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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2009

OR

For the transition period from          to          .

Commission File Number: 0-27596

CONCEPTUS, INC.

(Exact name of Registrant as specified in its charter)

331 East Evelyn

Mountain View, CA 94041

(Address of Principal Executive Offices) (Zip Code)

(650) 962-4000

(Registrant’s Telephone Number, Including Area Code)

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

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

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

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

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

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

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CONCEPTUS, INC.

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

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

Conceptus, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands)

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

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Conceptus, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share amounts)

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

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Conceptus, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

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

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Conceptus, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.          Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement have been included.

The condensed consolidated balance sheet as of December 31, 2008 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. This financial data should be read in conjunction with the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2008.  The results of operations for the three months ended March 31, 2009 may not necessarily be indicative of the operating results for the full 2009 fiscal year or any other future interim periods.

Our condensed consolidated financial statements for the three months ended March 31, 2008 include the financial results of Conceptus SAS starting on the acquisition date of January 7, 2008. All significant intercompany accounts and transactions have been eliminated in consolidation.

We have a limited history of operations and have incurred significant operating losses since inception. In December 2006, we filed a 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, 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 are converted, then upon conversion, holders will receive 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 $27.89 per share), in certain circumstances. Upon conversion, a holder would receive cash up to the principal amount of the note and our common stock in respect of such note’s conversion value in excess of such principal amount. This net share settlement feature of the notes would reduce our liquidity, and we may not have sufficient funds to pay in full the cash obligation upon such conversion. In the future, depending upon a variety of factors, we may need to raise additional funds through bank facilities, debt or equity offerings or other sources of capital. Any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve covenants that restrict us. Additional funding may not be available when needed or on terms acceptable to us. If we are unable to obtain additional capital, we may be required to delay, reduce the scope of or eliminate our research and development programs or reduce our sales and marketing activities.

Recent Accounting Pronouncements

In December 2007, the FASB issued Statement No. 141 (revised 2007) Business Combinations, or SFAS 141(R), and Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, or SFAS 160, an amendment of Accounting Research Bulleting No. 51, or ARB 51. SFAS 141(R) will impact financial statements on the acquisition date and in subsequent periods. Some of the changes, such as the accounting for contingent consideration, will introduce more volatility into earnings and may impact our acquisition strategy. Additionally, in February 2009, FASB issued FASB Staff Position FAS 141(R)-a, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which will amend the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination under SFAS 141(R).  SFAS 160 will change the accounting and reporting for minority interests, which will be re-characterized as non-controlling interests and classified as a component of equity. In addition, SFAS 141(R) will be applied prospectively and SFAS 160 will require retroactive adoption of the presentation and disclosure requirements for existing minority interests, while the remaining requirements of SFAS 160 will be applied prospectively. SFAS 141(R) and SFAS 160 are effective on January 1, 2009.  The adoption of SFAS 141(R) and SFAS 160 did not have a material impact on our financial condition, results of operations, or cash flows.

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We adopted Emerging Issues Task Force (“EITF”) 08-6 on January 2009, concurrently with the adoption of SFAS 141(R) and SFAS 160. The intent of EITF 08-6 is to clarify the accounting for certain transactions and impairment considerations related to equity method investments as modified by the provisions of SFAS 141(R) and SFAS 160. The adoption of EITF 08-6 did not have a material impact on our financial condition, results of operations, or cash flows.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133, or SFAS 161.  SFAS 161 requires enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and their effect on an entity’s financial position, financial performance and cash flows. SFAS 161 will be effective in the first quarter of fiscal year 2009.  The adoption of SFAS 161 did not have a material impact on our financial condition, results of operations, or cash flows.

In April 2008, the FASB issued FSP No. 142-3, Determination of the Useful Life of Intangible Assets, or FSP 142-3.  FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, Goodwill and Other Intangible Assets.  This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions.  FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008.  Early adoption is prohibited. The adoption of FSP 142-3 did not have a material impact on our financial condition, results of operations, or cash flows.

In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), or FSP APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement.  FSP APB 14-1 specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflect the issuer’s non-convertible debt borrowing rate which interest costs are recognized in subsequent periods.  FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008, and retrospective application is required for all periods presented.  We have adopted FSP APB 14-1 in the first quarter of fiscal 2009 and as a result have made certain adjustments to the presentation of our financial condition, results of operations, and cash flows.  See Note 9 — Convertible Senior Notes.

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

Effective January 1, 2008, we adopted  SFAS No. 157, Fair Value Measurements, or SFAS 157, as amended by FSP SFAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, or FSP SFAS 157-1, and FSP SFAS 157-2, Effective Date of FASB Statement No. 157, or FSP SFAS 157-2.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and provides for expanded disclosure about fair value measurements.  SFAS 157 applies prospectively to all other accounting pronouncements that require or permit fair value measurements.  FSP SFAS 157-1 amended SFAS 157 to exclude from the scope of SFAS 157 certain leasing transactions accounted for under SFAS No. 13, Accounting for Leases.  FSP SFAS 157-2 amended SFAS 157 to defer the effective date of SFAS 157 for all non-financial assets and non-financial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.  We adopted FSP SFAS 157-2 in the first quarter of fiscal 2009.  See Note 4 - Fair Value Measurements.

In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2 Recognition and Presentation of Other-Than-Temporary Impairments, which modifies the other-than-temporary impairment guidance for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the credit and noncredit components of impaired debt securities that are not expected to be sold. In addition, increased disclosures are 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. 115-2 and SFAS No. 124-2 will 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 adoption is permitted for periods ending after March 15, 2009. We are currently evaluating the effect of this FSP.

In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments.  This FSP amends SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to require publicly-traded companies, as defined in APB Opinion No. 28, Interim Financial Reporting, to provide disclosures on the fair value of financial instruments in interim financial statements.  Prior to the issuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, the fair values of those assets and liabilities were disclosed only once each year. With the issuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, we will now be required to disclose this information on a quarterly basis, providing quantitative and qualitative information about fair value estimates for all financial instruments not measured in the Condensed Consolidated Balance Sheets at fair value. FSP SFAS 107-1 and APB 28-1 are effective for interim periods ending after June 15, 2009.  We will adopt the new disclosure requirements in the second quarter of fiscal 2009.  We do not expect to have a material impact on our condensed consolidated financial condition, results of operations, or cash flows.

In April 2009, the FASB issued FSP SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, or FSP SFAS 157-4, which provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased.  This FSP re-emphasizes that regardless of market conditions the fair value measurement is an exit price concept as defined in SFAS 157.  This FSP clarifies and includes additional factors to consider in determining whether there has been a significant decrease in market activity for an asset or liability and provides additional clarification on estimating fair value when the market activity for an asset or liability has declined significantly.  The scope of this FSP does not include assets and liabilities measured under level 1 inputs.  FSP SFAS 157-4 is applied prospectively to all fair value measurements where appropriate 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 the second quarter of fiscal 2009, which we do not expect to have a material impact on our condensed consolidated financial condition, results of operations, or cash flows.

2.     Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The primary estimates underlying our financial statements include the write-off of obsolete and slow moving inventory, allowance for doubtful accounts receivable, product warranty, the fair value of our investment portfolio, assumptions regarding variables used in calculating the fair value of our equity awards, impairment of goodwill, intangibles and other long-lived assets, income taxes and contingent liabilities. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated.

Functional Currency

On January 7, 2008 we acquired Conceptus SAS, which sells to customers throughout Europe.  Sales by Conceptus SAS are denominated in Euros. On December 15, 2008, we incorporated Conceptus Medical Limited (“CML”) as our United Kingdom subsidiary.  In preparing our consolidated financial statements, we are required to translate the financial statements of Conceptus SAS and CML from the currency in which they keep their accounting records into U.S. Dollars.  Conceptus SAS maintains its accounting records in the functional currency which is also its local currency, the Euro. The functional currency of CML is the British Pound.  The functional currency is determined based on management’s judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a majority of its transactions, including billing, financing, payroll and other expenditures would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiary’s operations must also be considered. Since the functional currency of Conceptus SAS has been determined to be the Euro, and CML has been determined to be the British Pound, any gain or loss associated with the translation of Conceptus SAS’ and

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CML’s financial statements into U.S. Dollars is included as a component of stockholders’ equity, in accumulated other comprehensive loss.  If in the future we determine that there has been a change in the functional currency of Conceptus SAS or CML from its local currency to the U.S. Dollar, any translation gains or losses arising after the date 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 fair value of tangible and identifiable intangible net assets acquired in business combinations. We will perform an annual assessment during the fourth quarter of 2009 of our goodwill at the reporting unit level or earlier if an event occurs or circumstances change that would reduce the fair value of the reporting unit below its carrying amount. No impairment charges have been recorded as of March 31, 2009.

Other intangible assets include customer relationships and non-compete agreements. They are amortized using the straight-line method over their respective estimated useful lives.

Impairment of Long-Lived Assets

We account for the impairment of long-lived assets in accordance with SFAS 144.  We evaluate the carrying value of our long-lived assets, consisting primarily of our property and equipment, the Essure license acquired from a patent litigation settlement in 2003 and intangible assets acquired in connection with our acquisition of Conceptus SAS in 2008, whenever certain events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Such events or circumstances include a prolonged industry downturn, a significant decline in our market value or significant reductions in projected future cash flows.

Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including profit margins, long-term forecasts of the amounts and timing of overall market growth and our percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition, significant estimates and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economic obsolescence, and the value that could be realized in orderly liquidation. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring us to write down the assets.

3.     Long-Term Investments

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

Our ARS are long-term debt instruments backed by student loans, a substantial portion of which are guaranteed by the United States government.  Prior to 2008, our ARS were highly liquid, using a Dutch auction process that resets the applicable interest rate at predetermined intervals, typically every 20-30 days, to provide liquidity at par.  We have experienced failed auctions in 2009 and 2008 on all of our ARS.   The failures of these auctions do not affect the value of the collateral underlying the ARS, and we continue to earn and receive interest on our ARS at a pre-determined formula with spreads tied to particular interest rate indexes.

In November 2008, we accepted an offer from UBS AG, providing us with rights related to our ARS (the “Rights”).  The Rights permit us to require UBS to purchase our ARS at par value, which is defined as the price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or interest, at any time during the period of June 30, 2010 through July 2, 2012.  Conversely, UBS has the right, in its discretion, to purchase or sell our ARS at any time until July 2, 2012, so long as we receive payment at par value upon any sale or disposition.  We expect to sell our ARS under the Rights at par value.  However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have no further rights or obligation to buy our ARS.  So long as we hold our ARS, they will continue to accrue interest as determined by the auction process or the terms of the ARS if the auction process fails.

UBS’s obligations under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights.  UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

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We have accounted for the Rights as a freestanding financial instrument and elected to record the value of the Rights under the fair value option of SFAS 159.  As a result, upon acceptance of the offer from UBS, we recorded approximately $5.1 million as the fair value of the Rights with a corresponding credit to other expense, net in the fourth quarter of 2008.  As a result of our election to record the Rights at fair value, unrealized gains and losses will be included in earnings in future periods.   We estimated the fair value of the Rights using the expected value that we will receive from UBS which was calculated as the difference between the anticipated recognized loss and par value of the ARS as of the option exercise date. This value was discounted by using a UBS credit default rate to account for the consideration of UBS credit risk. For the three months ended March 31, 2009, we recorded an additional unrealized loss of $0.2 million which represents the decrease in the fair value of the put option.

Although the Rights represent the right to sell the securities back to UBS at par, we will be required to periodically assess the economic ability of UBS to meet that obligation in assessing the fair value of the Rights. We will continue to classify the ARS as long-term investments until June 30, 2009, one year prior to the contractual settlement.

Prior to accepting the UBS offer, we recorded our ARS as available-for-sale investments.  We recorded unrealized gains and losses on our available-for-sale securities, in accumulated other comprehensive income (loss) in the stockholders’ equity section of our balance sheets.  Such an unrealized loss did not change net income (loss) for the applicable accounting period.

In connection with our acceptance of the UBS offer in November 2008, resulting in our right to require UBS to purchase our ARS at par value beginning on June 30, 2010, we transferred our ARS from available-for-sale to trading securities in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities.  The transfer to trading securities reflects our intent to exercise our put option during the period June 30, 2010 to July 3, 2012.  Prior to our agreement with UBS, our intent was to hold our ARS until we realized the par value.

For the 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 model was the best available technique for measuring the fair value of our ARS. We used a trinomial discount model weighting estimated future cash flows, quality of collateral and the probability of future successful auctions occurring.  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, overall capital market liquidity and comparable securities, if any.

In November 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 rate securities at net no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the ARS that we have pledged as security for the credit line. Additionally, under the terms of the settlement agreement, if UBS is able to sell our ARS at par, proceeds would be utilized to first repay any outstanding balance under the revolving credit line. We are still able to sell the ARS, but in such a circumstance, if we sold at less than par value, we would not be entitled to recover the par value support from UBS.   See Note 10 — Credit Line.

4.     Fair Value Measurements

On January 1, 2008, we adopted the methods of fair value as described in SFAS 157 to value our financial assets and liabilities.  As defined in SFAS 157, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, SFAS 157 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

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

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

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

Our cash and cash equivalents are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with a reasonable level of price transparency. As of March 31, 2009, our Level 1 instruments are solely comprised of our investments in money market funds.

As a result of continued auction failures, quoted prices for our ARS did not exist as of March 31, 2009 and, accordingly, we concluded that Level 1 inputs were not available for these assets. Brokerage statements received from our broker/dealer that 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 inquiries relative to the measurements utilized to derive the estimated market values quoted on our brokerage

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

We determined that use of a valuation model was the best available technique for measuring the fair value of our ARS. We used a trinomial discount model weighting estimated future cash flows, quality of collateral and the probability of future successful auctions occurring. While our valuation model was based on both Level 2 (credit quality and interest rates) and Level 3 inputs, we determined that the Level 3 inputs were the most significant to the overall fair value measurement of these assets, particularly the estimates of expected 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, overall capital market liquidity and comparable securities, if any.

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

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

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

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The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the three months ended March 31, 2009 (in thousands):

The following table presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis, excluding accrued interest components, using significant unobservable inputs (Level 3) for the three months ended March 31, 2008 (in thousands):

5.            Goodwill and Intangible Assets

On January 7, 2008, we acquired all of the outstanding shares of Conceptus SAS.  Our condensed consolidated financial statements include the financial results of Conceptus SAS beginning from the acquisition date of January 7, 2008.

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

The aggregate Conceptus SAS purchase price of $22.5 million was allocated to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition.  The estimate of the excess of purchase price over the fair value of net tangible assets acquired was allocated to identifiable intangible assets with the remainder as goodwill.

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

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

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

6.     Inventories

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

7.     Warranty

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

8.     Stock-Based Compensation

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

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

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

For the three months ended March 31, 2009 and 2008, we calculated the fair value of each stock option and stock appreciation right on the date of grant using the Black-Scholes model as prescribed by SFAS 123(R). The assumptions used were as follows:

Stock Options and Stock Appreciation Rights: During the three months ended March 31, 2009, we granted stock appreciation rights for 842,057 shares of common stock, with an estimated total grant date fair value of approximately $4.2 million and a grant 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 shares of 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.

Restricted Stock Units: In connection with restricted stock units and restricted stock awards granted, we recorded stock compensation representing the fair market value of our common shares on the dates the awards were granted. Compensation expense is being recorded on a straight-line basis over the vesting periods of the underlying stock awards. During the three months ended March 31, 2009, we granted 24,489 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 of approximately $0.7 million and a grant-date weighted-average fair value of $17.45.

9.    Convertible Senior Notes

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

The notes 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 per share), in certain circumstances. Upon conversion, a holder would receive cash up to the principal amount of the note and our common stock in respect of such note’s conversion value in excess of such principal amount. The notes are convertible only in the following circumstances: (1) if the closing sale price of our common stock exceeds 120% of the conversion price during a period as defined in the indenture; (2) if the average trading price per $1,000 principal amount of the notes is less than or equal to 97% of the average conversion value of the notes during a period as defined in the indenture; (3) upon the occurrence of specified corporate transactions; (4) if we call the notes 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 notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount, plus any accrued and unpaid interest. We may not have sufficient funds to pay the interest, purchase price, repurchase price or principal return when conversion is triggered or a note becomes payable under the above terms.

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

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In connection with the offering, we entered into convertible note hedge transactions with affiliates of the initial purchasers. These transactions are intended to reduce the potential dilution to our Company’s stockholders upon any 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. We also entered into warrant transactions concurrently with the offering, pursuant to which we sold warrants to purchase approximately 3.1 million shares of our common stock to the same counterparties that entered into the convertible note hedge transactions. The convertible note hedge and warrant transactions effectively increased the conversion price of the convertible notes to approximately $36.47 per share of our common stock. Proceeds received from the issuance of the warrants totaled approximately $10.7 million and were recorded as an addition to additional paid-in capital.

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

Adoption of FSP APB 14-1

In May 2008, the FASB issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), or FSP APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement.  FSP APB 14-1 specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflect the issuer’s non-convertible debt borrowing rate which interest costs are recognized in subsequent periods.  FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008, and retrospective application is required for all periods presented.  We have adopted FSP APB 14-1 in our first quarter of fiscal 2009 and adjusted our financial statements as follows in connection with our outstanding convertible senior notes.

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

Interest expense associated with the Convertible Senior Notes consisted of the following (in thousands):

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

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

The impact of the adoption of FSP APB 14-1 on the Condensed Consolidated Balance Sheet as of December 31, 2008 (in thousands) is as follows:

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

The impact of the adoption of FSP APB 14-1 on the Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2008 (in thousands) is as follows:

10.       Credit Line

In November 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 a net no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the ARS that we have pledged as security for 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 the revolving credit line. We are still able to sell the ARS, but in such a circumstance, if we sold at less than par, we would not be entitled to recover the 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

Our effective tax rate was 3% for the three months ended March 31, 2009 and none for the three months ended March 31, 2008.  The Company’s effective rate for the three months ended March 31, 2009 is primarily related to our foreign operations.

We adopted 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 FIN 48 did not have a material impact on our financial position and results of operations.   We have not been audited by the Internal Revenue Service or any state income or franchise tax agency.   As of March 31, 2009, our federal returns for the years ended 2005 through the current period and most state returns for the years ended 2004 through the current period are still open to examination.  In addition, all of the net operating losses and research and development credit carryforwards that may be used in future years are still subject to inquiry given that the statute of limitation for these items would be from the year of the utilization.

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

The amount 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 which the benefit is recognized. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed.

We do not expect our unrecognized tax benefits to change significantly over the next 12 months.  In connection with the adoption of FIN 48, we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

12.         Computation of Net Loss Per Share

Basic net loss per share excludes any potential dilutive effects of options, unvested restricted shares and restricted stock units and common stock shares subject to repurchase.  Diluted net loss per share includes the impact of potentially dilutive securities.  In net loss periods presented, basic and diluted net loss per share are both computed using the weighted average number of common shares outstanding.

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

The following outstanding options, potential employee stock purchase plan shares, warrants, stock appreciation rights, restricted stock units and shares were excluded from the computation of diluted net loss per share, as their effect would have been antidilutive (in thousands):

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

13.         Comprehensive Loss

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

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

14.         Segment Information

We operate in one business segment, which encompasses all geographical regions. We use one measurement of profitability and do not segregate our business for internal reporting.

Net sales by geographic region, based on shipping location of our customer, are as follows (in thousands, except percentages):

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

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

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes thereto. This discussion contains forward-looking statements, including references to 2009 revenues and gross margins, increased product adoption, product improvements, expanded sales force and other forecasted items that involve risks and uncertainties such as our limited operating and sales history; the uncertainty of market acceptance of our product; dependence on obtaining and maintaining reimbursement; effectiveness and safety of our product over the long-term; our ability to obtain and maintain the necessary governmental clearances or approvals to market our product; our ability to develop and maintain proprietary aspects of our technology; our ability to manage our expansion; our limited history of manufacturing our product; our dependence on single source suppliers, third party manufacturers and co-marketers; intense competition in the medical device industry and in the contraception market; the inherent risk of exposure to product liability claims and product recalls and other factors referenced in this Form 10-Q. Our actual results could differ materially from those expressed or implied in these forward-looking statements as a result of various factors, including those discussed in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission on March 13, 2009 and those included elsewhere in this Form 10-Q.

Overview

We develop, manufacture and market the Essure® permanent birth control system, an innovative and proprietary medical device for women that was approved for marketing in the United States in November 2002 by the U.S. Food and Drug Administration, or FDA. The Essure system uses a soft and flexible micro-insert that is delivered into a woman’s fallopian tubes to provide permanent birth control by causing a benign tissue in-growth that blocks the fallopian tubes. A successfully placed Essure micro-insert and the subsequent tissue growth prohibits the egg from traveling through the fallopian tubes and therefore prevents fertilization. The effectiveness rate of the Essure system is 99.80% after four years of follow-up.

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

We were incorporated in the state of Delaware on September 18, 1992.  We maintain three websites located at www.conceptus.com, www.essuremd.com and www.essure.com. We make available free of 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 and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file or furnish such material to the Securities and Exchange Commission (SEC).

The Essure Procedure

The Essure procedure is typically performed in the office setting and is intended to be a less invasive and a less costly solution to tubal ligation, the leading form of permanent birth control in the United States and worldwide. Laparoscopic tubal ligation and tubal ligation by laparotomy typically involve abdominal incisions and/or punctures, general or regional anesthesia, four to ten days of normal recovery time and the risks associated with an incisional procedure. The Essure procedure does not require cutting or penetrating the abdomen, which lowers the likelihood of post-operative pain due to the incisions/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 a local anesthesia. General anesthesia is not typically used unless required by hospital protocol, if requested by the patient, or based on the experience and comfort level of the physician.   In the Pivotal trial of the Essure system, the average hysteroscopic procedure time was 13 minutes. A patient is typically discharged approximately 45 minutes after the Essure procedure. No overnight hospital stay is required. Furthermore, the Essure system is effective without drugs or hormones. There is a three-month waiting period after the procedure during which the woman must use another form of birth control while tissue in-growth occurs. At 90 days following the procedure, U.S. patients complete a confirmation test called a hysterosalpingogram, or HSG, which can determine whether the device was placed successfully and whether the fallopian tubes are occluded. Outside of the United States, patients are required to return for a pelvic X-ray at three months post-procedure with a subsequent HSG if device location on the initial radiographic image appears suspicious.

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We believe that the Essure system is a better alternative to tubal ligation for physicians, hospitals and payers. The Essure system is a less invasive permanent birth control option for physicians to offer to their patients; hospitals are able to utilize their facilities more cost effectively with the Essure procedure compared with tubal ligation; and payers are able to experience cost reductions resulting from the elimination of overhead and procedural costs related to anesthesia and post-operative hospital stays associated with tubal ligations.  In addition, we believe the Essure procedure is superior to other non-tubal ligation permanent 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, bowel injury and dilutional hyponatremia.  Published reports estimate that approximately 700,000 tubal ligation procedures are performed each year in the United States. We intend to capture the 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 temporary methods of birth control. In addition, payers may also benefit from the reduction of unplanned pregnancies associated with non-permanent birth control methods used by patients who have chosen to avoid the drawbacks of traditional permanent birth control methods but who may otherwise elect to use the Essure system.

Effectiveness of the Essure System

In July 2005, we received approval from the FDA to extend effectiveness data on the Essure product labeling. The Premarket Approval, or PMA, supplement filed in late January 2005 supports 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. The five-year effectiveness was demonstrated in a small portion of clinical trial subjects who had completed five year follow up at the time of the FDA submission.  Five year follow up of all patients in clinical trials is currently complete.  A PMA supplement to update the product labeling incorporating the results of the follow-up data will be submitted to the FDA.

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

Physician Penetration

We require physicians to be preceptored for between 3 and 5 cases by a certified trainer before being able to perform the procedure independently. We continue to see an increase in the number of physicians becoming trained or who are in the 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 on the number of physicians trained to perform the procedure. However, we understand that a strong base of trained physicians does not necessarily correlate to an increase in revenue proportionately. Furthermore, there are no revenues associated with the training activities. We do not charge a fee for the activity and no commitment arises for the physician from the preceptorship. Physician training is provided upfront and we have no obligation subsequent to the initial training. Training costs have not been significant from inception to-date.

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Reimbursement of the Essure Procedure

Market acceptance of the Essure system depends in part upon the availability of reimbursement within prevailing healthcare payment systems. We believe that physician advocacy of our product 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 private insurers and from 46 of the 51 Medicaid programs in the United States. We continue to receive positive responses relating to reimbursement, which we believe will help increase the adoption of the Essure device by doctors and patients. We intend to continue our effort to educate payers of the cost-effectiveness of our product and to establish further programs to help physicians to navigate reimbursement issues. As with all healthcare plans, coverage will vary and is dependent upon the individual’s specific benefit plan.

Effective January 1, 2009, the Centers for Medicare and Medicaid Service (CMS), the Medicare Physician Fee Schedule national average payment for hysteroscopic sterilization (CPT code) is $427 when performed in a hospital (facility) and $1,862 (non-facility) when performed in a physician’s office. In addition, in the CMS Final Rule for the 2009 Outpatient Prospective Payment System, or OPPS, which assigns hospital outpatient reimbursement amounts, CPT 58565 maps to APC 202 which is assigned a Medicare National Average of $2,888, which under Medicare includes the cost of the implant.  In 2009, the Medicare national average payment for hysteroscopic sterilization in the ambulatory surgery center is $1,535, which includes the cost of the implant. We believe these values are very favorable for the Essure procedure and will help in establishing increased utilization of the device amongst doctors.

Effective May 15, 2008, California’s state fee-for-service Medicaid program announced coverage of the Essure procedure for beneficiaries that are 21 years of age or older. Physicians may perform the Essure procedure in the physician’s office, 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 favorable for the Essure procedure and will continue be advantageous in establishing increased utilization for devices amongst doctors.

Reimbursement systems 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 that determine reimbursement for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems.

During the last several years, we received several positive responses from government and private agencies relating to reimbursement, which we believe will help us to speed up the acceptance of the Essure procedure by doctors and patients. In Europe, we are developing a strategic plan to obtain reimbursement in a number of European countries. In France, we obtained official reimbursement under certain conditions for the Essure device in February 2005 for the term of two years with the Haute Autorité de Santé, or HAS. This conditional approval required the procedure to be reserved for patients who had a potential laparoscopic risk. In addition, it required a follow up to demonstrate the safety of the Essure device, for which we conducted a multicenter study. As a result of these studies, 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 France for all women, regardless of medical status.  In addition, the CEPS in France ruled in November 2007 that the reimbursement for the Essure device will remain at the then current levels of 663 Euros for the next five years.

Adoption of the Essure System

We believe the Essure system to be the gold standard in permanent birth control because of its unparalleled effectiveness, safety, and low cost.  The Essure system is becoming increasingly well established among physicians and patients and is routinely taught to new physicians in residency programs. As a result, we believe that recommendations and endorsements by physicians that are essential for market acceptance of our product will continue to grow. Physicians are traditionally slow to adopt new products and treatment practices, partly because of perceived liability risks. Our biggest challenge is to accelerate  the adoption process to make the Essure procedure the standard of care for permanent birth control. The following discussion summarizes our programs to increase adoption of the Essure procedure.

First, we will continue to drive office-based procedures. The Essure procedure can be easily performed in the office, which is the most comfortable and convenient setting for the patient and the place where the physician is most productive from economic and logistical perspectives.  The physician’s office is also the lowest cost site of service for the payer and the patient and the setting where utilization rates can grow the fastest.

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

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Third, we will continue to expand our business in targeted international markets. We established a direct sales presence in the United Kingdom in December 2008 and in early 2009, we received approval for the Essure procedure from the Brazilian National Health Service. We also plan to hire additional distributors during the year.  Surgical tubal ligation is the primary form of permanent birth control worldwide, and thus we believe that the Essure system addresses a global clinical need.

Last, with the prospect of new competition in this large market, we are committed to continuing to improve the Essure device.  In 2009, we plan to make an FDA submission for marketing approval of our fourth-generation Essure device, which is designed to further reduce the already rapid procedure time and 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 in hysteroscopic sterilization.

We have experienced significant operating losses since inception and, as of March 31, 2009, had an accumulated deficit of $246.6 million. Although we were profitable in the third and fourth quarters of 2008, we experienced a net loss in the first quarter of 2009 and there is a risk that we may not sustain profitability.  We will continue to expend substantial resources in the selling and marketing of the Essure system in the United States and abroad. We will be in a net loss position unless sufficient revenues can be generated to offset expenses.

Results of Operations - Three Months Ended March 31, 2009 and 2008

 (in thousands, except percentages)

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

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

Net Sales

Net sales were $27.2 million for the three months ended March 31, 2009 as compared 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 continued commercialization and marketing of the Essure system worldwide and reflects the increasing numbers of physicians entering and completing training in the use of the procedure.

International sales 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 a domestic revenue increase of 29% in the three months ended March 31, 2009 as compared to the similar period in 2008.

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Net sales by geographic region, based on shipping location of our customer, are as follows (in thousands, except percentages):

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

We expect our net sales for 2009 to be in the range of approximately $125.0 million to $135.0 million, which would represent 23% to 32% growth from net sales in 2008 as we continue to increase the number of physicians performing the Essure procedure. We will also continue our programs aimed at raising patient awareness of the Essure procedure, such as radio, print and television advertising. We believe our revenue growth in 2009 and beyond will be significantly influenced by how successful we are in achieving our patient awareness objectives and physicians entering and completing training. However, as we have noted elsewhere in this Form 10-Q and risk factors from our Form 10-K, our expected revenue growth involves many risk factors, some of which are not entirely within our control, such as market acceptance of the Essure system and third party reimbursement for the device.

Gross Profit

Cost of goods sold for the three months ended March 31, 2009 was $5.8 million as compared to $5.4 million for the three months ended March 31, 2008, this represents an increase of $0.4 million, or 6%.  Gross margin for the three months ended March 31, 2009 was 79% as compared to 74% for the comparable period in 2008. The quarter-over-quarter increase in gross margin is related to lower manufacturing costs associated with higher unit volume and a domestic price increase implemented during the first quarter of 2009.  Our gross profit margin will vary as our sales mix changes. Increases in sales of our devices through distributors in international markets will tend to decrease our overall gross profit margin.

Research and Development Expenses

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

Research and development expenses reflect clinical expenditures and product development, which are substantially related to the ongoing development and associated regulatory approvals of our technology. Our goal is to continue our product enhancements over the coming years, which are intended to result in improved ease of use and clinical performance. We expect to identify and hire additional research and development personnel in the future to staff our planned research and development activities, and we expect that these costs will increase as we seek to maintain our leading position in the market for permanent female birth control.

Selling, General and Administrative Expenses

Selling, general and administrative 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 is primarily due to the following: an increase of $1.0 million due to expansion of our 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 and print media and is intended to drive patient awareness of the Essure procedure. In addition, fees related to consulting services, depreciation and expensed inventory increased by $1.0 million; offset by a decrease in stock compensation and training expenses of $0.3 million.  We expect selling, general and administrative expenses to increase in the second quarter of 2009 as we expect to hire additional 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

Total interest income and expenses and other expenses, net for the three months ended March 31, 2009 was a net expense of $1.6 million as compared to a net expense of $1.0 million for the three months ended March 31, 2008, which represents an increase of $0.6 million 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 on the Company’s investment portfolio, which consists of auction rate securities and money market accounts that are currently earning lower interest rates compared to 2008.

In May 2008, the FASP issued FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), or FSP APB 14-1, which clarifies the accounting for convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement.  FSP APB 14-1 specifies that an issuer of such instruments should separately account for the liability and equity components of the instruments in a manner that reflect the issuer’s non-convertible debt borrowing rate which interest costs are recognized in subsequent periods.  FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008, and retrospective application is required for all periods presented.  We have adopted FSP APB 14-1 with our first quarter 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 – Convertible Senior Notes.

Provision for income taxes

 In accordance with SFAS No. 109, Accounting for Income Taxes, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards.  Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets are expected to be realized or settled.  The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized. We evaluate the need for a valuation allowance for our deferred tax assets. Due to our cumulative pre-tax U.S. losses and the current uncertainty of our ability to realize our U.S. deferred tax assets, a valuation allowance in an amount equal to our U.S. deferred tax assets has been recorded.

We adopted 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 FIN 48 did not have a material impact on our financial position and results of operations.   We have not been audited by the Internal Revenue Service or any state income or franchise tax agency.   As of March 31, 2009, our federal returns for the years ended 2005 through the current period and most state returns for the years ended 2004 through the current period are still open to examination. In addition, all of the net operating losses and research and development credit carryforwards that may be used in future years are still subject to inquiry given that the statute of limitation for these items would be from the year of the utilization.

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

The amount 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 which the benefit is recognized. The remaining amount would be offset by the reversal of related deferred tax assets on which a valuation allowance is placed.

We do not expect our unrecognized tax benefits to change significantly over the next 12 months.  In connection with the adoption of FIN 48, we recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

Liquidity and Capital Resources

We have experienced significant operating losses since inception and, as of March 31, 2009, had an accumulated deficit of $246.6 million. Although we were profitable in the third and fourth quarters of 2008, we experienced a net loss in the first quarter of 2009 and there is a risk that we may not sustain profitability.  We will continue to expend substantial resources in the selling and marketing of the Essure system in the United States and abroad.  We will be in a net loss position unless sufficient revenues can be generated to offset expenses.

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In December 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 the sale of our senior convertible notes described below, we had $63,750,000 remaining available for sale under this shelf registration statement.

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

The notes 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 per share), in certain circumstances. Upon conversion, a holder would receive cash up to the principal amount of the note and our common stock in respect of such note’s conversion value in excess of such principal amount.   We may repurchase such securities from time to time.

The notes are convertible only in the following circumstances: (1) during any calendar quarter after the quarter ended March 31, 2007 if the closing sale price of our common stock for each of 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter exceeds 120% of the conversion price; (2) during the five consecutive business days immediately after any five consecutive trading day period if the average trading price per $1,000 principal amount of the notes is less than or equal to 97% of the average conversion value of the notes during such five-day period; (3) upon the occurrence of specified corporate transactions; (4) if we call the notes for redemption and (5) at anytime 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 notes may require us to repurchase all or a portion of their notes for cash at a repurchase price equal to 100% of the principal amount, plus any accrued and unpaid interest.

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

As of March 31, 2009, we held $48.5 million (par value) in auction rate securities (“ARS”) backed by federal and state student loans which are variable rate debt instruments and bear interest rates that reset approximately every 20-30 days. These ARS have a contractual maturity ranging from 2028 through 2047.

Our ARS are long-term debt instruments backed by student loans, a substantial portion of which are guaranteed by the United States government.  Prior to 2008, our ARS were highly liquid, using a Dutch auction process that resets the applicable interest rate at predetermined intervals, typically every 20-30 days, to provide liquidity at par.  We have experienced failed auction in 2008 on all of our ARS.   The failures of these auctions do not affect the value of the collateral underlying the ARS, and we continue to earn and receive interest on our ARS at a pre-determined formula with spreads tied to particular interest rate indexes.

In November 2008, we accepted an offer from UBS AG, providing us with rights related to our ARS (the “Rights”).  The Rights permit us to require UBS to purchase our ARS at par value, which is defined as the price equal to the liquidation preference of the ARS plus accrued but unpaid dividends or interest, at any time during the period of June 30, 2010 through July 2, 2012.  Conversely, UBS has the right, in its discretion, to purchase or sell our ARS at any time until July 2, 2012, so long as we receive payment at par value upon any sale or disposition.  We expect to sell our ARS under the Rights at par value.  However, if the Rights are not exercised before July 2, 2012 they will expire and UBS will have no further rights or obligation to buy our ARS.  So long as we hold our ARS, they will continue to accrue interest as determined by the auction process or the terms of the ARS if the auction process fails.

UBS’s obligations under the Rights are not secured by its assets and do not require UBS to obtain any financing to support its performance obligations under the Rights.  UBS has disclaimed any assurance that it will have sufficient financial resources to satisfy its obligations under the Rights.

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In November 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 no cost, meaning that the interest we pay on the credit line will not exceed the interest that we receive on the ARS that we have pledged as security for the credit line. Additionally, under the terms of the settlement agreement, if UBS is able to sell our ARS at par value, proceeds would be utilized to first repay any outstanding balance under the demand revolving credit line. We are still able to sell the ARS, but in such a circumstance, if we sold at less than par value, we would not be entitled to recover the par value support from UBS.

As of 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 $0.5 million is primarily due to cash usage for operating and investing activites offset by cash proceeds from the line of credit and issuance of common stock.   We believe that our existing cash and cash equivalents will be sufficient to meet our cash requirements for the next twelve months.

In the future, depending on a variety of factors, we may need to raise additional funds through bank facilities, debt or equity offerings or other sources of capital.  Additional financing may not be available when needed or on terms acceptable to us.

Operating Activities

Net cash used in operating 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 operating activities in the three months ended March 31, 2009 was primarily related to:

·                  net loss of $4.3 million; and

·                  non-cash related items of $3.7 million corresponding primarily to the accretion of notes payable, stock based compensation, depreciation and amortization of fixed assets, debt issuance cost and intangible amortization.

We monitor our accounts receivable turnover closely to ensure that receivables are collected timely and have an established a credit and collection policy to facilitate our collection process and reduce our credit loss exposure.

Investing Activities

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

Financing Activities

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

CRITICAL ACCOUNTING ESTIMATES AND POLICIES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying consolidated financial statements and related footnotes. A description of our critical accounting estimates and policies is included in our Annual Report on Form 10-K for the year ended December 31, 2008. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The primary estimates underlying our financial statements include reserves for obsolete and slow moving inventory, allowance for doubtful accounts receivable, product warranty, impairment for long-lived assets, income taxes, stock-based compensation and contingent liabilities. Other accounting policies are described in section “Critical Accounting Estimates and Policies” in our Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. Application of these policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.

Recent Accounting Pronouncements

In December 2007, the FASB issued Statement No. 141 (revised 2007) Business Combinations, or SFAS 141(R), and Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements, or SFAS 160, an amendment of Accounting Research Bulleting No. 51, or ARB 51. SFAS 141(R) will impact financial statements on the acquisition date and in subsequent periods. Some of the changes, such as the accounting for contingent consideration, will introduce more volatility into earnings and may impact our acquisition strategy. Additionally, in February 2009, FASB issued FASB Staff Positions FAS 141(R)-a, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which will amend the previsions related to the initial recognition and measurement, subsequent measurement