively which represents the increase inthe fair value of the ARS.  For the threeand nine months ended September 30, 2008 we had recorded a temporaryreduction in carrying value of $0.2 million and $2.8 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 settlements of our ARS in the threeand nine months ended September 30, 2009 of $4.5 million and $4.6 millionat full par value.

 

**4.    FairValue Measurements**

 

OnJanuary 1, 2008, we adopted the methods of fair value as described in ASC 820 *Fair ValueMeasurement and Disclosure*or**(“ASC 820”)(formerly SFAS 157, *Fair ValueMeasurements*)to value our financial assets and liabilities.  As defined in ASC 820, fair value is based onthe 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, ASC 820 establishes a fair value hierarchy that prioritizesobservable and unobservable inputs used to measure fair value into three broadlevels, which are described below:

 

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.

 

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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 September 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 September 30, 2009 and, accordingly, we concluded that Level 1inputs were not available for these assets. Brokerage statements received fromour broker-dealer that held our ARS included their estimated market value as ofSeptember 30, 2009. Our broker-dealer valued our ARS at 90% of par. Wemade inquiries relative to the measurements utilized to derive the estimatedmarket values quoted on our brokerage statements, but the broker-dealerdeclined to provide detailed information relating to their valuation methodologies.Due to the lack of transparency into the methodologies used to determine theestimated market values, we concluded that estimated market values provided onour brokerage statements did not constitute valid inputs and thus we did notutilize them in measuring the fair value of these ARS as of September 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 2010 through July 2012.  The put option is classified as short-termbecause we intend to is to sell our ARS under the Rights at the inception ofthe Rights period in June 2010.  See Note 3 — Short-term Investments.

 

Periodically,during the nine months ended September 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 September 30,2009, we had foreign currency forward contracts to sell 5.9 million Euros inexchange for $8.2 million U.S. dollars maturing in October 2009 through January 2010.  As of September 30, 2009 these forwardcontracts are recorded at their fair value of $0.4 million in other accruedliabilities on our condensed consolidated balance sheet.  We have outstanding intercompany receivablesprimarily from Conceptus SAS of $8.6 million as of September 30,2009.  We expect the changes in the fairvalue of the intercompany receivables to be materially offset by the changes inthe fair value of the forward contracts.

 

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 September 30,2009.

 

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

 

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

 
| ** **                         | ** ** | ** **      | ** ** | **Fair Value Measurements at Reporting Date**                          | ** ** |
|------------------------------------|------------|-----------------|------------|------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **September30** | ** ** | **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                 |       | $               | 40,812     |                                                                   | $          | 40,812 |   | $ | — |   | $ | — |   |
| Auction  rate securities           |       | 40,535          |       | —                                                                 |       | — |   | 40,535 |   |
| Put  option                        |       | 3,306           |       | —                                                                 |       | — |   | 3,306 |   |
| Total  assets                      |       | $               | 84,653     |                                                                   | $          | 40,812 |   | $ | — |   | $ | 43,841 |   |
|                               |       |            |       |                                                                   |       |   |   |   |   |
| Liabilities:                       |       |            |       |                                                                   |       |   |   |   |   |
| Foreign  currency forward contract |       | $               | 362        |                                                                   | $          | — |   | $ | 362 |   | $ | — |   |
| Total  liabilities                 |       | $               | 362        |                                                                   | $          | — |   | $ | 362 |   | $ | — |   |

 

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** | ** ** | **Quoted Price in  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 |   |

 

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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 September 30,2009 (in thousands):

 
| ** **                                      | ** ** | ** **     | ** ** | **Auction Rate** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Put Option** | ** ** | **Securities**   | ** ** | **Total**  | ** ** |
| Balance  at December 31, 2008              |       | $              | 5,144      |             | $          | 43,177     |       | $ | 48,321 |   |
| Gain  on auction rate securities                |       | —         |       | 155              |       | 155        |       |
| 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       | )          |
| Gain  on auction rate securities                |       | —         |       | 1,324            |       | 1,324      |       |
| Loss  on put option                             |       | (1,237         | )          | —           |       | (1,237     | )          |
| Balance  at June 30, 2009                  |       | $              | 3,730      |             | $          | 44,531     |       | $ | 48,261 |   |
|                                            |       |           |       |             |       |       |       |
| Sales  of auction rate securities, at par value |       | —         |       | (4,450           | )          | (4,450     | )          |
| Gain  on auction rate securities                |       | —         |       | 454              |       | 454        |       |
| Loss  on put option                             |       | (424           | )          | —           |       | (424       | )          |
| Balance  at September 30, 2009             |       | $              | 3,306      |             | $          | 40,535     |       | $ | 43,841 |   |

 

**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.

 

On September 30, 2009, we entered into an Asset Purchase Agreement(the “Purchase Agreement”) with American Medical Systems, Inc. (“AMS”)pursuant to which we acquired the intangible intellectual property assets,including patents and licenses, (“the assets”) of Ovion Inc., a wholly ownedsubsidiary of AMS (“Ovion”).  In connection with this purchase, we werereleased from any and all current and future domestic and international royaltyobligations under such licenses.

 

As consideration for the assets acquired in the purchase agreement, we paidto AMS $23.6 million in cash plus $0.1 million in direct cost to acquire theassets.  The purchase agreement contains customary representations,warranties and covenants, as well as a covenant from AMS that it will notcompete with us in the field of permanent female sterilization for a period offive years and that it will not engage in the research, development,manufacture or sale of permanent female sterilization products consisting of astent-like device delivered transcervically using a catheter for an additionalfour-year period.  The purchase agreement also contains mutual indemnificationobligations for, among other things, breach of any representation, warranty orcovenant in the purchase agreement. We did not acquire any employees, tangibleassets or processes from AMS.  Theseassets do not represent a purchase of a business but rather, a purchase ofintangible assets.  These assets arecapitalized and will be amortized over a period of nine years, the estimateduseful life of the intangible assets.

 

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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 nine months ended September 30,2009.

 

Thechanges in carrying amount of goodwill at September 30, 2009 are asfollows (in thousands):

 
| Goodwill,  at December 31, 2008  |   | $   | 17,105 |   |
|---------------------------------------|--------|-----|--------|--------|
| Effect  of currency translation       |   | 525 |   |
| Goodwill,  at September 30, 2009 |   | $   | 17,630 |   |

 

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

 

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

 
| ** **              | ** ** | ** **                                        | ** ** | ** **                    | ** ** | ** **                    | ** ** | ** **                                          | ** ** | ** **           | ** ** | **December 31,** | ** ** |
|-------------------------|------------|---------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|-----------------------------------------------------|------------|----------------------|------------|-----------------------|------------|
| ** **              | ** ** | ** **                                        | ** ** | **September 30, 2009**   | ** ** | **2008**                      | ** ** |
| ** **              | ** ** | **Weighted   average   remaining   life (years)** | ** ** | **Gross   carrying   amount** | ** ** | **Accumulated  amortization** | ** ** | **Cumulative   effect of   currency   translation** | ** ** | **Net book   value** | ** ** | **Net book   value**  | ** ** |
|                    |       |                                              |       |                          |       |                          |       |                                                |       |                 |       |                  |       |
| Patents  and licenses   |       | 9.00                                              |       | 25,750                        |       | (1,213                        | )          | —                                              |       | 24,537               |       | 960                   |       |
| Customer  relationships |       | 7.25                                              |       | $                             | 5,024      |                          | $          | (937                                                | )          | $                    | (71        | )                     | $          | 4,016 |   | $ | 4,281 |   |
| Other                   |       | 1.25                                              |       | 71                            |       | (39                           | )          | (2                                                  | )          | 30                   |       | 46                    |       |
| Total  intangibles      |       |                                              |       | $                             | 30,845     |                          | $          | (2,189                                              | )          | $                    | (73        | )                     | $          | 28,583 |   | $ | 5,287 |   |

 

**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):

 
| ** **       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------|------------|------------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Raw  materials   |       | $                      | 323        |                  | $          | 230 |   |
| Work-in-progress |       | 553                    |       | 1,225                 |       |
| Finished  goods  |       | 3,047                  |       | 2,374                 |       |
| **Total**        | ** ** | **$**                  | **3,923**  | ** **            | **$**      | **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 nine months ended September 30, 2009and 2008 are as follows (in thousands):

 
| ** **                                        | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Balance  at the beginning of the period           |       | $                                        | 272        |   | $ | 208 |   |
| Accruals  for warranties issued during the period |       | 324                                      |       | 205 |   |
| Settlements  made in kind during the period       |       | (323                                     | )          | (183 | ) |
| **Balance at the end of the period**              | ** ** | **$**                                    | **273**    | ** ** | **$** | **230** | ** ** |

 

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**8.    Stock-BasedCompensation**

 

Net loss for the three andnine months ended September 30, 2009 included stock-based compensationexpense under ASC 718 *Compensation — StockCompensation* or (“ASC 718”)**(formerly SFASNo. 123(R), *Share-Based Payment)*, ofapproximately $1.6 million and $4.5 million, respectively,  which consisted of stock-based compensationexpense of approximately $1.4 million and $3.9 million respectively related toemployee stock options, employee stock purchase plan and stock appreciationrights and stock-based compensation expense of approximately $0.2 million and$0.6 million respectively related to employee restricted stock and restrictedstock units.

 

Netloss for the three and nine months ended September 30, 2008 includedstock-based compensation expense under ASC 718 of approximately $1.4 millionand $4.2 million, respectively, which consisted of stock-based compensationexpense of approximately $1.2 million and $3.7 million, respectively, relatedto employee stock options, employee stock purchase plan and stock appreciationrights and stock-based compensation expense of approximately $0.2 millionand $0.6 million, respectively, related to employee restricted stock andrestricted stock units.

 

Stock-based compensationarrangements to non-employees are accounted for in accordance with ASC 505-50 *Equity Based Payments to Non-Employees*(formerly 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 $0 and $0.1 million for the three months ended September 30,2009 and 2008, respectively, and $44,000 and $0.2 million for the nine monthsended September 30, 2009 and 2008, respectively.

 

For the three and nine months ended September 30,2009 and 2008, we calculated the fair value of each stock appreciation right onthe date of grant using the Black-Scholes model as prescribed by SFAS 123(R).The assumptions used were as follows:

 
| ** **                       | ** ** | **Three Months**                  | ** ** | **Nine Months**                   | ** ** |
|----------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                       | ** ** | **ended September 30, 2009** | ** ** | **ended September 30, 2009** | ** ** |
| Expected  term (in years)        |       | 4.06                              |       | 4.33                              |       |
| Average  risk-free interest rate |       | 2.01                              | %          | 1.68                              | %          |
| Average  volatility factor       |       | 50.3                              | %          | 52.4                              | %          |
| Dividend  yield                  |       | 0                                 | %          | 0                                 | %          |

 
|                             | ** ** | **Three  Months**                  | ** ** | **Nine  Months**                   | ** ** |
|----------------------------------|------------|------------------------------------|------------|------------------------------------|------------|
|                             | ** ** | **ended  September 30, 2008** | ** ** | **ended  September 30, 2008** | ** ** |
| Expected  term (in years)        |       | 4.06                               |       | 4.56                               |       |
| Average  risk-free interest rate |       | 2.87                               | %          | 2.74                               | %          |
| Average  volatility factor       |       | 45.1                               | %          | 47.2                               | %          |
| Dividend  yield                  |       | 0                                  | %          | 0                                  | %          |

 

*StockAppreciation Rights*:During the three and nine months ended September 30, 2009, we grantedstock appreciation rights for 89,500 and 1,013,653 shares of common stock, withan estimated total grant date fair value of approximately $0.6 million and $5.4million, respectively and a grant date weighted-average fair value of $7.19 and$5.34  per share, respectively.  During the three and ninemonths ended September 30, 2008, we granted stock appreciation rights for180,500 and 1,012,910 shares of common stock, respectively, with an estimatedtotal grant date fair value of approximately $1.2 million and $7.5 million,respectively and a grant date weighted-average fair value of $6.82 and $7.42per 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 andnine months ended September 30, 2009, we granted 212 and 82,701 restrictedstock units, with a grant-date fair value of approximately $4,000 and $1.0million, respectively, and a grant-date weighted-average fair value of $18.96and $12.01, respectively.  During thethree and nine months ended September 30, 2008, we granted 1,000 and42,000 shares of restricted stock units, respectively, with a grant-date fairvalue of approximately $19,000 and $0.7 million, respectively and a grant-dateweighted average fair value of $18.58 and $17.48, respectively.

 

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*Employee Stock Purchase Plan (ESPP):* The compensation cost inconnection with the ESPP for the nine months ended September 30, 2009 wasapproximately $0.3 million with a grant date weighted-average fair value of$6.20. During the nine months ended September 30, 2008, the compensationcost was approximately $0.2 million, with a grant date weighted average fairvalue of $5.17. This cost is amortized on a straight-line basis over therelevant subscription period.

 

Wecalculated the fair value of each share under the ESPP on the date of grantusing the Black-Scholes model as prescribed by SFAS 123(R). The assumptionsused were as follows:

 
| ** **                       | ** ** | **Nine Months ended September 30,** | ** ** |
|----------------------------------|------------|------------------------------------------|------------|
| ** **                       | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| Expected  term (in years)        |       | 0.50                                     |       | 0.50 |   |
| Average  risk-free interest rate |       | 0.32                                     | %          | 2.01 | % |
| Average  volatility factor       |       | 73.9                                     | %          | 42.6 | % |
| Dividend  yield                  |       | 0                                        | %          | 0 | % |

 

**9.    ConvertibleSenior 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 ASC 815 *Derivative and*Hedgingor (“ASC 815”), (formerly SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities),* because theembedded stock conversion option would be recorded in stockholders’ equity ifit were a freestanding instrument.

 

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.

 

ASC815 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 ASC 815, the purchased call optioncontracts were recorded as a reduction of equity and the warrants were recordedas an addition to equity as of the trade date. ASC 815 states that a reportingentity shall not consider contracts to be derivative instruments if thecontract issued or held by the reporting entity is both indexed to its ownstock and classified in stockholders’ equity in its statement of financialposition. We concluded the purchased call option contracts and the warrantcontracts should be accounted for in stockholders’ equity.

 

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*Adoption of*ASC 470-20

 

ASC470-20 *Debt with Conversion and Other Options,*or(“ASC 470-20”), (formerly APB 14-1, *Accounting for Convertible Debt Instruments That May Be Settledin Cash upon Conversion (Including Partial Cash Settlement)*, clarifies the accounting for convertibledebt instruments that may be settled in cash upon conversion, including partialcash settlement.  ASC 470-20 specifiesthat an issuer of such instruments should separately account for the liabilityand equity components of the instruments in a manner that reflect the issuer’snon-convertible debt borrowing rate which interest costs are recognized insubsequent periods.  ASC 470-20 iseffective for fiscal years beginning after December 15, 2008, andretrospective application is required for all periods presented.  We have adopted ASC 470-20 in our firstquarter of fiscal 2009 and adjusted our financial statements as follows inconnection with our outstanding convertible senior notes.

 

Theeffect of the adoption of ASC 470-20 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 debtcomponent will be accreted to interest expense over a period of 5 years, whichis the expected term of our notes payable. The adjusted outstanding notes payable balance at December 31, 2008is $72.3 million.   In addition, wereclassified $0.8 million of debt issuance costs to additional paid incapital.  The debt component wasrecognized at the present value of its cash flows discounted using a 5.51% discountrate, our borrowing rate at the date of the issuance of the Debenture for asimilar debt instrument without the conversion feature.

 

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

 
| ** **                                  | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                  | ** ** | **2009**                                  | ** ** | **2008 (a)**                             | ** ** | **2009** | ** ** | **2008 (a)** | ** ** |
| Contractual coupon rate of interest         |       | $                                         | 489        |                                     | $          | 488 |   | $ | 1,455 |   | $ | 1,456 |   |
| Accretion  of note payable                  |       | 1,054                                     |       | 996                                      |       | 3,118 |   | 2,948 |   |
| Interest expense - convertible senior notes |       | $                                         | 1,543      |                                     | $          | 1,484 |   | $ | 4,573 |   | $ | 4,404 |   |

 

----

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

 

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

 
| ** **                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                 | ** ** | **2009**               | ** ** | **2008 (a)**          | ** ** |
| Principal  balance         |       | $                      | 65,101     |                  | $          | 65,101 |   |
| Accretion  of note payable |       | 10,361                 |       | 7,243                 |       |
| Carrying  amount           |       | $                      | 75,462     |                  | $          | 72,344 |   |
|                       |       |                   |       |                  |       |
| Estimated  fair value (b)  |       | $                      | 81,075     |                  | $          | 55,200 |   |

 

----

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

(b) Estimated fair value is estimated based on the quoted marketprice of the underlying bond.

 

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Theimpact of the adoption of ASC 470-20 on the Condensed Consolidated BalanceSheet as of December 31, 2008 (in thousands) is as follows:

 
| ** **                                   | ** ** | **As   Previously   Reported** | ** ** | **Incremental   Impact of   Adoption of ASC  470-20** | ** ** | **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 ASC 470-20 on the Condensed Consolidated Statement ofOperations (in thousands, except per share amount) is as follows:

 
| ** **                                                | ** ** | **Three months ended September 30, 2008** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                | ** ** | **As  Previously   Reported**                  | ** ** | **Incremental   Impact of Adoption  of ASC 470-20** | ** ** | **As   Adjusted** | ** ** |
| Total  interest income and expense and other expense, net |       | $                                              | (493       | ) | $ | (958 | ) | $ | (1,451 | ) |
| Net  loss                                                 |       | 2,975                                          |       | (958 | ) | 2,017 |   |
| Basic  net loss per share                                 |       | 0.10                                           |       | (0.03 | ) | 0.07 |   |
| Diluted  net loss per share                               |       | 0.10                                           |       | (0.04 | ) | 0.06 |   |
|                                                           |            |                                                |            |  |  |  |  |  |  |  |

 
| ** **                                                | ** ** | **Nine  months ended September 30, 2008** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                | ** ** | **As    Previously   Reported**                | ** ** | **Incremental    Impact of Adoption  of ASC 470-20** | ** ** | **As    Adjusted** | ** ** |
| Total  interest income and expense and other expense, net |       | $                                              | (720       | ) | $ | (2,831 | ) | $ | (3,551 | ) |
| Net  loss                                                 |       | (5,012                                         | )          | (2,831 | ) | (7,843 | ) |
| Basic  and diluted net loss per share                     |       | (0.17                                          | )          | (0.09 | ) | (0.26 | ) |
|                                                           |            |                                                |            |  |  |  |  |  |  |  |

 

Theimpact of the adoption of ASC 470-20 on the Condensed Consolidated Statement ofCash Flows for the nine months ended September 30, 2008 (in thousands) isas follows:

 
| ** **                           | ** ** | **Nine months ended September 30, 2008** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **As   Originally   Reported**                | ** ** | **Incremental   Impact of   Adoption of   ASC 470-20** | ** ** | **As   Adjusted** | ** ** |
| Net  loss                            |       | $                                             | (5,012     | ) | $ | (2,831 | ) | $ | (7,843 | ) |
| Amortization  of debt issuance costs |       | 465                                           |       | (117 | ) | 348 |   |
| Accretion  of note payable           |       | —                                        |       | 2,948 |   | 2,948 |   |
|                                      |            |                                               |            |  |  |  |  |  |  |  |

 

**10.    CreditLine**

 

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 the ARS at less than par, we would not be entitled torecover the par value support from UBS. During the nine months ended September 30, 2009 we borrowed anadditional $4.4 million, accrued interest payable of $0.2 million and repaid$5.0 million under this line of credit our loan balance as of September 30,2009 was $29.5 million.  We intend torepay this line of credit in entirety when we exercise our Right to have UBSpurchase the underlying ARS at full par value in June 2010.  Our line of credit is payable on demand andwe classify as short term.  Hence, webelieve the fair value equals the balance sheet value.  See Note 3 — Short-term Investments.

 

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**11.    IncomeTaxes**

 

Oureffective tax rate was 2% in the three months ended September 30, 2009compared to 5% in the three months ended September 30, 2008. Our effectivetax rate was 22% in the nine months ended September 30, 2009 compared to-4% in the nine months ended September 30, 2008. The Company’s effectiverate for the three and nine months ended September 30, 2008 and September 30,2009 were primarily related to our foreign operations.

 

Weadopted the provisions of ASC 740 *Income Taxes* or(“ASC 740”), (formerly FIN 48, *Accountingfor Uncertainty in Income Taxes*), on January 1, 2007.  Theadoption of the provisions, with respect to uncertain tax positions, did nothave 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 September 30,2009, our federal returns for the years ended 2006 through the current periodand most state returns for the years ended 2005 through the current period arestill open to examination.  In addition,all of the net operating losses and research and development credit carryforwardsthat may be used in future years are still subject to inquiry given that thestatute of limitation for these items would be from the year of theutilization. The tax returns for Conceptus SAS for the years ended 2005 to 2007were examined and closed by the French tax authorities in 2008.

 

Forthe three and nine months ended September 30, 2009, we recordedapproximately $0.1 million and $0.4 million of income tax expense,respectively.   For the three and nine months ended September 30,2008, we recorded approximately $0.1 million and $0.3 million of income taxexpense, respectively.

 

Theamount of unrecognized tax benefits at September 30, 2009 wasapproximately $2.5 million, of which, if ultimately recognized, approximately$0.6 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 ASC 740 we recognizeinterest and penalties accrued on any unrecognized tax benefits as a componentof income tax expense.

 

**12.    Computationof Net Income (Loss) Per Share**

 

Basicnet income (loss) per share excludes any potential dilutive effects of options,unvested restricted shares and restricted stock units and common stock sharessubject to repurchase.  Diluted net income (loss) per share includes theimpact of potentially dilutive securities using the treasury stockmethod.  In net loss periods presented, basic and diluted net loss pershare are both computed using the weighted average number of common sharesoutstanding.

 

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The following tableprovides a reconciliation of weighted-average number of common sharesoutstanding to the weighted-average number common shares outstanding used incomputing basic and diluted net loss per common share (in thousands):

 
| ** **                                                                                                              | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended   September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2009**                                  | ** ** | **2008 (a)**                               | ** ** | **2009** | ** ** | **2008 (a)** | ** ** |
| Numerator:                                                                                                              | ** ** | ** **                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Numerator  for diluted earnings per share -                                                                             | ** ** | ** **                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Income  (loss) available to common stockholders                                                                         | ** ** | **$**                                     | **6,232**  | ** **                                 | **$**      | **2,017** | ** ** | **$** | **1,341** | ** ** | **$** | **(7,843** | **)** |
| ** **                                                                                                              | ** ** | ** **                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Denominator:                                                                                                            |       |                                      |       |                                       |       |   |   |   |   |
| Denominator  for basic earnings per share -                                                                             |       |                                      |       |                                       |       |   |   |   |   |
| Weighted-average  number of common shares outstanding                                                                   |       | 30,599                                    |       | 30,347                                     |       | 30,521 |   | 30,177 |   |
| Less:  weighted-average unvested and restricted common shares                                                           |       | —                                    |       | (5                                         | )          | (2 | ) | (12 | ) |
| Weighted-average  number common shares outstanding used in share computing basic net income  (loss) per common share    |       | 30,599                                    |       | 30,342                                     |       | 30,519 |   | 30,165 |   |
| Effect  of dilutive securities:                                                                                         |       |                                      |       |                                       |       |   |   |   |   |
| Diluted  options & stock appreciation rights                                                                   |       | 853                                       |       | 823                                        |       | 566 |   | — |   |
| Diluted  stock awards                                                                                                   |       | 51                                        |       | 42                                         |       | 31 |   | — |   |
| Weighted-average  number common shares outstanding used in share computing dilutive net income  (loss) per common share | ** ** | **31,503**                                | ** ** | **31,207**                                 | ** ** | **31,116** | ** ** | **30,165** | ** ** |
|                                                                                                                         |            |                                           |            |                                            |            |  |  |  |  |  |  |  |  |

 

----

**(a)  **Adjusted for theretrospective adoption of ASC 470-20. See Note 9:  Convertible SeniorNotes - Adoption of ASC 470-20.

 

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):

 
| ** **                                                | ** ** | **Nine months ended   September 30,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                | ** ** | **2009**                                   | ** ** | **2008** | ** ** |
| Outstanding  options and stock appreciation rights        |       | 4,744                                      |       | 4,278 |   |
| Restricted  stock awards                                  |       | 0                                          |       | 5 |   |
| Restricted  stock units                                   |       | 149                                        |       | 104 |   |
| Warrants  issued in connection with our convertible notes |       | 3,093                                      |       | 3,093 |   |
| Total                                                     |       | 7,986                                      |       | 7,480 |   |

 

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.    ComprehensiveIncome (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** | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                                  | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                  | ** ** | **2009**               | ** ** | **2008 (a)**           | ** ** | **2009** | ** ** | **2008 (a)** | ** ** |
| Net  income (loss)                                          |       | $                      | 6,232      |                   | $          | 2,017 |   | $ | 1,341 |   | $ | (7,843 | ) |
| Other  comprehensive loss                                   |       |                   |       |                   |       |   |   |   |   |
| Foreign  currency translation adjustment, net of tax        |       | 658                    |       | (1,823                 | )          | 326 |   | (319 | ) |
| Change  to unrealized loss on available-for-sale securities |       | —                 |       | (227                   | )          | — |   | (2,842 | ) |
| Comprehensive  income (loss)                                |       | $                      | 6,890      |                   | $          | (33 | ) | $ | 1,667 |   | $ | (11,004 | ) |

 

----

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

 

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The balance of eachcomponent of accumulated other comprehensive loss, net of taxes, as of September 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 nine months period |       | 326                                  |       | 326                                            |       |
| Balance  as of September 30, 2009    |       | $                                    | (472       | )                                              | $          | (472 | ) |

 

**14.    SegmentInformation**

 

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 September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **               | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales (in thousands) |       | $                                         | 34,247     |                                     | $          | 26,645 |   | $ | 94,447 |   | $ | 73,452 |   |
|                     |       |                                      |       |                                     |       |   |   |   |   |
| United States of America |       | 82                                        | %          | 80                                       | %          | 80 | % | 78 | % |
| France                   |       | 11                                        | %          | 13                                       | %          | 12 | % | 14 | % |
| Rest of Europe           |       | 7                                         | %          | 6                                        | %          | 7 | % | 7 | % |
| Other                    |       | 0                                         | %          | 1                                        | %          | 1 | % | 1 | % |
|                          |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |

 

No customer accounted formore than 10% of total revenue for the three and nine months ended September 30,2009 and 2008.  No customer had a balancein excess of 10% of our net accounts receivable at September 30,2009.  Accounts receivable fromone customer accounted for 10% of our gross accounts receivable balance at September 30,2008.

 

**15.    Litigation**

 

OnMay 22, 2009, we filed a lawsuit in the United States District Court,Northern District of California against Hologic, Inc., (“Hologic”) seekingdeclaratory judgment by the Court that Hologic’s planned importation, use, saleor offer to sell of its forthcoming Adiana Permanent Contraception system willinfringe several U.S. patents owned by us including U.S. Patent Nos. 6,634,361,6,709,667, 7,237,552, 7,428,904 and 7,506,650, and an injunction prohibitingHologic from importing, using, selling or offering to sell its Adiana system inthe United States.  Upon FDA approval of the Adiana PermanentContraception system, we filed an Amended Complaint in July 2009 seeking ajudgment that Hologic’s importation, use, sale and/or offer to sell the systeminfringes the same patents mentioned above and requested an injunction againstsuch activity.  We also filed a motion for preliminary injunction,requesting the Court to enjoin the Adiana system in the United States pendingfinal judgment in the action.  A hearing on the preliminary injunctionmotion occurred on November 4, 2009 and we expect a ruling in the fourthquarter of 2009.

 

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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 product liability claims and product recallsand other factors referenced in this Form 10-Q. Our actual resultscould 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, highly effective and proprietary medicaldevice for women that was approved for marketing in the United States in November 2002by the 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 ourrevenues as we will recognize sales at end user pricing as compared to theprice at which 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 we electronicallyfile or furnish such material to the Securities and Exchange Commission (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 surgical tubal ligation, the leading form of permanent birthcontrol in the United States and worldwide. Laparoscopic tubal ligation andtubal ligation by laparotomy typically involve abdominal incisions and/orpunctures, general or regional anesthesia, four to ten days of normal recoverytime and the risks associated with an incisional procedure. The*Essure* procedure does not require cuttingor penetrating the abdomen, which lowers the likelihood of pre- andpost-operative pain due to the incisions/punctures, and it can be performed inan outpatient setting. Currently, the majority of the*Essure* procedures are performed using a regional anestheticsuch as a paracervical block or conscious sedation, such as IV sedation with alocal anesthesia. General anesthesia is not typically used unless required byhospital protocol, if requested by the patient, or based on the experience andcomfort level of the physician.   The *Essure* procedure can be performed rapidly; in the Pivotaltrial of the*Essure* system, theaverage hysteroscopic procedure time was 13 minutes. A patient is typicallydischarged approximately 45 minutes after the*Essure* procedure. No overnight hospital stay is required.Furthermore, the*Essure* system iseffective without burning tissue, drugs or hormones. There is a three-monthwaiting period after the procedure during which the woman must use another formof birth control while tissue in-growth occurs. At 90 days following theprocedure, U.S. patients complete a confirmation test called a hysterosalpingogram,or HSG, which can 

 

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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 the devicelocation does not appear to be appropriate on the initial radiographic image.

 

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, indirect and proceduralcosts related to anesthesia, post-operative care and hospital stays associatedwith tubal ligations.  In addition, webelieve the *Essure* procedure is superior to othernon-incisional tubal ligation alternatives because, unlike other devicedesigns, the *Essure* procedure does not rely onradio frequency (RF) thermal tissue injury as its mechanism of action, whichcan subject the patient to the risks of expanded thermal damage, bowel injuryand dilutional hyponatremia.  Publishedreports estimate that approximately 700,000 tubal ligation procedures areperformed each year in the United States. We intend to capture the majorityshare of this market and establish the *Essure*procedure as the gold standard for permanent birth control.  We also believe the *Essure*system is a solution for women whose family is complete but are using temporarymethods of birth control. In addition, payers may also benefit from thereduction of unplanned pregnancies associated with non-permanent birth controlmethods used by patients who have chosen to avoid the drawbacks of traditionalpermanent birth control 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 years and 99.74%after five years, from the previously approved 99.80% at three years. Thefive-year effectiveness was demonstrated in a small portion of clinical trialsubjects who had completed five year follow up at the time of the FDAsubmission.  Five year follow up of allpatients in clinical trials is currently complete.  A PMA supplement to update the productlabeling incorporating the results of the follow-up data has been submitted tothe FDA.  We have continued to follow upon our clinical trial patients past five years and plan to update oureffectiveness claims with the 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 largenumber of newly trained physicians who were not part of the previous clinicalstudies. Although treatment of the total number of patients required by the FDAhad not been completed, the data obtained to date provided us with theopportunity to request that the FDA permit an early termination of the study.Because of the FDA ruling, the PMA Supplement submitted in March 2005 hasbeen re-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 has beensubmitted to 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.

 

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*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 September 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.

 

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 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 of their medical status.   The Centre of European Policy Studies (CEPS)in France ruled in November 2007 that the reimbursement for the *Essure* device will remain at the then current levels of 663Euros 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 an additional $2.5 million in the fourth quarter of 2009 tofurther building consumer and referral physician awareness.  We believe that once consumers and referringphysicians are made aware of the benefits of the *Essure*procedure,they will no longer look to other methods of birth control currently available.In 2009, we have broadened this campaign to target 15% of the U.S.population.  All of our awarenessinitiatives are also aimed at enabling us to compete for a larger share of the7.5 million U.S. families who have completed their families but rely ontemporary forms of birth control with lower efficacy.

 

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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.

 

Last, we are committed tocontinuing to improve the *Essure*device.  In 2010, 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 September 30,2009, had an accumulated deficit of $240.9 million. Although we were profitablein the third quarter of 2009, we may continue to experience a net loss infuture quarters 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 Nine Months Ended September 30, 2009 and 2008**

**(inthousands, except percentages)**

 
| ** **                                    | ** ** | **Three  Months Ended September 30,** | ** ** | **Nine  Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                    | ** ** | **2009**                                   | ** ** | **2008  (a)**                             | ** ** | **2009  -2008** | ** ** | **2009** | ** ** | **2008  (a)** | ** ** | **2009  -2008** | ** ** |
| ** **                                    | ** ** | **Amount**                                 | ** ** | **%  (b)**                                | ** ** | **Amount** | ** ** | **%  (b)** | ** ** | **%  Change** | ** ** | **Amount** | ** ** | **%  (b)** | ** ** | **Amount** | ** ** | **%  (b)** | ** ** | **%  Change** | ** ** |
| Net  sales                                    |       | $                                          | 34,247     |                                      | 100        | % | $ | 26,645 |   | 100 | % | 29 | % | $ | 94,447 |   | 100 | % | $ | 73,452 |   | 100 | % | 29 | % |
| Gross  profit                                 |       | 29,203                                     |       | 85                                        | %          | 21,555 |   | 81 | % | 35 | % | 76,977 |   | 82 | % | 57,721 |   | 79 | % | 33 | % |
| Research  and development expenses            |       | 1,734                                      |       | 5                                         | %          | 1,611 |   | 6 | % | 8 | % | 5,149 |   | 5 | % | 5,186 |   | 7 | % | -1 | % |
| Selling,  general and administrative expenses |       | 19,472                                     |       | 57                                        | %          | 16,363 |   | 61 | % | 19 | % | 65,380 |   | 69 | % | 56,546 |   | 77 | % | 16 | % |
| Net  income (loss)                            |       | 6,232                                      |       | 18                                        | %          | 2,017 |   | 8 | % | 209 | % | 1,341 |   | 1 | % | (7,843 | ) | -11 | % | 117 | % |
|                                               |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**(a) **Adjusted for theretrospective adoption of ASC 470-20. See Note 9:  Convertible SeniorNotes - Adoption of ASC 470-20 of the Notes to Condensed Consolidated FinancialStatements.

**(b) **Expressed as a percentage oftotal net sales

 

*Net Sales*

 

Netsales were $34.2 million for the three months ended September 30, 2009 ascompared to $26.6 million for the three months ended September 30, 2008,representing an increase of approximately $7.6 million or 29%.  Net sales were $94.4 million for the ninemonths ended September 30, 2009 as compared to $73.5 million for the ninemonths ended September 30, 2008, representing an increase of approximately$20.9 million or 29%.  The increase isthe 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 September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **               | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net sales (in thousands) |       | $                                         | 34,247     |                                     | $          | 26,645 |   | $ | 94,447 |   | $ | 73,452 |   |
|                     |       |                                      |       |                                     |       |   |   |   |   |
| United States of America |       | 82                                        | %          | 80                                       | %          | 80 | % | 78 | % |
| France                   |       | 11                                        | %          | 13                                       | %          | 12 | % | 14 | % |
| Rest of Europe           |       | 7                                         | %          | 6                                        | %          | 7 | % | 7 | % |
| Other                    |       | 0                                         | %          | 1                                        | %          | 1 | % | 1 | % |
|                          |            |                                           |            |                                          |            |  |  |  |  |  |  |  |  |

 

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No customer accounted formore than 10% of total revenue for the three and nine months ended September 30,2009 and 2008.  No customer had a balancein excess of 10% of our net accounts receivable at September 30,2009.  Accounts receivable fromone customer accounted for 10% of our gross accounts receivable balance at September 30,2008.

 

Weexpect our net sales for 2009 to be in the range of approximately $131.9million to $132.4 million, which would represent 29% 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 September 30, 2009 was $5.0 million as compared to $5.1million for the three months ended September 30, 2008, this represents adecrease of $0.1 million, or 1%.  Grossmargin for the three months ended September 30, 2009 and 2008 was 85% and81% respectively.   For the ninemonths ended September 30, 2009, gross margin was 82%, which represents animprovement from a gross margin of 79% for the nine months ended September 30,2008.

 

Duringthe third quarter of 2009, we entered into an Asset Purchased Agreement withAmerican Medical Systems, Inc. (“AMS”) pursuant to which we acquired theintellectual property assets, including patents and licenses from Ovion Inc., awholly owned subsidiary of AMS (“Ovion”).  In connection with the purchaseagreement, AMS and Ovion released us from any and all current and futuredomestic and international royalty obligations under such licenses.  We released approximately $1.5 millionrelated to international royalty obligations, which we had accrued todate.  This resulted in our gross marginsbenefitting approximately 400 basis points in the third quarter of 2009.  We believe that our gross profit margin willcontinue to improve as a result of this acquisition because amounts that wouldhave been previously recorded as royalty expense would have been greater thanamounts that will be recorded as amortization of the acquired assets.  In addition, the increase ingross margin in the third quarter of 2009 as compared to the third quarter of2008 is related to lower manufacturing costs associated with higher unit volumeand a domestic price increase implemented during the first quarter of 2009.

 

Our gross profitmargin will vary as our sales mix changes. Increases in sales of our devicesthrough distributors in international markets will tend to decrease our overallgross profit margin.

 

*Research and Development Expenses*

 

Research and developmentexpenses, which include expenditures related to product development, clinicalresearch and regulatory affairs, were $1.7 million and $1.6 million for thethree months ended September 30, 2009 and 2008, respectively, whichrepresents an increase of $0.1 million, or 8%. The primary reason for theincrease is due to higher costs related to testing of prototypes and clinicaltrials of approximately $0.2 million, offset by a decrease related to payrolland consulting expenses of approximately $0.1 million.  Research and developmentexpenses were $5.1 million and $5.2 million for the nine months ended September 30,2009 and 2008, respectively, which represents a decrease of $0.1 million, or 1%.  The decrease results primarily from payrolland consulting expenses of approximately $0.5 million, offset by increased costrelated to building prototypes for testing and project prototype expenses ofapproximately $0.4 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 and administrativespending for the three months ended September 30, 2009 was $19.5 millionas compared to $16.4 million for the three months ended September 30,2008, which represents an increase of $3.1 million, or 19%. The increase isprimarily due to payroll, consulting and stock compensation of approximately$1.3 million, increased costs related to building rent of approximately $0.4million, and domestic advertising expenditures increased by $0.4 millionprimarily for our consumer-awareness campaign. This campaign involves television, radio and print media and is intendedto 

 

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driveconsumer awareness of the *Essure* procedure.The increase also reflects increased  taxand legal related expenses of approximately $0.4 million. The increase alsoreflects increased cost related to printing, market research, and clinicalrelated expenses of approximately $0.4 million and increase expenses related tobad debt of approximately $0.1 million.

 

Selling,general and administrative spending for the nine months ended September 30,2009 were $65.4 million as compared to $56.5 million for the nine months ended September 30,2008, which represents an increase of $8.9 million, or 16%.  The increases were primarily the result ofpayroll, consulting, and stock compensation expenditures of approximately $4.4million.   The increase also reflects thefollowing: increased tax related expenses of approximately $0.2 million,increased building rent expense of approximately $0.7 million, increased costsrelated to marketing materials of approximately $0.5 million, increased bankingfees of approximately $0.2 million and bad debt expenses of approximately $0.2million.  Advertising expendituresincreased by $2.5 million primarily for our consumer-awareness campaign.  We expect selling, general and administrativeexpenses to increase in the fourth quarter of 2009 as we expect to spend moreon our consumer awareness campaign as compared to the third quarter of 2009.

 

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

 

Totalinterest income and expenses and otherexpenses, net for the three months ended September 30, 2009 was anet expense of $1.6 million as compared to a net expense of $1.5 million forthe three months ended September 30, 2008, which represents an increase of$0.1 million or 11%. Total interestincome and expenses and other expenses, net for the nine months ended September 30,2009 was a net expense of $4.7 million as compared to a net expense of $3.6million for the nine months ended September 30, 2008, which represents anincrease of $1.1 million or 33%. Interest income in the threeand nine months ended September 30, 2009 was lower by $0.2 million and$0.9 million compared with the three and nine months ended September 30,2008, respectively. Interest income was negatively impacted due to lowerinterest rates on the Company’s investment portfolio, which consists of auctionrate securities and money market funds that are currently earning lowerinterest rates compared to 2008.

 

Interestexpense in the three and nine months ended September 30, 2009 was higherby $0.2 million and $0.5 million compared with the three and nine months ended September 30,2008, respectively primarily due to the interest on revolving credit  line which we entered into in November 2008.  See Note 10 — Credit Line.

 

InMay 2008, FASB issued ASC 470 *Debt with Conversion andOther Options*(“ASC 470”). ASC 470 (formerly FSP APB 14-1) clarifies the accounting for convertibledebt instruments that may be settled in cash upon conversion, including partialcash settlement.  ASC 470 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.  ASC 470 is effectivefor fiscal years beginning after December 15, 2008, and retrospectiveapplication is required for all periods presented.  We have adopted ASC 470 with our firstquarter of fiscal 2009.  The adoptionresulted in an increase of interest expense of $1.1 million and $3.1 millionfor each of the three and nine months ended September 30, 2009 and anincrease of interest expense of $1.0 million and $2.9 million for each of thethree and nine months ended September 30, 2008.    See Note 9 — Convertible Senior Notes.

 

*Provision for income taxes*

 

Inaccordance with ASC 740 *Income Taxes*(formerlyFIN 48), the provision for income taxes is computed using the asset andliability 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.  We record a valuation allowance toreduce deferred tax assets to the amount that is believed more likely than notto be realized. We evaluate the need for a valuation allowance for our deferredtax 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 ASC 740 *Income Taxes* or(“ASC 740”), (formerly FIN 48, *Accountingfor Uncertainty in Income Taxes*), on January 1, 2007.  Theadoption of ASC 740 with respect to uncertain tax positions did not have amaterial 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 September 30,2009, our federal returns for the years ended 2006 through the current periodand most state returns for the years ended 2005 through the current period arestill open to examination.  The taxreturns of Conceptus SAS for the years end 2005 to 2007 were examined andclosed by the French tax authorities in 2008. In addition, all of the net operating losses and research anddevelopment credit carryforwards that may be used in future years are stillsubject to inquiry given that the statute of limitation for these items wouldbe from the year of the utilization.

 

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Forthe three and nine months ended September 30, 2009, we recordedapproximately $0.1 million and $0.4 million of income tax expense,respectively.   For the three and nine months ended September 30,2008, we recorded approximately $0.1 million and $0.3 million, respectively ofincome tax expense.

 

Oureffective tax rate was 2% for the three months ended September 30, 2009and 22% for the nine months ended September 30, 2009.  The Company’seffective rate for the three and nine months ended September 30, 2009 isprimarily related to our foreign and domestic operations.  Our effective tax rate was 5% for the threemonths ended September 30, 2008 and -4% for the nine months ended September 30,2008. The Company’s effective rate for the three and nine months ended September 30,2008 is primarily related to our foreign operations.

 

Theamount of unrecognized tax benefits at September 30, 2009 wasapproximately $2.5 million, of which, if ultimately recognized, approximately$0.6 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 ASC 740, 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 September 30,2009, had an accumulated deficit of $240.9 million. Although we were profitablein the third quarter of 2009, we experienced a net loss in the first twoquarters of 2009.  We have experienced aprofitable quarter for the three months ended September 30, 2009; however,there is a risk that we may not sustain profitability.  We will continue to expend substantialresources in the selling and marketing of the *Essure*system in the United States and abroad. We will be in an accumulated deficit position unless sufficient revenuescan be generated to offset expenses.

 

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 $63,750,000 remainingavailable 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 seniornotes due 2027. These notes bear a 2.25% interest per annum on the principalamount, payable semiannually in arrears on February 15 and August 15of each year, 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.

 

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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 September 30, 2009, we held $43.9million (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 every20-30 days. These ARS have a contractual maturity ranging from 2028 through2047.

 

OurARS are short-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 2010 through July 2012.  Conversely,UBS has the right, in its discretion, to purchase or sell our ARS at any timeuntil July 2012, so long as we receive payment at par value upon any saleor disposition.  We expect to sell our ARS under the Rights at parvalue.  However, if the Rights are not exercised before July 2012they will expire and UBS will have no further rights or obligation to buy ourARS.  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 settlements of our ARS in the three months ended September 30,2009 of $4.5 million and $4.6 million for the nine months ended September 30,2009 at full par value.

 

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.   During the nine months ended September 30,2009, we borrowed an additional $4.4 million, accrued interest of $0.2 millionand repaid $5.0 million under this line of credit.  Our loan balance as of September 30,2009 was $29.5 million.  We intend torepay this line of credit in its entirety when we exercise our Rights to haveUBS purchase the underlying ARS at full par value in June 2010.

 

Asof September 30, 2009, we had cash and cash equivalents of $52.2 million,compared to $54.7 million at December 31, 2008. The decrease of $2.5million is primarily due to cash used in investing activities offset by cashproceeds from financing and operating 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 $18.4 million in the nine months ended September 30, 2009,as compared to $2.3 million provided by operating activities in the nine monthsended September 30, 2008.  Net cashprovided by operating activities in the nine months ended September 30,2009 was primarily related to a net income of $1.3 million, impacted by:

 

·                  $11.6 million increase corresponding to the accretionof notes payable, stock based compensation, depreciation and amortization offixed assets, debt issuance costs and intangible amortization;

 

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·                  Increase in accounts receivable of $1.7 millionas a result of our increase in sales;

·                  Net decrease of other assets and other currentassets of $5.7 million primarily due toamortization of prepayments for ouradvertising, primarily in the United States;

·                  A increase in inventories of $0.2 million;

·                  An increase in accounts payable of $1.0 millionprimarily related to timing of payments; and

·                  An increase in other accrued and longterm liabilities and accruedcompensation of $0.9 million primarily for 2009 incentive plans.

 

We monitor our accounts receivable turnover closely to ensure thatreceivables are collected timely and have established a credit and collectionpolicy to facilitate our collection process and reduce our credit lossexposure. We expect to grow our business and increase our revenues and tocontinue to use cash received from collection of outstanding receivables tofund our operations;

 

*Investing Activities*

 

Net cash used ininvesting activities for the nine months ended September 30, 2009 was$22.6 million, primarily due to the asset purchase agreement with AMSof $23.7 million and capital expenditures primarily related to purchases ofadditional hysteroscopy equipment of $3.5 million.  In addition, we had settlements of our ARSfor $4.6 million at full par value during the nine months ended September 30,2009.

 

*Financing Activities*

 

Net cash provided byfinancing activities in the nine months ended September 30, 2009 was $1.6million from the issuance of common stock for our stock option programs of $2.3million, proceeds of $4.4 million from and repayment of $5.0 million to ourrevolving credit line agreement with UBS. See Note 10 — Credit Line of our Notes to Condensed ConsolidatedFinancial Statements.

 

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

 

**CRITICAL ACCOUNTING ESTIMATES ANDPOLICIES**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates and assumptionsin certain 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*

 

In June 2009,Accounting Standards Codification (“ASC”) ASC 105 *GenerallyAccepted Accounting Principles* or (“ASC 105”) was issued.  ASC 105 (formerly SFAS 168, *The FASB Accounting Standards Codification**TM** and the Hierarchy of Generally AcceptedAccounting Principles*) became the single official source of authoritative, nongovernmentalgenerally accepted accounting principles (“GAAP”) in the UnitedStates.  The historical GAAP hierarchy was eliminated and the ASCbecame the only level of authoritative GAAP, other than guidance issued by theSecurities and Exchange Commission.  Our accounting policies were notaffected by the conversion to ASC.  However, references to specificaccounting standards in the footnotes to our consolidated financial statementshave been changed to refer to the appropriate section of ASC.

 

InDecember 2007, FASB issued ASC 805 *Business Combinations*or (“ASC 805”).  ASC 805 (formerly SFAS141(R),*Business Combinations*) will impactfinancial statements on the acquisition date and in subsequent periods. Some ofthe changes, such as the accounting for contingent consideration, may introducemore volatility into our earnings and may impact our acquisition strategy.  Additionally, in February 2009 FASBissued an amendment to ASC 805 which amends the provisions related to theinitial recognition and measurement, subsequent measurement and disclosure ofassets and liabilities 

 

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arisingfrom contingencies in a business combination under ASC 805.  ASC 810 *Consolidations*or**(“ASC 810”) (formerly SFAS 160, *Noncontrolling Interests in Consolidated Financial Statements*)changes the accounting and reporting for minority interests, which arere-characterized as non-controlling interests and classified as a component ofequity. ASC 805 is applied prospectively and ASC 810 requires retroactiveadoption of the presentation and disclosure requirements for existing minorityinterests, while the remaining requirements of ASC 810 are appliedprospectively.  ASC 805 and ASC 810become effective on January 1, 2009. We adopted ASC 805 and ASC 810 in the first quarter of fiscal 2009 andtheir adoption did not have a material impact on our financial condition,results of operations, or cash flows.

 

Effective January 1,2008, we adopted ASC 820, *Fair ValueMeasurements and Disclosures*or**(“ASC 820”) withrespect to its financial assets and liabilities. ASC 820 (formerly SFAS 157, *Fair Value Measurements*) defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles and provides for expanded disclosure about fair valuemeasurements.  ASC 820 appliesprospectively to all other accounting pronouncements that require or permitfair value measurements.  ASC 820 excludes certain leasingtransactions accounted for under ASC 840, *Leases* (“ASC840”)**(formerly SFAS 13).  ASC 820 defers the effective date of ASC 820for all non-financial assets and non-financial liabilities except those thatare recognized 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 ASC 820 in thefirst quarter of fiscal 2009.  See Note 4- Fair Value Measurements.

 

In May 2008, FASBissued ASC 470-20, *Debt with Conversion andOther Options* or (“ASC 470”). On January 1, 2009, we adopted the Cash Conversion Subsections ofASC 470-20 (formerly FSP APB 14-1, *Accounting for Convertible**Debt Instruments That May Be Settled in Cash upon Conversion (IncludingPartial Cash Settlement)**)*, whichclarify the accounting for convertible debt instruments that may be settled incash (including partial cash settlement) upon conversion.  ASC 470-20clarifies the accounting for convertible debt instruments that may besettled in cash upon conversion, including partial cash settlement.  ASC 470-20 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.  ASC 470 is effective for fiscal yearsbeginning after December 15, 2008, and retrospective application isrequired for all periods presented.  Perthe adoption of ASC 470 we have made certain adjustments to the presentation ofour financial condition, results of operations, and cash flows.  See Note 9 — Convertible Senior Notes.

 

In October 2008,FASB issued ASC 820 *Fair Value Measurement andDisclosure*or (“ASC 820”).  * *ASC 820 (formerly FSPSFAS 157-3,*Determining the Fair Valueof a Financial Asset When the Market for That Asset is Not Active*)clarifies the application of fair value measurement and disclosures, which wehave adopted as of January 1, 2008, in situations where the market for aparticular financial asset is not active. We have considered the guidanceprovided by ASC 820 in our determination of estimated fair values, and theimpact was not material.

 

In April 2009, FASBissued ASC 825 *Financial Instruments* or (“ASC825”) and ASC 270 *Interim Reporting* or**(“ASC 270”).  ASC 825(formerly FSP SFAS 107-1,*Interim Disclosures aboutFair Value of Financial Instruments*,) and ASC 270 (formerly APB28-1) requires us 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.   ASC 825 and ASC 270 areeffective for interim periods ending after June 15, 2009. We haveadopted the provisions of ASC 825 and ASC 270 effective the second quarter offiscal 2009.  See Note 4 - Fair ValueMeasurements and Note 9 — Convertible Senior Notes.

 

In April 2009, FASBissued ASC 320 *Investments — Debt and Equity Securities*or**(“ASC 320”).  ASC 320 (formerly FSP SFAS No. 115-2,*Recognition and Presentation of Other-Than-TemporaryImpairments*) modifies the other-than-temporary impairment guidancefor debt securities through increased consistency in the timing of impairmentrecognition and enhanced disclosures related to the credit and noncreditcomponents of impaired debt securities that are not expected to be sold. Inaddition, increased disclosures are required for both debt and equitysecurities regarding expected cash flows, credit losses, and an aging ofsecurities with unrealized losses. ASC 320 is effective for interim and annualreporting periods that end after June 15, 2009. We have adopted theprovisions of ASC 320 effective the second quarter of fiscal 2009. We haveconsidered the guidance provided by ASC 320 in our determination of impairment,and have determined that the impact was not material.  See Note 9 — ConvertibleSenior Notes.

 

InApril 2009, FASB issued ASC 820 *Fair Value Measurement andDisclosure* or (“ASC 820”) was issued.  ASC 820 (formerly FSP SFAS 157-4, *Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significantly Decreased and Identifying TransactionsThat Are Not Orderly)* provides additional guidance for estimatingfair value when the volume and level of activity for the asset or liabilityhave significantly decreased.  ASC 820 re-emphasizes that regardlessof market conditions the fair value measurement is an exit price concept.  ASC820 clarifies and includes 

 

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additional factors toconsider in determining whether there has been a significant decrease in marketactivity for an asset or liability and provides additional clarification onestimating fair value when the market activity for an asset or liability hasdeclined significantly.  The scope of ASC 820 does not include assetsand liabilities measured under level 1 inputs.  ASC 820 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 ASC 820 effective the second quarter of fiscal2009, and have determined that the adoption did not have an impact on ourcondensed consolidated financial statements.

 

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 167has not been codified.  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.

 

**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 September 30,2009 we held $43.9 million (par value) in ARS which are variable rate debtinstruments and bear interest rates that are due to reset approximately every20-30 days. In September 2009 we re-classified the ARS from long-terminvestments to short-term investments because our intention is to sell our ARSunder the Rights at par value at the inception of the Rights period in June 2010.   Due in part to these factors, our futureinvestment income may fall short of expectations due to changes in interestrates or we may suffer losses in principal if forced to sell securities thathave declined in market value due to changes in interest rates. Interest ratesthat may affect these items in the future will depend on market conditions andmay differ 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 of 2008.  We believe the establishment of CML continuesto expand our direct presence in international markets and will increase ourrevenues as we will recognize sales at end user pricing as compared to theprice 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.

 

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 in 

 

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relationto same currency liabilities. Periodically, during nine months ended September 30, 2009 weentered into forward contracts to buy U.S dollars at fixed intervals in theretail market in an over-the-counter environment.  As of September 30, 2009, we had foreigncurrency forward contracts to sell $5.9 million Euros in exchange for $8.2million U.S. dollars maturing in October 2009 through January 2010.  As of September 30, 2009 these forwardcontracts are recorded at their fair value of $0.4 million in other accruedliabilities on our condensed consolidated balance sheet.  We have outstanding intercompany receivablesfrom Conceptus SAS of $8.6 million as of September 30, 2009.  We expect the changes in the fair value ofthe intercompany receivables to be materially offset by the changes in the fairvalue 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 September 30,2009.

 

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

 

AtSeptember 30, 2009, our intercompany receivable balance with foreignsubsidiaries is $8.2 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 $0.8 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 andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, and in reaching a reasonable level ofassurance, management is required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

As of September 30,2009, the end of our most recent fiscal quarter, we carried out an evaluation,under the supervision and with the participation of our management, includingour Chief 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**

 

OnMay 22, 2009, we filed a lawsuit in the United States District Court,Northern District of California against Hologic, Inc., (“Hologic”) seekingdeclaratory judgment by the Court that Hologic’s planned importation, use, saleor offer to sell of its forthcoming Adiana Permanent Contraception system willinfringe several U.S. patents owned by us including U.S. Patent Nos. 6,634,361,6,709,667, 7,237,552, 7,428,904 and 7,506,650, and an injunction prohibitingHologic from importing, using, selling or offering to sell its Adiana system inthe United States.  Upon FDA approval of the Adiana PermanentContraception system, we filed an Amended Complaint in July 2009 seeking ajudgment that Hologic’s importation, use, sale and/or offer to sell the systeminfringes the same patents mentioned above and requested an injunction againstsuch activity.  We also filed a motion for preliminary injunction,requesting the Court to enjoin the Adiana system in the United States pendingfinal judgment in the action.  A hearing on the preliminary injunctionmotion occurred on November 4, 2009 and we expect a ruling in the fourthquarter of 2009.

 

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 our AnnualReport as of December 31, 2008 on Form 10-K filed with the Securitiesand Exchange Commission on March 13, 2009 should be considered whileevaluating Conceptus and our business. In addition to those factors and toother information in this Form 10-Q, the following updates to the riskfactors as of September 30, 2009 should be considered carefully whileevaluating the Company and our business.*

 

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

 

As of September 30,2009, we held approximately $43.9 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 through2047.  These investments havecharacteristics similar to short-term investments, because at pre-determinedintervals, generally ranging from 20 to 30 days, there is a new auctionprocess at which the interest rates for these securities are reset tocurrent interest rates. At the end of each such period, we historically haveeither chosen to roll-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 these securitiesin 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 2010 and ending July 2012. In exchange, theCompany released UBS from claims that it may have for damages related to theauction rate securities (other than consequential damages), and we granted UBSthe right to sell or otherwise dispose of the auction rate securities on itsbehalf (so long as we are paid the par value of the auction rate securitiesupon any disposition). We intend to sell our ARS under the Rights at theinception of the Rights period in June 2010.

 

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 may ultimatelyhave to recognize additional impairment charges in our results of operationswith respect to these investments.

 

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

 

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 methodsof permanent contraception, in particular tubal ligation;

 

·                  other methodsof non-permanent contraception, including devices such as intrauterine devices,or IUDs, vaginal rings, condoms and prescription drugs such as the birthcontrol pill, injectable and implantable contraceptives and patches; and

 

·                  other companiesthat may be developing permanent contraception devices that are similar to orotherwise compete with the*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 September 30, 2009, we were aware of one company, Hologic, Inc.which is in the 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.  We expect that these developments willintensify 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 competitive productthan 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 adoption of our *Essure*product;

 

·                  our ability torespond promptly to medical and technological changes through the developmentand commercialization of new products;

 

·                  availability ofcoverage and reimbursement from third-party payors, insurance companies andothers for the *Essure*procedure;

 

·                  the manufactureand delivery of our products in sufficient volumes on time, and accuratelypredicting and controlling costs associated with manufacturing, installation,warranty and maintenance of the products;

 

·                  our ability toattract and retain qualified personnel;

 

·                  the extent ofour patent protection or our ability to otherwise develop proprietary productsand processes; and

 

·                  securingsufficient capital resources to expand our sales and marketing efforts.

 

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

 

**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 

 

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pronouncements have occurredand may occur in the future. For example, we recently adopted ASC 470-20 in thefirst quarter of fiscal 2009. The adoption resulted in an increase of interestexpense of $1.1 million and $3.1 million for each of the three and nine monthsended September 30, 2009 and a retrospective increase of interest expenseof $1.0 million and $2.9 million for each of the three and nine months ended September 30,2008.  Similar changes to existing rules orthe questioning of current practices may adversely affect our reportedfinancial results 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 our business.  Currently, we are unable to stockpileadditional inventory to mitigate the risk of a shortfall in our supply ofproducts.

 

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.

 

**Ourbusiness, financial condition, results of operations and cash flows could besignificantly and adversely affected if certain types of healthcare reformprograms are adopted in our key markets and other administration andlegislative proposals are enacted into law.**

 

Recently,President Obama and members of Congress have proposed significant reforms tothe U.S. healthcare system. Both the U.S. Senate and House of Representativeshave conducted hearings about U.S. healthcare reform. The Obama administration’sfiscal year 2010 budget included proposals to limit Medicare payments, reducedrug spending and increase taxes. In addition, members of Congress haveproposed a single-payer healthcare system, a government health insurance optionto compete with private plans and other expanded public healthcare measures.Most recently, in September 2009, Max Baucus, the Chairman of the U.S.Senate Finance Committee released a draft of the committee’s healthcare reformbill, a bill which included an excise tax on all medical devices, requiring themedical device industry to contribute $4 billion to healthcare reform each yearfor a period of 10 years. Various healthcare reform proposals have also emergedat the state level. We cannot predict what healthcare initiatives, if any, willbe implemented at the federal or state level, or the effect any futurelegislation or regulation will have on us. However, an expansion in government’srole in the U.S. healthcare industry may lower reimbursements for our products,reduce medical procedure volumes and adversely affect our business and resultsof operations, possibly materially. In addition, if the excise tax contained inthe proposed legislation from the U.S. Senate Finance Committee is enacted intolaw, our effective tax rate and results of operations would be materially andadversely affected and our ability to innovate and conduct necessary researchand development to remain competitive with large, global companies could benegatively impacted.

 

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**Item 6.Exhibits**

 
| **Number** | ** ** | **Description**                                                                                                                    |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------|
| 10.1       |       | Asset Purchase  Agreement, dated September 30, 2009, between American Medical  Systems, Inc. and Conceptus Incorporated. |
| 10.2       |       | Employment Agreement,  dated November 2, 2009 between Julie Brooks and Conceptus Incorporated.                                |
| 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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**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: November 06, 2009

 

Conceptus, Inc.

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

 

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