**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                  | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                             | ** **                                                                                                                                                     |
| **For the quarterly period ended March 31, 2008** |
| ** **                                             | ** **                                                                                                                                                     | ** ** |
| ** **                                             | **OR**                                                                                                                                                         | ** ** |
| ** **                                             | ** **                                                                                                                                                     |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**For the transition period from              to                    .**

 

**Commission File Number: 0-27596**

 

**CONCEPTUS, INC.**

(Exact name of Registrant as specified in its charter)

 

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

 

**331 East Evelyn**

**Mountain View, CA 94041**

(Address of Principal Executive Offices) (Zip Code)

 

**(650) 962-4000**

(Registrant’s Telephone Number, Including Area Code)

 

 

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

 

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

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

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

 

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

 

Yes  o   No  x

 

There were 30,205,510  shares of Registrant’s Common Stock issuedand outstanding as of April 30, 2008.

 

 

----

 

**CONCEPTUS, INC.**

 

**Form 10-Q for the Quarter Ended March 31, 2008**

 

| ** **    | ** **                                                                                  | **Page**                                                                                                  |
|---------------|---------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
|          |                                                                                        |                                                                                                      |
| Part I.  | Financial Information                                                                       | 3                                                                                                         |
|          |                                                                                        |                                                                                                      |   |
| Item 1.       | Condensed Consolidated  Financial Statements (Unaudited)                                    | 3                                                                                                         |
|          | a)                                                                                          | Condensed Consolidated Balance  Sheets as of March 31, 2008 and December 31, 2007               | 3 |
|          | b)                                                                                          | Condensed Consolidated  Statements of Operations for the Three Months Ended March 31, 2008 and  2007 | 4 |
|          | c)                                                                                          | Condensed Consolidated Statements  of Cash Flows for the Three Months Ended March 31, 2008 and 2007  | 5 |
|          | d)                                                                                          | Notes to Condensed Consolidated  Financial Statements                                                     | 6 |
|          |                                                                                        |                                                                                                      |   |
| Item  2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 16                                                                                                        |
|          |                                                                                        |                                                                                                      |   |
| Item  3.      | Quantitative  and Qualitative Disclosures About Market Risk                                 | 23                                                                                                        |
|          |                                                                                        |                                                                                                      |   |
| Item 4.       | Controls and  Procedures                                                                    | 24                                                                                                        |
|          |                                                                                        |                                                                                                      |   |
| Part II. | Other Information                                                                           | 25                                                                                                        |
|          |                                                                                        |                                                                                                      |   |
| Item 1.       | Legal Proceedings                                                                           | 25                                                                                                        |
|          |                                                                                        |                                                                                                      |   |
| Item 1A.      | Risk Factors                                                                                | 25                                                                                                        |
|          |                                                                                        |                                                                                                      |   |
| Item 6.       | Exhibits                                                                                    | 25                                                                                                        |

 

2

----

 

**PART I. FINANCIAL INFORMATION**

 

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

 

**Conceptus, Inc.**

 

**Condensed Consolidated BalanceSheets**

**(Unaudited)**

**(In thousands, except number of shares)**

** **
| ** **                                          | ** ** | **March 31,** | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------|------------|--------------------|-------------|-----------------------|------------|
| ** **                                          | ** ** | **2008**           | ** **  | **2007**              | ** ** |
| **Assets**                                          |       |               |        |                  |       |
| Current assets:                                     |       |               |        |                  |       |
| Cash and cash equivalents                           |       | $                  | 18,183      |                  | $          | 28,450 |   |
| Short-term investments                              |       | —             |        | 16,700                |       |
| Accounts receivable, net                            |       | 13,082             |        | 11,903                |       |
| Inventories                                         |       | 3,738              |        | 2,418                 |       |
| Other current assets                                |       | 5,129              |        | 3,271                 |       |
|                                                |       |               |        |                  |       |
| Total current assets                                |       | 40,132             |        | 62,742                |       |
|                                                |       |               |        |                  |       |
| Property and equipment, net                         |       | 6,392              |        | 5,312                 |       |
| Debt issuance costs, net                            |       | 2,400              |        | 2,555                 |       |
| Intangible assets, net                              |       | 6,071              |        | 1,164                 |       |
| Long-term investments                               |       | 46,103             |        | 48,800                |       |
| Goodwill                                            |       | 15,672             |        | —                |       |
| Other assets                                        |       | 157                |        | 102                   |       |
|                                                |       |               |        |                  |       |
| **Total assets**                                    | ** ** | **$**              | **116,927** | ** **            | **$**      | **120,675** | ** ** |
|                                                |       |               |        |                  |       |
| **Liabilities and stockholders’ equity**       |       |               |        |                  |       |
| Current liabilities:                                |       |               |        |                  |       |
| Accounts payable                                    |       | $                  | 5,531       |                  | $          | 4,744 |   |
| Accrued compensation                                |       | 4,874              |        | 3,175                 |       |
| Interest payable                                    |       | 245                |        | 733                   |       |
| Other accrued liabilities                           |       | 3,856              |        | 3,606                 |       |
|                                                |       |               |        |                  |       |
| Total current liabilities                           |       | 14,506             |        | 12,258                |       |
|                                                |       |               |        |                  |       |
| Notes payable                                       |       | 86,250             |        | 86,250                |       |
| Other accrued liabilities                           |       | 215                |        | 240                   |       |
|                                                |       |               |        |                  |       |
| Total liabilities                                   |       | 100,971            |        | 98,748                |       |
|                                                |       |               |        |                  |       |
| Stockholders’ equity:                          |       |               |        |                  |       |
| Common stock and additional paid-in capital         |       | 259,874            |        | 257,176               |       |
| Accumulated other comprehensive income  (loss)      |       | (2,290             | )           | —                |       |
| Accumulated deficit                                 |       | (241,628           | )           | (235,249              | )          |
| Treasury stock, 77,863 shares, at cost              |       | —             |        | —                |       |
|                                                |       |               |        |                  |       |
| Total stockholders’ equity                     |       | 15,956             |        | 21,927                |       |
|                                                |       |               |        |                  |       |
| **Total liabilities and stockholders’ equity** | ** ** | **$**              | **116,927** | ** **            | **$**      | **120,675** | ** ** |

 

*The accompanying notes are an integral part of thesecondensed consolidated financial statements.*

 

3

----

 

**Conceptus, Inc.**

 

**Condensed Consolidated Statementsof Operations**

**(Unaudited)**

**(In thousands, except per share amounts)**

 
| ** **                                                                      | ** ** | **Three months ended** | ** ** |
|---------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                      | ** ** | **March 31,**               | ** ** |
| ** **                                                                      | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net sales                                                                       |       | $                                | 21,127     |   | $ | 13,780 |   |
| Cost of goods sold                                                              |       | 5,445                            |       | 3,705 |   |
| Gross profit                                                                    |       | 15,682                           |       | 10,075 |   |
|                                                                            |       |                             |       |   |   |
| Operating expenses:                                                             |       |                             |       |   |   |
| Research and development                                                        |       | 1,931                            |       | 1,642 |   |
| Selling, general and administrative                                             |       | 20,102                           |       | 13,009 |   |
| Total operating expenses                                                        |       | 22,033                           |       | 14,651 |   |
|                                                                            |       |                             |       |   |   |
| Operating loss                                                                  |       | (6,351                           | )          | (4,576 | ) |
|                                                                            |       |                             |       |   |   |
| Interest income                                                                 |       | 891                              |       | 815 |   |
| Interest expense                                                                |       | (637                             | )          | (339 | ) |
| Other income (expense)                                                          |       | (282                             | )          | — |   |
| Total other income (expense)                                                    |       | (28                              | )          | 476 |   |
|                                                                            |       |                             |       |   |   |
| Net loss                                                                        |       | $                                | (6,379     | ) | $ | (4,100 | ) |
|                                                                            |       |                             |       |   |   |
| Basic and diluted net loss per share                                            |       | $                                | (0.21      | ) | $ | (0.14 | ) |
|                                                                            |       |                             |       |   |   |
| Weighted-average shares used in computing  basic and diluted net loss per share |       | 29,935                           |       | 29,260 |   |

 

*The accompanying notes are an integral part of thesecondensed consolidated financial statements.*

 

4

----

 

**Conceptus, Inc.**

 

**Condensed Consolidated Statementsof Cash Flows**

**(Unaudited)**

**(In thousands)**

** **
| ** **                                                                   | ** ** | **Three months ended** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                   | ** ** | **March 31,**               | ** ** |
| ** **                                                                   | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| **Cash flows from operating activities**                                     |       |                             |       |   |   |
| Net loss                                                                     |       | $                                | (6,379     | ) | $ | (4,100 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                             |       |   |   |
| Depreciation and amortization of property,  plant and equipment              |       | 665                              |       | 313 |   |
| Amortization of debt issuance costs                                          |       | 155                              |       | 77 |   |
| Amortization of intangibles                                                  |       | 187                              |       | 50 |   |
| Inventory write-down                                                         |       | (74                              | )          | 70 |   |
| Stock-based compensation expense                                             |       | 1,608                            |       | 1,453 |   |
| Allowance for doubtful accounts                                              |       | (4                               | )          | 28 |   |
| Loss on retirement of fixed assets                                           |       | —                           |       | 17 |   |
| Changes in operating assets and  liabilities, net of effect of acquisition:  |       |                             |       |   |   |
| Accounts receivable                                                          |       | 60                               |       | (1,971 | ) |
| Inventories                                                                  |       | 651                              |       | (1,496 | ) |
| Other current assets                                                         |       | (1,530                           | )          | (168 | ) |
| Other assets                                                                 |       | —                           |       | 200 |   |
| Accounts payable                                                             |       | (1,014                           | )          | 1,883 |   |
| Accrued compensation                                                         |       | (266                             | )          | (698 | ) |
| Other accrued and long term liabilities                                      |       | 836                              |       | 366 |   |
| Net cash used in operating activities                                        |       | (5,105                           | )          | (3,976 | ) |
|                                                                         |       |                             |       |   |   |
| **Cash flows from investing activities**                                     |       |                             |       |   |   |
| Purchase of Conceptus SAS, net of cash  acquired                             |       | (22,619                          | )          | — |   |
| Purchase of investments                                                      |       | (5,000                           | )          | (27,850 | ) |
| Sales & Maturities of investments                                   |       | 22,050                           |       | 2,150 |   |
| Capital expenditures                                                         |       | (808                             | )          | (262 | ) |
| Net cash used in investing activities                                        |       | (6,377                           | )          | (25,962 | ) |
|                                                                         |       |                             |       |   |   |
| **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 |   |
| Proceeds from issuance of common stock                                       |       | 1,095                            |       | 1,107 |   |
| Net cash provided by financing activities                                    |       | 1,095                            |       | 75,609 |   |
|                                                                         |       |                             |       |   |   |
| Effect of exchange rate on cash                                              |       | 120                              |       |   |   |
|                                                                         |       |                             |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                        |       | (10,267                          | )          | 45,671 |   |
| Cash and cash equivalents at the beginning  of the period                    |       | 28,450                           |       | 3,238 |   |
| Cash and cash equivalents at end of the  period                              |       | $                                | 18,183     |   | $ | 48,909 |   |

 

*The accompanying notes are an integral part of thesecondensed consolidated financial statements.*

 

5

----

 

**Conceptus, Inc.**

 

***NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS***

 

***(Unaudited)***

 

**1.****         ****Basis of 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 as of December 31, 2007 has beenderived from the audited consolidated financial statements at that date, butdoes not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements. This financial data should be reviewed in conjunction with theaudited consolidated financial statements and related notes included in ourAnnual Report on Form 10-K for the year ended December 31,2007.  The results of operations for the three months ended March 31,2008 may not necessarily be indicative of the operating results for the full2008 fiscal year or any other future interim periods.

 

Ourcondensed consolidated financial statements for the three months ended March 31,2008 include the financial results of Conceptus SAS starting on the acquisitiondate of January 7, 2008. All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

Wehave a limited history of operations and have incurred significant operatinglosses since inception. We will continue to be in a net loss position untilsufficient revenues can be generated to offset expenses. In December 2006we filed a Registration Statement on Form S-3, through which we may sellfrom time to time any combination of debt securities, common stock, preferredstock and warrants, in one or more offerings, with an initial offering pricenot to exceed $150,000,000. In February 2007, we issued an aggregateprincipal amount of $86,250,000 of our 2.25% convertible senior notes due 2027.If the notes are convertible, then upon conversion, holders will receive cashand, if applicable, shares of our common stock based on an initial conversionrate, subject to adjustment, of 35.8616 shares per $1,000 principal amount ofnotes (which represents an initial conversion price of $27.89 per share), incertain circumstances. Upon conversion, a holder would receive cash up to theprincipal amount of the note and our common stock in respect of such note’sconversion value in excess of such principal amount. This net share settlementfeature of the notes will reduce our liquidity, and we may not have sufficientfunds to pay in full the cash obligation upon such conversion. In the future,depending upon a variety of factors, we may need to raise additional fundsthrough bank facilities, debt or equity offerings or other sources of capital.Any additional equity financing may be dilutive to stockholders, and debtfinancing, if available, may involve covenants that restrict us. Additionalfunding may not be available when needed or on terms acceptable to us. If weare unable to obtain additional capital, we may be required to delay, reducethe scope of or eliminate our research and development programs or reduce oursales and marketing activities.

 

*RecentAccounting Pronouncements*

 

InSeptember 2006, the Financial Standards Accounting Board, or FASB, issuedStatement No. 157, “*Fair ValueMeasurement,*” or SFAS 157. This standard defines fair value,establishes the framework for measuring fair value in accounting principlesgenerally accepted in the United States and expands disclosure about fair valuemeasurements. This pronouncement applies under other accounting standards thatrequire or permit fair value measurements. SFAS 157 is effective for financialstatements issued for years beginning after November 15, 2007, and interimperiods of those fiscal years. FASB Staff Position 157-2, “Effective Date ofFASB Statement No. 157” delays the effective date of SFAS 157 for allnon-financial assets and non-financial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually), until the beginning of the first quarterof 2009.  Effective January 1, 2008,we adopted SFAS 157 for financial assets and liabilities carried at fair value.The adoption of SFAS 157 for financial assets and liabilities did not have amaterial impact on our condensed consolidated financial statements.  See Note 4- Fair Value Measurements.

 

InFebruary 2007, FASB issued Statement No. 159, “*The Fair Value Option for Financial Assets andFinancial Liabilities*,” or SFAS 159, which permits entities tochoose to measure many financial instruments and certain other items at fairvalue that are not currently required to be measured at fair value. SFAS 159 becameeffective for us on January 1, 2008. The adoption of SFAS 159 did not havea material impact on our condensed consolidated financial statements.

 

6

----

** **

InDecember 2007, FASB issued Statement No. 141 (revised 2007), *“Business Combinations,”*or SFAS 141(R) andStatement No. 160, *“NoncontrollingInterests in Consolidated Financial Statements*,” or SFAS 160, anamendment of Accounting Research Bulleting No. 51. SFAS 141(R) willimpact financial statements on the acquisition date and in subsequent periods.Some of the changes, such as the accounting for contingent consideration, willintroduce more volatility into earnings and may impact our acquisition strategy.SFAS 160 will change the accounting and reporting for minority interests, whichwill be recharacterized as noncontrolling interests and classified as acomponent of equity. In addition, SFAS 141(R) will be appliedprospectively and SFAS 160 will require retroactive adoption of thepresentation and disclosure requirements for existing minority interests, whilethe remaining requirements of SFAS 160 will be applied prospectively. SFAS 141(R) andSFAS 160 are effective on January 1, 2009. We are currently evaluating theimpact of adopting SFAS 141(R) and SFAS 160 on our consolidated financialstatements.

 

InMarch 2008, FASB issued Statement No. 161, *“Disclosures about Derivative Instruments and Hedging Activities, anamendment of FASB No. 133,”* or SFAS 161. This statement isintended to improve transparency in financial reporting by requiring enhanceddisclosures of an entity’s derivative instruments and hedging activities andtheir effects on the entity’s financial position, financial performance and cashflows. SFAS 161 applies to all derivative instruments within the scope of SFAS133 as well as related hedged items, bifurcated instruments and non-derivativeinstruments that are designated and qualify as hedging instruments. Entitieswith instruments subject to SFAS 161 must provide more robust qualitativedisclosures and expanded quantitative disclosures. SFAS 161 is effectiveprospectively for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008, with early applicationpermitted. We are currently evaluating the disclosure implications of thisstatement.

 

**2.     Summary ofSignificant 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, valuation of investments, productwarranty, impairment of long-lived assets and stock-based compensation.

 

*FunctionalCurrency*

 

OnJanuary 7, 2008 we acquired Conceptus SAS, which sells to customers in France and all of Europe. Our condensedconsolidated financial statements for the three months ended March 31, 2008include the financial results of Conceptus SAS starting on January 7, 2008.Sales by Conceptus SAS are denominated in Euros. In preparing our consolidatedfinancial statements, we are required to translate the financial statements of ConceptusSAS from the currency in which they keep their accounting records into U.S.Dollars.  Conceptus SAS maintains itsaccounting records in the functional currency which is also its respectivelocal currency, the Euro. The functional currency is determined based onmanagement’s judgment and involves consideration of all relevant economic factsand circumstances affecting the subsidiary. Generally, the currency in whichthe subsidiary transacts a majority of its transactions, including billing,financing, payroll and other expenditures would be considered the functionalcurrency, but any dependency upon the parent and the nature of the subsidiary’soperations must also be considered. Since the functional currency of ConceptusSAS has been determined to be the Euro, any gain or loss associated with thetranslation of Conceptus SAS’ financial statements into U.S. Dollars isincluded as a component of stockholders’ equity, in accumulated othercomprehensive income (loss).  If in thefuture we determine that there has been a change in the functional currency of ConceptusSAS from its local currency to the U.S. Dollar, any translation gains or lossesarising after the date of change would be included within our statement ofoperations.

 

*Goodwill*

 

Goodwill represents the excess of the purchase price paid over the fairvalue of tangible and identifiable intangible net assets acquired in businesscombinations. We will perform an annual assessment of our goodwill at thereporting unit level, or earlier if an event occurs or circumstances changethat would reduce the fair value of the reporting unit below its carryingamount. No impairment charges have been recorded as of March 31, 2008.

 

7

----

 

**3.     Long-TermInvestments**

 

Asof March 31, 2008, we held $48.5 million (par value) in auction ratesecurities backed by federal and state student loans which are variable ratedebt instruments and bear interest rates that reset approximately every 20-30days. These auction rate securities were rated AAA by a major credit ratingagency and have contractual maturities that range from 20 to 40 years. Thesecurities are classified as available for sale and are recorded at fair value.We recorded a temporary reduction in carrying value of $2.3 million for thethree months ended March 31, 2008, which has been recorded as anunrealized loss in accumulated other comprehensive loss.  We have experienced failed auctions in 2008of certain of our auction rate securities and there is no assurance thatauctions on the remaining auction rate securities in our investment portfoliowill succeed in the future. As a result, our ability to liquidate ourinvestments in the near term may be limited, and our ability to fully recoverthe carrying value of our investments may be limited or non-existent. Anauction failure means that the parties wishing to sell securities could notcarry out the transaction. If the issuers of these securities are unable tosuccessfully close future auctions or their credit ratings deteriorate, we mayin the future be required to record an impairment charge on these investments.It could take until the final maturity of the underlying notes (up to 40 years)to realize our investments’ recorded value.

 

Giventhe recent disruptions in the credit markets and the fact that the liquidityfor these types of securities remains uncertain, we have classified all of ourauction rate securities as long-term investments in our condensed consolidatedbalance sheet as our ability to liquidate such securities in the next 12 monthsis uncertain. The carrying value of our auction rate securities on ourcondensed consolidated balance sheet as of March 31, 2008 was $46.1 million.See Note 4- Fair Value Measurements for additional information concerning fairvalue measurement of our auction rate securities.

 

**4.     Fair ValueMeasurements**

 

Asstated in Note 1- Basis of Presentation, on January 1, 2008, we adoptedthe methods of fair value as described in SFAS 157 to value our financialassets and liabilities.  As defined inSFAS 157, fair value is based on the price that would be received to sell anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. In order to increase consistency andcomparability in fair value measurements, SFAS 157 establishes a fair valuehierarchy that prioritizes observable and unobservable inputs used to measurefair value into three broad levels, which are described below:

 

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

 

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

 

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

 

Ourcash and cash equivalents are classified within Level 1 of the fair valuehierarchy because they are valued using quoted market prices, broker or dealerquotations, or alternative pricing sources with a reasonable level of pricetransparency. As of March 31, 2008 our Level 1 instruments are solelycomprised of our investments in money market funds.

 

OnJanuary 7, 2008, we acquired Conceptus SAS (See Note 5- BusinessCombinations) and thereby assumed an outstanding foreign currency forwardcontract to buy U.S. Dollars at fixed intervals throughout the remainder offiscal 2008. Conceptus SAS executed the foreign currency contract in the retailmarket in an over-the-counter environment with a relatively high level of pricetransparency. The counterparty is a large regional bank located in France. Ourforeign currency contract valuation inputs are based on quoted prices andquoted pricing intervals from public data and do not involve managementjudgment. Accordingly, we have classified our outstanding foreign currency forwardcontract within Level 2 of the fair value hierarchy and have recorded the fairvalue of the contract in other accrued liabilities on our condensedconsolidated balance sheet as of March 31, 2008.

 

Asa result of continued auction failures, quoted prices for our auction ratesecurities did not exist as of March 31, 2008 and, accordingly, weconcluded that Level 1 inputs were not available for these assets. Brokeragestatements received from our broker/dealer that held our auction ratesecurities included their estimated market value as of March 31, 2008. Ourbroker/dealer valued our auction rate securities at 95% of par. We madeinquiries relative to the measurements utilized to derive the estimated marketvalues quoted on our brokerage statements, but the broker/dealer declined toprovide detailed information relating to their valuation methodologies. Due tothe lack of transparency into the methodologies used to determine the estimatedmarket values, we concluded that estimated market values provided on ourbrokerage statements did not constitute valid inputs and thus we did notutilize them in measuring the fair value of these auction rate securities as ofMarch 31, 2008.

 

 

8

----

 

Wedetermined that use of a valuation model was the best available technique formeasuring the fair value of our auction rate securities. We used a trinomialdiscount model weighting estimated future cash flows, quality of collateral andthe probability of future successful auctions occurring. While our valuationmodel was based on both Level 2 (credit quality and interest rates) and Level 3inputs, we determined that the Level 3 inputs were the most significant to theoverall fair value measurement of these assets, particularly the estimates ofexpected periods of illiquidity. The valuation model also reflected ourintention to hold our auction rate securities until they can be liquidated in amarket that facilitates orderly transactions and our belief that we have theability and intent to maintain our investments until their recovery in value.

 

Fairvalue hierarchy of our securities and foreign currency contract at fair valuein connection with our adoption of SFAS 157 is as follows (in thousands):

 
| ** **                         | ** ** | ** **         | ** ** | **Fair  Value Measurements  at Reporting Date** | ** ** |
|------------------------------------|------------|--------------------|------------|-------------------------------------------------|------------|
| ** **                         | ** ** | **March 31,** | ** ** | ** **                                      |
| **Description**                    | ** ** | **2008**           | ** ** | **Level 1**                                     | ** ** | **Level 2** | ** ** | **Level 3** |   |
| Assets:                            |       |               |       |                                            |       |   |   |   |   |
| Money market fund                  |       | $                  | 14,546     |                                            | 14,546     |   | — |   | — |   |
| Auction rate securites             |       | 46,103             |       | —                                          |       | — |   | 46,103 |   |
| Liabilities:                       |       |               |       |                                            |       |   |   |   |   |
| Foreign currency forward contracts |       | $                  | 1,085      |                                            | —     |   | 1,085 |   | — |   |

 

**5.     BusinessCombination**

 

OnJanuary 7, 2008 (the “Closing Date”), we entered into a Share PurchaseAgreement (the “Share Purchase Agreement”) with Conceptus SAS, in connectionwith the exercise of our call option under the existing Share Purchase and CallOption Agreement dated January 17, 2004 and amended on February 27,2007 and on November 19, 2007. Pursuant to the Share Purchase Agreement,we acquired all of the outstanding shares of Conceptus SAS on the Closing Date.As a result of this transaction, Conceptus SAS became our wholly ownedsubsidiary and its results of operations are consolidated with our results ofoperations starting on January 7, 2008. We believe the acquisition ofConceptus SAS expands our presence in international markets and will increaseour revenues as we will recognize sales at end user pricing as compared to theprice we previously sold the *Essure*product directly to Conceptus SAS.

 

Thetotal preliminary purchase price of $22.1 million included $24.0 million incash consideration and $0.3 million in direct transaction costs, less areduction to the purchase price of $2.2 million as explained below. On February 27,2007, we entered into an amendment to the Share Purchase and Call OptionAgreement dated January 17, 2004 with Conceptus SAS and into an amendmentto the Distribution Agreement with Conceptus SAS, dated January 17,2004.  Pursuant to the amendment to the Share Purchase and Call OptionAgreement, we agreed not to exercise the call option to acquire Conceptus SASin 2007 and agreed to exercise our call option to acquire SAS sometime between January 1,2008 and January 2, 2009 subject to the satisfaction of certain closingconditions.  Pursuant to the amendment to the Distribution Agreement, ConceptusSAS agreed to increase the price they pay to us for the*Essure* product. The difference inprice of product under the revised Distribution Agreement compared to theprevious agreement was recorded as a current liability in our consolidatedbalance sheet prior to the acquisition. The balance of this current liabilityof $2.2 million on the date of acquisition was recorded as a reduction of thepurchase price of Conceptus SAS.

 

9

----

 

Theaggregate Conceptus SAS purchase price of $22.1 million was allocated to theassets acquired and liabilities assumed based on their preliminary estimatedfair values at the date of acquisition. The preliminary estimate of the excess of purchase price over the fairvalue of net tangible assets acquired was allocated to identifiable intangibleassets with the remainder as goodwill. In accordance with generally acceptedaccounting principles, we have twelve months from the closing date to finalizethe valuation and we will finalize any remaining direct transaction costs andpayment of outstanding liabilities within this time period. The following tablesummarizes the preliminary allocation of the purchase price of the assetsacquired and liabilities assumed based on their fair values:

 
| **(in  thousands):**           | *** *** | *** *** | *** *** |
|--------------------------------|--------------|--------------|--------------|
| Cash acquired                  |         | $            | 1,689        |   |
| Inventory                      |         | 1,816        |         |
| Accounts receivable            |         | 3,270        |         |
| Other tangible assets acquired |         | 396          |         |
| Amortizable intangible assets: |         |         |         |
| Customer relationships         |         | 5,024        |         |
| Covenant not to compete        |         | 71           |         |
| Goodwill                       |         | 15,672       |         |
| Liabilities assumed            |         | (5,848       | )            |
| Total                          |         | $            | 22,090       |   |

 

Theamortizable intangible assets have useful lives for customer relationships of 9years and for the covenant not to compete of 3 years. No amounts have beenallocated to in-process research and development and approximately $15.7million has been allocated to goodwill. Goodwill was recorded based on theresidual purchase price after allocating the purchase price to the fair marketvalue of tangible and intangible assets acquired less liabilities assumed. Thegoodwill arising from the acquisition is not deductible for tax purposes. 

 

Theunaudited pro forma information set forth below represents the revenues, netloss, and earnings per share of the Company including Conceptus SAS as if theacquisition were effective as of the beginning of fiscal 2007, after givingeffect to certain adjustments, including the amortization of Conceptus SASacquisition related intangibles and the elimination of  preacquisition intercompany profits. Theoperating results for the period from January 1, 2008 to January 7,2008 (date of close) and for the comparable period of fiscal 2007 were notreadily available and were not considered practical to obtain. The unauditedpro forma financial information does not necessarily reflect the results ofoperations that would have occurred had the combined businesses constituted asingle entity during such period, and is not necessarily indicative of resultswhich may be obtained in the future (in thousands, except per share amounts):

 
| ** **                                             | ** ** | ** **                 | ** ** |
|--------------------------------------------------------|------------|----------------------------|------------|
| ** **                                             | ** ** | **Year Ended**        | ** ** |
| ** **                                             |       | **December 31, 2007** |       |
| Pro forma total revenue                                |       | $                          | 74,395     |   |
| Pro forma net loss                                     |       | $                          | (9,917     | ) |
| Pro forma net loss per share – basic and  diluted |       | $                          | (0.34      | ) |
| Pro forma weighted average basic and  diluted shares   |       | 29,463                     |       |

 

**6.     Inventories**

 

Inventoriesare stated 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,** | ** ** |
|------------------|------------|--------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Raw materials    |       | $                  | 309        |                  | $          | 177 |   |
| Work-in-progress |       | 1,504              |       | 1,356                 |       |
| Finished goods   |       | 1,925              |       | 885                   |       |
| **Total**        | ** ** | **$**              | **3,738**  | ** **            | **$**      | **2,418** | ** ** |

 

 

10

----

 

**7.     Warranty**

 

Weoffer warranties on our product and record a liability for the estimated futurecosts associated with warranty claims, which is based upon our historicalexperience and 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 ended March 31,2008 and 2007 follows (in thousands):

 

| ** **                                    | ** ** | **2008** | ** ** | **2007**   | ** ** |
|-----------------------------------------------|------------|----------|------------|------------|------------|
| Balance at the beginning of period            |       | $        | 208        |       | $          | 209 |   |
| Accruals for warranties issued during  period |       | 57       |       | 115        |       |
| Settlements made in kind during period        |       | (67      | )          | (102       | )          |
| **Balance at the end of the period**          | ** ** | **$**    | **198**    | ** ** | **$**      | **222** | ** ** |

 

**8.     Stock-BasedCompensation**

 

Netloss for the first quarter of 2008 included stock-based compensationexpense under SFAS No. 123(R) , *“Share-Based Payment,”*or SFAS, 123(R) of approximately $1.5 million, which consisted ofstock-based compensation expense of approximately $1.3 million related toemployee stock options, employee stock purchase plan and stock appreciationrights and stock-based compensation expense of approximately $0.2 millionrelated to employee restricted stock and restricted stock units.

 

Netloss for the first quarter of 2007 included stock-based compensation expenseunder SFAS 123(R) of approximately $1.4 million, which consisted ofstock-based compensation expense of approximately $1.1 million related toemployee stock options, employee stock purchase plan and stock appreciationrights and stock-based compensation expense of approximately $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 forEquity Instruments That Are Issued to Other Than Employees for Acquiring, or inConjunction with Selling, Goods or Services*, which requires thatthese equity instruments are recorded at their fair value on the measurementdate. The measurement of stock-based compensation is subject to adjustment asthe underlying equity instruments vest. Stock-based compensation expenserelating to non-employees was approximately $55,000 and $61,000 for the threemonths ended March 31, 2008 and 2007, respectively.

 

Forthe three months ended March 31, 2008, we calculated the fair value ofeach option on the date of grant using the Black-Scholes model as prescribed bySFAS 123(R). The assumptions used were as follows:

 

| ** **                      | ** ** | **Three months ended  March 31, 2008**                | ** ** |
|---------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Stock Option and Stock  Appreciation Right  Plans** | ** ** |
| Expected term (in years)        |       | 4.67                                                                      |       |
| Average risk-free interest rate |       | 2.65                                                                      | %          |
| Average volatility factor       |       | 47.9                                                                      | %          |
| Dividend yield                  |       | —                                                                    |       |

 

Forthe three months ended March 31, 2007, we calculated the fair value ofeach option on the date of grant using the Black-Scholes model as prescribed bySFAS 123(R). The assumptions used were as follows:

 

| ** **                      | ** ** | **Three months ended  March 31, 2007**                | ** ** |
|---------------------------------|------------|---------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **Stock Option and Stock  Appreciation Right  Plans** | ** ** |
| Expected term (in years)        |       | 3.54                                                                      |       |
| Average risk-free interest rate |       | 4.68                                                                      | %          |
| Average volatility factor       |       | 48.6                                                                      | %          |
| Dividend yield                  |       | —                                                                    |       |

 

11

----

 

*ExpectedTerm:* Our expectedterm represents the period that our stock-based awards are expected to beoutstanding and was determined based on historical exercise experience ofsimilar awards, giving consideration to the contractual terms of thestock-based awards and vesting schedules.

 

*ExpectedVolatility:* We usedhistorical volatility based on the expected term of the awards, which isconsistent with our assessment that the historical volatility for such periodis more representative of future stock price trends than any other type ofvolatility.

 

*ExpectedDividends:* We havenot paid and do not anticipate paying any dividends in the near future.

 

*Risk-FreeInterest Rate:* Webase the risk-free interest rate on the U.S. Treasury yield curve in effect atthe time of grant based on the expected term of the underlying option.

 

*Forfeitures:* As stock-based compensation expenserecognized in the condensed consolidated statement of operations for the threemonths ended March 31, 2008 is based on awards ultimately expected tovest, it has been reduced for estimated forfeitures. SFAS 123(R) requiresforfeitures to be estimated at the time of grant and revised, if necessary, insubsequent periods if actual forfeitures differ from those estimates.Forfeitures were estimated based on historical experience.

 

Noincome tax benefit has been recognized relating to stock-based compensationexpense and no tax benefits have been realized from exercised stock options.

 

*StockOptions and Stock Appreciation Rights*: During the three months ended March 31, 2008, we granted stockappreciation rights for 716,794 shares of common stock, with an estimated totalgrant date fair value of approximately $5.4 million and a grant dateweighted-average fair value of $7.52 per share. During the three months ended March 31, 2007, we granted stockoptions and stock appreciation rights for 551,500 shares of common stock, withan estimated total grant date fair value of approximately $4.0 million and agrant date weighted-average fair value of $7.33 per share.

 

Asof March 31, 2008, there was unrecognized compensation cost ofapproximately $12.2 million for total stock-based compensation related to stockoptions and stock appreciation rights, before forfeitures. We expect torecognize this cost over a weighted-average amortization period of 3.20 years.

 

*EmployeeStock Purchase Plan (ESPP):* The compensation cost in connection with the ESPP for the three monthsended March 31, 2008 was approximately $82,000 with a grant dateweighted-average fair value of $5.32. During the three months ended March 31,2007, the compensation cost was approximately $81,000, with a grant dateweighted average fair value of $5.84. This cost is amortized on a straight-linebasis over the relevant subscription period.

 

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

 

| ** **                      | ** ** | **Three months ended  March 31, 2008** | ** ** |
|---------------------------------|------------|------------------------------------------------------------|------------|
| Expected term (in years)        |       | 0.50                                                       |       |
| Average risk-free interest rate |       | 2.15                                                       | %          |
| Average volatility factor       |       | 43.9                                                       | %          |
| Dividend yield                  |       | -                                                          |       |

 

Forthe three months ended March 31, 2007, we calculated the fair value ofeach share on the date of grant using the Black-Scholes model as prescribed bySFAS 123(R). The assumptions used were as follows:

 

| ** **                      | ** ** | **Three months ended  March 31, 2007** | ** ** |
|---------------------------------|------------|------------------------------------------------------------|------------|
| Expected term (in years)        |       | 0.49                                                       |       |
| Average risk-free interest rate |       | 5.14                                                       | %          |
| Average volatility factor       |       | 42.0                                                       | %          |
| Dividend yield                  |       | —                                                     |       |

 

12

----

 

*RestrictedStock Units*: Inconnection with restricted stock units and restricted stock awards granted, werecorded stock compensation representing the fair market value of our commonshares on the dates the awards were granted. Compensation expense is beingrecorded on a straight-line basis over the vesting periods of the underlyingstock awards. During the three months ended March 31, 2008, we granted41,000 shares of restricted stock units, with a grant-date fair value ofapproximately $0.7 million and a grant-date weighted-average fair value of$17.45.   During the three months ended March 31,2007, we granted 45,050 shares of restricted stock units, with a grant-datefair value of approximately $0.8 million and a grant-date weighted-average fairvalue of $18.06.

 

Asof March 31, 2008, there was an unrecognized compensation cost ofapproximately $1.5 million related to nonvested restricted stock awards andrestricted stock units, before forfeitures. We expect to recognize this costover a weighted-average amortization period of 2.44 years.

 

**9.     ConvertibleSenior Notes**

 

InFebruary 2007, we issued an aggregate principal amount of $86,250,000 ofour 2.25% convertible senior notes due 2027. These notes bear a 2.25% interestper annum on the principal amount, payable semiannually in arrears on February 15and August 15 of each year, beginning on August 15, 2007.

 

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

 

Inconnection with the sale and issuance of the notes we incurred debt issuancecosts of $3.1 million which is being amortized to interest expense over afive year period.

 

Weconcluded that the embedded stock conversion option is not considered aderivative under SFAS No. 133, *“Accountingfor Derivative Instruments and Hedging Activities,”* or SFAS 133,because the embedded stock conversion option would be recorded in stockholders’equity if it were a freestanding instrument per Emerging Issues Task Force(“EITF”) Issue No. 00-19, *“Accountingfor Derivative Financial Instruments Indexed to, and Potentially Settled in, aCompany’s Own Stock,”* or EITF 00-19. We concluded that the notes areaccounted for similar to traditional convertible debt (that is, as a combinedinstrument) because the embedded stock conversion option meets the requirementsof EITF No. 00-19, including the provisions contained in paragraphs 12-32of EITF 00-19.  Accordingly, the embedded stock conversion option is notseparated as a derivative.

 

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

 

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

 

13

----

 

**10.  Income Taxes**

 

Weadopted the provisions of FIN 48 on January 1, 2007.  The adoption ofthe provisions of FIN 48 did not have a material impact on our financialposition and results of operations. We have not been audited by the InternalRevenue Service or any state income or franchise tax agency. As of March 31,2008, our federal returns for the years ended 2004 through the current periodand most state returns for the years ended 2003 through the current period arestill open to examination. In addition, all of the net operating losses andresearch and development credit carryforwards that may be used in future yearsare still subject to inquiry given that the statute of limitation for theseitems would be from the year of the utilization.

 

The amount of unrecognized tax benefits at December 31, 2007, was $1.9million, which, if ultimately recognized, will reduce our annual effective taxrate. We have a full valuation allowance against the $1.9 million unrecognizedtax benefit.  Any additional unrecognizedtax benefits generated subsequent to December 31, 2007 would also have a fullvaluation allowance placed against them.

 

We do not expect our unrecognized tax benefits to change signifcantlyover the next 12 months.  In connectionwith the adoption of FIN 48, we will recognize interest and penalties accruedon any unrecognized tax benefits as a component of income tax expense.  As of March 31, 2008, we have not accruedinterest or penalties related to uncertain tax positions.

 

**11.****      ****Computation of Net Loss PerShare**

 

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.

 

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,**               | ** ** |
| ** **                                                                                                           | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Denominator:                                                                                                         |       |                             |       |   |   |
| Weighted-average number of common shares  oustanding                                                                 |       | 29,952                           |       | 29,328 |   |
| Less: Weighted-average unvested and  restricted common shares                                                        |       | (17                              | )          | (68 | ) |
| **Weighted-average number common shares  outstanding used in computing basic and diluted net loss per common share** |       | **29,935**                       |       | **29,260** |   |

 

Thefollowing outstanding options, potential employee stock purchase plan shares,warrants, stock appreciation rights, restricted stock units and shares wereexcluded from the computation of diluted net loss per share, as their effectwould have been antidilutive (in thousands):

 
| ** **                                                | ** ** | **At March 31,** | ** ** |
|-----------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                | ** ** | **2008**                   | ** ** | **2007** | ** ** |
| Outstanding options and stock appreciation  rights        |       | 4,521                      |       | 3,963 |   |
| Restricted stock awards                                   |       | 17                         |       | 52 |   |
| Restricted stock units                                    |       | 140                        |       | 276 |   |
| Employee stock purchase plan                              |       | 16                         |       | 15 |   |
| Warrants issued in connection with our convertible  notes |       | 3,093                      |       | 3,093 |   |
| **Total**                                                 | ** ** | **7,787**                  | ** ** | **7,399** | ** ** |

 

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

 

14

----

 

**12.  ComprehensiveIncome (Loss)**

 

Comprehensiveincome (loss) represents all changes in stockholders’ equity except thoseresulting from investments or contributions by stockholders. Our comprehensiveincome (loss) consists of unrealized losses on available-for-sale securitiesand cumulative translation adjustments. A summary of the comprehensive income(loss) for the periods indicated is as follows (in thousands):

 
| ** **                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | ** **                                       |
| ** **                                             | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Net loss                                               |       | $                                                | (6,379     | ) | $ | (4,100 | ) |
| Other comprehensive loss                               |       |                                             |       |   |   |
| Foreign currency translation adjustment,  net of tax   |       | 57                                               |       | — |   |
| Unrealized gain loss on available-for-sale  securities |       | (2,347                                           | )          | — |   |
| Comprehensive loss                                     |       | $                                                | (8,669     | ) | $ | (4,100 | ) |

 

Thebalances of each component of accumulated other comprehensive income (loss),net of taxes, as of March 31, 2008 and December 31, 2007 consist ofthe following (in thousands):

 
| ** **                               | ** ** | **Unrealized Gain  (Loss) on Available-for-Sale Securities** | ** ** | **Foreign  Currency  Translation** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** |
|------------------------------------------|------------|----------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------|------------|
| Balance as of December 31, 2007     |       | —                                                                           |       | —                             |       | —                                                    |       |
| Net change during the three month period |       | $                                                                                | (2,347     | )                                  | $          | 57                                                        |       | $ | (2,290 | ) |
| Balance as of March 31, 2008        |       | $                                                                                | (2,347     | )                                  | $          | 57                                                        |       | $ | (2,290 | ) |

 

**13.  Segment Information**

 

Weoperate in one business segment, which encompasses all geographical regions. Weuse one measurement of profitability and do not segregate our business forinternal reporting.

 

Netsales by geographic region, based on shipping location of our customer, are asfollows (in thousands, except percentages):

** **
| ** **               | ** ** | **Three  Months Ended  March 31,** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|
| ** **               | ** ** | ** **                              |
| ** **               | ** ** | **2008**                                | ** ** | **2007** | ** ** |
| Net sales (in thousands) |       | $                                       | 21,127     |   | $ | 13,780 |   |
| United States of America |       | 78                                      | %          | 91 | % |
| France                   |       | 14                                      | %          | 9 | % |
| Europe                   |       | 8                                       | %          | 0 | % |
| Other                    |       | <1                                   | %          | <1 | % |
|                          |            |                                         |            |  |  |  |  |

 

Nocustomer accounted for more than 10% of total revenue for the three monthsended March 31, 2008 and 2007. No customer had a balance in excess of 10%of our net accounts receivable at March 31, 2008. Accounts receivable fromtwo customers accounted for 22% and 10%, respectively, of our net accountsreceivable balance as of March 31, 2007.

 

**14.  Stockholders’Equity**

 

Asof March 31, 2008, 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.

 

15

----

 

**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 2008 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 on Form 10-K forthe year ended December 31, 2007 filed with the Securities and ExchangeCommission on March 14, 2008 and those included elsewhere in this Form 10-Q.*

 

**Overview**

 

Wedevelop, manufacture and market the*Essure*® permanentbirth control system, an innovative and proprietary medical device for womenthat was approved for marketing in the United States in November 2002 bythe United States Food and Drug Administration, or FDA. The*Essure* system uses a soft and flexiblemicro-insert that is delivered into a woman’s fallopian tubes to providepermanent birth control by causing a benign tissue in-growth that blocks thefallopian tubes. A successfully placed*Essure* micro-insert and the subsequent tissue growth prohibits theegg from traveling through the fallopian tubes and therefore prevents fertilization.

 

      On January 7, 2008 (the “ClosingDate”), we entered into a Share Purchase Agreement (the “Share PurchaseAgreement”) with Conceptus SAS, in connection with the exercise of our calloption under the existing Share Purchase and Call Option Agreement dated January 17,2004 and amended on February 27, 2007 and on November 19, 2007.Pursuant to the Share Purchase Agreement, we acquired all of the outstandingshares of Conceptus SAS on the Closing Date. As a result of this transaction,Conceptus SAS became our wholly owned subsidiary and its results of operationsare consolidated with our results of operations starting on January 7,2008. We believe the acquisition of Conceptus SAS expands our presence ininternational markets and will increase our revenues as we will recognize salesat end user pricing as compared to the price we previously sold the *Essure* product directly to ConceptusSAS.  Our condensed consolidatedfinancial statements for the three months ended March 31, 2008 include thefinancial results of Conceptus SAS beginning from the acquisition date of January 7,2008.

 

*The Essure Procedure*

 

The*Essure* procedure is typically performedas an outpatient procedure and is intended to be a less invasive and a lesscostly alternative to tubal ligation, the leading form of birth control in theUnited States and worldwide. Laparoscopic tubal ligation and tubal ligation bylaparotomy typically involve abdominal incisions and/or punctures, general orregional anesthesia, four to ten days of normal recovery time and the risksassociated with an incisional procedure. The*Essure* procedure does not require cutting or penetrating theabdomen, which lowers the likelihood of post-operative pain due to theincisions/punctures, and it can be performed in an outpatient setting withoutgeneral or regional anesthesia. In the Pivotal trial of the*Essure* system, the total procedure timeaveraged 35 minutes, with an average of 13 minutes of hysteroscopic time toplace the*Essure* micro-insert. Apatient is typically discharged approximately 45 minutes after the*Essure* procedure. No overnight hospitalstay is required. Furthermore, the*Essure*  system is effective without drugs orhormones. There is a three-month waiting period after the procedure duringwhich the woman must use another form of birth control while tissue in-growthoccurs. At 90 days following the procedure, U.S. patients complete a follow-upexamination called a hysterosalpingogram, or HSG, which can determine whetherthe device was placed successfully and whether the fallopian tubes areoccluded. Outside of the United States, patients are required to return for apelvic X-ray at three months post-procedure with a subsequent HSG if devicelocation on the initial radiographic image appears suspicious.

 

Webelieve that the*Essure* system isalso an attractive alternative to tubal ligation for physicians, hospitals andpayers. The*Essure* system is aless invasive permanent birth control option for physicians to offer to theirpatients; hospitals are able to utilize their facilities more cost effectivelywith the* Essure*  procedurecompared with tubal ligation; and payers are able to experience cost reductionsresulting from the elimination of overhead and procedural costs related toanesthesia and post-operative hospital stays associated with tubal ligations.We also believe the*  Essure*  system is a viable alternative to other

 

16

----

 

temporary methods of birthcontrol being used when there is no intention of having children in the future.In addition, payers may also benefit from the reduction of unplannedpregnancies associated with non-permanent methods of birth control used bypatients who have chosen to avoid the drawbacks of traditional permanent birthcontrol methods but who may elect to use the*  Essure*  system.

 

Publishedreports estimate that 700,000 tubal ligation procedures are performed each yearin the United States. We intend to tap into this market and establish the*Essure* procedure as the gold standard forpermanent birth control.

 

The*Essure* system is currently being marketedin multiple countries. In November 2002 we received approval from the FDAto market the*Essure* system inthe United States. In 2001, we were given approval to affix the CE Mark to the*Essure* system, indicating that the*  Essure*  system is certified for sale throughout theEuropean Union, subject to compliance with local regulations such asregistration with health ministries and/or particular requirements regardinglabeling or distribution. In 1999, the*Essure* Permanent Birth Control system was listed with Australia’sTherapeutic Goods Administration, which allows us to market and sell the*Essure* system in Australia. In Canada, we received clearance from Health Canadato market the*Essure*  system in Canada in November 2001. InFrance, the “Haute Autorité de santé” lifted in October 2007 all therestrictions, thereby putting the *Essure*procedure on an equal footing with tubal ligations. Following this decision,the *Essure* procedure is coveredin France for all women, regardless of medical status.  In addition, the CEPS in France ruled in November 2007that the reimbursement for the *Essure*device will remain at the then current levels of 700 Euros for the next 5years.

 

Wecurrently have distributors in Australia, Canada, Puerto Rico and Spain. In January 2008,we acquired all of the outstanding shares of Conceptus SAS, our distributor inFrance, and as a result Conceptus SAS is operating as our wholly-ownedsubsidiary.

 

*Effectivenessof the Essure System*

 

InJuly 2005, we received approval from the FDA to extend effectiveness dataon the*Essure* product labeling.The Premarket Approval, or PMA, supplement filed in late January 2005supports an extension of the effectiveness rate of the*  Essure*  system to 99.80% after four years and 99.74%after five years of follow-up, from the previously approved 99.80% at threeyears. The five-year effectiveness was demonstrated in a small portion of thewomen undergoing clinical studies. Five year follow up of all patients inclinical trials is ongoing.

 

InSeptember 2005, we received approval from the FDA to terminate ourpost-approval study with physicians who were newly trained in performing the*  Essure*  procedure due to the positive placement dataobtained. The purpose of the post-approval study, required by the FDA as acondition of the November 2002 approval of the*  Essure*  system, was to determine the rate ofsuccessful bilateral placements of the*  Essure*  micro-inserts at first attempt with a largenumber of newly trained physicians who were not part of the previous clinicalstudies. Although treatment of the total number of patients required by the FDAhad not been completed, the data obtained to date provided us with theopportunity to request that the FDA permit an early termination of the study.Because of the FDA ruling, the PMA Supplement submitted in March 2005 hasbeen re-classified as a Final Report. The results of the post-approval studydemonstrated an improvement in placement rates from those obtained in thepivotal study. In November 2005, we filed a PMA supplement with the FDA inorder to obtain approval to modify the*  Essure*  Physician and Patient labeling to reflect a94.6% first procedure bilateral placement rate based on results of thepost-approval study. In October 2006, we received such approval from theFDA. In March 2006, we filed a PMA supplement with the FDA in order toobtain approval for a modified delivery system and micro-insert, and new valvedintroducer.  We received such approvalfrom the FDA in June 2007. A post-approval study is being conducted toinvestigate the bilateral placement rate at first attempt for the modifieddelivery system and micro-insert, and is expected to be similar for the newestmodel of the *Essure* system.

 

*Penetration*

 

Werequire physicians to be preceptored for between 3 and 5 cases by a certifiedtrainer before being able to perform the procedure independently. In the firstquarter of 2008 we continued to see an increase in the number of physiciansbecoming trained or that are in the process of training. The level of sales forthe* Essure*  system,particularly in this early period of adoption, is highly dependent on thenumber of physicians trained to perform the procedure. However, we understandthat a strong base of trained physicians does not necessarily correlate to anincrease in revenue proportionately. Furthermore, there are no revenuesassociated with the training activities. We do not charge a fee for theactivity and no commitment arises for the physician from the preceptorship.Physician training is provided upfront and we have no obligation subsequent tothe initial training. Training costs have not been significant from inceptionto-date.

 

17

----

 

*Reimbursementof the Essure Procedure*

 

Marketacceptance of the*Essure* systemdepends in part upon the availability of reimbursement within prevailinghealthcare payment systems. We believe that physician advocacy of ourproduct will be required to continue to obtain reimbursement. As of March 31,2008, we have received positive reimbursement decisions for the *Essure* procedure from most privateinsurers and from 45 of the 51 Medicaid programs in the United States. Wecontinue to receive positive responses relating to reimbursement, which webelieve will help increase the adoption of the *Essure*device by doctors and patients. We intend to continue our effort toeducate payers of the cost-effectiveness of our product and to establishfurther programs to help physicians to navigate reimbursement issues. As withall healthcare plans, coverage will vary and is dependent upon the individual’sspecific benefit plan.

 

EffectiveJanuary 1, 2008, the Centers for Medicare and Medicaid Services, or CMS,the Medicare National unadjusted average payment for hysteroscopicsterilization, the CPT code, is $420 when performed in a hospital and $2,024when performed in a physician’s office. While the newly approved payment forthe hospital is valid for the year 2008, the physician schedule is expected tobe revisited by June 2008. In addition, in the CMS Final Rule for the2008 Outpatient Prospective Payment System or OPPS, which assigns hospitaloutpatient reimbursement amounts, the CPT code was assigned a Medicare NationalAverage of $2,720. In 2008, the Medicare national average payment forhysteroscopic sterilization in the ambulatory surgery center is $1,446, whichincludes the cost of the implant. We believe these values are very favorablefor the  Essure procedure and will helpin establishing increased utilization of the device amongst doctors.

 

*Adoption of the Essure System*

 

The*Essure* system is a novel product in thecontraception market, which is dominated by procedures that are wellestablished among physicians and patients and are routinely taught to newphysicians. As a result, we believe that recommendations and endorsements byphysicians will be essential for market acceptance of our product. Physiciansare traditionally slow to adopt new products and treatment practices, partlybecause of perceived liability risks. Our biggest challenge is to speed up theadoption process to make the*Essure*procedure the standard of care for permanent birth control. The followingdiscussion summarizes our program in the United States to increase adoption ofthe*Essure* procedure.

 

First,we are attempting to increase patient awareness, so as to increase the numberof women that will ask for information about the*Essure* procedure. During 2008 we expect to spend more than$9 million on building patient awareness. The largest part of this expenditurewill be a direct to consumer (DTC) pilot program in eight cities, incorporatingtelevision, radio and print media advertising. These programs commenced in thefirst quarter of 2008 with expenditures of approximately $3.5 million. We hopethrough these programs to drive patient awareness of the *Essure* procedure.

 

Second,we are expanding our sales territories and channels of distribution so as toincrease our call frequency on physicians. During the first quarter of 2008 weadded a number of in office specialists and sales positions. Also, we haveincluded targeting regional distributors of women’s gynecology products in ourmarketing efforts. Among other responsibilities, our sales representatives areattempting to increase penetration and utilization of the*  Essure*  procedure, as well as to facilitate themovement of the*  Essure*  procedure to the in-office environment.

 

Third,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. Our tactical reimbursement focus is intended to give the physician andhis/her staff the tools to ensure that claims will ultimately be paid andthereby encourages the physician to continue performing the*  Essure*  procedure despite reimbursement issues. Thistactical reimbursement team is generally targeting specific accounts with theaim of eventually meeting with all of our accounts so as to provide them withthe knowledge of how to file and follow up on claims on a payer by payer basis.

 

Fourth,we intend to continue making labeling improvements to our product as well asphysical product enhancements to increase the adoption of the*Essure* procedure. This may involve working with the various regulatory agenciesaround the world that regulate the sale and labeling of medical devices toprovide updates to claims such as effectiveness and placement rates. Whereappropriate, we will make physical improvements to the product for improvedmanufacturability, for the ease of use by the physician or to improve theclinical performance of our product.

 

Wehave experienced significant operating losses since inception and, as of March 31,2008, had an accumulated deficit of $241.6 million. We will continue to expendsubstantial resources in the selling and marketing of the*Essure* system in the United States andabroad. Due to the unpredictable nature of these activities, we do not knowwhether we will achieve or sustain profitability in the future. We willcontinue to be in a net loss position until sufficient revenues can begenerated to offset expenses.

 

18

----

 

**Results of Operations - Three months Ended March 31,2008 and 2007**

**2008 results compared to 2007 (in thousands, exceptpercentages)**

** **
| ** **                                    | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                             | ** ** | **2007** | ** ** | **2008-2007** | ** ** |
| ** **                                    | ** ** | **Amount**                                           | ** ** | **% (a)** | ** ** | **Amount** | ** ** | **% (a)** | ** ** | **% Change** | ** ** |
| Net sales                                     |       | $                                                    | 21,127     |   | 100 | % | $ | 13,780 |   | 100 | % | 53 | % |
| Gross profit                                  |       | 15,682                                               |       | 74 | % | 10,075 |   | 73 | % | 56 | % |
| Research and development expenses             |       | 1,931                                                |       | 9 | % | 1,642 |   | 12 | % | 18 | % |
| Selling, general and administrative  expenses |       | 20,102                                               |       | 95 | % | 13,009 |   | 94 | % | 55 | % |
| Net loss                                      |       | (6,379                                               | )          | -30 | % | (4,100 | ) | -30 | % | 56 | % |
|                                               |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

----

**(a) **Expressed as a percentage of total net sales.

 

*Net Sales*

 

Netsales were $21.1 million for the three months ended March 31, 2008 ascompared to $13.8 million for the three months ended March 31, 2007,representing an increase of $7.3 million, or 53%. The increase in netsales is the result of continued commercialization of the *Essure* system worldwide. Internationalsales comprised 22% of our total sales reflecting almost a full quarter ofrevenues realized from our acquisition of Conceptus SAS in January 2008.Net sales increase also reflects the increasing number of physicians enteringand completing training in the use of the procedure. We understand that astrong base of trained physicians does not necessarily correlate to an increasein revenue proportionately. Furthermore, there are no revenues associated withthe training activities. We do not charge a fee for the activity and nocommitment arises for the physician from the preceptorship. Physician trainingis provided upfront and we have no obligation subsequent to the initialtraining. Training costs have not been significant to us from inceptionto-date.

 

19

----

 

Netsales by geographic region, based on shipping location of our customer, are asfollows (in thousands, except percentages):

** **
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **March 31,**               | ** ** |
| ** **               | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net sales (in thousands) |       | $                                | 21,127     |   | $ | 13,780 |   |
| United States of America |       | 78                               | %          | 91 | % |
| France                   |       | 14                               | %          | 9 | % |
| Europe                   |       | 8                                | %          | 0 | % |
| Other                    |       | < 1                           | %          | < 1 | % |
|                          |            |                                  |            |  |  |  |  |

 

Nocustomer accounted for more than 10% of total revenue for the three monthsended March 31, 2008 and 2007. No customer had a balance in excess of 10%of our net accounts receivable at March 31, 2008. Accounts receivable fromtwo customers accounted for 22% and 10%, respectively, of our net accountsreceivable balance as of March 31, 2007.

 

Weexpect our net sales for 2008 to be approximately $102 million to $105 million,which would represent 58% to 63% growth from net sales in 2007 as we continueto increase the number of sales representatives in order to provide evengreater depth of physician coverage, which in turn we expect will increasephysician utilization and the number of physicians performing the*Essure* procedure. We intend to continueto increase our programs aimed at raising patient awareness of the*Essure* procedure, such as radio, print and television advertising.Additionally, we expect to see an increase in our international sales with thecompletion of the acquisition of Conceptus SAS in January 2008. However,as we have noted elsewhere in this Form 10-Q and risk factors in our 2007Annual Report on Form 10-K, our expected revenue growth involves many riskfactors, some of which are not entirely within our control, such as marketacceptance of the*Essure* system and third party reimbursement for thedevice.

 

*GrossProfit*

 

Costof goods sold for the three months ended March 31, 2008 was $5.4 millionas compared to $3.7 million for the three months ended March 31, 2007.This increase of $1.7 million, or 47%, was caused by higher volumes ofsales.  Gross profit margin was 74% forthe three months ended March 31, 2008 and 73% for the same period ended March 31,2007. Gross profit margin was negatively impacted by 600 basis points in thefirst quarter of 2008 due to the provisions of SFAS 141, which require finishedgoods inventory of the acquired enterprise to be valued at estimated sellingprices less a reasonable profit allowance for the selling effort of anacquiring enterprise. Therefore, the inventory on hand at Conceptus SAS at dateof acquisition was valued at approximately $370 per unit higher than ourconsolidated standard cost. Gross profit margin was also impacted by highervolumes of sales on relatively fixed manufacturing costs, offset by decreasedunit costs of the next-generation device and to a domestic price increaseimplemented during the first quarter of 2008. We anticipate gross margins will improve in the remainder of 2008 due tothe lower per-unit costs on greater volume and the increased margin obtainedfrom end-user sales by Conceptus SAS; however, our gross profit margin willvary as our sales mix changes. Increases in sales of our devices throughdistributors in international markets will tend to decrease our overall grossprofit margin.

 

*Researchand Development Expenses*

 

Researchand development expenses, which include expenditures related to productdevelopment, clinical research and regulatory affairs, were $1.9 million and$1.6 million for the three months ended March 31, 2008 and 2007,respectively. The primary reason for the increase results from $0.2 million ofpayroll and payroll related expenditures, due to the increase in staffing ofour research and development team. Research and development expenses reflectclinical expenditures and product development, which are substantially relatedto the ongoing development and associated regulatory approvals of ourtechnology. Our goal is to continue our product enhancements over the comingyears, which are intended to result in improved ease of use and clinicalperformance. We expect to identify and hire additional research and developmentpersonnel in the future to staff our planned research and developmentactivities, and we expect that these costs will increase as we seek to maintainour leading position in the market for permanent female birth control.

 

20

----

 

*Selling,General and Administrative Expenses*

 

Selling,general and administrative spending for the three months ended March 31,2008 was $20.1 million as compared to $13.0 million for the three months ended March 31,2007, which represents an increase of $7.1 million, or 55%. The increase isfrom higher payroll expenditures of $1.5 million, primarily due to theexpansion of our U.S. field sales force, which is meant to provide us with moreselling time to focus on physician penetration. Additionally, we spent $3.5million on our direct to consumer advertising campaign that was launched duringthe first quarter of 2008. In connection with our acquisition of Conceptus SASin January 2008, we incurred $1.5 million of additional operating expensesrepresenting the normal operating expenses of running that business.Additionally, increases in selling, general and administrative expenses were aresult of higher professional fees of $0.2 million and stock based compensationexpenses of $0.1 million. We expect selling, general and administrativeexpenses to increase in the future as we increase expenses in advertising tosupport patient awareness and hire additional sales professionals.

 

Interestand other income and expenses decreased $0.5 million in the three months ended March 31,2008 as compared to the three months ended March 31, 2007. The decrease isdue to foreign currency losses on our outstanding hedge contract of $0.4million offset by exchange gains of $0.2 million and increased interest expenseas a resulting of our convertible debt offering in February 2007 of $0.3million.

 

**Liquidityand Capital Resources**

 

Wehave experienced significant operating losses since inception. As of March 31,2008, we had an accumulated deficit of $241.6 million. We have financedour operations since inception primarily through equity and debt financings. InDecember 2006, we filed a shelf Registration Statement on Form S-3,through which we may sell from time to time any combination of debt securities,common stock, preferred stock and warrants, in one or more offerings. Theaggregate initial offering price of all securities sold will not exceed$150,000,000. After the sale of our senior convertible notes described below,we had $63,750,000 remaining available for sale.

 

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

 

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

 

Inaddition, in connection with the issuance of the notes, we entered intoseparate convertible note hedge transactions and separate warrant transactionsto reduce the potential dilution upon conversion of the notes (“Call SpreadTransactions”). As a result of the 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 millionshares of our common stock, which is the number of shares underlying the notes.In addition, we sold warrants permitting the purchasers to acquire up to approximately3.1 million shares of our common stock.

 

Asof March 31, 2008, we held $48.5 million (par value) in auction ratesecurities backed by federal and state student loans which are variable ratedebt instruments and bear interest rates that reset approximately every 20-30days. The auction rate securities were rated AAA by a major credit ratingagency and have contractual maturities that range from 20-40

 

21

----

 

years. The securities areclassified as available for sale and are recorded at fair value. We recorded atemporary reduction in carrying value of $2.3 million for the three-monthperiod ended March 31, 2008, which has been recorded as an unrealized lossin accumulated other comprehensive loss. We have experienced failed auctions in2008 of certain of our auction rate securities and there is no assurance thatauctions on the remaining auction rate securities in our investment portfoliowill succeed in the future. As a result, our ability to liquidate ourinvestments in the near term may be limited, and our ability to fully recoverthe carrying value of our investments may be limited or non-existent. Anauction failure means that the parties wishing to sell securities could notcarry out the transaction. If the issuers of these securities are unable tosuccessfully close future auctions or their credit ratings deteriorate, we mayin the future be required to record an impairment charge on these investments.It could take until the final maturity of the underlying notes (up to40 years) to realize our investments’ recorded value.

 

Giventhe recent disruptions in the credit markets and the fact that the liquidityfor these types of securities remains uncertain, we have classified all of ourauction rate securities as long-term investments in our condensed consolidatedbalance sheet as our ability to liquidate such securities in the next 12 monthsis uncertain. The carrying value of our auction rate securities on ourcondensed consolidated balance sheet as of March 31, 2008 was $46.1million. During the first quarter of 2008 we successfully liquidated $22.1million of our investments in auction rate securities, however, the auctionsfor $48.5 million (par value) of our investments in auction ratesecurities failed. Based on our ability to access our cash and other short-terminvestments, our expected operating cash flows, and our other sources of cash,we do not anticipate the current lack of liquidity on these investments willaffect our ability to operate our business.

 

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

 

Asof March 31, 2008, we had cash, cash equivalents and short-terminvestments of $18.2 million, compared to $45.2 million at December 31,2007. The decrease of $27.0 million is primarily due to our acquisition ofConceptus SAS in January 2008. We expect cash usage in operatingactivities to decrease in the future as our net loss decreases.

 

*OperatingActivities*

 

Netcash used in operating activities was $5.1 million in the three months ended March 31,2008, as compared to $4.0 million in the three months ended March 31,2007. Net cash used in operating activities in the three months ended March 31,2008 was primarily related to:

 

·                  net loss of $6.4 million; and

·                  non-cash related items of $2.5 millioncorresponding primarily to stock based compensation and depreciation andamortization of fixed assets and intangibles.

 

Wemonitor our accounts receivable turnover closely to ensure that receivables arecollected timely and have an established a credit and collection policy tofacilitate our collection process and reduce our credit loss exposure.

 

*InvestingActivities*

 

Netcash used in investing activities for the three months ended March 31,2008 was $6.4 million, primarily from sales and maturity of short-terminvestments of $22.1 million, offset by the purchase of Conceptus SAS of $22.6million, net of cash acquired of $1.7 million, purchases of investments of  $5.0 million and capital expenditures of $0.8million. Net cash 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$2.2 million, offset by purchases of investments of $27.9 million and capitalexpenditures of $0.3 million.

 

*FinancingActivities*

 

Netcash provided by financing activities in the three months ended March 31,2008 was $1.1 million from the issuance of common stock for our stock optionprograms. Net cash provided by financing activities was $75.6 million for thethree months ended March 31, 2007 primarily due to the net proceeds of$83.2 million from our issuance of senior convertible notes in February 2007,the proceeds of $10.7 million for the issuance of warrants in connection withour senior convertible notes and the proceeds of $1.1 million for the issuanceof common stock for our stock option programs, offset by $19.4 million for thecost of our purchase of call options on our convertible senior notes.

 

22

----

 

**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, 2007.In preparing 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 our financialstatements include reserves for obsolete and slow moving inventory, allowancefor doubtful accounts receivable, product warranty, impairment for long-livedassets, income taxes, stock-based compensation and contingent liabilities.Other accounting policies are described in section “Critical AccountingEstimates and Policies” in our Financial Statements included in our AnnualReport on Form 10-K for the year ended December 31, 2007. Applicationof these policies involves the exercise of judgment and use of assumptions asto future uncertainties and, as a result, actual results could differ fromthese estimates.

 

*RecentAccounting Pronouncements*

 

InSeptember 2006, the Financial Standards Accounting Board, or FASB, issuedStatement No. 157, “*Fair Value Measurement,*”or SFAS 157. 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. SFAS 157 is effective for financial statements issued for yearsbeginning after November 15, 2007, and interim periods of those fiscalyears. FASB Staff Position 157-2, “Effective Date of FASB Statement No. 157”delays the effective date of SFAS 157 for all non-financial assets andnon-financial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis (at least annually),until the beginning of the first quarter of 2009.  Effective January 1, 2008, we adoptedSFAS 157 for financial assets and liabilities carried at fair value. Theadoption of SFAS 157 for financial assets and liabilities did not have amaterial impact on our condensed consolidated financial statements.  See Note 4- Fair Value Measurements.

 

InFebruary 2007, FASB issued Statement No. 159, “*The Fair Value Option for Financial Assets andFinancial Liabilities*”, or 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 became effectivefor us on January 1, 2008. The adoption of SFAS 159 did not have amaterial impact on our condensed consolidated financial statements.

 

InDecember 2007, FASB issued Statement No. 141 (revised 2007), *“Business Combinations,”*or SFAS 141(R) andStatement No. 160, *“NoncontrollingInterests in Consolidated Financial Statements*,” or SFAS 160, anamendment of Accounting Research Bulleting No. 51. SFAS 141(R) willimpact financial statements on the acquisition date and in subsequent periods.Some of the changes, such as the accounting for contingent consideration, willintroduce more volatility into earnings and may impact our acquisitionstrategy. SFAS 160 will change the accounting and reporting for minorityinterests, which will be recharacterized as noncontrolling interests andclassified as a component of equity. In addition, SFAS 141(R) will beapplied prospectively and SFAS 160 will require retroactive adoption of thepresentation and disclosure requirements for existing minority interests, whilethe remaining requirements of SFAS 160 will be applied prospectively. SFAS 141(R) andSFAS 160 are effective on January 1, 2009. We are currently evaluating theimpact of adopting SFAS 141(R) and SFAS 160 on our consolidated financialstatements.

 

InMarch 2008, FASB issued Statement No. 161, *“Disclosures about Derivative Instruments and Hedging Activities, anamendment of FASB No. 133,”* or SFAS 161. This statement isintended to improve transparency in financial reporting by requiring enhanceddisclosures of an entity’s derivative instruments and hedging activities andtheir effects on the entity’s financial position, financial performance andcash flows. SFAS 161 applies to all derivative instruments within the scope ofSFAS 133 as well as related hedged items, bifurcated instruments andnon-derivative instruments that are designated and qualify as hedginginstruments. Entities with instruments subject to SFAS 161 must provide morerobust qualitative disclosures and expanded quantitative disclosures. SFAS 161is effective prospectively for financial statements issued for fiscal years andinterim periods beginning after November 15, 2008, with early applicationpermitted. We are currently evaluating the disclosure implications of thisstatement.

 

**Item 3. Quantitative and Qualitative Disclosures AboutMarket 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*:  Wehave been exposed to interest rate risk through interest earned on holdings ofavailable-for-sale marketable securities. We have experienced failed auctionsin 2008 of certain of our auction rate securities and there is no assurancethat auctions on the remaining auction rate securities in our investmentportfolio will succeed in the future. As a result,

 

23

----

 

our ability to liquidate ourinvestments in the near term may be limited, and our ability to fully recoverthe carrying value of our investments may be limited or non-existent. Anauction failure means that the parties wishing to sell securities could notcarry out the transaction. If the issuers of these securities are unable tosuccessfully close future auctions or their credit ratings deteriorate, we mayin the future be required to record an impairment charge on these investments.It could take until the final maturity of the underlying notes (up to40 years) to realize our investments’ recorded value. As of March 31,2008 we held $48.5 million (par value) in auction rate securities whichare variable rate debt instruments and bear interest rates that resetapproximately every 20-30 days. All of these auction rate securities wereclassified as long term investments in our condensed consolidated balance sheetat March 31, 2008 with an expected maturity of greater than one year. Duein part to these factors, our future investment income may fall short ofexpectations due to changes in interest rates or we may suffer losses inprincipal if forced to sell securities that have declined in market value dueto changes in interest rates. Interest rates that may affect these items in thefuture will depend on market conditions and may differ from the rates we haveexperienced in the past.

 

*ForeignCurrency Exchange Risk:*    Historically,all of our expenses and our revenues were typically denominated in UnitedStates dollars. On January 7, 2008, we acquired all the outstanding sharesof Conceptus SAS.  As a result of thistransaction, Conceptus SAS became a wholly owned subsidiary and its results ofoperations have been consolidated with our results of operations for financialreporting purposes as of the acquisition date. The functional currency ofConceptus SAS is the Euro; therefore, we are now exposed  to changes in foreign exchange rates. We areexposed to foreign exchange rate fluctuations as we translate the financialstatements of Conceptus SAS into U.S. dollars in consolidation. If there is achange in foreign currency exchange rates, the translation of Conceptus SAS’financial statements into U.S. dollars will lead to translation gains or losseswhich are recorded net as a component of accumulated other comprehensive loss.We will seek to manage our foreign exchange risk through operational means,including managing same currency revenues in relation to same currencyexpenses, and same currency assets in relation to same currency liabilities. Inconnection with the acquisition of Conceptus SAS, we assumed a forward exchangecontract to hedge dollar denominated estimated accounts payable in 2008. Wehave recorded the changes of the fair value of the hedge contract in ourresults of operations for the three months ended March 31, 2008.  In 2007, we did not enter into forwardexchange contracts to hedge exposure denominated in foreign currencies or anyother derivative financial instruments for trading or speculative purposes.

 

**Item 4. Controls and Procedures**

 

*Evaluationof Disclosure Controls and Procedures:*

 

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

 

As of March 31, 2008,the end of our most recent fiscal quarter, we carried out an evaluation, underthe supervision and with the participation of our management, including ourChief Executive Officer and our Chief Financial Officer, of the effectivenessof the design and operation of our disclosure controls and procedures. Based onthe foregoing, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures were effective.

 

*Changes inInternal Control Over Financial Reporting:*

 

There was no change in ourinternal control over financial reporting during our most recent fiscal quarterthat has materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

*InherentLimitations of Internal Controls*

 

Internal control overfinancial reporting cannot provide absolute assurance of achieving financialreporting objectives because of its inherent limitations.  Internalcontrol over financial reporting is a process that involves human diligence andcompliance and is subject to lapses in judgment and breakdowns resulting from humanfailures. Internal control over financial reporting also can be circumvented bycollusion or improper management override. Because of such limitations, thereis a risk that material misstatements may not be prevented or detected on atimely basis by internal control over financial reporting. However, theseinherent limitations are known features of the financial reporting process.Therefore, it is possible to design into the process safeguards to reduce,though not eliminate, this risk.

 

24

----

 

**PART II.  OTHER INFORMATION**

 

**Item 1. 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.

 

**Item 1A. Risk Factors**

 

*The riskfactors included in our Annual Report as of December 31, 2007 on Form 10-Kfiled with the Securities and Exchange Commission on March 14, 2008 shouldbe considered while evaluating Conceptus and our business. In addition to thosefactors and to other information in this Form 10-Q, the following updatesto the risk factors as of March 31, 2008 should be considered carefullywhile evaluating the Company and our business.*

 

***Our investment portfolio is invested in auction rate securities.Failures in the auctions for these securities affect our liquidity, whiledeterioration in credit ratings of issuers of such securities and/or thirdparties insuring such investments may require us to adjust the carrying valueof our investment through an impairment of earnings.***

 

Asof May 1, 2008, approximately $48.5 million (par value) ofinvestments consisted entirely of auction rate securities backed by federal andstate student loans securities with maturities that range from 20 to40 years. These investments have characteristics similar to short-terminvestments, because at pre-determined intervals, generally ranging from 20 to30 days, there is a new auction process at which the interest ratesfor these securities are reset to current interest rates. At the end of eachsuch period, we historically have either chosen to roll-over these securitiesor redeem the securities for cash.

 

Wehave experienced failed auctions in 2008 of certain of our auction ratesecurities and there is no assurance that auctions on the remaining auctionrate securities in our investment portfolio will succeed in the future. As aresult, our ability to liquidate our investments in the near term may belimited, and our ability to fully recover the carrying value of our investmentsmay be limited or non-existent. An auction failure means that the partieswishing to sell securities could not carry out the transaction. If the issuersof these securities are unable to successfully close future auctions or theircredit ratings deteriorate, we may in the future be required to record animpairment charge on these investments. It could take until the final maturityof the underlying notes (up to 40 years) to realize our investments’recorded value. Based on our ability to access our cash and cash equivalents,expected operating cash flows, and our other sources of cash, we do notanticipate that the current lack of liquidity on these investments will affectour ability to continue to operate our business in the ordinary course.However, we can provide no assurance as to when these investments will againbecome liquid or as to whether we may ultimately have to recognize animpairment charge with respect to these investments.

 

**Item 6. Exhibits**

** **
| **Number** | ** ** | **Description**                                                                                            |
|------------|------------|------------------------------------------------------------------------------------------------------------|
| 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. |

 

25

----

 

**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

Date: May 9, 2008

 

Conceptus, Inc.

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

 

26

----

 

**EXHIBITINDEX**

** **
| **Number** | ** ** | **Description**                                                                                            |
|------------|------------|------------------------------------------------------------------------------------------------------------|
| 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. |

 

27

----