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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2009

OR

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

For the transition period from                to                     .

Commission File Number: 0-27596

CONCEPTUS, INC.

(Exact name of Registrant as specified in its charter)

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 30,571,073 shares of Registrant’s Common Stock issued and outstanding as of August 1, 2009.

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CONCEPTUS, INC.

Form 10-Q for the Quarter Ended June 30, 2009

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PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

Conceptus, Inc.

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands)

(A) 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) or 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)

(A)  Adjusted for the retrospective adoption of FSP APB 14-1. See Note9: Convertible Senior Notes - Adoption of 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)

(A) Adjusted for the retrospective adoption of FSP APB 14-1. See Note9: Convertible Senior Notes – Adoption of 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 and six months ended June 30, 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 and six months ended June 30, 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 in certain circumstances, 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). 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.

We have evaluated subsequent events through August 7, 2009, the date we filed our quarterly report on Form 10-Q for the quarter ended June 30, 2009.

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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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 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 October 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) SFAS No. 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active, or FSP SFAS 157-3. FSP SFAS 157-3 clarifies the application of SFAS 157, which we have adopted as of January 1, 2008, in situations where the market for a particular financial asset is not active. We have considered the guidance provided by FSP SFAS 157-3 in our determination of estimated fair values, and the impact was not material.

In April 2009, the FASB issued FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP SFAS 107-1 and APB 28-1.  This FSP amends SFAS 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 107-1 and APB 28-1, we are 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 have adopted the provisions of FSP SFAS 107-1 and APB 28-1 effective the second quarter of fiscal 2009.  See Note 4 - Fair Value Measurements and Note 9 — Convertible Senior Notes.

In April 2009, the FASB issued FSP SFAS No. 115-2 and SFAS No. 124-2 Recognition and Presentation of Other-Than-Temporary Impairments, or FSP SFAS 115-2 and SFAS 124-2, 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. FSP SFAS 115-2 and SFAS 124-2 are effective for interim and annual reporting periods that end after June 15, 2009. We have adopted the provisions of FSP SFAS 115-2 and SFAS 124-2 effective the second quarter of fiscal 2009. We have considered the guidance provided by FSP SFAS 115-2 and SFAS 124-2 in our determination of impairment, and the impact was not material.  See Note 9 — Convertible Senior Notes.

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

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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 is effective for interim and annual periods ending after June 15, 2009.  We have adopted the provisions of FSP SFAS 157-4 effective the second quarter of fiscal 2009 which did not have an impact on our condensed consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, or SFAS 165. SFAS 165 establishes general accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. This statement also outlines the circumstances under which an entity would need to record transactions occurring after the balance sheet date in the financial statements. These new disclosures identify the date through which the entity has evaluated subsequent events. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. See Note 1 — Basis of Presentations, for disclosure of the date to which subsequent events are disclosed.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) or SFAS 167, which modifies how we determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 clarifies that the determination of whether we are required to consolidate an entity is based on, among other things, an entity’s purpose and design and power to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 167 requires an ongoing reassessment of whether we are the primary beneficiary of a variable interest entity. SFAS 167 also requires additional disclosures about our involvement in variable interest entities and any significant changes in risk exposure due to that involvement. SFAS 167 is effective for fiscal years beginning after November 15, 2009 and is effective for us on January 1, 2010. We do not expect SFAS 167 to have an impact on our financial position and results of operations in future periods, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the transactions we may consummate in the future.

In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles, or SFAS 168. SFAS 168 establishes the FASB Accounting Standards Codification (the “Codification”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. All guidance contained in the Codification carries an equal level of authority. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Codification will supersede all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. Following SFAS 168, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The FASB will not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates will serve only to update the Codification, provide background information about the guidance and provide the bases for conclusions on the change(s) in the Codification. We will update our disclosures to conform to the Codification in our Form 10-Q for the third quarter of 2009.

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 intercompany accounts and transactions have been eliminated.

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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 and CML both maintain their accounting records in the functional currency which is also their local currency. The functional currency of CML is the British Pound and the functional currency of Conceptus SAS is the Euro.  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 and CML has been determined to be their local currency, any gain or loss associated with the translation of Conceptus SAS’s and 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 June 30, 2009.

Other intangible assets include customer relationships, license agreements 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, Accounting for the Impairment of Disposal of Long-Lived Assets.  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 June 30, 2009, we held $48.3 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 most of our ARS, having settlements of nominal amounts in 2009.  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.

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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, at 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.

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, The Fair Value for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 19.  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 and six months ended June 30, 2009, we recorded an additional unrealized loss of $1.2 million and $1.4 million, respectively 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.

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 and six months ended June 30, 2009, we recorded an unrealized gain of $1.3 million and $1.5 million, respectively which represents the increase in the fair value of the ARS.  For the three and six months ended June 30, 2008 we had recorded a temporary reduction in carrying value of $0.3 million and $2.6 million, respectively.  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.  We had a small settlement of our ARS in the three months ended June 30, 2009 of $0.1 million at full par value.

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:

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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 June 30, 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 June 30, 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 June 30, 2009. Our broker-dealer valued our ARS at 89% of par. We made inquiries relative to the measurements utilized to derive the estimated market values quoted on our brokerage 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 June 30, 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.

During three months ended June 30, 2009 we entered into forward contracts to buy U.S dollars at fixed intervals in the retail market in an over-the-counter environment.  As of June 30, 2009, we had foreign currency forward contracts to sell 5.2 million Euros in exchange for $6.9 million U.S. dollars maturing in July through November 2009.  As of June 30, 2009 these forward contracts are recorded at a value of $0.3 million in other accrued liabilities on our condensed consolidated balance sheet.  We have outstanding intercompany receivables from Conceptus SAS of $6.9 million as of June 30, 2009.  We expect the changes in the fair value of the intercompany receivables to be materially offset by the changes in the fair value of the derivatives.

The purpose of these forward contracts is to minimize the risk associated with foreign exchange rate fluctuations.  We have developed a foreign exchange policy to govern our forward contracts.  These foreign currency contracts do not qualify as cash flow hedges and all changes in fair value are reported in earnings as part of other income and expenses.  We have not entered into any other types of derivative financial instruments for trading or speculative purpose.  Our foreign currency forward contract valuation inputs are based on quoted prices and quoted pricing intervals from public data and do not involve management judgment.  Accordingly, we have classified our outstanding foreign currency forward contract within Level 2 of the fair value hierarchy and have recorded the fair value of the contract in other accrued liabilities on our consolidated balance sheet as of June 30, 2009.

For the six months ended June 30, 2008, we had assumed a forward exchange contract to hedge U.S. Dollar-denominated estimated accounts payable in 2008 in connection with the acquisition of Conceptus SAS.  We recorded the changes of the fair value of the hedge contract in our results of operations for the six months ended June 30, 2008.  The hedge contract was fully utilized by December 31, 2008.

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Assets and liabilities measured at fair value on a recurring basis at June 30, 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):

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) as of June 30, 2009 (in thousands):

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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.

Goodwill is tested for impairment on an annual bases or more frequent upon the occurrence of circumstances that indicate that goodwill assets might be impaired.  We did not record any impairment of goodwill during the three and six months ended June 30, 2009.

The changes in carrying amount of goodwill at June 30, 2009 are as follows (in thousands):

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

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

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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 six months ended June 30, 2009 and 2008 are as follows (in thousands):

8.              Stock-Based Compensation

Net loss for the three and six months ended June 30, 2009 included stock-based compensation expense under SFAS No. 123(R), Share-Based Payment, or SFAS 123(R), of approximately $1.5 million and $2.9 million, respectively,  which consisted of stock-based compensation expense of approximately $1.3 million and $2.5 million respectively related to employee stock options, employee stock purchase plan and stock appreciation rights and stock-based compensation expense of approximately $0.2 million and $0.4 million respectively related to employee restricted stock and restricted stock units.

Net loss for the three and six months ended June 30, 2008 included stock-based compensation expense under SFAS 123(R) of approximately $1.4 million and $2.9 million, respectively, which consisted of stock-based compensation expense of approximately $1.2 million and $2.5 million, respectively, related to employee stock options, employee stock purchase plan and stock appreciation rights and stock-based compensation expense of approximately $0.2 million and $0.4 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 $59,000 for the three months ended June 30, 2009 and 2008, respectively, and $48,000 and $114,000 for the six months ended June 30, 2009 and 2008, respectively.

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For the three and six months ended June 30, 2009 and 2008, we calculated the fair value of each 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 Appreciation Rights: During the three and six months ended June 30, 2009, we granted stock appreciation rights for 82,096 and 924,153 shares of common stock, with an estimated total grant date fair value of approximately $0.6 million and $4.8 million, respectively and a grant date weighted-average fair value of $6.90 and $5.16  per share, respectively.  During the three and six months ended June 30, 2008, we granted stock appreciation rights for 115,616 and 832,410 shares of common stock, respectively, with an estimated total grant date fair value of approximately $0.9 million and $6.3 million, respectively and a grant date weighted-average fair value of $7.73 and $7.55 per share, respectively.

Restricted Stock Units: In connection with restricted stock units, 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 and six months ended June 30, 2009, we granted 58,250 and 82,739 restricted stock units, with a grant-date fair value of approximately $0.7 million and $1.0 million, respectively, and a grant-date weighted-average fair value of $11.88 and $11.99, respectively.  During the three and six months ended June 30, 2008, we granted zero and 41,000 shares of restricted stock units, respectively, 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.  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):

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

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

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

(2) Estimated fair value is estimated based on the quoted market price of the underlying bond.

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 (in thousands, except per share amount) is as follows:

Three months ended June 30, 2008

Six months ended June 30, 2008

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The impact of the adoption of FSP APB 14-1 on the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2008 (in thousands) is as follows:

Six months ended June 30, 2008

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.  During the six months ended June 30, 2009 we have borrowed an additional $2.1 million under this line of credit.  Our loan balance as of June 30, 2009 is $32.1 million.  Our line of credit is payable on demand and we classify as short term; therefore, we believe the fair value equal the balance sheet value.  See Note 3 — Long-term Investments.

11.       Income Taxes

Our effective tax rate was 5% for the six months ended June 30, 2009 and 2% for the six months ended June 30, 2008.  The Company’s effective rate for the six months ended June 30, 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 June 30, 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.

For the three and six months ended June 30, 2009, we recorded approximately $0.1 million and $0.2 million of income tax expense, respectively, attributable to Conceptus SAS.   For the three and six months ended June 30, 2008, we recorded approximately $0.2 million of income tax expense, respectively, 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 June 30, 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.

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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, 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):

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 Income (Loss)

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

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

The balance of each component of accumulated other comprehensive loss, net of taxes, as of June 30, 2009 and December 31, 2008 consist of the following (in thousands):

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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):