UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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 at least the past 90 days. Yes x   No o

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

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 29,568,729 shares of Registrant’s Common Stock issued and outstanding as of October 31, 2007.

CONCEPTUS, INC.

FORM 10-Q for the Quarter Ended September 30, 2007

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PART I. FINANCIAL INFORMATION

ITEM 1. Condensed Consolidated Financial Statements

Conceptus, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except number of shares)

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)

(*) Includes the following amounts related to stock-based compensation:

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)

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 at December 31, 2006 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 reviewed 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, 2006.  The results of operations for the three and nine months ended September 30, 2007 may not necessarily be indicative of the operating results for the full 2007 fiscal year or any other future interim periods.

Recent Accounting Pronouncements

In July 2006, the Financial Standards Accounting Board (or “FASB”) issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” or FIN 48, which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim-period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and we adopted FIN 48 beginning fiscal year 2007. The adoption of the provisions of FIN 48 did not have a material impact on our financial position or results of operations.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurement” or SFAS 157. This standard defines fair value, establishes the framework for measuring fair value in accounting principles generally accepted in the United States and expands disclosure about fair value measurements. This pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We will be required to adopt SFAS 157 in the first quarter of 2008. We are currently evaluating the requirements of SFAS 157 and have not yet determined the impact on our consolidated financial statements. On October 17, 2007, the FASB agreed to consider delaying the effective date for certain entities that may include smaller public companies (as yet undefined) and all entities with respect to non-financial instruments. To that end, the FASB asked its staff to develop recommendations on whether a delay would be appropriate and, if so, to whom and to what it should apply. The staff’s recommendations will be presented to the FASB and discussed at a future meeting. We are unable to assess at this time the impact, if any, of the FASB decisions to be agreed at the next meeting.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”, or SFAS 159, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for us on January 1, 2008. We are currently evaluating the impact of adopting SFAS 159 on our consolidated financial statements.

On July 25, 2007, the FASB held a meeting to discuss, among other things, the accounting method for net share settled securities, such as our convertible senior notes.  As a result of the meeting, the FASB voted to adopt a method for accounting for net share settled securities under which the debt and equity components of the security would be bifurcated and accounted for separately. The effect of this proposal is that the equity component would be included in the paid-in-capital section of stockholders’ equity on our balance sheet and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the notes. As a result, net loss attributable to our common stockholders would be higher as a result of the recognition of the accretion of the discounted carrying value of our convertible senior notes to their face amount as additional interest expense. The diluted earnings per share calculation would continue to be calculated based on the treasury stock method. In addition, the FASB may require that the new method be implemented retrospectively. The FASB has not yet reached its final decision with respect to this proposed change to accounting treatment so there remains

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uncertainty as to the full impact of this accounting change. We cannot predict the outcome of the FASB deliberations and whether the FASB is proposing that net share settled securities be accounted for under the existing method, the proposed method described above or some other method, and when any change would be implemented or whether it would be implemented retrospectively or prospectively.

2.              Summary of Significant Accounting 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. 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 write-offs for obsolete and slow moving inventory, allowance for doubtful accounts receivable, product warranty, impairment of long-lived assets and stock-based compensation.

Our significant accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006 that was filed with the Securities and Exchange Commission on March 15, 2007. Our significant accounting policies have not materially changed since December 31, 2006.

3.              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):

4.              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 nine months ended September 30, 2007 and 2006 follows (in thousands):

5.              Stock-Based Compensation

Net loss for the three and nine months ended September 30, 2007 included stock-based compensation expense under SFAS 123(R) of $1.6 million and $4.5 million, respectively, which consisted of stock-based compensation expense of $1.4 million and $3.8 million, respectively, related to employee stock options, employee stock purchase plan and stock appreciation rights and stock-based compensation expense of $0.2 million and $0.7 million, respectively, related to employee restricted stock and restricted stock units.

Net loss for the three and nine months ended September 30, 2006 included stock-based compensation expense under SFAS 123(R) of $1.4 million and $4.4 million, respectively, which consisted of stock-based compensation expense of $1.1

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million and $3.4 million, respectively, related to employee stock options, employee stock purchase plan and stock appreciation rights and stock-based compensation expense of $0.3 million and $1.0 million, respectively, related to employee restricted stock and restricted stock units.

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 $56,000 and $37,000 for the three months ended September 30, 2007 and 2006, respectively, and $174,000 and $137,000 for the nine months ended September 30, 2007 and 2006, respectively.

We calculated the fair value of each option on the date of grant using the Black-Scholes model as prescribed by SFAS 123(R). The assumptions used were as follows:

For the three and nine months ended September 30, 2006, we calculated the fair value of each option on the date of grant using the Black-Scholes model as prescribed by SFAS 123(R). The assumptions used were as follows:

Expected Term: Our expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on historical exercise experience of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules.

Expected Volatility: We used historical volatility based on the expected term of the awards, which is consistent with our assessment that the historical volatility for such period is more representative of future stock price trends than any other type of volatility.

Expected Dividends: We have not paid and do not anticipate paying any dividends in the near future.

Risk-Free Interest Rate: We base the risk-free interest rate on the U.S. Treasury yield curve in effect at the time of grant based on the expected term of the underlying option.

Forfeitures: As stock-based compensation expense recognized in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.

No income tax benefit has been recognized relating to stock-based compensation expense and no tax benefits have been realized from exercised stock options.

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Stock Options and Stock Appreciation Rights: During the three months ended September 30, 2007, we granted stock options and stock appreciation rights for 49,000 shares of common stock to employees and 5,000 shares of common stock to consultants. The shares granted to employees had an estimated total grant-date fair value of approximately $0.3 million and a grant date weighted-average fair value of $6.42 per share. The 5,000 shares of common stock granted to consultants were accounted for inaccordance with EITF 96-18. During the three months ended September 30, 2006, we granted stock options and stock appreciation rights for 51,500 shares of common stock, with an estimated total grant-date fair value of approximately $0.3 million and a grant date weighted-average fair value of $5.72 per share.

As of September 30, 2007, there was unrecognized compensation cost of approximately $10.0 million for total stock-based compensation related to stock options and stock appreciation rights, before forfeitures. This cost is expected to be recognized over a weighted-average amortization period of 2.6 years.

Employee Stock Purchase Plan (ESPP): The compensation cost in connection with the ESPP for the three months ended September 30, 2007 was approximately $82,000 with a grant-date weighted-average fair value of $5.29. During the three months ended September 30, 2006, the compensation cost was approximately $48,000, with a grant-date weighted-average fair value of $3.79. This cost is amortized on a straight-line basis over the relevant subscription period.

We calculated the fair value of each share under the ESPP on the date of grant using the Black-Scholes model as prescribed by SFAS No. 123(R). The assumptions used were as follows:

For the three months ended September 30, 2006, the ESPP assumptions were as follows:

Restricted Shares and Restricted Stock Units: In connection with restricted shares and restricted stock units granted, we recorded stock compensation representing the difference between the exercise price of the shares and 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 September 30, 2007, we did not grant shares of restricted stock or restricted stock units. During the three months ended September 30, 2006, we granted 2,500 shares of restricted stock and 1,000 shares of restricted stock units, with a grant-date fair value of approximately $46,000 and a grant-date weighted-average fair value of $13.19.

As of September 30, 2007, there was an unrecognized compensation cost of approximately $1.4 million related to nonvested restricted shares and restricted stock units, before forfeitures. This cost is expected to be recognized over a weighted-average amortization period of 1.4 years for restricted stock awards and 1.9 years for restricted stock units.

6.              Notes Payable

In February 2007, we issued an aggregate principal amount of $86,250,000 of our 2.25% convertible senior notes due 2027. These notes bear interest on the principal amount at 2.25% per annum, 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 described in the next paragraph. Upon conversion, a holder would receive cash up to the principal amount of the note and shares of 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) during any calendar quarter after the quarter ending 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 in which 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

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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 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 $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. See Note 9, Stockholders’ Equity.

7.              Income Taxes

We adopted the provisions of 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 September 30, 2007, our federal returns for the years ended 2004 through the current period and most state returns for the years ended 2003 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.

8.              Computation of Net Loss Per Share

Basic net loss per share excludes any potential dilutive effects of options and common stock shares subject to repurchase. Diluted net loss per share includes the impact of potentially dilutive securities.  However, due to our net loss position, 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):

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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):

Our 2.25% senior convertible notes are not included in the calculation of net loss per share because their effect is anti-dilutive.

9.              Stockholders’ Equity

As of September 30, 2007, we hold 77,863 shares of treasury stock as a result of repurchasing shares of restricted common stock at par value in accordance with the terms of the restricted stock agreements. These shares had a purchase price of $0.003 per share and are recorded as treasury stock.

In connection with the issuance of our senior convertible notes (see Note 6) in February 2007, we entered into the Call Spread Transactions, which have the effect of reducing the potential dilution upon conversion of the notes. We purchased call options in private transactions to cover approximately 3.1 million shares of our common stock at a strike price of $27.89 per share (subject to adjustment in certain circumstances) for approximately $19.4 million. The call options generally will allow us to receive shares of common stock from counterparties equal to the number of shares of common stock payable to the holders of our senior convertible notes upon conversion. These call options will terminate the earlier of the maturity dates of the related senior convertible notes or the first day all of the related senior convertible notes are no longer outstanding due to conversion or otherwise. In addition, we sold warrants permitting the purchasers to acquire up to approximately 3.1 million shares of our common stock at an exercise price of $36.47 per share (subject to adjustments in certain circumstances) in private transactions for total proceeds of approximately $10.7 million. The warrants provide for net share settlement. We have analyzed the Call Spread Transactions under EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled In, a Company’s Own Stock,” and determined that they meet the criteria for classification as equity transactions. As a result, in the nine months ended September 30, 2007, we recorded the purchase of the call options of $19.4 million as a reduction in additional paid-in capital and the proceeds of the warrants of $10.7 million as an addition to paid-in capital, and we will not recognize subsequent changes in fair value of the agreements.

10.       Commitments and Contingencies

On February 27, 2007, we entered into an amendment to the Share Purchase and Call Option Agreement dated January 17, 2004 with Conceptus SAS, (or “SAS”) and into an amendment to the Distribution Agreement with SAS, dated January 17, 2004.  Pursuant to the amendment to the Share Purchase and Call Option Agreement, we agreed not to exercise the call option to acquire 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, SAS agreed to increase the price they pay to us for the Essure  product. The difference in price of the revised Distribution Agreement compared to the previous agreement is being recorded as a current liability in our consolidated balance sheet. As of September 30, 2007, the balance of this current liability was $1.7 million.

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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 consolidated financial statements and related notes thereto. This discussion contains forward-looking statements, including references to 2007 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, 2006 filed with the Securities and Exchange Commission on March 15, 2007 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 United States 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 Essure Procedure

The Essure procedure is typically performed as an outpatient procedure and is intended to be a less invasive and a less costly alternative to tubal ligation, the leading form of 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 without general or regional anesthesia.  In the Pivotal trial of the Essure system, the total procedure time averaged 35 minutes, with an average of 13 minutes of hysteroscopic time to place the Essure  micro-insert. 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, the patient completes a follow-up examination called a hysterosalpingogram, or HSG, which can determine whether the device was placed successfully and whether the fallopian tubes are occluded.

We believe that the Essure system is also an attractive 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. We also believe the Essure system is a viable alternative to other temporary methods of birth control being used when there is no intention of having children in the future. In addition, payers may also benefit from the reduction of unplanned pregnancies associated with non-permanent methods of birth control used by patients who have chosen to avoid the drawbacks of traditional permanent birth control methods but who may elect to use the Essure system.

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

The Essure system is currently being marketed in multiple countries. In November 2002 we received approval from the FDA to market the  Essure  system in the United States. In 2001, we were given approval to affix the CE Mark to the  Essure  system, indicating that the  Essure  system is certified for sale throughout the European Union, subject to compliance with local regulations such as registration with health ministries and/or particular requirements regarding labeling or distribution. In Canada, we received clearance from Health Canada to market the  Essure  system in Canada in November 2001. We currently have distributors in Australia, Canada and France, which cover Europe, Middle East, Africa, Mexico, Central America and South America.

On February 27, 2007, we entered into an amendment to the Share Purchase and Call Option Agreement dated January 17, 2004 between Conceptus, Conceptus SAS, or SAS, and the Purchasers party thereto and an amendment to the Distribution Agreement with SAS, dated January 17, 2004.  Pursuant to the amendment to the Share Purchase and Call Option Agreement, we agreed not to exercise the call option to acquire 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. The purchase price will be determined as a multiplier of yearly sales. Pursuant to the amendment to the Distribution Agreement, SAS agreed to increase

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the price they pay to us for the  Essure  product. The difference in price of the revised Distribution Agreement compared to the previous agreement is being recorded as a current liability in our consolidated balance sheet. As of September 30, 2007, the balance of this current liability was $1.7 million.

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 of follow-up, from the previously approved 99.80% at three years. The five-year effectiveness was demonstrated in a small portion of the women undergoing clinical studies. Five year follow up of all patients in clinical trials is ongoing.

In September 2005, we received approval from the 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 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 and we will seek to obtain a new placement rate claim for the product using this new data. 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 addition, the FDA has recently approved the third generation of the Essure product for sale in the United States.

Penetration

Physicians are required to be preceptored for between 3 and 5 cases by a certified trainer before being able to perform the procedure independently. As of September 30, 2007, the increase of physicians that have been trained or that are in the process of training has been commensurate with the increase in sales. 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.

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 September 30, 2007, we have received positive reimbursement decisions for the  Essure  procedure from most private insurers and 43 of the 51 Medicaid programs in the country. 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.

In July 2005, the UnitedHealthcare Group, or UHC, approved the Essure procedure for reimbursement. In addition, in February 2006, we received coverage from CIGNA Corporation, or Cigna. As with all healthcare plans, coverage will vary and is dependent upon the individual’s specific benefit plan.

Effective January 1, 2007, the Centers for Medicare and Medicaid Services, or CMS, the Medicare National unadjusted average payment for hysteroscopic sterilization, the CPT code, is $433 when performed in a hospital and $2,017 when performed in a physician’s office. This compares to a Medicare national average payment for tubal ligation, the current standard of care for permanent female sterilization, of $370. In addition, in the CMS Final Rule for the 2007 Outpatient Prospective Payment System (or OPPS), which assigns hospital outpatient reimbursement amounts, the CPT code was assigned a Medicare National Average of $2,642. In 2007, the CPT code was moved from Group 4 which had a national average reimbursement of $633 to Group 9 which has a national average reimbursement of $1,339. We believe these values are very favorable for the  Essure procedure and will help in establishing increased utilization of the device amongst doctors. We expect that the new code, once the process to establish it at all private payers that have given a favorable coverage decision is complete, will significantly ease the burden on a physician’s office in obtaining reimbursement for the  Essure  procedure and accelerate the coverage of the Essure  procedure by private insurance companies and Medicaid. This process is not automatic following

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receipt of the new CPT code, however, and we anticipate continuing to focus on reimbursement issues for sometime in the future, both to secure our code and payment schedule into the payers’ databases, as well as to help the physician negotiate a favorable contract for payment off that schedule.

Adoption of the Essure system

The Essure system is a novel product in the contraception market, which is dominated by procedures that are well established among physicians and patients and are routinely taught to new physicians. As a result, we believe that recommendations and endorsements by physicians will be essential for market acceptance of our product. Physicians are traditionally slow to adopt new products and treatment practices, partly because of perceived liability risks. Our biggest challenge is to speed up the adoption process to make the  Essure  procedure the standard of care for permanent birth control. The following discussion summarizes our program in the United States to increase adoption of the  Essure  procedure.

First, we are expanding our sales territories and channels of distribution so as to increase our call frequency on physicians. During the nine months ended September 30, 2007, we added a substantial number of sales positions and are expecting to add more in the remaining of 2007. Also, we have included regional distributors of women’s gynecology products to our marketing efforts. Among other responsibilities, our sales representatives are attempting to increase penetration and utilization of the Essure procedure, as well as to facilitate the movement of the Essure procedure to the in the office environment.

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

Third, we are focused on obtaining favorable coverage decisions from the remaining payers representing the private paying and state-paying Medicaid systems that have not given a coverage decision. It is our intention to maintain our field based tactical reimbursement group aimed at obtaining coverage decisions and educating the physician and office regarding payer procedures.

Fourth, we have entered into certain strategic agreements in the past and we may explore such opportunities in the future. We intend for these agreements to provide us with the ability to increase awareness, gain market presence and credibility, accelerate our ability to train doctors, as well as expand our market opportunity by driving adoption among a group of physicians not previously targeted by our marketing programs. The success of these campaigns will depend upon the effectiveness of our sales force training programs, market demand for Essure procedures in conjunction with the products marketed by strategic partners and the efforts and commitment of strategic partners to the program. We cannot be certain how successful these programs will be, if at all.

Lastly, as appropriate we intend to make labeling improvements to our product as well as physical product enhancements to enhance the adoption of the Essure procedure. This may involve working with the various regulatory agencies around the world that regulate the sale and labeling of medical devices to provide updates to claims such as effectiveness and placement rates. Where appropriate, we will make physical improvements to the product for improved manufacturability or for the ease of use by the physician. The FDA has recently approved the third generation of the Essure product for sale in the United States.

We have experienced significant operating losses since inception and, as of September 30, 2007, have an accumulated deficit of $232.5 million. We intend to continue to expend substantial resources in the selling and marketing of the Essure  system in the United States and abroad. We will continue to be in a net loss position until sufficient revenues can be generated to offset expenses. 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 used the shelf to complete a convertible debt offering for an aggregate principal amount of $86,250,000 of our 2.25% convertible senior notes due 2027. In the future, depending upon a variety 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.

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Results of Operations - Three and Nine Months Ended September 30, 2007 and 2006

2007 results compared to 2006 (in thousands, except percentages)

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

Net Sales

Net sales were $16.4 million for the three months ended September 30, 2007 as compared to $11.0 million for the three months ended September 30, 2006, representing an increase of $5.4 million, or 49%. Net sales for the nine months ended September 30, 2007 were $45.9 million, as compared to $29.0 million for the nine months ended September 30, 2006, an increase of $16.9 million, or 58%. The increase in net sales is the result of continued commercialization of the Essure system worldwide, and reflects the increasing number of physicians entering and completing training in the use of the procedure and higher utilization by trained physicians. As of September 30, 2007, the increase of physicians that have been trained or that are in the process of training has been commensurate with the increase in sales. Our accomplishment in obtaining the number of physicians trained is very important because it provides us with a strong referral base within major metropolitan areas we have targeted. 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 to us from inception to-date.

Net product sales by geographic region as a percentage of net sales for the three and nine months ended September 30, 2007 and 2006 are as follows (in thousands, except percentages):

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

No single customer accounted for 10% or more of our net sales during the three and nine months ended September 30, 2007 and September 30, 2006.  Accounts receivable from one customer accounted for 23% of our gross accounts receivable balance as of September 30, 2007. Accounts receivable from one customer accounted for 12% of our gross accounts receivable balance as of September 30, 2006.

We expect our net sales for 2007 to be approximately $63.4 million to $64.4 million, which would represent 51% to 54% growth from net sales in 2006. We expect net sales from the United States will continue to be the major contributor of our global net sales. We have established four primary goals to achieve our revenue growth. We expect to increase sales coverage and with that increase physician penetration and utilization of the Essure device in both the hospital and the office setting.  In addition, we will continue to increase our programs aimed at raising patient awareness of the Essure procedure, such as advertising with physicians and internet marketing, we will obtain additional payer coverage decisions or otherwise improve

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the public and private payer coverage for the Essure procedure, and bring product improvements to the Essure device to the market. We believe our revenue growth in 2007 and beyond will be significantly influenced by how successful we are in achieving these objectives. However, as we have noted elsewhere in this Form 10-Q and risk factors from our Form 10-K referenced herein, our expected revenue growth involves factors that are outside of 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 September 30, 2007 was $4.3 million as compared to $3.5 million for the three months ended September 30, 2006. This increase of $0.8 million, or 24%, was caused by the increase in net sales, partially offset by reductions in manufacturing costs due to the impact of higher volumes of sales on relatively fixed manufacturing costs, offset by decreased unit costs of the next-generation device and to a domestic price increase implemented during the first quarter of 2007. For the nine months ended September 30, 2007, cost of goods sold was $12.3 million, as compared to $10.0 million for the nine months ended September 30, 2006. The increase of $2.2 million, or 22%, was caused by the same factors. Gross profit margin improved from 68% for the three months ended September 30, 2006 to 74 % for the same period ended September 30, 2007. For the nine months ended September 30, 2007, gross profit margin was $33.6 million, or 73 %, which represents an improvement from a gross profit margin of 65 % from the nine months ended September 30, 2006. We anticipate gross margins will improve in the remainder of 2007 due to lower per-unit costs on greater volume; however, 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.

Operating Expenses

Research and development expenses, which include expenditures related to product development, clinical research and regulatory affairs, were $1.5 million for the three months ended September 30, 2007 as compared to $1.0 million for the for the three months ended September 30, 2006. Research and development expenses were $4.2 million and $3.3 million for the nine months ended September 30, 2007 and 2006, respectively. The primary reason for the increase in research and development expenses was due to ongoing product development. We intend to continue to focus our research and development efforts on the development of new or alternative product designs along with management of the on-going clinical trials. It is our goal to launch new product designs over the coming years, which are intended to result in a lower cost of the device, improved ease of use of the Essure system and simplified packaging systems.

Selling, general and administrative spending for the three months ended September 30, 2007 was $13.9 million as compared to $10.3 million for the three months ended September 30, 2006, which represents an increase of $3.7 million, or 36 %. The primary reason for the increase was higher payroll expenditures of $1.9 million, primarily due to the expansion of our U.S. field sales force, which we intend will generate more selling time and focus on physician penetration. Additionally, increases in selling, general and administrative expenses were a result of increased consulting and professional expenses of $0.6 million, increased insurance and taxes of $0.4 million, higher market research in $0.2 million, increased stock compensation of $0.2 million as a result in our increase in headcount and higher travel expenses of $0.1 million. The remainder is due to general corporate expenses to support our growing infrastructure.

Selling, general and administrative spending for the nine months ended September 30, 2007 was $40.1 million as compared to $31.2 million for the nine months ended September 30, 2006, which represents an increase of $8.9 million, or 29%. The primary reason for the increase was higher payroll expenditures of $3.9 million, primarily due to the expansion of our U.S. field sales force, which we intend will generate more selling time and focus on physician penetration. Additionally, increases in selling, general and administrative expenses were a result of increased advertising expenditures of $1.0 million, higher travel expenses of $0.8 million, increased consulting expenditures of $0.7 million, higher professional and legal fees of $0.7 million, increased insurance and taxes of $0.4 million, increased stock compensation of $0.4 million as a result in our increase in headcount and higher recruiting expenses of $0.2 million. The remainder is due to general corporate expenses to support our growing infrastructure.

Interest and other income and expenses of $0.7 million increased by $0.4 million in the three months ended September 30, 2007, compared to $0.3 million in the same period ended September 30, 2006. For the nine months ended September 30, 2007, interest and other income and expense was $1.8 million, compared to $1.0 million for the same period ended September 30, 2006, which represents an increase of $0.8 million, or 85 %. The increase is due to higher interest income in the first nine months of 2007 and the increase in funds as a result of investing of proceeds from our convertible senior note offering completed in February 2007, offset by amortization of debt issuance costs and interest expense on our convertible debt. For these reasons, we expect higher interest income in 2007 compared to the previous fiscal year.

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Liquidity and Capital Resources

We have experienced significant operating losses since inception. As of September 30, 2007 we had an accumulated deficit of $232.5 million. We have financed our operations since inception primarily through equity financings and debt. 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. The aggregate initial offering price of all securities sold will not exceed $150,000,000. After the sale of our senior convertible notes described below, we had $63,750,000 remaining available for sale.

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 will be 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) during any calendar quarter after the quarter ending 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 in which 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 transaction; (4) if we call the notes for redemption and (5) at anytime on or after December 15, 2011 to and including February 15, 2012 and anytime on or after February 15, 2025. Upon a change in 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 September 30, 2007, we had cash, cash equivalents and short-term investments of $94.3 million, compared to $25.8 million at December 31, 2006. The increase of $68.5 million is primarily due to the proceeds from of the sale of our senior convertible notes in February 2007 and cash used in our operating and investing activities. We expect cash usage in operating activities to decrease in the future as our net loss decreases.

Operating Activities

Net cash used in operating activities was $7.0 million in the nine months ended September 30, 2007, as compared to $8.3 million in the nine months ended September 30, 2006. Net cash used in operating activities in the nine months ended September 30, 2007 was primarily related to:

•                  net loss of $8.9 million;

•                  non-cash related items of $6.6 million corresponding primarily to stock based compensation and depreciation and amortization of fixed assets;

•                  planned increase of inventories of $1.8 million to support our projected growth in sales; and

•                  increase in accounts receivable of $4.6 million resulting from our increase in sales.

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

We expect cash usage in operating activities in the future to decrease as our revenues grow.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2007 was $71.3 million, from sales and maturity of short-term investments of $18.1 million, offset by purchases of investments constituting auction rate securities and commercial paper of $87.6 million and capital expenditures of $1.8 million. Net cash used in investing activities for the nine months ended September 30, 2006 was $3.4 million, from sales and maturity of short-term investments of $19.0 million, offset by purchases of investments of $21.4 million and capital expenditures of $1.0 million

Financing Activities

Net cash provided by financing activities in the nine months ended September 30, 2007 was $77.3 million, primarily due to the net proceeds of $83.2 million from our issuance of senior convertible notes in February 2007, the proceeds of $10.7 million for the issuance of warrants in connection with our senior convertible notes and the proceeds of $2.8 million for the issuance of common stock for our stock option programs and the ESPP, offset by $19.4 million for the cost of our purchase of call options on our convertible senior notes. Net cash provided by financing activities was $2.5 million for the nine months ended September 30, 2006 from the exercise of stock options.

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, 2006. 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, 2006. 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 July 2006, the Financial Standards Accounting Board (or “FASB”) issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” or FIN 48, which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim-period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and we adopted FIN 48 beginning fiscal year 2007. The adoption of the provisions of FIN 48 did not have a material impact on our financial position or results of operations.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurement” or SFAS 157. This standard defines fair value, establishes the framework for measuring fair value in accounting principles generally accepted in the United States and expands disclosure about fair value measurements. This pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. This statement is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. We will be required to adopt SFAS 157 in the first quarter of 2008. We are currently evaluating the requirements of SFAS 157 and have not yet determined the impact on our consolidated financial statements. On October 17, 2007, the FASB agreed to consider delaying the effective date for certain entities that may include smaller public companies (as yet undefined) and all entities with respect to non-financial instruments. To that end, the FASB asked its staff to develop recommendations on whether a delay would be appropriate and, if so, to whom and to what it should apply. The staff’s recommendations will be presented to the FASB and discussed at a future meeting. We are unable to assess at this time the impact, if any, of the FASB decisions to be agreed at the next meeting.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial

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Liabilities”, or SFAS 159, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for us on January 1, 2008. We are currently evaluating the impact of adopting SFAS 159 on our consolidated financial statements.

On July 25, 2007, the FASB held a meeting to discuss, among other things, the accounting method for net share settled securities, such as our convertible senior notes.  As a result of the meeting, the FASB voted to adopt a method for accounting for net share settled securities under which the debt and equity components of the security would be bifurcated and accounted for separately. The effect of this proposal is that the equity component would be included in the paid-in-capital section of stockholders’ equity on our balance sheet and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the notes. As a result, net loss attributable to our common stockholders would be higher as a result of the recognition of the accretion of the discounted carrying value of our convertible senior notes to their face amount as additional interest expense. The diluted earnings per share calculation would continue to be calculated based on the treasury stock method. In addition, the FASB is expected to require that the new method be implemented retrospectively. The FASB has not yet reached its final decision with respect to this proposed change to accounting treatment so there remains uncertainty as to the full impact of this accounting change. We cannot predict the outcome of the FASB deliberations and whether the FASB may require that net share settled securities be accounted for under the existing method, the proposed method described above or some other method, and when any change would be implemented or whether it would be implemented retrospectively or prospectively.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following discusses our exposure to market risk related to changes in interest rates and foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results.

Interest Rate Risk: We have been exposed to interest rate risk through interest earned on holdings of available-for-sale marketable securities.  Interest rates that may affect these items in the future will depend on market conditions and may differ from the rates we have experienced in the past. The fair value of our investment portfolio or related income would not be significantly impacted by changes in interest rates since we reduce the sensitivity of our results of operations to these risks by maintaining an investment portfolio, which is primarily comprised of highly rated, marketable securities. We do not hold or issue derivatives, commodity instruments or other financial instruments for trading purposes.

The fair market value of our 2.25% senior convertible notes is subject to interest rate risk and market risk due to their convertible feature. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The fair market value of our senior convertible notes will increase as the market price of our common stock increases, and decrease as the market price falls. The interest and market value changes affect the fair market value of our senior convertible notes, but do not impact our financial position, cash flows or results of operations.

Foreign Currency Exchange Risk:  All of our expenses and our revenues are denominated in United States dollars. As a result, we have low exposure for currency exchange risks and do not have foreign exchange losses. We do not enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. In the future, if our assessment of our foreign currency exposure changes, we may consider hedging transactions for risk mitigation.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures:

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2007, the end of our most recent fiscal quarter, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief

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Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting:

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

Inherent Limitations of Internal Controls

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

PART II.  OTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are involved in legal proceedings arising in the ordinary course of business.  We believe there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on our financial position, result of operations or cash flows.

Item 1A. Risk Factors

The risk factors included in our Annual Report as of December 31, 2006 on Form 10-K filed with the Securities and Exchange Commission on March 15, 2007 should be considered while evaluating Conceptus and our business. In addition to those factors and to other information in this Form 10-Q, the following updates to the risk factors as of September 30, 2007 should be considered carefully while evaluating the Company and our business. This Form 10-Q contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934, as amended. Some of the forward-looking statements can be identified by use of forward-looking words such as “believes,” “expects,” “anticipates,” “may,” “will,” “should,” “seeks,” “approximates,” “intends,” “plans,” or “estimates,” or the negative of these words, or other comparable terminology. The discussion of financial trends, strategy, plans or intentions may also include forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected. Although it is not possible to predict or identify all such risks and uncertainties, they may include, but are not limited to, the risk factors incorporated by reference and to their updates. Readers should not consider these lists to be a complete statement of all potential risks and uncertainties.

The accounting method for convertible debt securities with net share settlement, like the notes, is expected  to change.

On July 25, 2007, the FASB held a meeting to discuss, among other things, the accounting method for net share settled securities, such as our convertible senior notes.  As a result of the meeting, the FASB voted to adopt a method for accounting for net share settled securities under which the debt and equity components of the security would be bifurcated and accounted for separately.  The effect of this proposal is that the equity component would be included in the paid-in-capital section of stockholders’ equity on our balance sheet and the value of the equity component would be treated as original issue discount for purposes of accounting for the debt component of the notes.  As a result, net loss attributable to our common stockholders would be higher as a result of the recognition of the accretion of the discounted carrying value of our convertible senior notes to there face amount as additional interest expense. The diluted earnings per share calculation would continue to be calculated based on the treasury stock method. In addition, the FASB is proposing that the new method be implemented retrospectively.

The FASB has not yet reached a final decision with respect to this proposed change to accounting treatment so there remains uncertainty as to the full impact of this accounting change.

We cannot predict the outcome of the FASB deliberations and whether the FASB will require that net share settled securities be accounted for under the existing method, the proposed method described above or some other method, and when any change would be implemented or whether it would be implemented retrospectively or prospectively.

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We also cannot predict any other changes in Generally Accepted Accounting Principles that may be made affecting the accounting for our convertible senior notes. Any change in the accounting of our convertible senior notes could have an adverse impact on our reported or future financial results. These impacts could adversely affect the trading price of our common stock and in turn negatively impact the trading price of the notes.

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Item 6. Exhibits

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SIGNATURE

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

Date: November 7, 2007

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EXHIBIT INDEX

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