Table ofContents

 

 

 

**UNITEDSTATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **x** | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Forthe quarterly period ended March 31, 2009**

** **

**OR**

** **

| **o** | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Forthe transition period from          to         .**

 

**CommissionFile Number: 0-27596**

 

**CONCEPTUS, INC.**

(Exact name ofRegistrant as specified in its charter)

 

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

 

**331East Evelyn**

**MountainView, CA 94041**

(Address ofPrincipal Executive Offices) (Zip Code)

 

**(650) 962-4000**

(Registrant’sTelephone Number, Including Area Code)

 

 

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

 

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

 

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

 

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

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

 

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

 

There were 30,518,109 shares of Registrant’s CommonStock issued and outstanding as of May 1, 2009.

 

 

 

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**CONCEPTUS,INC.**

 

**Form 10-Q for the Quarter Ended March 31,2009**

 
|          | ** **                                                                                  | **Page**                                                                                                     |
|---------------|---------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
| Part I.  | Financial  Information                                                                      |                                                                                                         |
|          |                                                                                        |                                                                                                         |
| Item 1.       | Condensed  Consolidated Financial Statements (Unaudited)                                    |                                                                                                         |
|          |                                                                                        | a) Condensed Consolidated Balance Sheets as of  March 31, 2009 and December 31, 2008               | 3 |
|          |                                                                                        | b)  Condensed Consolidated Statements of Operations for the Three Months Ended  March 31, 2009 and 2008 | 4 |
|          |                                                                                        | c)  Condensed Consolidated Statements of Cash Flows for the Three Months Ended  March 31, 2009 and 2008 | 5 |
|          |                                                                                        | d) Notes to Condensed Consolidated Financial  Statements                                                     | 6 |
|          |                                                                                        |                                                                                                         |
| Item 2.       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 19                                                                                                           |
|          |                                                                                        |                                                                                                         |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                 | 28                                                                                                           |
|          |                                                                                        |                                                                                                         |
| Item 4.       | Controls and  Procedures                                                                    | 29                                                                                                           |
|          |                                                                                        |                                                                                                         |
| Part II. | Other Information                                                                           |                                                                                                         |
|          |                                                                                        |                                                                                                         |
| Item 1.       | Legal Proceedings                                                                           | 30                                                                                                           |
|          |                                                                                        |                                                                                                         |
| Item 1A.      | Risk  Factors                                                                               | 30                                                                                                           |
|          |                                                                                        |                                                                                                         |
| Item 6.       | Exhibits                                                                                    | 33                                                                                                           |

 

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**PART I.FINANCIAL INFORMATION**

 

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

 

**Conceptus, Inc.**

 

**Condensed Consolidated Balance Sheets**

**(Unaudited)**

**(Inthousands)**

** **
| ** **                                          | ** ** | **March 31,** | ** **  | **December 31,**           | ** ** |
|-----------------------------------------------------|------------|--------------------|-------------|---------------------------------|------------|
| ** **                                          | ** ** | **2009**           | ** **  | **2008**                        | ** ** |
| ** **                                          | ** ** | ** **         | ** **  | **(As Adjusted) (1)** | ** ** |
| **Assets**                                          |       |               |        |                            |       |
| Current assets:                                     |       |               |        |                            |       |
| Cash and cash equivalents                           |       | $                  | 54,241      |                            | $          | 54,720 |   |
| Accounts receivable, net                            |       | 14,637             |        | 14,377                          |       |
| Inventories                                         |       | 2,659              |        | 3,829                           |       |
| Prepaids                                            |       | 7,449              |        | 7,478                           |       |
| Other current assets                                |       | 1,953              |        | 1,617                           |       |
| Total current assets                                |       | 80,939             |        | 82,021                          |       |
|                                                |       |               |        |                            |       |
| Property and equipment, net                         |       | 8,827              |        | 8,635                           |       |
| Debt issuance costs, net                            |       | 1,336              |        | 1,451                           |       |
| Intangible assets, net                              |       | 4,830              |        | 5,287                           |       |
| Long-term investments                               |       | 43,332             |        | 43,177                          |       |
| Put option                                          |       | 4,967              |        | 5,144                           |       |
| Restricted cash                                     |       | 351                |        | 351                             |       |
| Goodwill                                            |       | 15,949             |        | 17,105                          |       |
| Other assets                                        |       | 47                 |        | 50                              |       |
| **Total assets**                                    | ** ** | **$**              | **160,578** | ** **                      | **$**      | **163,221** | ** ** |
|                                                |       |               |        |                            |       |
| **Liabilities and stockholders’ equity**       |       |               |        |                            |       |
| Current liabilities:                                |       |               |        |                            |       |
| Accounts payable                                    |       | $                  | 5,107       |                            | $          | 3,869 |   |
| Accrued compensation                                |       | 5,371              |        | 6,762                           |       |
| Line of credit                                      |       | 30,938             |        | 29,944                          |       |
| Deferred tax liability                              |       | 1,307              |        | 1,442                           |       |
| Other accrued liabilities                           |       | 4,379              |        | 4,598                           |       |
| Total current liabilities                           |       | 47,102             |        | 46,615                          |       |
|                                                |       |               |        |                            |       |
| Notes payable                                       |       | 73,369             |        | 72,344                          |       |
| Other accrued liabilities                           |       | 505                |        | 394                             |       |
| Total liabilities                                   |       | 120,976            |        | 119,353                         |       |
|                                                |       |               |        |                            |       |
| Stockholders’ equity:                          |       |               |        |                            |       |
| Common stock and additional paid-in capital         |       | 288,503            |        | 286,951                         |       |
| Accumulated other comprehensive loss                |       | (2,281             | )           | (798                            | )          |
| Accumulated deficit                                 |       | (246,620           | )           | (242,285                        | )          |
| Treasury stock, 77,863 shares, at cost              |       | —             |        | —                          |       |
| Total stockholders’ equity                     |       | 39,602             |        | 43,868                          |       |
|                                                |       |               |        |                            |       |
| **Total liabilities and stockholders’ equity** | ** ** | **$**              | **160,578** | ** **                      | **$**      | **163,221** | ** ** |

 

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(1) Adjusted for the retrospectiveadoption of Financial Accounting Standards Board (FASB) Staff Position No. APB 14-1,*Accountingfor Convertible Debt Instruments That May Be Settled in Cash UponConversion (Including Partial Cash Settlement)*(FSP APB 14-1). See Note 9:Convertible Senior Notes - Adoption of FSP APB 14-1.

 

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

 

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**Conceptus, Inc.**

 

**Condensed Consolidated Statements of Operations**

**(Unaudited)**

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

 
| ** **                                                                      | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                                                      | ** ** | ** **                                       | ** ** | **(As Adjusted) (1)** | ** ** |
| Net sales                                                                       |       | $                                                | 27,151     |   | $ | 21,127 |   |
| Cost of goods sold                                                              |       | 5,756                                            |       | 5,445 |   |
| Gross profit                                                                    |       | 21,395                                           |       | 15,682 |   |
|                                                                            |       |                                             |       |   |   |
| Operating expenses:                                                             |       |                                             |       |   |   |
| Research and development                                                        |       | 1,407                                            |       | 1,931 |   |
| Selling, general and administrative                                             |       | 22,570                                           |       | 20,102 |   |
| Total operating expenses                                                        |       | 23,977                                           |       | 22,033 |   |
|                                                                            |       |                                             |       |   |   |
| Operating loss                                                                  |       | (2,582                                           | )          | (6,351 | ) |
|                                                                            |       |                                             |       |   |   |
| Interest income                                                                 |       | 356                                              |       | 891 |   |
| Interest expense                                                                |       | (1,718                                           | )          | (1,567 | ) |
| Other expense, net                                                              |       | (250                                             | )          | (282 | ) |
| Total interest income and expense and other expense, net                        |       | (1,612                                           | )          | (958 | ) |
|                                                                            |       |                                             |       |   |   |
| Loss before provision for income taxes                                          |       | (4,194                                           | )          | (7,309 | ) |
|                                                                            |       |                                             |       |   |   |
| Provision for income taxes                                                      |       | 141                                              |       | — |   |
| Net loss                                                                        |       | $                                                | (4,335     | ) | $ | (7,309 | ) |
|                                                                            |       |                                             |       |   |   |
| Basic and diluted net loss per share                                            |       | $                                                | (0.14      | ) | $ | (0.24 | ) |
|                                                                            |       |                                             |       |   |   |
| Weighted-average shares used in computing basic and diluted net loss  per share |       | 30,438                                           |       | 29,935 |   |

 

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(1) Adjusted for the retrospectiveadoption of Financial Accounting Standards Board (FASB) Staff Position No. APB 14-1,*Accountingfor Convertible Debt Instruments That May Be Settled in Cash UponConversion (Including Partial Cash Settlement)*(FSP APB 14-1). See Note 9:Convertible Senior Notes - Adoption of FSP APB 14-1.

 

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

 

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**Conceptus, Inc.**

 

**Condensed Consolidated Statements of Cash Flows**

**(Unaudited)**

**(Inthousands)**

 
| ** **                                                                   | ** ** | **Three months ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| ** **                                                                   | ** ** | ** **                                       | ** ** | **(As Adjusted) (1)** | ** ** |
| **Cash flows from operating activities**                                     |       |                                             |       |   |   |
| Net loss                                                                     |       | $                                                | (4,335     | ) | $ | (7,309 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                                             |       |   |   |
| Depreciation and amortization of property, plant and equipment               |       | 1,013                                            |       | 665 |   |
| Amortization of debt issuance costs                                          |       | 116                                              |       | 116 |   |
| Accretion of note payable                                                    |       | 1,025                                            |       | 969 |   |
| Amortization of intangibles                                                  |       | 180                                              |       | 187 |   |
| Loss on put option                                                           |       | 177                                              |       | — |   |
| Unrealized gain on trading securities                                        |       | (155                                             | )          | — |   |
| Stock-based compensation expense                                             |       | 1,347                                            |       | 1,608 |   |
| Gain on disposal of fixed assets                                             |       | (12                                              | )          | — |   |
| Changes in operating assets and liabilities, net of effect of  acquisition:  |       |                                             |       |   |   |
| Accounts receivable                                                          |       | (476                                             | )          | 56 |   |
| Inventories                                                                  |       | 1,014                                            |       | 577 |   |
| Other current assets                                                         |       | (375                                             | )          | (1,530 | ) |
| Accounts payable                                                             |       | 1,195                                            |       | (1,014 | ) |
| Accrued compensation                                                         |       | (1,321                                           | )          | (266 | ) |
| Other accrued and long term liabilities                                      |       | (115                                             | )          | 836 |   |
| Net cash used in operating activities                                        |       | (722                                             | )          | (5,105 | ) |
|                                                                         |       |                                             |       |   |   |
| **Cash flows from investing activities**                                     |       |                                             |       |   |   |
| Purchase of Conceptus SAS, net of cash acquired                              |       | —                                           |       | (22,619 | ) |
| Purchase of investments                                                      |       | —                                           |       | (5,000 | ) |
| Sales and maturities of investments                                          |       | —                                           |       | 22,050 |   |
| Proceeds from sale of fixed assets                                           |       | 16                                               |       | — |   |
| Capital expenditures                                                         |       | (847                                             | )          | (808 | ) |
| Net cash used in investing activities                                        |       | (831                                             | )          | (6,377 | ) |
|                                                                         |       |                                             |       |   |   |
| **Cash flows from financing activities**                                     |       |                                             |       |   |   |
| Proceeds from line of credit                                                 |       | 1,067                                            |       | — |   |
| Repayment of line of credit outstanding                                      |       | (97                                              | )          | — |   |
| Proceeds from issuance of common stock                                       |       | 225                                              |       | 1,095 |   |
| Net cash provided by financing activities                                    |       | 1,195                                            |       | 1,095 |   |
|                                                                         |       |                                             |       |   |   |
| Effect of exchange rate changes on cash and cash equivilents                 |       | (121                                             | )          | 120 |   |
|                                                                         |       |                                             |       |   |   |
| Net decrease in cash and cash equivalents                                    |       | (479                                             | )          | (10,267 | ) |
| Cash and cash equivalents at beginning of the period                         |       | 54,720                                           |       | 28,450 |   |
| Cash and cash equivalents at end of the period                               |       | $                                                | 54,241     |   | $ | 18,183 |   |

 

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(1) Adjusted for the retrospectiveadoption of Financial Accounting Standards Board (FASB) Staff Position No. APB 14-1,*Accountingfor Convertible Debt Instruments That May Be Settled in Cash UponConversion (Including Partial Cash Settlement)*(FSP APB 14-1). See Note 9:Convertible Senior Notes - Adoption of FSP APB 14-1.

 

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

 

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**Conceptus, Inc.**

 

***NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS***

 

***(Unaudited)***

 

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

 

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

 

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

 

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. In December 2006, we filed a RegistrationStatement on Form S-3, through which we may sell from time to time anycombination of debt securities, common stock, preferred stock and warrants, inone or more offerings, with an initial offering price not to exceed$150,000,000. In February 2007, we issued an aggregate principal amount of$86,250,000 of our 2.25% convertible senior notes due 2027. If the notes areconverted, then upon conversion, holders will receive cash and, if applicable,shares of our common stock based on an initial conversion rate, subject toadjustment, of 35.8616 shares per $1,000 principal amount of notes (whichrepresents an initial conversion price of $27.89 per share), in certaincircumstances. Upon conversion, a holder would receive cash up to the principalamount of the note and our common stock in respect of such note’s conversionvalue in excess of such principal amount. This net share settlement feature ofthe notes would reduce our liquidity, and we may not have sufficient funds topay in full the cash obligation upon such conversion. In the future, dependingupon a variety of factors, we may need to raise additional funds through bankfacilities, debt or equity offerings or other sources of capital. Anyadditional 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.

 

*Recent Accounting Pronouncements*

 

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

 

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We adoptedEmerging Issues Task Force (“EITF”) 08-6 on January 2009, concurrentlywith the adoption of SFAS 141(R) and SFAS 160. The intent of EITF 08-6 isto clarify the accounting for certain transactions and impairmentconsiderations related to equity method investments as modified by theprovisions of SFAS 141(R) and SFAS 160. The adoption of EITF 08-6 did nothave a material impact on our financial condition, results of operations, orcash flows.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities — an amendment of FASBStatement No. 133*, or SFAS 161. SFAS 161 requires enhanced disclosures about how and why an entity usesderivative instruments, how derivative instruments and related hedged items areaccounted for and their effect on an entity’s financial position, financialperformance and cash flows. SFAS 161 will be effective in the first quarter offiscal year 2009.  The adoption of SFAS161 did not have a material impact on our financial condition, results ofoperations, or cash flows.

 

InApril 2008, the FASB issued FSP No. 142-3, *Determinationof the Useful Life of Intangible Assets*, or FSP 142-3.  FSP 142-3 amends the factors an entity shouldconsider in developing renewal or extension assumptions used in determining theuseful life of recognized intangible assets under FASB Statement No. 142, *Goodwill and Other Intangible Assets*.  This new guidance applies prospectively tointangible assets that are acquired individually or with a group of otherassets in business combinations and asset acquisitions.  FSP 142-3 is effective for financialstatements issued for fiscal years and interim periods beginning after December 15,2008.  Early adoption is prohibited. Theadoption of FSP 142-3 did not have a material impact on our financialcondition, results of operations, or cash flows.

 

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

 

InJune 2008, the FASB ratified EITF Issue 07-5, *Determining Whether an Instrument (or Embedded Feature) Is Indexed toan Entity’s Own Stock* (EITF 07-5). Paragraph 11(a) of SFAS No. 133, *Accountingfor Derivatives and Hedging Activities*, or SFAS 133, specifies thata contract that would otherwise meet the definition of derivative but is both (a) indexedto such company’s own stock and (b) classified in stockholders’ equity inthe statement of financial position would not be considered a derivativefinancial instrument.  EITF 07-5 providesa new two-step model to be applied in determining whether a financialinstrument or an embedded feature is indexed to an issuer’s own stock and thusable to qualify for the SFAS 133 paragraph 11(a) scope exception.  EITF 07-05 will be effective for the firstannual reporting period beginning after December 15, 2008, and earlyadoption is prohibited.  The adoption ofEITF 07-05 did not have a material impact on our financial condition, resultsof operations, or cash flows.

 

EffectiveJanuary 1, 2008, we adopted  SFAS No. 157, *Fair Value Measurements*, or SFAS 157, as amended by FSPSFAS 157-1, *Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13*, or FSP SFAS 157-1,and FSP SFAS 157-2, *Effective Date of FASBStatement No. 157*, or FSP SFAS 157-2.  SFAS 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and provides for expanded disclosureabout fair value measurements.  SFAS 157 applies prospectively to allother accounting pronouncements that require or permit fair value measurements.  FSPSFAS 157-1 amended SFAS 157 to exclude from the scope of SFAS 157 certainleasing transactions accounted for under SFAS No. 13, *Accounting for Leases.*  FSP SFAS157-2 amended SFAS 157 to defer the effective date of SFAS 157 for allnon-financial assets and non-financial liabilities except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis to fiscal years beginning after November 15, 2008, andinterim periods within those fiscal years.  We adopted FSP SFAS 157-2in the first quarter of fiscal 2009.  SeeNote 4 - Fair Value Measurements.

 

In April 2009, theFASB issued FSP SFAS No. 115-2 and SFAS No. 124-2 *Recognition and Presentation of Other-Than-TemporaryImpairments,*which modifiesthe other-than-temporary impairment guidance for debt securities throughincreased consistency in the timing of impairment recognition and enhanceddisclosures related to the credit and noncredit components of impaired debtsecurities that are not expected to be sold. In addition, increased disclosuresare required for both debt and equity securities regarding expected cash flows,credit losses, and an aging of securities with unrealized losses. 

 

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FSP SFAS No. 115-2and SFAS No. 124-2 will be effective for interim and annual reportingperiods that end after June 15, 2009, which, for us, would be the secondquarter of fiscal 2009. Early adoption is permitted for periods ending after March 15,2009. We are currently evaluating the effect of this FSP.

 

In April 2009, theFASB issued FSP SFAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments.*  This FSP amends SFASNo. 107, *Disclosures about Fair Value of FinancialInstruments*, to require publicly-traded companies, as defined in APBOpinion No. 28, *Interim FinancialReporting*, to provide disclosures on the fair value of financialinstruments in interim financial statements.  Prior to the issuanceof FSP FAS No. 107-1 and APB Opinion No. 28-1, the fair values ofthose assets and liabilities were disclosed only once each year. With theissuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, we will nowbe required to disclose this information on a quarterly basis, providingquantitative and qualitative information about fair value estimates for allfinancial instruments not measured in the Condensed Consolidated Balance Sheetsat fair value. FSP SFAS 107-1 and APB 28-1 are effective for interim periodsending after June 15, 2009.  We will adopt the new disclosurerequirements in the second quarter of fiscal 2009.  We do not expect to have a material impact onour condensed consolidated financial condition, results ofoperations, or cash flows.

 

In April 2009, theFASB issued FSP SFAS 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly,*or FSP SFAS 157-4, which provides additional guidance for estimating fair valuein accordance with SFAS 157 when the volume and level of activity for the assetor liability have significantly decreased.  This FSP re-emphasizesthat regardless of market conditions the fair value measurement is an exitprice concept as defined in SFAS 157.  This FSP clarifies andincludes additional factors to consider in determining whether there has been asignificant decrease in market activity for an asset or liability and provides additionalclarification on estimating fair value when the market activity for an asset orliability has declined significantly.  The scope of this FSP does notinclude assets and liabilities measured under level 1 inputs.  FSPSFAS 157-4 is applied prospectively to all fair value measurements whereappropriate and will be effective for interim and annual periods ending after June 15,2009.  We will adopt the provisions of FSP SFAS 157-4 effective thesecond quarter of fiscal 2009, which we do not expect to have a material impacton our condensed consolidated financial condition, results ofoperations, or cash flows.

 

**2.     Summary of Significant Accounting Policies**

 

*Use of Estimates*

 

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

 

*Principles of Consolidation*

 

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

 

*Functional Currency*

 

OnJanuary 7, 2008 we acquired Conceptus SAS, which sells to customersthroughout Europe.  Sales by ConceptusSAS are denominated in Euros. On December 15, 2008, we incorporatedConceptus Medical Limited (“CML”) as our United Kingdom subsidiary.  In preparing our consolidated financialstatements, we are required to translate the financial statements of ConceptusSAS and CML from the currency in which they keep their accounting records intoU.S. Dollars.  Conceptus SAS maintainsits accounting records in the functional currency which is also its localcurrency, the Euro. The functional currency of CML is the British Pound.  The functional currency is determined basedon management’s judgment and involves consideration of all relevant economicfacts and circumstances affecting the subsidiary. Generally, the currency inwhich the subsidiary transacts a majority of its transactions, includingbilling, financing, payroll and other expenditures would be considered thefunctional currency, but any dependency upon the parent and the nature of thesubsidiary’s operations must also be considered. Since the functional currencyof Conceptus SAS has been determined to be the Euro, and CML has beendetermined to be the British Pound, any gain or loss associated with thetranslation of Conceptus SAS’ and 

 

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CML’sfinancial statements into U.S. Dollars is included as a component ofstockholders’ equity, in accumulated other comprehensive loss.  If in the future we determine that there hasbeen a change in the functional currency of Conceptus SAS or CML from its localcurrency to the U.S. Dollar, any translation gains or losses arising after thedate of change would be included within our statement of operations.

 

*Goodwill and Other Intangible Assets*

 

Goodwill represents the excess of the purchase price paid over the fairvalue of tangible and identifiable intangible net assets acquired in businesscombinations. We will perform an annual assessment during the fourth quarter of2009 of our goodwill at the reporting unit level or earlier if an event occursor circumstances change that would reduce the fair value of the reporting unit belowits carrying amount. No impairment charges have been recorded as of March 31,2009.

 

Otherintangible assets include customer relationships and non-compete agreements.They are amortized using the straight-line method over their respectiveestimated useful lives.

 

*Impairment of Long-Lived Assets*

 

Weaccount for the impairment of long-lived assets in accordance with SFAS144.  We evaluate the carrying value ofour long-lived assets, consisting primarily of our property and equipment, the*Essure* license acquired from a patentlitigation settlement in 2003 and intangible assets acquired in connection withour acquisition of Conceptus SAS in 2008, whenever certain events or changes incircumstances indicate that the carrying amount of the assets may not be recoverable.Such events or circumstances include a prolonged industry downturn, asignificant decline in our market value or significant reductions in projectedfuture cash flows.

 

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

 

**3.     Long-Term Investments**

 

Asof March 31, 2009, we held $48.5 million (par value) in auction ratesecurities, or ARS, backed by federal and state student loans which arevariable rate debt instruments and bear interest rates that reset approximatelyevery 20-30 days. These ARS have a contractual maturity ranging from 2028through 2047.

 

OurARS are long-term debt instruments backed by student loans, a substantialportion of which are guaranteed by the United Statesgovernment.  Prior to 2008, our ARS were highly liquid, using a Dutchauction process that resets the applicable interest rate at predeterminedintervals, typically every 20-30 days, to provide liquidity atpar.  We have experienced failed auctions in 2009 and 2008 on all ofour ARS.   The failures of these auctionsdo not affect the value of the collateral underlying the ARS, and we continueto earn and receive interest on our ARS at a pre-determined formula withspreads tied to particular interest rate indexes.

 

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

 

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

 

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Wehave accounted for the Rights as a freestanding financial instrument andelected to record the value of the Rights under the fair value option of SFAS159.  As a result, upon acceptance of theoffer from UBS, we recorded approximately $5.1 million as the fair value of theRights with a corresponding credit to other expense, net in the fourth quarterof 2008.  As a result of our election torecord the Rights at fair value, unrealized gains and losses will be includedin earnings in future periods.   We estimated the fair value ofthe Rights using the expected value that we will receive from UBS which wascalculated as the difference between the anticipated recognized loss and parvalue of the ARS as of the option exercise date. This value was discounted byusing a UBS credit default rate to account for the consideration of UBS creditrisk. For the three months ended March 31, 2009, we recorded an additionalunrealized loss of $0.2 million which represents the decrease in the fair valueof the put option.

 

Althoughthe Rights represent the right to sell the securities back to UBS at par, wewill be required to periodically assess the economic ability of UBS to meetthat obligation in assessing the fair value of the Rights. We will continue toclassify the ARS as long-term investments until June 30, 2009, one yearprior to the contractual settlement.

 

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

 

Inconnection with our acceptance of the UBS offer in November 2008,resulting in our right to require UBS to purchase our ARS at par valuebeginning on June 30, 2010, we transferred our ARS from available-for-saleto trading securities in accordance with SFAS 115, *Accountingfor Certain Investments in Debt and Equity Securities*.  Thetransfer to trading securities reflects our intent to exercise our put optionduring the period June 30, 2010 to July 3, 2012.  Prior toour agreement with UBS, our intent was to hold our ARS until we realized thepar value.

 

Forthe three months ended March 31, 2009, we recorded an unrealized gain of$0.2 million, which represents the increase in the fair value of the ARS.  We determined that use of a valuation modelwas the best available technique for measuring the fair value of our ARS. Weused a trinomial discount model weighting estimated future cash flows, qualityof collateral and the probability of future successful auctions occurring.  In determining a discount factor for eachARS, the model weights various factors, including assessments of credit quality,duration, insurance wraps, portfolio composition, discount rates, overallcapital market liquidity and comparable securities, if any.

 

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

 

**4.     Fair Value Measurements**

 

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

 

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 value hierarchybecause they are valued using quoted market prices, broker or dealerquotations, or alternative pricing sources with a reasonable level of pricetransparency. As of March 31, 2009, our Level 1 instruments are solelycomprised of our investments in money market funds.

 

Asa result of continued auction failures, quoted prices for our ARS did not existas of March 31, 2009 and, accordingly, we concluded that Level 1 inputswere not available for these assets. Brokerage statements received from our broker/dealerthat held our ARS included their estimated market value as of March 31,2009. Our broker/dealer valued our ARS at 88% of par. We made inquiriesrelative to the measurements utilized to derive the estimated market valuesquoted on our brokerage 

 

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statements,but the broker/dealer declined to provide detailed information relating totheir valuation methodologies. Due to the lack of transparency into themethodologies used to determine the estimated market values, we concluded thatestimated market values provided on our brokerage statements did not constitutevalid inputs and thus we did not utilize them in measuring the fair value ofthese ARS as of March 31, 2009.

 

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

 

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

 

Assetsand liabilities measured at fair value on a recurring basis at March 31,2009 are as follows (in thousands):

 
| ** **              | ** ** | ** **        | ** ** |
|-------------------------|------------|-------------------|------------|
| ** **              | ** ** | ** **        | ** ** | **Fair Value Measurements at Reporting Date** | ** ** |
| ** **              | ** ** | **March 31** | ** ** | **Quoted Price in  Active Markets  for Identical  Instruments** | ** ** | **Significant Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| ** **              | ** ** | **2009**          | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|                    |       |              |       |   |   |   |   |   |   |
| Assets:                 |       |              |       |   |   |   |   |   |   |
| Money market fund       |       | $                 | 48,345     |   | $ | 48,345 |   | $ | — |   | $ | — |   |
| Auction rate securities |       | 43,332            |       | — |   | — |   | 43,332 |   |
| Put option              |       | 4,967             |       | — |   | — |   | 4,967 |   |
|                    |       |              |       |   |   |   |   |   |   |
| Total assets            |       | $                 | 96,644     |   | $ | 48,345 |   | $ | — |   | $ | 48,299 |   |

 

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

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

 

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Thefollowing table presents a reconciliation of all assets and liabilitiesmeasured at fair value on a recurring basis, excluding accrued interestcomponents, using significant unobservable inputs (Level 3) for the threemonths ended March 31, 2009 (in thousands):

 
| ** **                                 | ** ** | ** **     | ** ** | **Auction Rate** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|
| ** **                                 | ** ** | **Put Option** | ** ** | **Securities**   | ** ** | **Total**  | ** ** |
| Balance at December 31, 2008          |       | $              | 5,144      |             | $          | 43,177     |       | $ | 48,321 |   |
| Unrealized gain on auction rate securities |       | —         |       | 155              |       | 155        |       |
| Unrealized loss on put option              |       | (177           | )          | —           |       | (177       | )          |
|                                       |       |           |       |             |       |       |       |
| Balance at March 31, 2009             |       | $              | 4,967      |             | $          | 43,332     |       | $ | 48,299 |   |

 

Thefollowing table presents a reconciliation of all assets and liabilitiesmeasured at fair value on a recurring basis, excluding accrued interestcomponents, using significant unobservable inputs (Level 3) for the threemonths ended March 31, 2008 (in thousands):

 
| ** **                                 | ** ** | **Auction Rate** | ** ** |
|--------------------------------------------|------------|------------------|------------|
| ** **                                 | ** ** | **Securities**   | ** ** |
| Balance at December 31, 2007               |       | $                | —     |   |
| Transfers from level 2 to level 3          |       | 48,800           |       |
| Sale of auction rate securities            |       | (350             | )          |
| Unrealized loss on auction rate securities |       | (2,347           | )          |
| Balance at March 31, 2008                  |       | $                | 46,103     |   |

 

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

 

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

 

Thetotal purchase price of $22.5 million included $24.4 million in cash considerationand $0.3 million in direct transaction costs, less a reduction to the purchaseprice of $2.2 million as explained below. On February 27, 2007, we enteredinto an amendment to the Share Purchase and Call Option Agreement withConceptus SAS and into an amendment to the Distribution Agreement withConceptus SAS.  Pursuant to the amendment to the Share Purchase and CallOption Agreement, we agreed not to exercise the call option to acquireConceptus SAS in 2007 and agreed to exercise our call option to acquire SASsometime between January 1, 2008 and January 2, 2009 subject to thesatisfaction of certain closing conditions.  Pursuant to the amendment tothe Distribution Agreement, Conceptus SAS agreed to increase the price they payto us for the*Essure* product.The difference in price of product under the revised Distribution Agreementcompared to the previous agreement was recorded as a current liability in ourconsolidated balance sheet prior to the acquisition. The balance of thiscurrent liability of $2.2 million on the date of acquisition was recorded as areduction of the purchase price of Conceptus SAS.

 

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

 

Thechanges in carrying amount of goodwill for the three months ended March 31,2009 is as follows (in thousands):

 
| ** **                     | ** ** | **Three Months**         | ** ** |
|--------------------------------|------------|-------------------------------|------------|
| ** **                     | ** ** | **Ended March 31,** | ** ** |
| ** **                     | ** ** | **2009**                      | ** ** |
| Goodwill, beginning of period  |       | $                             | 17,105     |   |
| Effect of currency translation |       | (1,156                        | )          |
| Goodwill, end of period        |       | $                             | 15,949     |   |

 

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

 
| ** **                | ** ** | ** **                                | ** ** | **March 31, 2009**     | ** ** |
|---------------------------|------------|-------------------------------------------|------------|-----------------------------|------------|
| ** **                | ** ** | **Weighted avg  remaining life  (years)** | ** ** | **Gross  carrying  amount** | ** ** | **Accumulated  amortization** | ** ** | **Cumulative  effect of  currency  translation** | ** ** | **Net book  value** | ** ** |
|                      |       |                                      |       |                        |       |   |   |   |   |   |   |
| Customer relationships    |       | 7.75                                      |       | $                           | 5,024      |   | $ | (678 | ) | $ | (463 | ) | $ | 3,883 |   |
| Covenant not to compete . |       | 1.75                                      |       | 71                          |       | (28 | ) | (5 | ) | 38 |   |
| Licenses                  |       | 4.45                                      |       | 2,020                       |       | (1,111 | ) | — |   | 909 |   |
|                      |       |                                      |       |                        |       |   |   |   |   |   |   |
| Total intangibles         |       |                                      |       | $                           | 7,115      |   | $ | (1,817 | ) | $ | (468 | ) | $ | 4,830 |   |

 

Intangible assets are being amortized over periodsranging from 3 to 9 years.

 

**6.     Inventories**

 

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

 
| ** **       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------|------------|--------------------|------------|-----------------------|------------|
| ** **       | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| Raw materials    |       | $                  | 275        |                  | $          | 230 |   |
| Work-in-progress |       | 1,105              |       | 1,225                 |       |
| Finished goods   |       | 1,279              |       | 2,374                 |       |
| **Total**        | ** ** | **$**              | **2,659**  | ** **            | **$**      | **3,829** | ** ** |

 

**7.     Warranty**

 

We offer warranties onour product and record a liability for the estimated future costs associatedwith warranty claims, which is based upon our historical experience and ourestimate of the level of future costs. Warranty costs are reflected in thestatement of operations as a cost of goods sold.  A reconciliation of thechanges in warranty liability for the three months ended March 31, 2009and 2008 are as follows (in thousands):

 
| ** **                                       | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Balance at the beginning of the period           |       | $                                     | 272        |   | $ | 208 |   |
| Accruals for warranties issued during the period |       | 59                                    |       | 57 |   |
| Settlements made in kind during the period       |       | (99                                   | )          | (67 | ) |
| **Balance at the end of the period**             | ** ** | **$**                                 | **232**    | ** ** | **$** | **198** | ** ** |

 

 

**8.     Stock-Based Compensation**

 

Net loss for the firstquarter of 2009 included stock-based compensation expense under SFAS No. 123(R),*Share-Based Payment,* or SFAS 123(R), ofapproximately $1.4 million, which consisted of stock-based compensationexpense of approximately $1.2 million related to employee stock options,employee stock purchase plan and stock appreciation rights andstock-based compensation expense of approximately $0.2 million related toemployee restricted stock and restricted stock units.

 

Net loss for the firstquarter of 2008 included stock-based compensation expense under SFAS 123(R) ofapproximately $1.5 million, which consisted of stock-based compensation expenseof approximately $1.3 million related to employee stock options, employee stockpurchase plan and stock appreciation rights and stock-based compensationexpense of approximately $0.2 million related to employee restricted stock andrestricted stock units.

 

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Stock-based compensationarrangements to non-employees are accounted for in accordance with EITF Issue No. 96-18,*Accounting for Equity Instruments That AreIssued to Other Than Employees for Acquiring, or in Conjunction with Selling,Goods or Services*, which requires that these equity instruments arerecorded at their fair value on the measurement date. The measurement ofstock-based compensation is subject to adjustment as the underlying equityinstruments vest. Stock-based compensation expense relating to non-employeeswas approximately $0 and $55,000 for the three months ended March 31, 2009and 2008, respectively.

 

For the three months ended March 31, 2009 and2008, we calculated the fair value of each stock option and stock appreciationright on the date of grant using the Black-Scholes model as prescribed by SFAS123(R). The assumptions used were as follows:

 
| ** **                      | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------|------------|---------------------------------------|------------|
| ** **                      | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Expected term (in years)        |       | 4.35                                  |       | 4.67 |   |
| Average risk-free interest rate |       | 1.61                                  | %          | 2.65 | % |
| Average volatility factor       |       | 52.6                                  | %          | 47.9 | % |
| Dividend yield                  |       | —                                |       | — |   |

 

*StockOptions and Stock Appreciation Rights*: During the three months ended March 31, 2009,we granted stock appreciation rights for 842,057 shares of common stock, withan estimated total grant date fair value of approximately $4.2 million and agrant date weighted-average fair value of $4.99 per share.  During the three months ended March 31,2008, we granted stock options and stock appreciation rights for 716,794 sharesof common stock, with an estimated total grant date fair value of approximately$5.4 million and a grant date weighted-average fair value of $7.52 per share.

 

*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, 2009, we granted24,489 restricted stock units, with a grant-date fair value of approximately$0.3 million and a grant-date weighted-average fair value of $12.25.   During the three months ended March 31,2008, we granted 41,000 restricted stock units, with a grant-date fair value ofapproximately $0.7 million and a grant-date weighted-average fair value of$17.45.

 

**9.    Convertible Senior Notes**

 

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

 

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

 

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

 

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

 

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

 

Adoptionof FSP APB 14-1

 

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

 

Theeffect of the adoption of FASB APB 14-1 was to bifurcate the debt and equitycomponents of our convertible notes. The note payable principal balance at thedate of issuance of $86.3 million in February 2007 was bifurcated into the debtcomponent of $65.1 million and the equity component of $21.2 million.  The difference between the note payableprincipal balance of $86.3 million and the $65.1 million value of the debtcomponent will be accreted to interest expense over a period of 5 years, whichis the expected term of our notes payable. The adjusted outstanding notes payable balance at December 31, 2008is $72.3 million.   In addition, wereclassified $0.8 million of debt issuance costs to additional paid in capitalwhich will have the effect of reducing quarterly amortization by $39,000.  The debt component was recognized at thepresent value of its cash flows discounted using a 5.51% discount rate, ourborrowing rate at the date of the issuance of the Debenture for a similar debtinstrument without the conversion feature.

 

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

 
| ** **                                  | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                  | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| ** **                                  | ** ** | ** **                            | ** ** | **(As Adjusted) (1)** | ** ** |
| Contractual coupon rate of interest         |       | $                                     | 478        |   | $ | 483 |   |
| Accretion of note payable                   |       | 1,025                                 |       | 969 |   |
| Interest expense - convertible senior notes |       | $                                     | 1,503      |   | $ | 1,452 |   |

 

----

| (1) Adjusted for the retrospective adoption of FSP APB 14-1. |
|-------------------------------------------------------------------|

 

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Amounts comprising thecarrying amount of the Convertible Senior Notes are as follows (in thousands):

 
| ** **                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| ** **                | ** ** | ** **         | ** ** | **(As Adjusted) (1)** | ** ** |
| Principal balance         |       | $                  | 65,101     |                  | $          | 65,101 |   |
| Accretion of note payable |       | 8,268              |       | 7,243                 |       |
| Carrying amount           |       | $                  | 73,369     |                  | $          | 72,344 |   |

 

----

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

 

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

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

 

Theimpact of the adoption of FSP APB 14-1 on the Condensed Consolidated Statementof Operations for the three months ended March 31, 2008 (in thousands,except per share amount) is as follows:

 
| ** **                                               | ** ** | **As  Previously  Reported** | ** ** | **Incremental  Impact of  Adoption of  FSP APB 14-1** | ** ** | **As  Adjusted** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|-------------------------------------------------------|------------|------------------|------------|
| Total interest income and expense and other expense, net |       | $                            | (28        | )                                                     | $          | (930             | )          | $ | (958 | ) |
| Net loss                                                 |       | (6,379                       | )          | (930                                                  | )          | (7,309           | )          |
| Basic and diluted net loss per share                     |       | (0.21                        | )          | (0.03                                                 | )          | (0.24            | )          |
|                                                          |            |                              |            |                                                       |            |                  |            |  |  |  |

 

Theimpact of the adoption of FSP APB 14-1 on the Condensed Consolidated Statementof Cash Flows for the three months ended March 31, 2008 (in thousands) isas follows:

 
| ** **                          | ** ** | **As  Originally  Reported** | ** ** | **Incremental  Impact of  Adoption of FSP  APB 14-1** | ** ** | **As  Adjusted** | ** ** |
|-------------------------------------|------------|------------------------------|------------|-------------------------------------------------------|------------|------------------|------------|
| Net loss                            |       | $                            | (6,379     | )                                                     | $          | (930             | )          | $ | (7,309 | ) |
| Amortization of debt issuance costs |       | 155                          |       | (39                                                   | )          | 116              |       |
| Accretion of note payable           |       | —                       |       | 969                                                   |       | 969              |       |
|                                     |            |                              |            |                                                       |            |                  |            |  |  |  |

 

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

 

InNovember 2008 we entered into a revolving credit line agreement with UBS,payable on demand, in an amount equal to 75% of the fair value of our ARS at anet no cost, meaning that the interest we pay on the credit line will notexceed the interest that we receive on the ARS that we have pledged as securityfor the credit line. Additionally, if UBS is able to sell our ARS at par value,proceeds would be utilized to first repay any outstanding balance under therevolving credit line. We are still able to sell the ARS, but in such acircumstance, if we sold at less than par, we would not be entitled to recoverthe par value support from UBS.  As of March 31,2009 our loan balance was $30.9 million. See Note 3 — Long-term Investments.

 

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

 

Oureffective tax rate was 3% for the three months ended March 31, 2009 andnone for the three months ended March 31, 2008.  The Company’s effectiverate for the three months ended March 31, 2009 is primarily related to ourforeign operations.

 

Weadopted the provisions of FASB Interpretation No. 48, *Accounting for Uncertainty in Income Taxes*,or FIN 48, on January 1, 2007.  The adoption of the provisions of FIN48 did not have a material impact on our financial position and results ofoperations.   We have not been audited by the Internal RevenueService or any state income or franchise tax agency.   As of March 31,2009, our federal returns for the years ended 2005 through the current periodand most state returns for the years ended 2004 through the current period arestill open to examination.  In addition,all of the net operating losses and research and development creditcarryforwards that may be used in future years are still subject to inquirygiven that the statute of limitation for these items would be from the year ofthe utilization.

 

Asof March 31, 2009, we recorded approximately $0.1 million of income taxexpense attributable to Conceptus SAS.   The tax returns forConceptus SAS for the years ended 2005 to 2007 were examined and closed by theFrench tax authorities in 2008.

 

Theamount of unrecognized tax benefits at March 31, 2009 was approximately$2.4 million, of which, if ultimately recognized, approximately$0.5 million would decrease the effective tax rate in the period in whichthe benefit is recognized. The remaining amount would be offset by the reversalof related deferred tax assets on which a valuation allowance is placed.

 

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

 

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

 

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

 

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

 
| ** **                                                                                                           | ** ** | **Three months ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                           | ** ** | **March 31,**               | ** ** |
| ** **                                                                                                           | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Denominator:                                                                                                         |       |                             |       |   |   |
| Weighted-average number of common shares oustanding                                                                  |       | 30,442                           |       | 29,952 |   |
| Less: Weighted-average unvested and restricted common shares                                                         |       | (4                               | )          | (17 | ) |
| **Weighted-average number common shares  outstanding used in computing basic and diluted net loss per common share** | ** ** | **30,438**                       | ** ** | **29,935** | ** ** |

 

The following outstandingoptions, potential employee stock purchase plan shares, warrants, stockappreciation rights, restricted stock units and shares were excluded from thecomputation of diluted net loss per share, as their effect would have beenantidilutive (in thousands):

 
| ** **                                               | ** ** | **At March 31,** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|
| ** **                                               | ** ** | **2009**                   | ** ** | **2008** | ** ** |
| Outstanding options and stock appreciation rights        |       | 4,826                      |       | 4,521 |   |
| Restricted stock awards                                  |       | 4                          |       | 17 |   |
| Restricted stock units                                   |       | 101                        |       | 140 |   |
| Employee stock purchase plan                             |       | 19                         |       | 16 |   |
| Warrants issued in connection with our convertible notes |       | 3,093                      |       | 3,093 |   |
| **Total**                                                | ** ** | **8,043**                  | ** ** | **7,787** | ** ** |

 

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

 

**13.****        ****Comprehensive Loss**

 

Comprehensive lossrepresents all changes in stockholders’ equity except those resulting frominvestments or contributions by stockholders. Our comprehensive loss consistsof unrealized losses on available-for-sale securities and cumulativetranslation adjustments. A summary of the comprehensive loss for the periodsindicated is as follows (in thousands):

 
| ** **                                                      | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **March 31,**               | ** ** |
| ** **                                                      | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Net loss                                                        |       | $                                | (4,335     | ) | $ | (7,309 | ) |
| Other comprehensive loss                                        |       |                             |       |   |   |
| Foreign currency translation adjustment, net of tax             |       | (1,483                           | )          | 57 |   |
| Change to unrealized gain loss on available-for-sale securities |       | —                           |       | (2,347 | ) |
| Comprehensive loss                                              |       | $                                | (5,818     | ) | $ | (9,599 | ) |

 

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

 
| ** **                               | ** ** | **Foreign Currency  Translation** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** |
|------------------------------------------|------------|----------------------------------------|------------|---------------------------------------------|------------|
| Balance as of December 31, 2008     |       | $                                      | (798       | )                                           | $          | (798 | ) |
| Net change during the three month period |       | (1,483                                 | )          | (1,483                                      | )          |
| Balance as of March 31, 2009        |       | $                                      | (2,281     | )                                           | $          | (2,281 | ) |

 

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

 

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

 

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

 
| ** **               | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|
| ** **               | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Net sales (in thousands) |       | $                                                    | 27,151     |   | $ | 21,127 |   |
|                     |       |                                                 |       |   |   |
| United States of America |       | 78                                                   | %          | 78 | % |
| France                   |       | 15                                                   | %          | 14 | % |
| Rest of Europe           |       | 7                                                    | %          | 8 | % |
| Other                    |       | <  1                                              | %          | <  1 | % |
|                          |            |                                                      |            |  |  |  |  |

 

No customer accounted formore than 10% of total revenue for the three months ended March 31, 2009and 2008. No customer had a balance in excess of 10% of our net accountsreceivable at March 31, 2009.

 

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

 

*Thefollowing discussion of our financial condition and results of operationsshould be read in conjunction with our condensed consolidated financialstatements and related notes thereto. This discussion contains forward-lookingstatements, including references to 2009 revenues and gross margins, increasedproduct adoption, product improvements, expanded sales force and otherforecasted items that involve risks and uncertainties such as our limitedoperating and sales history; the uncertainty of market acceptance of ourproduct; dependence on obtaining and maintaining reimbursement; effectivenessand safety of our product over the long-term; our ability to obtain andmaintain the necessary governmental clearances or approvals to market ourproduct; our ability to develop and maintain proprietary aspects of ourtechnology; 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, 2008 filed with the Securities and ExchangeCommission on March 13, 2009 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 U.S. Food and Drug Administration, or FDA. The*Essure* system uses a soft and flexible micro-insert that isdelivered into a woman’s fallopian tubes to provide permanent birth control bycausing a benign tissue in-growth that blocks the fallopian tubes. Asuccessfully placed*Essure*micro-insert and the subsequent tissue growth prohibits the egg from travelingthrough the fallopian tubes and therefore prevents fertilization. Theeffectiveness rate of the*Essure*system is 99.80% after four years of follow-up.

 

OnJanuary 7, 2008, we acquired all of the outstanding shares of ConceptusSAS, which markets *Essure* directlyin France and utilizes distributors to market *Essure* in other European markets.  As a result of this transaction, ConceptusSAS became our wholly-owned subsidiary. We believe the acquisition of ConceptusSAS expands our presence in international markets and will increase ourrevenues as we will recognize sales at end user pricing as compared to theprice at which we previously sold the *Essure*product directly to Conceptus SAS.  Ourconsolidated financial statements include the financial results of ConceptusSAS beginning from the acquisition date of January 7, 2008.  Consolidated net sales for the three monthsended March 31, 2009 were $27.2 million of which 78% were generated in theUnited States.  For financial informationabout geographic areas and for segment information with respect to net sales,refer to the information set forth in Note 14 to our condensed consolidatedfinancial statements.

 

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

 

*TheEssure Procedure*

 

The*Essure* procedure is typically performedin the office setting and is intended to be a less invasive and a less costlysolution to tubal ligation, the leading form of permanent birth control in theUnited States and worldwide. Laparoscopic tubal ligation and tubal ligation bylaparotomy typically involve abdominal incisions and/or punctures, general orregional anesthesia, four to ten days of normal recovery time and the risksassociated with an incisional procedure. The*Essure* procedure does not require cutting or penetrating theabdomen, which lowers the likelihood of post-operative pain due to theincisions/punctures, and it can be performed in an outpatient setting.Currently, the majority of the*Essure*procedures are performed using conscious sedation, such as IV sedation with alocal anesthesia. General anesthesia is not typically used unless required byhospital protocol, if requested by the patient, or based on the experience andcomfort level of the physician.   In thePivotal trial of the*Essure*system, the average hysteroscopic procedure time was 13 minutes. A patient istypically discharged approximately 45 minutes after the*Essure* procedure. No overnight hospitalstay is required. Furthermore, the*Essure*system is effective without drugs or hormones. There is a three-month waitingperiod after the procedure during which the woman must use another form ofbirth control while tissue in-growth occurs. At 90 days following theprocedure, U.S. patients complete a confirmation test called ahysterosalpingogram, or HSG, which can determine whether the device was placedsuccessfully and whether the fallopian tubes are occluded. Outside of theUnited States, patients are required to return for a pelvic X-ray at threemonths post-procedure with a subsequent HSG if device location on the initialradiographic image appears suspicious.

 

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Webelieve that the *Essure* system is a betteralternative to tubal ligation for physicians, hospitals and payers. The Essuresystem is a less invasive permanent birth control option for physicians tooffer to their patients; hospitals are able to utilize their facilities morecost effectively with the *Essure*procedure compared with tubal ligation; and payers are able to experience costreductions resulting from the elimination of overhead and procedural costsrelated to anesthesia and post-operative hospital stays associated with tuballigations.  In addition, we believe the *Essure* procedure is superior to other non-tubal ligationpermanent contraception alternatives because, unlike other device designs, the *Essure* procedure does not involve the use of radio frequency(RF) energy, which subjects the patient to risks of thermal injury, bowelinjury and dilutional hyponatremia. Published reports estimate that approximately 700,000 tubal ligationprocedures are performed each year in the United States. We intend to capturethe majority share of this market and establish the *Essure*procedure as the gold standard for permanent birth control.  We also believe the *Essure*system is a solution for women whose family is complete but are using temporarymethods of birth control. In addition, payers may also benefit from thereduction of unplanned pregnancies associated with non-permanent birth controlmethods used by patients who have chosen to avoid the drawbacks of traditionalpermanent birth control methods but who may otherwise elect to use the *Essure* system.

 

*Effectivenessof the Essure System*

 

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

 

InSeptember 2005, we received approval from the FDA to terminate ourpost-approval study with physicians who were newly trained in performing the*Essure* procedure due to the positive placementdata obtained. 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  has been conducted to investigate thebilateral placement rate at first attempt for the modified delivery system andmicro-insert.  In March 2009, wereceived approval from the FDA to terminate our post-approval study withphysicians who were newly trained in performing the*Essure* procedure due to the positive placement dataobtained.  A PMA supplement to update theproduct labeling incorporating the results of the post-approval study will besubmitted to the FDA.

 

*Physician Penetration*

 

Werequire physicians to be preceptored for between 3 and 5 cases by a certifiedtrainer before being able to perform the procedure independently. We continueto see an increase in the number of physicians becoming trained or who are inthe process of training to perform the *Essure*procedure. The level of sales for the*Essure*system, particularly in this early period of adoption, is highly dependent onthe number of physicians trained to perform the procedure. However, weunderstand that a strong base of trained physicians does not necessarilycorrelate to an increase in revenue proportionately. Furthermore, there are norevenues associated with the training activities. We do not charge a fee forthe activity 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.

 

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*Reimbursement of the EssureProcedure*

 

Marketacceptance of the*Essure* systemdepends in part upon the availability of reimbursement within prevailinghealthcare payment systems. We believe that physician advocacy of ourproduct will be required to continue to obtain reimbursement. As of March 31,2009, we have received positive reimbursement decisions for the *Essure* procedure from most privateinsurers and from 46 of the 51 Medicaid programs in the United States. Wecontinue to receive positive responses relating to reimbursement, which webelieve will help increase the adoption of the *Essure*device by doctors and patients. We intend to continue our effort toeducate payers of the cost-effectiveness of our product and to establishfurther programs to help physicians to navigate reimbursement issues. As withall healthcare plans, coverage will vary and is dependent upon the individual’sspecific benefit plan.

 

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

 

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

 

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

 

Duringthe last several years, we received several positive responses from governmentand private agencies relating to reimbursement, which we believe will help usto speed up the acceptance of the*Essure*procedureby doctors and patients. In Europe, we are developing a strategic plan toobtain reimbursement in a number of European countries. In France, we obtainedofficial reimbursement under certain conditions for the*Essure* device in February 2005 forthe term of two years with the Haute Autorité de Santé, or HAS. Thisconditional approval required the procedure to be reserved for patients who hada potential laparoscopic risk. In addition, it required a follow up todemonstrate the safety of the*Essure*device, for which we conducted a multicenter study. As a result of thesestudies, the “Haute Autorité de Santé” lifted all the restrictions in October 2007,thereby putting the *Essure*procedure on an equal footing with tubal ligations. Following this decision,the *Essure* procedure is covered in Francefor all women, regardless of medical status. In addition, the CEPS in France ruled in November 2007 that thereimbursement for the *Essure* devicewill remain at the then current levels of 663 Euros for the next five years.

 

*Adoptionof the Essure System*

 

Webelieve the*Essure* system to bethe gold standard in permanentbirth control because of its unparalleled effectiveness, safety, and lowcost.  The *Essure*system is becoming increasingly well established among physicians and patientsand is routinely taught to new physicians in residency programs. As a result,we believe that recommendations and endorsements by physicians that areessential for market acceptance of our product will continue to grow.Physicians are traditionally slow to adopt new products and treatmentpractices, partly because of perceived liability risks. Our biggest challengeis to accelerate  the adoption process tomake the*Essure* procedure thestandard of care for permanent birth control. The following discussionsummarizes our programs to increase adoption of the*Essure* procedure.

 

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

 

Second, we expect tospend approximately $13 million in 2009 on further building patientawareness.  We believe that once patientsare made aware of the benefits of the *Essure*procedure,they will no longer look to other methods of birth control currently available.In 2009, we intend to broaden our consumer-awareness campaign to include 15% ofthe U.S. population.  All of ourawareness initiatives are also aimed at enabling us to compete for a largershare of the 7.5 million U.S. families who have completed their families butrely on temporary forms of birth control with lower efficacy.

 

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

 

Last, with the prospectof new competition in this large market, we are committed to continuing toimprove the *Essure* device.  In 2009, we plan to make an FDA submissionfor marketing approval of our fourth-generation *Essure*device, which is designed to further reduce the already rapid procedure timeand improve the precision of device deployment. We are also working on our fifth-generation *Essure*device, which will be designed to once again set a new standard inhysteroscopic sterilization.

 

Wehave experienced significant operating losses since inception and, as of March 31,2009, had an accumulated deficit of $246.6 million. Although we were profitablein the third and fourth quarters of 2008, we experienced a net loss in thefirst quarter of 2009 and there is a risk that we may not sustainprofitability.  We will continue toexpend substantial resources in the selling and marketing of the*Essure* system in the United States andabroad. We will be in a net loss position unless sufficient revenues can begenerated to offset expenses.

 

**Resultsof Operations - Three Months Ended March 31, 2009 and 2008**

** (in thousands, except percentages)**

 
| ** **                                   | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                   | ** ** | **2009**                                             | ** ** | **2008 (As Adjusted) (1)** | ** ** | **2009-  2008  %** | ** ** |
| ** **                                   | ** ** | **Amount**                                           | ** ** | **% (a)** | ** ** | **Amount** | ** ** | **% (a)** | ** ** | **Change** | ** ** |
| Net sales                                    |       | $                                                    | 27,151     |   | 100 | % | $ | 21,127 |   | 100 | % | 29 | % |
| Gross profit                                 |       | 21,395                                               |       | 79 | % | 15,682 |   | 74 | % | 36 | % |
| Research and development expenses            |       | 1,407                                                |       | 5 | % | 1,931 |   | 9 | % | -27 | % |
| Selling, general and administrative expenses |       | 22,570                                               |       | 83 | % | 20,102 |   | 95 | % | 12 | % |
| Net loss                                     |       | (4,335                                               | )          | -16 | % | (7,309 | ) | -35 | % | -41 | % |
|                                              |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Adjusted for theretrospective adoption of FSP APB 14-1. See Note 9: Convertible Senior Notes - Adoption of FSP APB 14-1 of theNotes to Condensed Consolidated Financial Statements.

 

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

 

*Net Sales*

 

Netsales were $27.2 million for the three months ended March 31, 2009 ascompared to $21.1 million for the three months ended March 31, 2008,representing an increase of approximately $6.1 million or 29%.  The increase is the result of continuedcommercialization and marketing of the*Essure* system worldwide and reflects the increasing numbers ofphysicians entering and completing training in the use of the procedure.

 

Internationalsales comprised 22% of our total net sales in the three months ended March 31,2009.  International sales increased 26%compared to the three months ended March 31, 2008.  The net sales increase also reflects adomestic revenue increase of 29% in the three months ended March 31, 2009as compared to the similar period in 2008.

 

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

 
| ** **               | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|
| ** **               | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Net sales (in thousands) |       | $                                                    | 27,151     |   | $ | 21,127 |   |
|                     |       |                                                 |       |   |   |
| United States of America |       | 78                                                   | %          | 78 | % |
| France                   |       | 15                                                   | %          | 14 | % |
| Rest of Europe           |       | 7                                                    | %          | 8 | % |
| Other                    |       | <  1                                              | %          | <  1 | % |
|                          |            |                                                      |            |  |  |  |  |

 

No customer accounted formore than 10% of total revenue for the three months ended March 31, 2009and 2008. No customer had a balance in excess of 10% of our net accountsreceivable at March 31, 2009.

 

Weexpect our net sales for 2009 to be in the range of approximately $125.0million to $135.0 million, which would represent 23% to 32% growth from netsales in 2008 as we continue to increase the number of physicians performingthe*Essure* procedure. We willalso continue our programs aimed at raising patient awareness of the*Essure* procedure, such as radio, printand television advertising. We believe our revenue growth in 2009 and beyondwill be significantly influenced by how successful we are in achieving ourpatient awareness objectives and physicians entering and completing training.However, as we have noted elsewhere in this Form 10-Q and risk factorsfrom our Form 10-K, our expected revenue growth involves many riskfactors, some of which are not entirely within our control, such as marketacceptance of the*Essure* systemand third party reimbursement for the device.

 

*Gross Profit*

 

Costof goods sold for thethree months ended March 31, 2009 was $5.8 million as compared to $5.4million for the three months ended March 31, 2008, this represents anincrease of $0.4 million, or 6%.  Grossmargin for the three months ended March 31, 2009 was 79% as compared to74% for the comparable period in 2008. The quarter-over-quarterincrease in gross margin is related to lower manufacturing costs associatedwith higher unit volume and a domestic price increase implemented during thefirst quarter of 2009.  Our gross profitmargin will vary as our sales mix changes. Increases in sales of our devicesthrough distributors in international markets will tend to decrease our overallgross profit margin.

 

*Research and Development Expenses*

 

Research and developmentexpenses, which include expenditures related to product development, clinicalresearch and regulatory affairs, were $1.4 million and $1.9 million for thethree months ended March 31, 2009 and 2008, respectively, which representsa decrease of $0.5 million, or 27%. The primary reason for the decrease is dueto decreased payroll and payroll related expenditures of $0.1 million,consulting and outside services of $0.3 million and clinical trials of $0.2million, offset by an increase to project prototypes of $0.1 million.

 

Research and developmentexpenses reflect clinical expenditures and product development, which aresubstantially related to the ongoing development and associated regulatoryapprovals of our technology. Our goal is to continue our product enhancementsover the coming years, which are intended to result in improved ease of use andclinical performance. We expect to identify and hire additional research 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.

 

*Selling, General and AdministrativeExpenses*

 

Selling, general andadministrative spending for the three months ended March 31, 2009 was$22.6 million as compared to $20.1 million for the three months ended March 31,2008, which represents an increase of $2.5 million, or 12%. The increase isprimarily due to the following: an increase of $1.0 million due to expansion ofour U.S. field sales force and increased domestic advertising expenditures of$0.8 million primarily for our consumer-awareness campaign.  This campaign involves television, radio andprint media and is intended to drive patient awareness of the *Essure* procedure. In addition, fees related to consultingservices, depreciation and expensed inventory increased by $1.0 million; offsetby a decrease in stock compensation and training expenses of $0.3 million.  We expect selling, general and administrativeexpenses to increase in the second quarter of 2009 as we expect to hireadditional sales professionals and to continue our consumer-awareness  campaign in targeted markets.

 

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

 

Totalinterest income and expenses and otherexpenses, net for the three months ended March 31, 2009 was a netexpense of $1.6 million as compared to a net expense of $1.0 million for thethree months ended March 31, 2008, which represents an increase of $0.6million or 68%. Interest income in the three months ended March 31,2009 was lower by $0.5 million compared with the three months ended March 31,2008. Interest income was negatively impacted due to lower interest rates onthe Company’s investment portfolio, which consists of auction rate securitiesand money market accounts that are currently earning lower interest ratescompared to 2008.

 

InMay 2008, the FASP issued FSP APB 14-1, *Accountingfor Convertible DebtInstruments That May Be Settled in Cash upon Conversion (Including PartialCash Settlement)*, orFSP APB 14-1, which clarifies the accounting for convertible debt instrumentsthat may be settled in cash upon conversion, including partial cashsettlement.  FSP APB 14-1 specifies thatan issuer of such instruments should separately account for the liability andequity components of the instruments in a manner that reflect the issuer’snon-convertible debt borrowing rate which interest costs are recognized insubsequent periods.  FSP APB 14-1 iseffective for fiscal years beginning after December 15, 2008, andretrospective application is required for all periods presented.  We have adopted FSP APB 14-1 with our firstquarter of fiscal 2009 which resulted in an increase of interest expense of$1.0 million and $0.9 million for each of the three months ended March 31,2009 and 2008.  See Note 9 – ConvertibleSenior Notes.

 

*Provision for income taxes*

 

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

 

Weadopted the provisions of FASB Interpretation No. 48, *Accountingfor Uncertainty in Income Taxes*, or FIN 48, on January 1, 2007. The adoption of the provisions of FIN 48 did not have a material impact on ourfinancial position and results of operations.   We have not beenaudited by the Internal Revenue Service or any state income or franchise taxagency.   As of March 31, 2009, our federal returns for theyears ended 2005 through the current period and most state returns for theyears ended 2004 through the current period are still open to examination. Inaddition, all of the net operating losses and research and development creditcarryforwards that may be used in future years are still subject to inquirygiven that the statute of limitation for these items would be from the year ofthe utilization.

 

AtMarch 31, 2009, we recorded approximately $0.1 million of income taxexpense attributable to Conceptus SAS.   The tax returns forConceptus SAS for the years ended 2005 to 2007 were examined and closed by theFrench tax authorities in 2008.

 

Theamount of unrecognized tax benefits at March 31, 2009 was approximately$2.4 million, of which, if ultimately recognized, approximately$0.5 million would decrease the effective tax rate in the period in whichthe benefit is recognized. The remaining amount would be offset by the reversalof related deferred tax assets on which a valuation allowance is placed.

 

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

 

**Liquidity and Capital Resources**

 

Wehave experienced significant operating losses since inception and, as of March 31,2009, had an accumulated deficit of $246.6 million. Although we were profitablein the third and fourth quarters of 2008, we experienced a net loss in thefirst quarter of 2009 and there is a risk that we may not sustainprofitability.  We will continue toexpend substantial resources in the selling and marketing of the *Essure* system in the United States andabroad.  We will be in a net lossposition unless sufficient revenues can be generated to offset expenses.

 

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

 

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

 

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

 

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

 

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

 

Asof March 31, 2009, we held $48.5 million (par value) in auction ratesecurities (“ARS”) backed by federal and state student loans which are variablerate debt instruments and bear interest rates that reset approximately every20-30 days. These ARS have a contractual maturity ranging from 2028 through2047.

 

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

 

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

 

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

 

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

 

Asof March 31, 2009, we had cash and cash equivalents of $54.2 million,compared to $54.7 million at December 31, 2008. The decrease of $0.5million is primarily due to cash usage for operating and investing activitesoffset by cash proceeds from the line of credit and issuance of commonstock.   We believe that our existingcash and cash equivalents will be sufficient to meet our cash requirements forthe next twelve months.

 

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

 

*Operating Activities*

 

Net cash used inoperating activities was $0.7 million in the three months ended March 31,2009, as compared to $5.1 million in the three months ended March 31,2008.  Net cash used in operatingactivities in the three months ended March 31, 2009 was primarily relatedto:

 

·                  net loss of $4.3 million; and

·                  non-cash related items of $3.7 million correspondingprimarily to the accretion of notes payable, stock basedcompensation, depreciation and amortization of fixed assets, debt issuance costand intangible amortization.

 

We monitor our accountsreceivable turnover closely to ensure that receivables are collected timely andhave an established a credit and collection policy to facilitate our collectionprocess and reduce our credit loss exposure.

 

*Investing Activities*

 

Net cash used ininvesting activities for the three months ended March 31, 2009 was $0.8million, due to capital expenditures primarily related to purchases ofadditional hysteroscopy equipment.

 

*Financing Activities*

 

Net cash provided byfinancing activities in the three months ended March 31, 2009 was $1.2million from the issuance of common stock for our stock option programs andproceeds from our revolving credit line agreement with UBS.  See Note 10 of our Notes to CondensedConsolidated Financial Statements.

 

**CRITICAL ACCOUNTING ESTIMATES ANDPOLICIES**

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions 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, 2008.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 ourfinancial statements include reserves for obsolete and slow moving inventory,allowance for doubtful accounts receivable, product warranty, impairment forlong-lived assets, income taxes, stock-based compensation and contingentliabilities. Other accounting policies are described in section “CriticalAccounting Estimates and Policies” in our Financial Statements included in ourAnnual Report on Form 10-K for the year ended December 31, 2008.Application of these policies involves the exercise of judgment and use ofassumptions as to future uncertainties and, as a result, actual results coulddiffer from these estimates.

 

*Recent Accounting Pronouncements*

 

InDecember 2007, the FASB issued Statement No. 141 (revised 2007) *Business Combinations*, or SFAS 141(R), and Statement No. 160,*Noncontrolling Interests in Consolidated FinancialStatements*, or SFAS 160, an amendment of Accounting ResearchBulleting No. 51, or ARB 51. SFAS 141(R) will impact financialstatements on the acquisition date and in subsequent periods. Some of thechanges, such as the accounting for contingent consideration, will introducemore volatility into earnings and may impact our acquisition strategy.Additionally, in February 2009, FASB issued FASB Staff Positions FAS141(R)-a, *Accounting for Assets Acquired and LiabilitiesAssumed in a Business Combination That Arise from Contingencies*,which will amend the previsions related to the initial recognition andmeasurement, subsequent measurement 

 

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anddisclosure of assets and liabilities arising from contingencies in a businesscombination under FAS 141(R).  SFAS 160will change the accounting and reporting for minority interests, which will bere-characterized as non-controlling interests and classified as a component ofequity. In addition, SFAS 141(R) will be applied prospectively and SFAS160 will require retroactive adoption of the presentation and disclosurerequirements for existing minority interests, while the remaining requirementsof SFAS 160 will be applied prospectively. SFAS 141(R) and SFAS 160 areeffective on January 1, 2009.  Theadoption of SFAS 141(R) and SFAS 160 did not have a material impact on ourfinancial condition, results of operations, or cash flows.

 

We adoptedEmerging Issues Task Force (“EITF”) 08-6 on January 2009, concurrentlywith the adoption of SFAS 141(R) and SFAS 160. The intent of EITF 08-6 isto clarify the accounting for certain transactions and impairmentconsiderations related to equity method investments as modified by theprovisions of SFAS 141(R) and SFAS 160. The adoption of EITF 08-6 did nothave a material impact on our financial condition, results of operations, orcash flows.

 

InMarch 2008, the FASB issued SFAS No. 161, *Disclosuresabout Derivative Instruments and Hedging Activities — an amendment of FASBStatement No. 133*, or SFAS 161. SFAS 161 requires enhanced disclosures about how and why an entity usesderivative instruments, how derivative instruments and related hedged items areaccounted for and their effect on an entity’s financial position, financialperformance and cash flows. SFAS 161 will be effective in the first quarter offiscal year 2009.  The adoption of SFAS161 did not have a material impact on our financial condition, results of operations,or cash flows.

 

InApril 2008, the FASB issued FSP No. 142-3, *Determinationof the Useful Life of Intangible Assets*, or FSP 142-3.  FSP 142-3 amends the factors an entity shouldconsider in developing renewal or extension assumptions used in determining theuseful life of recognized intangible assets under FASB Statement No. 142, *Goodwill and Other Intangible Assets*.  This new guidance applies prospectively tointangible assets that are acquired individually or with a group of otherassets in business combinations and asset acquisitions.  FSP 142-3 is effective for financialstatements issued for fiscal years and interim periods beginning after December 15,2008.  Early adoption is prohibited. Theadoption of FSP 142-3 did not have a material impact on our financialcondition, results of operations, or cash flows.

 

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

 

InJune 2008, the FASB ratified EITF Issue 07-5, *Determining Whether an Instrument (or Embedded Feature) Is Indexed toan Entity’s Own Stock* (EITF 07-5). Paragraph 11(a) of SFAS No. 133, *Accountingfor Derivatives and Hedging Activities*, or SFAS 133, specifies thata contract that would otherwise meet the definition of derivative but is both (a) indexedto such company’s own stock and (b) classified in stockholders’ equity inthe statement of financial position would not be considered a derivativefinancial instrument.  EITF 07-5 providesa new two-step model to be applied in determining whether a financialinstrument or an embedded feature is indexed to an issuer’s own stock and thusable to qualify for the SFAS 133 paragraph 11(a) scope exception.  EITF 07-05 will be effective for the firstannual reporting period beginning after December 15, 2008, and earlyadoption is prohibited.  The adoption ofEITF 07-05 did not have a material impact on our financial condition, resultsof operations, or cash flows.

 

EffectiveJanuary 1, 2008, we adopted  SFAS No. 157, *Fair Value Measurements*(“SFAS 157”) asamended by FSP SFAS 157-1, *Applicationof FASB Statement No. 157 to FASB Statement No. 13 and OtherAccounting Pronouncements That Address Fair Value Measurements for Purposes ofLease Classification or Measurement under Statement 13*, or FSP SFAS157-1, and FSP SFAS 157-2, *Effective Date ofFASB Statement No. 157*, or FSP SFAS 157-2.  SFAS 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and provides for expanded disclosureabout fair value measurements.  SFAS 157 applies prospectively to allother accounting pronouncements that require or permit fair valuemeasurements.  FSP SFAS 157-1 amended SFAS 157 to exclude from thescope of SFAS 157 certain leasing transactions accounted for under SFAS No. 13,*Accounting for Leases.*  FSPSFAS 157-2 amended SFAS 157 to defer the effective date of SFAS 157 for allnon-financial assets and non-financial liabilities except those that arerecognized or disclosed at fair value in the financial statements on arecurring basis to fiscal years beginning after November 15, 2008, andinterim periods within those fiscal years.  We adopted FSP SFAS 157-2in the first quarter of fiscal 2009. See Note 4 - Fair Value Measurements of our Notes to Condensed ConsolidatedFinancial Statements.

 

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In April 2009, theFASB issued FSP SFAS No. 115-2 and SFAS No. 124-2 *Recognition and Presentation of Other-Than-TemporaryImpairments*which**modifies the other-than-temporaryimpairment guidance for debt securities through increased consistency in thetiming of impairment recognition and enhanced disclosures related to the creditand noncredit components of impaired debt securities that are not expected tobe sold. In addition, increased disclosures are required for both debt andequity securities regarding expected cash flows, credit losses, and an aging ofsecurities with unrealized losses. SFSP FAS No. 115-2 and SFAS No. 124-2will be effective for interim and annual reporting periods that end after June 15,2009, which, for us, would be the second quarter of fiscal 2009. Early adoptionis permitted for periods ending after March 15, 2009. We are currentlyevaluating the effect of this FSP.

 

In April 2009, theFASB issued FSP SFAS 107-1 and APB 28-1, *Interim Disclosures aboutFair Value of Financial Instruments.*  This FSP amends SFASNo. 107, *Disclosures about Fair Value of FinancialInstruments*, to require publicly-traded companies, as defined in APBOpinion No. 28, *Interim FinancialReporting*, to provide disclosures on the fair value of financialinstruments in interim financial statements.  Prior to the issuanceof FSP FAS No. 107-1 and APB Opinion No. 28-1, the fair values ofthose assets and liabilities were disclosed only once each year. With theissuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, we will nowbe required to disclose this information on a quarterly basis, providingquantitative and qualitative information about fair value estimates for all financialinstruments not measured in the Condensed Consolidated Balance Sheets at fairvalue. FSP SFAS 107-1 and APB 28-1 are effective for interim periods endingafter June 15, 2009.  We will adopt the new disclosurerequirements in the second quarter of fiscal 2009.  We do not expect to have a material impact onour condensed consolidated financial statements.

 

In April 2009, theFASB issued FSP SFAS 157-4, *Determining Fair ValueWhen the Volume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly,* or FSPSFAS 157-4, which provides additional guidance for estimating fair value inaccordance with SFAS 157 when the volume and level of activity for the asset orliability have significantly decreased.  This FSP re-emphasizes thatregardless of market conditions the fair value measurement is an exit priceconcept as defined in SFAS 157.  This FSP clarifies and includesadditional factors to consider in determining whether there has been a significantdecrease in market activity for an asset or liability and provides additionalclarification on estimating fair value when the market activity for an asset orliability has declined significantly.  The scope of this FSP does notinclude assets and liabilities measured under level 1 inputs.  FSPSFAS 157-4 is applied prospectively to all fair value measurements whereappropriate and will be effective for interim and annual periods ending after June 15,2009.  We will adopt the provisions of FSP SFAS 157-4 effective thesecond quarter of fiscal 2009, which we do not expect to have a material impacton our condensed consolidated financial statements.

 

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

 

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

 

*Interest Rate Risk*:  We have been exposedto interest rate risk through interest earned on holdings of available-for-saleand trading marketable securities. We have experienced failed auctions in 2009and 2008 of all our ARS and there is no assurance that auctions on these ARS inour investment portfolio will succeed in the future. As a result, our abilityto liquidate our investments in the near term may be limited, and our abilityto fully recover the carrying value of our investments may be limited ornon-existent. An auction failure means that the parties wishing to sellsecurities could not carry out the transaction. If the issuers of thesesecurities are unable to successfully close future auctions or their creditratings deteriorate, we may be required to record further impairment charges onthese investments. It could take until the final maturity of the underlyingnotes (up to 39 years) to realize our investments’ recorded value. As of March 31,2009 we held $48.5 million (par value) in ARS which are variable rate debtinstruments and bear interest rates that are due to reset approximately every20-30 days. All of these ARS are classified as long term investments inour consolidated balance sheet at March 31, 2009 with an expected maturityof greater than one year. Due in part to these factors, our future investmentincome may fall short of expectations due to changes in interest rates or wemay suffer losses in principal if forced to sell securities that have declinedin market value due to changes in interest rates. Interest rates that mayaffect these items in the future will depend on market conditions and maydiffer from the rates we have experienced in the past.

 

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

 

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OnDecember 15, 2008, we incorporated Conceptus Medical Limited (“CML”) asour United Kingdom subsidiary.  Weestablished CML to serve as our direct sales office in the United Kingdom afterthe termination of our distributor agreement during the fourth quarter of2008.  We believe the establishment ofCML continues to expand our direct presence in international markets and willincrease our revenues as we will recognize sales at end user pricing ascompared to the price at which we previously sold to the distributor.  The functional currency of CML is the BritishPound; therefore, we are now further exposed to changes in foreign exchange rates.

 

Weare exposed to foreign exchange rate fluctuations as we translate the financialstatements of our foreign subsidiaries into U.S. Dollars in consolidation. Ifthere is a change in foreign currency exchange rates, the translation of theforeign subsidiaries’ financial statements into U.S. Dollars will lead totranslation gains or losses which are recorded net as a component ofaccumulated other comprehensive loss. We will seek to manage our foreignexchange risk through operational means, including managing same currencyrevenues in relation to same currency expenses, and same currency assets inrelation to same currency liabilities. In the three months ended March 31, 2009, we did not enter intoforward exchange contracts to hedge exposure denominated in foreign currenciesor any other derivative financial instruments for trading or speculativepurpose.   For the three months ended March 31,2008, we had assumed a forward exchange contract to hedge U.S.Dollar-denominated estimated accounts payable in 2008 in connection with theacquisition of Conceptus SAS.  Werecorded the changes of the fair value of the hedge contract in our results ofoperations for the three months ended March 31, 2008.  The hedge contract was fully utilized by December 31,2008.

 

AtMarch 31, 2009, our intercompany receivable balance with foreignsubsidiaries is $4.9 million and the potential loss in fair valueresulting from a hypothetical 10 percent strengthening in the value of theU.S. dollar/local currency exchange rate would be approximately $0.5 million.

 

**Item 4. Controls and Procedures**

 

*Evaluation of Disclosure Controlsand Procedures:*

 

We maintain disclosure controls and procedures thatare designed to ensure that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow for timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognized that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and in reaching a reasonable level of assurance, managementis required to apply its judgment in evaluating the cost-benefit relationshipof possible controls and procedures.

 

As of March 31, 2009, the end of our most recentfiscal quarter, we carried out an evaluation, under the supervision and withthe participation of our management, including our Chief Executive Officer andour Chief Financial Officer, of the effectiveness of the design and operationof our disclosure controls and procedures. Based on the foregoing, our ChiefExecutive Officer and Chief Financial Officer concluded that our disclosurecontrols and procedures were effective.

 

*Changes in Internal Control OverFinancial Reporting:*

 

There was no change in our internal control overfinancial reporting during our most recent fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

*Inherent Limitations of InternalControls*

 

Internal control over financial reporting cannotprovide absolute assurance of achieving financial reporting objectives becauseof its inherent limitations.  Internal control over financial reporting isa process that involves human diligence and compliance and is subject to lapsesin judgment and breakdowns resulting from human failures. Internal control overfinancial reporting also can be circumvented by collusion or impropermanagement override. Because of such limitations, there is a risk that materialmisstatements may not be prevented or detected on a timely basis by internalcontrol over financial reporting. However, these inherent limitations are knownfeatures of the financial reporting process. Therefore, it is possible todesign into the process safeguards to reduce, though not eliminate, this risk.

 

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**PART II.  OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

From time to time, we are involved in legalproceedings arising in the ordinary course of business.  We believe thereis no litigation pending that could have, individually or in the aggregate, amaterial adverse effect on our financial position, result of operations or cashflows.

 

**Item 1A. Risk Factors**

 

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

 

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

 

As of March 31,2009, we held approximately $48.5 million (par value) of investmentsconsisting entirely of auction rate securities backed by federal and statestudent loans securities.  These auctionrate securities have contractual maturities ranging from 2028 through2047.  These investments havecharacteristics similar to short-term investments, because at pre-determinedintervals, generally ranging from 20 to 30 days, there is a new auctionprocess at which the interest rates for these securities are reset tocurrent interest rates. At the end of each such period, we historically haveeither chosen to roll-over these securities or redeem the securities for cash.

 

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

 

The Rightsare subject to a number of risks. Given the substantial dislocation in thefinancial markets and among financial services companies, we cannot assure youthat UBS will ultimately have the ability to repurchase our auction ratesecurities at par, or at any other price during the put period describedabove.  We will be required to periodically assess theeconomic ability of UBS to meet that obligation in assessing the fair value ofthe Rights. Moreover,if we choose to not exercise the Rights or if UBS is unable to honor theRights, our ability to liquidate our investments in the near term may belimited, and our ability to fully recover the carrying value of our investmentsmay be limited or non-existent. If issuers of these securities are unable tosuccessfully close future auctions or their credit ratings deteriorate, we mayin the future be required to record further impairment charges on these investments.It could take until the final maturity of the underlying notes (up to39 years) to realize our investments’ recorded value. Based on our abilityto access our cash and cash equivalents, expected operating cash flows, and ourother sources of cash, we do not anticipate that the current lack of liquidityon these investments will affect our ability to continue to operate ourbusiness in the ordinary course. However, we can provide no assurance as towhen these investments will again become liquid or as to whether we mayultimately have to recognize additional impairment charges in our results ofoperations with respect to these investments.

 

**Government or third partyreimbursement for the*Essure*procedure may not be available or may be inadequate, which could adverselyaffect consumer demand, limit our future product revenues and adversely affectour profitability.**

 

Market acceptance of the *Essure* system in the United States and ininternational markets will depend in part upon the availability of reimbursementwithin prevailing healthcare payment systems. Reimbursement systems ininternational markets vary significantly by country and sometimes by region,and reimbursement approvals must be obtained on a country-by-country basis.Many international markets have government managed healthcare systems thatdetermine reimbursement for new devices and procedures. In most markets, thereare private insurance systems as well as government managed systems. Regardlessof the type of reimbursement system, we believe that physician advocacy of ourproduct will be required to obtain reimbursement.

 

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Availability and extentof continued reimbursement will depend, at least in part, on the clinical andcost effectiveness of our product. We cannot assure that reimbursement for ourproduct will continue to be available in the United States or in internationalmarkets under either government or private reimbursement systems, or that thosephysicians will support and advocate reimbursement for use of our product forall indications intended by us. We may be unable to obtain or maintainreimbursement in any country within a particular time frame, for a particularamount or at all, which would limit our future product revenues and delay orprevent our profitability.

 

In addition, the level ofreimbursement offered by prevailing healthcare payment systems maycorrespondingly affect the level of co-payment that is required by thepatient.  As an elective procedure, apatient’s decision to have the Essure procedure may be impacted by a decline inoverall economic conditions as patients are forced to prioritize discretionaryspending.

 

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

 

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

 

·                  other methodsof permanent contraception, in particular tubal ligation;

 

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

 

·                  other companiesthat may are developing permanent contraception devices that are similar to orotherwise compete with the*Essure*  system.

 

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

 

Asof March 31, 2009, we were aware of one company, Hologic, Inc. whichis attempting to bring a transcervical sterilization device to the market.  In January 2009, Hologic received CEmarking approval for its permanent contraception system, allowing it to marketits product in the 27 countries of the European Union (EU) and three of thefour member states of the European Free Trade Associations (EFTA).  In March 2009, the FDA issued a letterstating that Hologic’s permanent contraception system is approvable subject toFDA inspection of Hologic’s manufacturing facilities.  Hologic is in the process of registering itsproduct in Canada and Australia.  Weexpect that these developments will intensify competition in the industry.

 

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

 

·                  widespreadawareness, acceptance and adoption of our Essure product;

 

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

 

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

 

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

 

·                  our ability toattract and retain qualified personnel;

 

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·                  the extent of ourpatent protection or our ability to otherwise develop proprietary products andprocesses; and

 

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

 

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

 

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

 

Ourmanufacturing operations in Mexico may be impacted by the April 2009outbreak of H1N1 Flu (“Swine Flu”).  Ourproduct is manufactured by Accellent, Inc., or Accellent, which is athird-party subcontractor located in Mexico. In addition, we are in the process of developing manufacturingcapabilities at Avail, another third-party subcontractor located inMexico.  Recently, the Mexican governmentasked that all non-essential services shut down for a five day period beginningon May 1, 2009.  At the presenttime, Accellent and Avail are planning to remain open, but they may be forcedto temporarily shut down their operations if the Swine Flu outbreakworsens.  If Accellent and Availtemporarily shut down their operations, we may not be able to supply productssufficient to meet demand, which may harm our business.  Currently, we are unable to stockpileadditional inventory to mitigate the risk of a shortfall in our supply ofproducts.

 

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

 

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

 

Changes in accountingstandards or practices, particularly changes related to convertible debtinstruments such as our senior convertible notes, may have a significant effecton our reported results and may affect our reporting of transactions completedbefore the change is effective. New accounting pronouncements and varyinginterpretations of accounting pronouncements have occurred and may occur in thefuture. For example, we recently adopted FSP APB 14-1 with our first quarter offiscal 2009, which resulted in an increase of interest expense of $1.0 millionand $.09 million for each of the three months ended March 31, 2009 and2008.  Similar changes to existing rules orthe questioning of current practices may adversely affect our reportedfinancial results or the way we conduct our business.

 

**Ourliquidity could be adversely impacted by adverse conditions in the financialmarkets.**

 

AtMarch 31, 2009, we had cash and cash equivalents of $54.2 million.  This available cash and cash equivalents areheld in accounts at financial institutions and consist of invested cash andcash in our operating accounts.  Theinvested cash is invested in interest bearing money market funds managed bythird party financial institutions. These funds invest in direct obligations of the government of the UnitedStates and traditional money market funds. We can provide no assurances that access to our invested cash and cashequivalents will not be impacted by adverse conditions in the financialmarkets.

 

Allof our cash and cash equivalents in our operating accounts are with third partyfinancial institutions.  These balancesexceed the Federal Deposit Insurance Corporation insurance limits.  While we monitor the cash balances in our operatingaccounts and adjust the cash balances as appropriate, these cash balances couldbe impacted if the underlying financial institutions fail or are subject toother adverse conditions in the financial markets.  To date we have experienced no loss or lackof access to cash in our operating accounts.

 

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**Item 6. Exhibits**

** **
| **Number** | ** ** | **Description**                                                                                                                                                                                                            |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1        |       | Amended and Restated Bylaws of Registrant.  Incorporated by reference to Exhibit 3.1 of the Registrant’s  Form 8-K filed on December 18, 2008.                                                         |
| 3.2        |       | Certificate of Amendment No. 1 to the Amended  and Restated By-Laws of Conceptus, Inc.  Incorporated by reference  to Exhibit 3.1 of the Registrant’s Form 8-K filed on March 2,  2009. |
| 10.1       |       | Amended and Restated Employment Agreement between  the Company and Mark M. Sieczarek dated December 24, 2008.                                                                                                         |
| 10.2       |       | Amended and Restated Change of Control Agreement  between the Company and Gregory E. Lichtwardt dated September 9, 2008.                                                                                              |
| 10.3       |       | Amended and Restated Change of Control Agreement  between the Company and Urlic Cote dated September 9, 2008.                                                                                                         |
| 31.1       |       | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                  |
| 31.2       |       | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                  |
| 32.1       |       | Certification of Chief Executive Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                  |
| 32.2       |       | Certification of Chief Financial Officer Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                  |

 

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**SIGNATURE**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

Date: May 08, 2009

 

Conceptus, Inc.

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

 

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