**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM10-Q**

| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------|-----------------------------------------------------------------------------------------------|
| ** ** |                                                                                          | ** ** |
| ** ** | **For the  quarterly period ended March 31, 2007**                                            |
| ** ** |                                                                                          | ** ** |
| ** ** | **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.) |

 

**331 EastEvelyn**

**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 bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for at least the past 90 days. Yes x No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act (Check one)

Large acceleratedfiler  o AcceleratedFiler  x Non acceleratedfiler  o

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of ExchangeAct).

Yes  oNo  x

There were 29,405,201shares of Registrant’s Common Stock issued and outstanding as of April 30,2007.

 

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**CONCEPTUS, INC.**

**FORM10-Q for the Quarter Ended March 31, 2007**
|            | ** ** | ** **                                                                                  | ** ** | **Page**   |
|------------|------------|---------------------------------------------------------------------------------------------|------------|------------|
| ** ** | ** ** | ** **                                                                                  | ** ** | ** ** |
| Part I.    |       | Financial Information                                                                       |       | 3          |
|       |       |                                                                                        |       |       |
| Item 1.    |       | Condensed  Consolidated Financial Statements (Unaudited)                                    |       | 3          |
|       |       |                                                                                        |       |       |
|       |       | a) Condensed  Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006        |       | 3          |
|       |       |                                                                                        |       |       |
|       |       | b) Condensed  Consolidated Statements of Operations for the three months period ended       |       |       |
|       |       | March 31, 2007  and 2006                                                                    |       | 4          |
|       |       |                                                                                        |       |       |
|       |       | c) Condensed  Consolidated Statements of Cash Flows for the three months period ended       |       |       |
|       |       | March 31, 2007  and 2006                                                                    |       | 5          |
|       |       |                                                                                        |       |       |
|       |       | d) Notes to  Condensed Consolidated Financial Statements                                    |       | 6          |
|       |       |                                                                                        |       |       |
| Item 2.    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 11         |
|       |       |                                                                                        |       |       |
| Item 3.    |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 18         |
|       |       |                                                                                        |       |       |
| Item 4.    |       | Controls and  Procedures                                                                    |       | 19         |
|       |       |                                                                                        |       |       |
| Part II.   |       | Other Information                                                                           |       | 19         |
|       |       |                                                                                        |       |       |
| Item  1.   |       | Legal Proceedings                                                                           |       | 19         |
|       |       |                                                                                        |       |       |
| Item  1A.  |       | Risk  Factors                                                                               |       | 19         |
|       |       |                                                                                        |       |       |
| Item 6.    |       | Exhibits                                                                                    |       | 21         |
|       |       |                                                                                        |       |       |

 

2

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**PART I.FINANCIAL INFORMATION**

**ITEM1. Condensed Consolidated Financial Statements**

**Conceptus,Inc.**

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

**(Inthousands, except number of shares)**
| ** **                                          | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **2007**           | ** **  | **2006**              | ** ** |
| **Assets**                                          | ** ** | ** **         | ** **  | ** **            | ** ** |
| Current assets:                                     |       |               |        |                  |       |
| Cash and cash  equivalents                          |       | $                  | 48,909      |                  | $          | 3,238 |   |
| Short-term investments                              |       | 48,300             |        | 22,600                |       |
| Accounts receivable,  net                           |       | 8,919              |        | 6,976                 |       |
| Inventories                                         |       | 2,036              |        | 610                   |       |
| Other current assets                                |       | 1,233              |        | 1,064                 |       |
|                                                |       |               |        |                  |       |
| Total current assets                                |       | 109,397            |        | 34,488                |       |
|                                                |       |               |        |                  |       |
| Property and equipment,  net                        |       | 2,849              |        | 2,917                 |       |
| Intangible assets, net                              |       | 1,300              |        | 1,350                 |       |
| Debt issuance costs,  net                           |       | 2,994              |        | —                |       |
| Other assets                                        |       | 797                |        | 996                   |       |
|                                                |       |               |        |                  |       |
| **Total assets**                                    | ** ** | **$**              | **117,337** | ** **            | **$**      | **39,751** | ** ** |
|                                                |       |               |        |                  |       |
| **Liabilities and stockholders’  equity**      | ** ** | ** **         | ** **  | ** **            | ** ** |
| Current liabilities:                                |       |               |        |                  |       |
| Accounts payable                                    |       | $                  | 4,786       |                  | $          | 2,903 |   |
| Accrued compensation                                |       | 3,007              |        | 3,909                 |       |
| Other accrued  liabilities                          |       | 1,983              |        | 1,597                 |       |
|                                                |       |               |        |                  |       |
| Total current  liabilities                          |       | 9,776              |        | 8,409                 |       |
|                                                |       |               |        |                  |       |
| Notes payable                                       |       | 86,250             |        | —                |       |
| Other accrued  liabilities                          |       | 308                |        | 328                   |       |
|                                                |       |               |        |                  |       |
| Total liabilities                                   |       | 96,334             |        | 8,737                 |       |
|                                                |       |               |        |                  |       |
| Stockholders’ equity:                          |       |               |        |                  |       |
| Common stock and  additional paid-in capital        |       | 248,720            |        | 254,631               |       |
| Accumulated deficit                                 |       | (227,717           | )           | (223,617              | )          |
| Treasury Stock, 77,863  and 91,752 shares, at cost  |       | —             |        | —                |       |
|                                                |       |               |        |                  |       |
| Total stockholders’  equity                    |       | 21,003             |        | 31,014                |       |
|                                                |       |               |        |                  |       |
| **Total liabilities and stockholders’ equity** | ** ** | **$**              | **117,337** | ** **            | **$**      | **39,751** | ** ** |

 

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

3

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**Conceptus,Inc.**

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

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

** **
| ** **                                                                      | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **March 31,**               | ** ** |
| ** **                                                                      | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net sales                                                                       |       | $                                | 13,780     |   | $ | 7,962 |   |
| Cost of goods  sold (*)                                                         |       | 3,705                            |       | 2,883 |   |
| Gross profit                                                                    |       | 10,075                           |       | 5,079 |   |
|                                                                            |       |                             |       |   |   |
| Operating  expenses:                                                            |       |                             |       |   |   |
| Research and  development (*)                                                   |       | 1,642                            |       | 1,200 |   |
| Selling, general  and administrative (*)                                        |       | 13,009                           |       | 10,000 |   |
| Total operating  expenses                                                       |       | 14,651                           |       | 11,200 |   |
| Operating loss                                                                  |       | (4,576                           | )          | (6,121 | ) |
|                                                                            |       |                             |       |   |   |
| Interest and other income                                                       |       | 476                              |       | 333 |   |
| Net loss                                                                        |       | $                                | (4,100     | ) | $ | (5,788 | ) |
| Basic and  diluted net loss per share                                           |       | $                                | (0.14      | ) | $ | (0.20 | ) |
| Weighted-average  shares used in computing basic and diluted net loss per share |       | 29,260                           |       | 28,860 |   |

 

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(*) Includes the following amounts related to stock-based compensation:
| ** **                           | ** ** | **Three months ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **March 31,**               | ** ** |
| ** **                           | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Cost of goods  sold                  |       | $                                | 6          |   | $ | 40 |   |
| Research and  development            |       | 99                               |       | 173 |   |
| Selling, general and  administrative |       | 1,348                            |       | 1,241 |   |
|                                      |            |                                  |            |  |  |  |  |

 

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

4

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**Conceptus,Inc.**

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

**(Inthousands)**
| ** **                                                                   | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**               | ** ** |
| ** **                                                                   | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities**                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                | (4,100     | ) | $ | (5,788 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                             |       |   |   |
| Depreciation and  amortization of property, plant and equipment              |       | 313                              |       | 254 |   |
| Amortization of  debt issuance costs                                         |       | 77                               |       | — |   |
| Amortization of  intangibles                                                 |       | 50                               |       | 50 |   |
| Inventory  write-down                                                        |       | 70                               |       | (80 | ) |
| Stock-based  compensation expense                                            |       | 1,453                            |       | 1,454 |   |
| Allowance for  doubtful accounts                                             |       | 28                               |       | 43 |   |
| Loss on  retirement of fixed assets                                          |       | 17                               |       | — |   |
| Changes in  operating assets and liabilities:                                |       |                             |       |   |   |
| Accounts receivable                                                          |       | (1,971                           | )          | (499 | ) |
| Inventories                                                                  |       | (1,496                           | )          | 655 |   |
| Other current  assets                                                        |       | (168                             | )          | 149 |   |
| Other assets                                                                 |       | 200                              |       | 115 |   |
| Accounts payable                                                             |       | 1,883                            |       | (217 | ) |
| Accrued  compensation                                                        |       | (698                             | )          | (469 | ) |
| Other accrued  and long term liabilities                                     |       | 366                              |       | 125 |   |
| Net cash used in  operating activities                                       |       | (3,976                           | )          | (4,208 | ) |
|                                                                         |       |                             |       |   |   |
| **Cash  flows from investing activities**                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Purchase of  investments                                                     |       | (27,850                          | )          | (21,450 | ) |
| Maturities of  investments                                                   |       | 2,150                            |       | 15,300 |   |
| Capital  expenditures                                                        |       | (262                             | )          | (395 | ) |
| Net cash used in  investing activities                                       |       | (25,962                          | )          | (6,545 | ) |
|                                                                         |       |                             |       |   |   |
| **Cash  flows from financing activities**                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Proceeds from  issuance of long term debt, net of issuance costs             |       | 83,179                           |       | — |   |
| Purchase of call  options on convertible senior notes                        |       | (19,372                          | )          | — |   |
| Proceeds from  issuance of warrants                                          |       | 10,695                           |       | — |   |
| Issuance of  common stock                                                    |       | 1,107                            |       | 661 |   |
| Net cash  provided by financing activities                                   |       | 75,609                           |       | 661 |   |
|                                                                         |       |                             |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                        |       | 45,671                           |       | (10,092 | ) |
| Cash and cash  equivalents at the beginning of the period                    |       | 3,238                            |       | 12,573 |   |
| Cash and cash  equivalents at end of the period                              |       | $                                | 48,909     |   | $ | 2,481 |   |

 

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

5

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**Conceptus,Inc****.**

***NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS***

***(Unaudited)***

**1.****                Basisof Presentation**

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and pursuant to theinstructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes requiredby accounting principles generally accepted in the United States for completefinancial statements. In the opinion of management, all adjustments, consistingonly of normal recurring adjustments, considered necessary for a fair statementhave been included.

Thecondensed consolidated balance sheet at December 31, 2006 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 reviewed in conjunction with the audited consolidatedfinancial statements and related notes included in our Annual Report on Form10-K for the year ended December 31, 2006.  The results of operations forthe three months ended March 31, 2007 may not necessarily be indicative of theoperating results for the full 2007 fiscal year or any other future interimperiods.

InJuly 2006, the Financial Standards Accounting Board (or “FASB”) issuedFinancial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109”, or FIN 48, which is a change inaccounting for income taxes. FIN 48 specifies how tax benefits for uncertaintax positions are to be recognized, measured, and derecognized in financialstatements; requires certain disclosures of uncertain tax matters; specifieshow reserves for uncertain tax positions should be classified on the balancesheet; and provides transition and interim-period guidance, among otherprovisions. FIN 48 is effective for fiscal years beginning after December 15,2006 and as a result, we adopted FIN 48 during the three months period ended onMarch 31, 2007. The adoption of the provisions of FIN 48 did not have amaterial impact on our financial position and results of operations.

*RecentAccounting Pronouncements*

InSeptember 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS157”). This standard defines fair value, establishes the framework formeasuring fair value in accounting principles generally accepted in the UnitedStates and expands disclosure about fair value measurements. This pronouncementapplies under other accounting standards that require or permit fair valuemeasurements. Accordingly, this statement does not require any new fair valuemeasurement. This statement is effective for fiscal years beginning afterNovember 15, 2007 and interim periods within those fiscal years. We will berequired to adopt SFAS No. 157 in the first quarter of 2008. We are currentlyevaluating the requirements of SFAS No. 157 and have not yet determined theimpact on our consolidated financial statements.

InFebruary 2007, the Financial Accounting Standards Board (the “FASB”) issuedSFAS No. 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS 159”) which permits entities to choose to measure manyfinancial instruments and certain other items at fair value that are notcurrently required to be measured at fair value. SFAS 159 will be effective forus on January 1, 2008. We are currently evaluating the impact of adopting SFAS159 on our financial position, cash flows, and results of operations.

**2.****                Summaryof Significant Accounting Policies**

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions in certain circumstances that affect amounts reported in theaccompanying consolidated financial statements and related footnotes. Inpreparing these financial statements, management has made its best estimatesand judgments of certain amounts included in the financial statements, givingdue consideration to materiality. The primary estimates underlying ourfinancial statements include write-offs for obsolete and slow moving inventory,allowance for doubtful accounts receivable, product warranty, impairment oflong-lived assets and stock-based compensation.

Oursignificant accounting policies are disclosed in our Annual Report on Form 10-Kfor the year ended December 31, 2006 that was filed with the Securities andExchange Commission on March 15, 2007. Our significant accounting policies havenot materially changed since December 31, 2006.

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**3.****                Inventories**

Inventories arestated at the lower of cost or market.  Cost is based on actual costscomputed on a first-in, first-out basis.  The components of inventoriesconsist of the following (in thousands):
|                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------|------------|--------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| Raw materials    |       | $                  | 198        |                  | $          | 159 |   |
| Work-in-progress |       | 1,030              |       | 292                   |       |
| Finished goods   |       | 808                |       | 159                   |       |
| **Total**        | ** ** | **$**              | **2,036**  | ** **            | **$**      | **610** | ** ** |

 

**4.****                Warranty**

We offerwarranties on our product and record a liability for the estimated future costsassociated with warranty claims, which is based upon our historical experienceand our estimate of the level of future costs.  Warranty costs arereflected in the statement of operations as a cost of goods sold.  Areconciliation of the changes in warranty liability for the three months endedMarch 31, 2007 and 2006 follows (in thousands):
|                                                   | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Balance at the  beginning of the period           |       | $                                                    | 209        |   | $ | 70 |   |
| Accruals for  warranties issued during the period |       | 115                                                  |       | 85 |   |
| Settlements made  in kind during the period       |       | (102                                                 | )          | (58 | ) |
| **Balance at the end of the  period**             | ** ** | **$**                                                | **222**    | ** ** | **$** | **97** | ** ** |

 

**5.****                Stock-BasedCompensation**

Netloss for the first quarter of 2007 included stock-based compensation expenseunder Statement of Financial Accounting Standards (“SFAS”) No. 123(R) ofapproximately $1.4 million, which consisted of stock-based compensation expenseof approximately $1.1 million related to employee stock options, employee stockpurchase plan and stock appreciation rights and stock-based compensationexpense of approximately $0.3 million related to employee restricted stock andrestricted stock units.

Netloss for the first quarter of 2006 included stock-based compensation expenseunder Statement of Financial Accounting Standards (or “SFAS”) No. 123(R) of$1.4 million, which consisted of stock-based compensation expense of $1.1million related to employee stock options, employee stock purchase plan andstock appreciation rights and stock-based compensation expense of $0.3 millionrelated to employee restricted stock and restricted stock units.

Stock-basedcompensation arrangements to non-employees are accounted for in accordance withEITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued toOther Than Employees for Acquiring, or in Conjunction with Selling, Goods orServices,” which requires that these equity instruments are recorded at theirfair value on the measurement date. The measurement of stock-based compensationis subject to periodic adjustment as the underlying equity instruments vest.Stock-based compensation expense relating to non-employees was approximately$61,000 and $59,000 for the three months ended March 31, 2007 and 2006,respectively.

7

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Wecalculated the fair value of each option on the date of grant using theBlack-Scholes method as prescribed by SFAS No. 123(R). The assumptions usedwere as follows:
|                                  | ** ** | **Three months ended March 31, 2007**            | ** ** |
|----------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                       | ** ** | **Stock Option and Stock  Appreciation Right  Plans** | ** ** | **Employee Stock  Purchase Plan** | ** ** |
| Expected term  (in years)        |       | 3.54                                                                      |       | 0.49 |   |
| Average  risk-free interest rate |       | 4.68                                                                      | %          | 5.14 | % |
| Average  volatility factor       |       | 48.6                                                                      | %          | 42.0 | % |
| Dividend yield                   |       | —                                                                    |       | — |   |

 

*ExpectedTerm:* Our expected term represents the period that ourstock-based awards are expected to be outstanding and was determined based onhistorical exercise experience of similar awards, giving consideration to thecontractual terms of the stock-based awards and vesting schedules.

*ExpectedVolatility:* We used historical volatility based on theexpected term of the awards, which is consistent with our assessment that thehistorical volatility for such period is more representative of future stockprice trends than any other type of volatility. The calculation was based on asimple-average method, using a reasonably sufficient number of priceobservations, in accordance with SFAS No. 123(R) and Staff Accounting BulletinNo. 107, “Share-Based Payment” (“SAB 107”).

*ExpectedDividends:* We have not paid and do not anticipate paying anydividends in the near future.

*Risk-FreeInterest Rate:* We base the risk-free interest rate on theU.S. Treasury yield curve in effect at the time of grant based on the expectedterm of the underlying option.

*Forfeitures:*As stock-based compensation expense recognized in the Condensed ConsolidatedStatement of Operations for the first three months of fiscal year 2007 is basedon awards ultimately expected to vest, it has been reduced for estimatedforfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the timeof grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. Forfeitures were estimated based on historicalexperience.

No incometax benefit has been recognized relating to stock-based compensation expenseand no tax benefits have been realized from exercised stock options. There wasno cash flow impact from SFAS 123(R) in the three months ended March 31, 2007and March 31, 2006.

Stock Options andStock Appreciation Rights: During the three months endedMarch 31, 2007, we granted stock options and stock appreciation rights for551,500 shares of common stock, with an estimated total grant-date fair valueof approximately $4.0 million and a grant date weighted-average fair value of$7.33 per share. During the three months ended March 31, 2006, we granted stockoptions and stock appreciation rights for 384,000 shares of common stock, withan estimated total grant-date fair value of approximately $2.6 million and agrant date weighted-average fair value of $6.86 per share.

Asof March 31, 2007, there was unrecognized compensation cost of approximately$10.4 million for total stock-based compensation related to stock options andstock appreciation rights, before forfeitures. This cost is expected to berecognized over a weighted-average amortization period of 1.4 years.

Employee StockPurchase Plan (ESPP): The compensation cost in connectionwith the ESPP for the three months ended March 31, 2007 was approximately$81,000 with a grant-date weighted-average fair value of $5.84. During thethree months ended March 31, 2006, the compensation cost was approximately$61,000, with a grant-date weighted-average fair value of $4.34. This cost isamortized on a straight-line basis over the relevant subscription period.

Restricted Sharesand Restricted Stock Units: In connection with restrictedshares and restricted stock units granted, we recorded stock compensationrepresenting the difference between the exercise price of the shares and thefair market value of our common shares on the dates the awards were granted.This stock compensation is being recorded as compensation expense on astraight-line basis over the vesting periods of the underlying stock awards.During the three months ended March 31, 2007, we recorded approximately$312,000 of such compensation expense, with a grant date weighted-average fairvalue of $18.06 per share. During the three months ended March 31, 2006, werecorded approximately $278,000 of such compensation expense, with a grant dateweighted-average fair value of $14.76 per share.

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Asof March 31, 2007, there was an unrecognized compensation cost of approximately$1.5 million related to nonvested restricted shares and restricted stock units,before forfeitures. This cost is expected to be recognized over aweighted-average amortization period of 0.6 years for restricted stock awardsand 1.6 years for restricted stock units.

**6.****                Notes Payable**

InFebruary 2007, we issued an aggregate principal amount of $86,250,000 of our2.25% convertible senior notes due 2027. These notes bear interest on theprincipal amount at 2.25% per annum, payable semiannually in arrears onFebruary 15 and August 15 of each year, beginning on August 15, 2007. Interestaccrual on the notes commenced on February 12, 2007. The notes will mature onFebruary 15, 2027, unless earlier redeemed, repurchased or purchased by us orconverted.

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 described inthe next paragraph. Upon conversion, a holder would receive cash up to theprincipal amount of the note and shares of our common stock in respect of suchnote’s conversion value in excess of such principal amount.

Thenotes are convertible only in the following circumstances: (1) during anycalendar quarter after the quarter ending March 31, 2007 if the closing saleprice of our common stock for each of 20 or more trading days in a period of 30consecutive trading days ending on the last trading day of the immediatelypreceding calendar quarter exceeds 120% of the conversion price; (2) during thefive consecutive business days immediately after any five consecutive tradingday period in which 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 the notesduring such five-day period; (3) upon the occurrence of specified corporatetransactions; (4) if we call the notes for redemption and (5) at anytime on orafter December 15, 2011 to and including February 15, 2012 and anytime on orafter February 15, 2025. Upon a change in control or termination of trading,holders of the notes may require us to repurchase all or a portion of theirnotes for cash at a repurchase price equal to 100% of the principal amount,plus any accrued and unpaid interest.

Inaddition, in connection with the issuance of the notes, we entered intoseparate convertible note hedge transactions and separate warrant transactionsto reduce the potential dilution upon conversion of the notes ( “Call SpreadTransactions”). As a result of the Call Spread Transactions, we do notanticipate experiencing an increase in the total shares outstanding from theconversion of the notes unless the price of our common stock appreciates above$36.47 per share, effectively increasing the conversion premium to us to$36.47. We purchased call options to cover approximately 3.1 million shares ofour common stock, which is the number of shares underlying the notes. Inaddition, we sold warrants permitting the purchasers to acquire up toapproximately 3.1 million shares of our common stock.

**7.****                Income Taxes**

Weadopted the provisions of FASB No. 48 Accounting for Uncertainty in IncomeTaxes (“FIN 48”) an interpretation of FASB Statement No. 109 (“SFAS 109”) onJanuary 1, 2007.  The adoption of theprovisions of FIN 48 did not have a material impact on our financial positionand results of operations. We have not been audited by the Internal RevenueService or any state income or franchise tax agency. As of March 31, 2007, ourfederal returns for the years ended 2003 through the current period and moststate returns for the years ended 2002 through the current period are stillopen to examination. In addition, all of the net operating losses and researchand development 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.

**8.****                Computation of NetLoss Per Share**

Basicnet loss per share excludes any potential dilutive effects of options andcommon stock shares subject to repurchase.  Diluted net loss per shareincludes the impact of potentially dilutive securities.  However, due toour net loss position, basic and diluted net loss per share are both computedusing the weighted average number of common shares outstanding.

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Thefollowing table provides a reconciliation of weighted-average number of commonshares outstanding to the weighted-average number common shares outstandingused in computing basic and diluted net loss per common share (in thousands):
|                                                                                                                       | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                            | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                            | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Denominator:                                                                                                          |       |                             |       |   |   |
| Weighted-average  number of common shares outstanding                                                                 |       | 29,328                           |       | 29,121 |   |
| Less: Weighted-average unvested and restricted  common shares                                                         |       | (68                              | )          | (261 | ) |
| **Weighted-average  number common shares outstanding used in computing basic and diluted net loss  per common share** | ** ** | **29,260**                       | ** ** | **28,860** | ** ** |

 

Thefollowing outstanding options, potential employee stock purchase plan shares,stock appreciation rights and restricted stock shares were excluded from thecomputation of diluted net loss per share, as their effect would have beenantidilutive (in thousands):
|                                                           | ** ** | **At March 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                | ** ** | **2007**                   | ** ** | **2006** | ** ** |
| Outstanding  options and SARs                             |       | 3,963                      |       | 3,798 |   |
| Restricted stock                                          |       | 52                         |       | 267 |   |
| Restricted stock  units                                   |       | 276                        |       | 68 |   |
| Employee Stock  Purchase Plan                             |       | 15                         |       | 34 |   |
| Warrants issued  in connection with our convertible notes |       | 3,093                      |       | — |   |
| **Total**                                                 | ** ** | **7,399**                  | ** ** | **4,167** | ** ** |

 

Our2.25% senior convertible notes are not included in the calculation of net lossper share because their effect is anti-dilutive.

**9.****                Stockholders’Equity**

Asof March 31, 2007, we hold 77,863 shares of treasury stock as a result ofrepurchasing shares of restricted common stock at par value in accordance withthe terms of the restricted stock agreements. These shares had a purchase priceof $0.003 per share and are recorded as treasury stock.

In connection withthe issuance of our senior convertible notes (see Note 6) in February 2007, weentered into the Call Spread Transactions, which have the effect of reducingthe potential dilution upon conversion of the notes. As a result, we do notanticipate experiencing an increase in the number of shares outstanding fromthe conversion of our senior convertible notes unless the price of our commonstock appreciates above $36.47 per share, effectively increasing the conversionpremium to us to $36.47. The Call Spread Transactions do not affect the rightsof noteholders under the indenture governing our senior convertible notes. Wepurchased call options in private transactions to cover approximately 3.1million shares of our common stock at a strike price of $27.89 per share(subject to adjustment in certain circumstances) for approximately $19.4million. The call options generally will allow us to receive shares of commonstock from counterparties equal to the number of shares of common stock payableto the holders of our senior convertible notes upon conversion. These calloptions will terminate the earlier of the maturity dates of the related seniorconvertible notes or the first day all of the related senior convertible notesare no longer outstanding due to conversion or otherwise. In addition, we soldwarrants permitting the purchasers to acquire up to approximately 3.1 millionshares of our common stock at an exercise price of $36.47 per share (subject toadjustments in certain circumstances) in private transactions for totalproceeds of approximately $10.7 million. The warrants provide for net sharesettlement. We have analyzed the Call Spread Transactions under EITF Issue No.00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled In, a Company’s Own Stock,” and determined that they meetthe criteria for classification as equity transactions. As a result, in thethree months ended March 31, 2007, we recorded the purchase of the call optionsas a reduction in additional paid-in capital and the proceeds of the warrantsas an addition to paid-in capital, and we will not recognize subsequent changesin fair value of the agreements. 

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**10.****     Commitments and Contingencies**

OnFebruary 27, 2007, we entered into an amendment to the Share Purchase and CallOption Agreement dated January 17, 2004 with Conceptus SAS, (or “SAS”) and into an amendment to theDistribution Agreement with SAS, dated January 17, 2004.  Pursuant to the amendment to the SharePurchase and Call Option Agreement, weagreed not to exercise the call option to acquire SAS in 2007 and agreed toexercise our call option to acquire SAS sometime between January 1, 2008and January 2, 2009 subject to the satisfaction of certain closing conditions.  Pursuant to the amendment to the DistributionAgreement, SAS agreed to increase the price they pay to us for the *Essure* product.The difference in price of the revised Distribution Agreement compared to theprevious agreement is being recorded as a current liability in our consolidatedbalance sheet.

**Item2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations**

*The following discussion of our financial condition andresults of operations should be read in conjunction with our consolidatedfinancial statements and related notes thereto. This discussion containsforward-looking statements, including references to 2007 revenues and grossmargins, increased product adoption, product improvements, expanded sales forceand other forecasted items, that involve risks and uncertainties such as ourlimited operating and sales history; the uncertainty of market acceptance ofour product; dependence on obtaining and maintaining reimbursement;effectiveness and safety of our product over the long-term; our ability toobtain and maintain the necessary governmental clearances or approvals tomarket our product; our ability to develop and maintain proprietary aspects ofour technology; our ability to manage our expansion; our limited history ofmanufacturing our product; our dependence on single source suppliers,third party manufacturers and co-marketers; intense competition in the medicaldevice industry and in the contraception market; the inherent risk of exposureto product liability claims and product recalls and other factors referenced inthis Form 10-Q.  Our actual results could differ materially from thoseexpressed or implied in these forward-looking statements as a result of variousfactors, including those discussed in our Annual Report as of December 31, 2006on Form 10-K filed with the Securities and Exchange Commission on March 15,2007 and those included elsewhere in this Form 10-Q.*

**Overview**

Wedevelop, manufacture and market the*Essure*® Permanent Birth Control system,an innovative and proprietary medical device for women that was approved formarketing in the United States in November 2002 by the United States Food andDrug Administration or FDA. The*Essure*system uses a soft and flexible micro-insert that is delivered into a woman’sfallopian tubes to provide permanent birth control by causing a benign tissuein-growth that blocks the fallopian tubes.  A successfully placed *Essure* micro-insert and the subsequenttissue growth prohibits the egg from traveling through the fallopian tubes andtherefore prevents fertilization.

*TheEssure Procedure*

The *Essure*procedure is typically performed as an outpatient procedure and is intended tobe a less invasive and a less costly alternative to tubal ligation, the leadingform of birth control in the United States and worldwide.  Laparoscopictubal ligation and tubal ligation by laparotomy typically involve abdominalincisions and/or punctures, general or regional anesthesia, four to ten days ofnormal recovery time and the risks associated with an incisionalprocedure. The *Essure*procedure does not require cutting or penetrating the abdomen, which lowers thelikelihood of post-operative pain due to the incisions/punctures, and it can beperformed in an outpatient setting without general or regionalanesthesia.  In the Pivotal trial of the *Essure*system, the total procedure time averaged 35 minutes, with an average of 13minutes of hysteroscopic time to place the *Essure*micro-insert.  A patient is typically discharged approximately 45 minutesafter the *Essure* procedure.  No overnighthospital stay is required.  Furthermore, the *Essure*system is effective without 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, the patient completes a follow-up examination called ahysterosalpingogram, or HSG, which can determine whether the device was placedsuccessfully and whether the fallopian tubes are occluded.

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We believe that the *Essure*system is also an attractive alternative to tubal ligation for physicians,hospitals and payers.  The *Essure* systemis a less invasive permanent birth control option for physicians to offer totheir patients; hospitals are able to utilize their facilities more costeffectively with the *Essure*procedure compared with tubal ligation, and payers are able to experience costreductions resulting from the elimination of overhead and procedural costsrelated to anesthesia and post-operative hospital stays associated with tuballigations. We also believe the *Essure* systemis a viable alternative to other temporary methods of birth control being usedwhen there is no intention of having children in the future.  In addition,payers may also benefit from the reduction of unplanned pregnancies associatedwith non-permanent methods of birth control used by patients who have chosen toavoid the drawbacks of traditional permanent birth control methods but who mayelect to use the *Essure* system.

Published reports estimate that 700,000 tubal ligationprocedures are performed each year in the United States.  We intend to tapinto this market and establish the *Essure*procedure as the gold standard for permanent birth control.

The *Essure* systemis currently being marketed in multiple countries.  In November 2002 wereceived approval from the FDA to market the *Essure*system in the United States.  In 2001, we were given approval to affix theCE Mark to the *Essure* system, indicating thatthe *Essure* system is certified for salethroughout the European Union, subject to compliance with local regulationssuch as registration with health ministries and/or particular requirementsregarding labeling or distribution. In 1999, the *Essure*permanent birth control system was listed with Australia’s Therapeutic GoodsAdministration, which allows us to market and sell the *Essure*system in Australia.  In December 2004, we made the decision to terminateour direct subsidiary operations in Australia and convert to an independentdistributor.  This decision was largely a cost reduction measure due to ofthe small size of the Australian market and our inability to manage our directoperation in Australia to a cash-flow positive position.  We have enteredinto a distribution agreement with an independent distributor and thetransition was completed in January 2005. In Canada, we received clearance from Health Canada to market the *Essure* system in Canada in November 2001. We currentlyhave distributors in Australia, Canada and France, which covers Europe, MiddleEast, Africa, Mexico, Central America and South America.

OnFebruary 27, 2007, we entered into an amendment to the Share Purchase and CallOption Agreement dated January 17, 2004 between Conceptus, Conceptus SAS, or SAS, and the Purchasers party theretoand an amendment to the Distribution Agreement with SAS, dated January 17,2004.  Pursuant to the amendment to theShare Purchase and Call Option Agreement, we agreed not to exercise the call option to acquire SAS in 2007 andagreed to exercise our call option to acquire SAS sometime betweenJanuary 1, 2008 and January 2, 2009 subject to the satisfaction of certainclosing conditions. The purchase price will be determined as a multiplier ofyearly sales. Pursuant to the amendment to the Distribution Agreement, SASagreed to increase the price they pay to us for the *Essure* product.

*Effectivenessof the Essure System*

In July 2005, we received approval from the FDA toextend effectiveness data on the *Essure* productlabeling. 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 of follow-up,from the previously approved 99.80% at three years. The five-year effectivenesswas demonstrated in a small portion of the women undergoing clinical studies.Five year follow up of all patients in clinical trials is ongoing.

In September 2005, we received approval from the FDAto terminate our post-approval study with physicians who were newly trained inperforming the *Essure* procedure due to thepositive placement data obtained. The purpose of the post-approval study,required by the FDA as a condition of the November 2002 approval of the *Essure* system, was to determine the rate of successfulbilateral placements of the *Essure*micro-inserts at first attempt with a large number of newly trained physicianswho were not part of the previous clinical studies. Although treatment of thetotal number of patients required by FDA had not been completed, the dataobtained to date provided us with the opportunity to request that the FDApermit an early termination of the study. Because of the FDA ruling, the PMASupplement submitted in March 2005 has been re-classified as a Final Report.The results of the post-approval study demonstrated an improvement in placementrates from those obtained in the pivotal study and we will seek to obtain a newplacement rate claim for the product using this new data. In November 2005, we filed a PMA supplement withthe FDA in order to obtain approval to modify the *Essure*Physician and Patient labeling to reflect a 94.6% first procedure bilateralplacement rate based on results of the post-approval study.  In October 2006, we received such approvalfrom the FDA.

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*Penetration*

Werequire physicians to be preceptored for between 3 and 5 cases by a certifiedtrainer before being able to perform the procedure independently. As of March31, 2007, the increase of physicians that have been trained or that are in theprocess of training has been commensurate with the increase in sales. The levelof sales for the *Essure* system, particularly inthis early period of adoption, is highly dependent on the number of physicianstrained to perform the procedure. However, we understand that a strong base oftrained physicians does not necessarily correlate to an increase in revenueproportionately. Furthermore, there are no revenues associated with thetraining activities. We do not charge a fee for the activity and no commitmentarises for the physician from the preceptorship. Physician training is providedupfront and we have no obligation subsequent to the initial training. Trainingcosts have not been significant from inception to-date.

*Reimbursementof the Essure Procedure*

Marketacceptance of the *Essure* system depends in partupon the availability of reimbursement within prevailing healthcare paymentsystems. We believe that physician advocacy of our product will be required tocontinue to obtain reimbursement. As of March 31, 2007, we have receivedpositive reimbursement decisions for the *Essure*procedure from most private insurers and 43 of the 51 Medicaid programs in thecountry. We intend to continue our effort to educate payers of thecost-effectiveness of our product, and to establish further programs to helpphysicians to navigate reimbursement issues.

InJuly 2005, the UnitedHealthcare Group, or UHC, approved the *Essure* procedure for reimbursement. In addition, in February2006, we received coverage from CIGNA Corporation, or Cigna. As with allhealthcare plans, coverage will vary and is dependent upon the individual’sspecific benefit plan.

EffectiveJanuary 1, 2007, the Centers for Medicare and Medicaid Services, or CMS, theMedicare National unadjusted average payment for hysteroscopic sterilization,the CPT code, is $433 when performed in a hospital and $2,017 when performed ina physician’s office. This compares to a Medicare national average payment fortubal ligation, the current standard of care for permanent femalesterilization, of $370. In addition, in the CMS Final Rule for the 2007Outpatient Prospective Payment System (or OPPS), which assigns hospitaloutpatient reimbursement amounts, the CPT code was assigned a Medicare NationalAverage of $2,642. In 2007, the CPT code was moved from Group 4 which had anational average reimbursement of $633 to Group 9 which has a national averagereimbursement of $1,339. We believe these values are very favorable for the *Essure* procedure and will help in establishing increasedutilization of the device amongst doctors. We expect that the new code, oncethe process to establish it at all private payers that have given a favorablecoverage decision is complete, will significantly ease the burden on aphysician’s office in obtaining reimbursement for the *Essure*  procedure and accelerate the coverage of the *Essure* procedure by private insurance companies andMedicaid. This process is not automatic following receipt of the new CPT code,however, and we anticipate continuing to focus on reimbursement issues forsometime in the future, both to secure our code and payment schedule into thepayers’ databases, as well as to help the physician negotiate a favorablecontract for payment off that schedule.

Inmid-August 2004, the MSAC division recommended against public funding for the *Essure* procedure, citing insufficient evidence for safety,effectiveness and cost effectiveness. The overall market for femalesterilization in Australia is very small and we believe that our marketpenetration will remain limited by the MSAC decision until such time as we areable to submit sufficient long-term data to obtain public funding.

*Adoptionof the Essure system*

 The *Essure* systemis a novel product in the contraception market, which is dominated byprocedures that are well established among physicians and patients and areroutinely taught to new physicians. As a result, we believe thatrecommendations and endorsements by physicians will be essential for marketacceptance of our product. Physicians are traditionally slow to adopt newproducts and treatment practices, partly because of perceived liability risks.Our biggest challenge is to speed up the adoption process to make the *Essure* procedure the standard of care for permanent birthcontrol. The following discussion summarizes our program in the United Statesto increase adoption of the *Essure*procedure.

First,we are focused on obtaining favorable coverage decisions from payersrepresenting the private paying and state-paying Medicaid systems. We are alsofocused on getting the CPT code and payment schedule implemented at all of thepayers that have given a coverage decision. Until such time as the code iscompletely implemented and all major payers have provided a coverage decision,we have developed a field based tactical reimbursement group aimed at educatingthe physician

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and office staffregarding payer procedures following a declined claim, including appeals andpetitioning procedures. Typically a newly covered product will go through aperiod where claims are either inadvertently declined or are paid at the incorrectamount. In either instance, the physician is reluctant to perform additionalprocedures until payment has been secured for earlier cases, causing a declinein utilization. Our tactical reimbursement focus is intended to give thephysician and his/her staff the tools to ensure that claims will ultimately bepaid and thereby encourages the physician to continue performing the *Essure* procedure despite reimbursement issues. This tacticalreimbursement group is generally targeting specific accounts with the aim ofeventually meeting with all of our accounts so as to provide them with theknowledge of how to file and follow up on claims on a payer by payer basis.

Second,we are expanding our sales territories and channels of distribution so as toincrease our call frequency on physicians. During the three months ended March31, 2007, we added a substantial number of sales positions and are expecting toadd more in 2007. Also, we have included regional distributors of women’sgynecology products to our marketing efforts. Among other responsibilities, oursales representatives are attempting to increase penetration and utilization ofthe *Essure* procedure, as well as tofacilitate the movement of the *Essure*procedure to the in the office environment.

Third,we have entered into certain strategic agreements in the past and we mayexplore such opportunities in the future. We intend for these agreements toprovide us with the ability to increase awareness, gain market presence andcredibility, accelerate our ability to train doctors, as well as expand ourmarket opportunity by driving adoption among a group of physicians notpreviously targeted by our marketing programs. The success of these jointmarketing campaigns will depend upon the effectiveness of our sales forcetraining programs, market demand for *Essure*procedures in conjunction with the products marketed by strategic partners andthe efforts and commitment of strategic partners to the program. We cannot becertain how successful these programs will be, if at all.

Fourth,we are attempting to increase patient awareness, so as to increase the numberof women that will ask for information about the *Essure*procedure. We may achieve this through radio campaigns, direct mail and printmedia (magazine) advertisements aimed at increasing consumer awareness.

Lastly,as appropriate we intend to make labeling improvements to our product as wellas physical product enhancements to enhance the adoption of the *Essure* procedure. This may involve working with the variousregulatory agencies around the world that regulate the sale and labeling ofmedical devices to provide updates to claims such as effectiveness andplacement rates. Where appropriate, we will make physical improvements to theproduct for improved manufacturability or for the ease of use by the physician.

Wehave experienced significant operating losses since inception and, as of March31, 2007, had an accumulated deficit of $227.7 million. We will continue toexpend substantial resources in the selling and marketing of the *Essure*  system in theUnited States and abroad. Due to the unpredictable nature of these activities,we do not know whether we will achieve or sustain profitability in the future.We will continue to be in a net loss position until sufficient revenues can begenerated to offset expenses. 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 used the shelf to complete a convertibledebt offering for an aggregate principal amount of $86,250,000 of our 2.25%convertible senior notes due 2027. In the future, depending upon a variety offactors, we may need to raise additional funds through bank facilities, debt orequity offerings or other sources of capital. Additional financing may not beavailable when needed or on terms acceptable to us.

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**Resultsof Operations - Three Months Ended March 31, 2007 and 2006**

**2007results compared to 2006 (in thousands, except percentages)**
|                                              | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2007-2006** | ** ** |
| ** **                                   | ** ** | **Amount**                                           | ** ** | **% (a)** | ** ** | **Amount** | ** ** | **% (a)** | ** ** | **% Change** | ** ** |
| Net sales                                    |       | $                                                    | 13,780     |   | 100 | % | $ | 7,962 |   | 100 | % | 73 | % |
| Gross profit                                 |       | 10,075                                               |       | 73 | % | 5,079 |   | 64 | % | 98 | % |
| Research and  development expenses           |       | 1,642                                                |       | 12 | % | 1,200 |   | 15 | % | 37 | % |
| Selling general  and administrative expenses |       | 13,009                                               |       | 94 | % | 10,000 |   | 126 | % | 30 | % |
| Net Loss                                     |       | (4,100                                               | )          | -30 | % | (5,788 | ) | -73 | % | -29 | % |
|                                              |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

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**(a)** Expressed as a percentage of total netsales.

*NetSales*

Netsales were $13.8 million for the three months ended March 31, 2007 as comparedto $8.0 million for the three months ended March 31, 2006, an increase of $5.8million, or 73%.  The increase in net sales is the result of continuedcommercialization of the *Essure* systemworldwide, and reflects the increasing number of physicians entering andcompleting training in the use of the procedure and higher utilization bytrained physicians. As of March 31, 2007, the increase of physicians that havebeen trained or that are in the process of training has been commensurate withthe increase in sales. Our accomplishment in obtaining the number of physicianstrained is very important because it provides us with a strong referral basewithin major metropolitan areas we have targeted. We understand that a strongbase of trained physicians does not necessarily correlate to an increase inrevenue proportionately. Furthermore, there are no revenues associated with thetraining activities. We do not charge a fee for the activity and no commitmentarises for the physician from the preceptorship. Physician training is providedupfront and we have no obligation subsequent to the initial training. Trainingcosts have not been significant to us from inception to-date.

Weexpect to see higher sales of our *Essure* systemin 2007 as we continue to increase the number of sales representatives in orderto provide even greater depth of physician coverage, which in turn we expectwill increase physician utilization and the number of physicians performing the*Essure* procedure in both the hospitaland the office setting. Second, we will continue to increase our programs aimedat raising patient awareness of the *Essure* procedure,such as advertising with physicians and internet marketing. However, as we havenoted elsewhere in this Form 10-Q, our expected revenue growth is dependent onmarket acceptance of the*Essure*  system and third party reimbursement for thedevice, which involves factors that are outside of our control.

Forthe three months ended March 31, 2007 and 2006, no single customer accountedfor 10% or more of total consolidated net sales. Accounts receivable from twocustomers accounted for 22% and 10%, respectively, of our net accountsreceivable balance as of March 31, 2007. Accounts receivable from a customeraccounted for 20% of our net accounts receivable balance as of March 31, 2006.

Netproduct sales by geographic region as a percentage of net sales for the threemonths ended March 31, 2007 and 2006 are as follows:
|                           | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **March 31,**               | ** ** |
| ** **                | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net sales (in  thousands) |       | $                                | 13,780     |   | $ | 7,962 |   |
| United States of  America |       | 91                               | %          | 89 | % |
| Europe                    |       | 9                                | %          | 10 | % |
| Other                     |       | 0                                | %          | 1 | % |
|                           |            |                                  |            |  |  |  |  |

 

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

Weexpect our net sales for 2007 to be approximately $66 million to $68 million,which would represent 58% to 62% growth from net sales in 2006. We expect netsales from the United States will continue to be the major contributor of our

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global netsales.  We have established four primary goals to achieve our revenuegrowth.  We expect to increase sales coverage and with that increasephysician penetration and utilization of the*Essure* device, build patient awareness through targeted advertisingand internet programs, obtain additional payer coverage decisions or otherwiseimprove the public and private payer coverage for the*Essure* procedure, and bring product improvements to the*Essure* device to the market. We believeour revenue growth in 2007 and beyond will be significantly influenced by howsuccessful we are in achieving those objectives.

*GrossProfit*

Costof goods sold for the three months ended March 31, 2007 was $3.7 million ascompared to $2.9 million for the three months ended March 31, 2006. Thisincrease of $0.8 million, or 29%, was caused by the increase in net sales,partially offset by reductions in manufacturing costs due to the impact ofhigher volumes on relatively fixed manufacturing costs. Gross profit marginimproved from 64% for the three months ended March 31, 2006 to 73% for the sameperiod ended March 31, 2007, which was primarily from higher volumes onrelatively fixed manufacturing costs.  Weanticipate gross margins will improve throughout 2007 due to lower per-unitcosts on higher volume; however, our gross profit margin will vary as our salesmix changes. Increases in sales of our devices through distributors ininternational markets will tend to decrease our overall gross profit margin.

*OperatingExpenses*

Researchand development expenses, which include expenditures related to productdevelopment, clinical research and regulatory affairs, were $1.6 million and$1.2 million for the three months ended March 31, 2007 and 2006, respectively.The primary reason for the increase in research and development expenses wasdue to ongoing product development. We intend to continue to focus our researchand development efforts on the development of new or alternative productdesigns along with management of the on-going clinical trials. It is our goalto launch new product designs over the coming years, which are intended toresult in a lower cost of the device, improved ease of use of the *Essure* system and simplified packaging systems.

Selling,general and administrative spending for the three months ended March 31, 2007was $13.0 million as compared to $10.0 million for the three months ended March31, 2006, which represents an increase of $3.0 million, or 30%. The primaryreason for the increase results from higher payroll expenditures of $1.3million, primarily due to the expansion of our U.S. field sales force, which ismeant to provide us with more selling time to focus on physician penetration.Additionally, increases in selling, general and administrative expenses were aresult of higher travel expenses of $0.5 million and higher advertisingcampaigns of $0.5 million. The remainder is due to general corporate expensesto support our growing infrastructure. We expect selling, general andadministrative expenses to increase in the future as we expect to hireadditional sales professionals and to increase expenses in advertising tosupport patient awareness.

Interestand other income and expenses of $0.5 million increased by$0.2 million in the three months ended March 31, 2007, compared to$0.3 million in the same period ended March 31, 2006. The increase is dueto higher interest income in the first quarter of 2007 due to higher interestrates applied to the investments portfolio, as well as higher interest incomeas a result of investing of proceeds from our convertible senior note offeringcompleted in February 2007, at a rate in excess of the coupon rate, offset byamortization of debt issuance costs.  Forthese reasons, we expect higher interest income in 2007 compared to theprevious fiscal year.

**Liquidityand Capital Resources**

Wehave experienced significant operating losses since inception. As of March 31,2007 we had an accumulated deficit of $227.7 million. We have financed ouroperations since inception primarily through equity financings. In December2006 we filed a shelf Registration Statement on Form S-3, through which we maysell from time to time any combination of debt securities, common stock,preferred stock and warrants, in one or more offerings. The aggregate initialoffering price of all securities sold will not exceed $150,000,000. After thesale of our senior convertible notes described below, we had $63,750,000remaining available for sale.

InFebruary 2007, we issued and sold off the shelf Registration Statement in anaggregate principal amount of $86,250,000 of our 2.25% convertible senior notesdue 2027. These notes bear a 2.25% interest per annum on the principal amount,payable semiannually in arrears on February 15 and August 15 of each year,beginning on August 15, 2007. Interest accrual on the notes commenced onFebruary 12, 2007. The notes will mature on February 15, 2027, unless earlierredeemed, repurchased or purchased by us or converted.

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Thenotes will be convertible into cash and, if applicable, shares of our commonstock based on an initial conversion rate, subject to adjustment, of 35.8616shares per $1,000 principal amount of notes (which represents an initialconversion price of approximately $27.89 per share), in certain circumstances.Upon conversion, a holder would receive cash up to the principal amount of thenote and our common stock in respect of such note’s conversion value in excessof such principal amount.

Thenotes are convertible only in the following circumstances: (1) during anycalendar quarter after the quarter ending March 31, 2007 if the closing saleprice of our common stock for each of 20 or more trading days in a period of 30consecutive trading days ending on the last trading day of the immediatelypreceding calendar quarter exceeds 120% of the conversion price; (2) during thefive consecutive business days immediately after any five consecutive tradingday period in which 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 transaction; (4) if we call the notes for redemption and (5) atanytime on or after December 15, 2011 to and including February 15, 2012 andanytime on or after February 15, 2025. Upon a change in control or terminationof trading, holders of the notes may require us to repurchase all or a portionof their notes for cash at a repurchase price equal to 100% of the principalamount, plus any accrued and unpaid interest.

Inaddition, in connection with the issuance of the notes, we entered intoseparate convertible note hedge transactions and separate warrant transactionsto reduce the potential dilution upon conversion of the notes ( “Call SpreadTransactions”). As a result of the Call Spread Transactions, we do notanticipate experiencing an increase in the total shares outstanding from theconversion of the notes unless the price of our common stock appreciates above$36.47 per share, effectively increasing the conversion premium to us to$36.47. We purchased call options to cover approximately 3.1 million shares ofour common stock, which is the number of shares underlying the notes. Inaddition, we sold warrants permitting the purchasers to acquire up toapproximately 3.1 million shares of our common stock.

Asof March 31, 2007, we had cash, cash equivalents and short-term investments of$97.2 million, compared to $25.8 million at December 31, 2006. The increase of$71.4 million is primarily due to the proceeds from of the sale of our seniorconvertible notes in February 2007 and cash used in our operating and investingactivities. We expect cash usage in operating activities to decrease in thefuture as our revenues grow.

*OperatingActivities*

Net cash used in operating activities was $4.0million in the three months ended on March 31, 2007, as compared to $4.2million in the three months ended March 31, 2006. Net cash used in operatingactivities in the first quarter of 2007 was primarily related to:

·                  Net loss of $4.1 million;

·                  Non-cash related items of $2.0 million corresponding primarily to stockbased compensation and depreciation and amortization of fixed assets;

·                  Planned increase of inventories of $1.5 million to support our increasein sales;

·                  Increase in accounts receivable of $2.0 million. We monitor ouraccounts receivable turnover closely to ensure that receivables are collectedtimely and have established a credit and collection policy to facilitate ourcollection process and reduce our credit loss exposure. We expect to grow ourbusiness and increase our revenues and to continue to use cash received fromcollection of outstanding receivables to fund our operations;

·                  Cash used due to a decrease in accrued compensation due to payout offiscal 2006 bonuses and the growth in our employees headcount, particularly inour sales force; and

·                  Increases in accounts payable of $1.8million, primarily due to planned payouts for our inventory increases.

We expect cash usage in operating activities in the future to decrease.

*InvestingActivities*

Netcash used in investing activities for the three months ended March 31, 2007 was$26.0 million, from sales and maturity of short-term investments of $2.2million, offset by purchases of investments constituting auction ratesecurities of $27.9 million and capital expenditures of $0.3 million**.** Net cash used in investing activities forthe three months ended March 31, 2006 was $6.5 million, from sales and maturityof short-term investments of $15.3 million, offset by purchases of investmentsof $21.4 million and capital expenditures of $0.4 million.

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*FinancingActivities*

Netcash provided by financing activities was $75.6 million, primarily due to thenet proceeds of $83.2 million from our issuance of senior convertible notes inFebruary 2007 million, the proceeds of $10.7 million for the issuance ofwarrants in connection with our senior convertible notes and the proceeds of$1.1 million for the issuance of common stock for our stock option programs andthe Employee Stock Purchase Plan, offset by $19.4 million for the cost of ourpurchase of call options on convertible senior notes.

Netcash provided by financing activities was $0.7 million for the three monthsended March 31, 2006 from the exercise of stock options.

**CRITICALACCOUNTING ESTIMATES AND POLICIES**

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions in certain circumstances that affect amounts reported in theaccompanying consolidated financial statements and related footnotes. Adescription of our critical accounting estimates and policies is included inour Annual Report on Form 10-K for the year ended December 31, 2006. Inpreparing these financial statements, management has made its best estimatesand judgments of certain amounts included in the financial statements, givingdue consideration to materiality. The primary estimates underlying the Company’sfinancial statements include reserves for obsolete and slow moving inventory,allowance for doubtful accounts receivable, product warranty, impairment forlong-lived assets, income taxes, stock-based compensation and contingentliabilities. Other accounting policies are described in section “CriticalAccounting Estimates and Policies” in our Financial Statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2006. Application ofthese policies involves the exercise of judgment and use of assumptions as tofuture uncertainties and, as a result, actual results could differ from theseestimates.

*RecentAccounting Pronouncements*

InSeptember 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS157”). This standard defines fair value, establishes the framework formeasuring fair value in accounting principles generally accepted in the UnitedStates and expands disclosure about fair value measurements. This pronouncementapplies under other accounting standards that require or permit fair valuemeasurements. Accordingly, this statement does not require any new fair valuemeasurement. This statement is effective for fiscal years beginning afterNovember 15, 2007 and interim periods within those fiscal years. We will berequired to adopt SFAS No. 157 in the first quarter of 2008. We are currentlyevaluating the requirements of SFAS No. 157 and have not yet determined theimpact on our consolidated financial statements.

InFebruary 2007, FASB issued SFAS No. 159, “The Fair Value Option for FinancialAssets and Financial Liabilities” (“SFAS 159”) which permits entities to chooseto measure many financial instruments and certain other items at fair valuethat are not currently required to be measured at fair value. SFAS 159 will beeffective for us on January 1, 2008. We are currently evaluating the impact ofadopting SFAS 159 on our financial position, cash flows, and results ofoperations.

**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.

*InterestRate Risk*:  We have been exposed to interest rate riskthrough interest earned on holdings of available-for-sale marketablesecurities.  Interest rates that may affect these items in the future willdepend on market conditions and may differ from the rates we have experiencedin the past. The fair value of our investment portfolio or related income wouldnot be significantly impacted by changes in interest rates since we reduce thesensitivity of our results of operations to these risks by maintaining aninvestment portfolio, which is primarily comprised of highly rated, marketablesecurities. We do not hold or issue derivatives, commodity instruments or otherfinancial instruments for trading purposes.

The fairmarket value of our 2.25% senior convertible notes is subject to interest raterisk and market risk due to their convertible feature. Generally, the fairmarket value of fixed interest rate debt will increase as interest rates falland decrease

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as interest rates rise.The fair market value of our senior convertible notes will increase as themarket price of our common stock increases, and decrease as the market pricefalls. The interest and market value changes affect the fair market value ofour senior convertible notes, but do not impact our financial position, cashflows or results of operations.

*ForeignCurrency Exchange Risk*:  All of our expenses and ourrevenues are typically denominated in United States dollars. As a result, wehave low exposure for currency exchange risks and foreign exchange losses havebeen minimal to date. We do not enter into forward exchange contracts to hedgeexposure denominated in foreign currencies or any other derivative financialinstruments for trading or speculative purposes. In the future, if ourassessment of our foreign currency exposure changes, we may consider hedgingtransactions for risk mitigation.

**Item 4. Controls and Procedures**

*Evaluationof Disclosure Controls and Procedures:*

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission’s rules and forms and that such informationis accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate, to allow fortimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognized that any controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, and inreaching a reasonable level of assurance, management is required to apply itsjudgment in evaluating the cost-benefit relationship of possible controls andprocedures.

Asof March 31, 2007, the end of our most recent fiscal quarter, we carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and our Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures. Based on the foregoing, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective.

*Changesin Internal Control Over Financial Reporting:*

Therewas no change in our internal control over financial reporting during our mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

*InherentLimitations of Internal Controls*

Internalcontrol over financial reporting cannot provide absolute assurance of achievingfinancial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves humandiligence and compliance and is subject to lapses in judgment and breakdownsresulting from human failures. Internal control over financial reporting alsocan be circumvented by collusion or improper management override. Because ofsuch limitations, there is a risk that material misstatements may not beprevented or detected on a timely basis by internal control over financialreporting. However, these inherent limitations are known features of thefinancial reporting process. Therefore, it is possible to design into theprocess safeguards to reduce, though not eliminate, this risk.

**PART II.  OTHER INFORMATION**

**Item1. Legal Proceedings**

Fromtime to time, we are involved in legal proceedings arising in the ordinarycourse of business.  We believe there is no litigation pending that couldhave, individually or in the aggregate, a material adverse effect on ourfinancial position, result of operations or cash flows.

**Item1A. Risk Factors**

*The risk factors included in our Annual Report asof December 31, 2006 on Form 10-K filed with the Securities and ExchangeCommission on March 15, 2007 should be considered while evaluating Conceptusand our business. In addition to those factors and to other information in thisForm 10-Q, the following updates to the risk factors as of March 31, 2007*

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*should beconsidered carefully while evaluating the Company and our business. This Form10-Q contains forward-looking statements within the meaning of section 27A ofthe Securities Act of 1933, as amended and section 21E of the SecuritiesExchange Act of 1934, as amended. Some of the forward-looking statements can beidentified by use of forward-looking words such as “believes,” “expects,” “anticipates,”“may,” “will,” “should,” “seeks,” “approximates,” “intends,” “plans,” or “estimates,”or the negative of these words, or other comparable terminology. The discussionof financial trends, strategy, plans or intentions may also includeforward-looking statements. Forward-looking statements involve risks anduncertainties that could cause actual results to differ materially from thoseprojected. Although it is not possible to predict or identify all such risksand uncertainties, they may include, but are not limited to, the risk factorsincorporated by reference and to their updates. Readers should not considerthese lists to be a complete statement of all potential risks anduncertainties.*

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

Oursuppliers may encounter problems during manufacturing due to a variety ofreasons, including failure to follow specific protocols and procedures, failureto comply with applicable regulations, equipment malfunctions, labor shortagesor environmental factors.  In addition,we and our third party manufacturer purchase both raw materials used in ourproduct and finished goods from various suppliers, and we rely on single sourcesuppliers for certain components of our product.  We are currently negotiating contract renewalterms for one of our single source components and have not yet finalized thearrangements.  If we or our contractmanufacturer are unable to secure on a timely basis sufficient quantities ofthe materials we depend on to manufacture our products, if we encounter delaysor contractual or other difficulties in our relationships with these suppliers,or if we cannot find suppliers at an acceptable cost, then the manufacture ofour products may be disrupted, which could increase our costs and have amaterial adverse effect on our business.

***Theaccounting method for convertible debt securities with net share settlement,like the notes, may be subject to change.***

Forthe purpose of calculating diluted earnings per share, a convertible debtsecurity providing for net share settlement of the conversion value and meetingspecified requirements under Emerging Issues Task Force, or EITF, Issue No.00-19, “Accounting for Derivative Financial Instruments Indexed to, andPotentially Settled in, a Company’s Own Stock,” is accounted for similar tonon-convertible debt, with the stated coupon constituting interest expense andany shares issuable upon conversion of the security being accounted for underthe treasury stock method.  The effect ofthe treasury stock method is that the shares potentially issuable uponconversion of the notes are not included in the calculation of our earnings pershare except to the extent that the conversion value of the notes exceeds theirprincipal amount, in which event we are treated for earnings per share purposesas having issued the number of shares of our common stock necessary to settlethe conversion.

TheEITF is reviewing, among other things, the accounting method for net sharesettled securities.  A subcommittee ofthe EITF is considering a proposed method for accounting for net share settledsecurities under which the debt and equity components of the security would bebifurcated and accounted for separately. The effect of this proposal is that the equity component would be includedin the paid-in-capital section of stockholders’ equity on an issuer’s balancesheet and the value of the equity component would be treated as original issuediscount for purposes of accounting for the debt component of the notes.  Net income attributable to our commonstockholders would be lower by recognizing accretion of the discounted carryingvalue of the convertible debt security to its face amount as additionalinterest expense.  The diluted earningsper share calculation would continue to be calculated based on the treasurystock method.

Wecannot predict the outcome of the EITF deliberations and whether the EITF willrequire that net share settled securities be accounted for under the existingmethod, the proposed method described above or some other method, and when anychange would be implemented or whether it would be implemented retroactively orprospectively.

Wealso cannot predict any other changes in GAAP that may be made affectingaccounting for convertible debt securities. Any change in the accounting methodfor convertible debt securities could have an adverse impact on our reported orfuture financial results.  These impactscould adversely affect the trading price of our common stock and in turnnegatively impact the trading price of the notes.

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**Item 6. Exhibits**
| Number | ** ** | **Description**                                                                                      | ** ** |
|--------|------------|------------------------------------------------------------------------------------------------------|------------|
| 10.1   |       | Ninth Amended and  Restated 2001 Equity Incentive Plan.                                              |       |
| 10.2   |       | Amended and Restated  2002 Non-Qualified Stock Option Plan.                                          |       |
| 10.3   |       | Independent Director  Equity Compensation Policy.                                                    |       |
| 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 the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.
|                                                             |   | CONCEPTUS, INC.                         |
|-------------------------------------------------------------|--------|-----------------------------------------|
|                                                        |   | /s/ Gregory E. Lichtwardt               |   |
|                                                        |   | Gregory E. Lichtwardt                   |
|                                                        |   | Executive Vice President, Treasurer and |
|                                                        |   | Chief Financial Officer                 |
|                                                        |   |                                    |
|                                                        |   |                                    |
| Date:       May  8, 2007 |   |                                    |

 

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**EXHIBITINDEX**
| Number | ** ** | **Description**                                                                                      |
|--------|------------|------------------------------------------------------------------------------------------------------|
| 10.1   |       | Ninth Amended and Restated 2001 Equity Incentive  Plan.                                              |
| 10.2   |       | Amended and Restated 2002 Non-Qualified Stock Option  Plan.                                          |
| 10.3   |       | Independent Director Equity Compensation Policy.                                                     |
| 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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