Endologix
ENDOLOGIX INC /DE/ (Form: 10-Q, Received: 11/09/2006 16:34:32)
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 
FORM 10-Q
     
þ   Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended September 30, 2006.
     
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 000-28440
ENDOLOGIX, INC.
(Exact name of Registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
  68-0328265
(I.R.S. Employer
Identification Number)
11 Studebaker, Irvine, California 92618
(Address of principal executive offices)
(949) 595-7200
Registrant’s telephone number, including area code
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  þ 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):
Large accelerated filer o     Accelerated filer þ     Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
On October 16, 2006, there were 42,639,187 shares of the registrant’s only class of common stock outstanding.
 
 

 


 

ENDOLOGIX, INC.
Form 10-Q
September 30, 2006
TABLE OF CONTENTS
             
        Page  
Part I.
  Financial Information        
 
           
Item 1.
  Condensed Consolidated Financial Statements (Unaudited)        
 
           
 
  Condensed consolidated balance sheets at September 30, 2006 and December 31, 2005     3  
 
           
 
  Condensed consolidated statements of operations for the three and nine months ended September 30, 2006 and 2005     4  
 
           
 
  Condensed consolidated statements of cash flows for the nine months ended September 30, 2006 and 2005     5  
 
           
 
  Notes to condensed consolidated financial statements     6  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     18  
 
           
  Quantitative and Qualitative Disclosures about Market Risk     25  
 
           
  Controls and Procedures     25  
 
           
  Other Information        
 
           
  Other Information     26  
 
           
  Exhibits     26  
 
           
Signatures     27  
 
           
Exhibit Index     28  
  EXHIBIT 10.1
  EXHIBIT 10.2
  EXHIBIT 10.6.2
  EXHIBIT 31.1
  EXHIBIT 31.2
  EXHIBIT 32.1
  EXHIBIT 32.2

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ENDOLOGIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and par value amounts)
(Unaudited)
                 
    September 30,     December 31,  
    2006     2005  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 14,076     $ 8,191  
Restricted cash equivalents
    500       500  
Marketable securities available-for-sale, including unrealized gains (losses) of $1 and $(20)
    8,900       8,959  
Accounts receivable, net of allowance for doubtful accounts of $0 and $26
    2,629       1,248  
Other receivables
    88       175  
Inventories
    7,331       7,372  
Other current assets
    690       576  
 
           
Total current assets
    34,214       27,021  
 
           
Property and equipment, net
    4,645       4,490  
Marketable securities available-for-sale, including unrealized losses of $0 and $0
    800        
Goodwill
    4,631       4,631  
Intangibles, net
    10,670       11,724  
Other assets
    78       78  
 
           
Total assets
  $ 55,038     $ 47,944  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 3,115     $ 4,501  
 
           
Total current liabilities
    3,115       4,501  
Long term liabilities
    1,188       1,236  
 
           
Total liabilities
    4,303       5,737  
 
           
Commitments and contingencies (Note 12)
               
Stockholders’ equity:
               
Preferred stock, $0.001 par value; 5,000,000 shares authorized, no shares issued and outstanding
           
Common stock, $0.001 par value; 60,000,000 shares authorized, 43,134,000 and 36,679,000 shares issued, respectively, and 42,639,000 and 36,184,000 shares outstanding, respectively
    43       37  
 
               
Additional paid-in capital
    163,091       141,903  
Accumulated deficit
    (111,812 )     (99,120 )
Treasury stock, at cost, 495,000 shares
    (661 )     (661 )
 
               
Accumulated other comprehensive income
    74       48  
 
           
Total stockholders’ equity
    50,735       42,207  
 
           
Total liabilities and stockholders’ equity
  $ 55,038     $ 47,944  
 
           
See accompanying notes

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ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2006     2005     2006     2005  
Revenue:
                               
Product
  $ 3,748     $ 2,135     $ 9,869     $ 4,983  
License
    53       66       160       194  
 
                       
Total revenue
    3,801       2,201       10,029       5,177  
Cost of product revenue
    1,532       866       4,449       2,093  
 
                       
Gross profit
    2,269       1,335       5,580       3,084  
 
                       
Operating expenses:
                               
Research, development and clinical
    1,628       1,513       5,145       4,346  
Marketing and sales
    4,023       2,588       9,773       5,680  
General and administrative
    1,167       1,114       4,093       3,344  
 
                       
Total operating expenses
    6,818       5,215       19,011       13,370  
 
                       
Loss from operations
    (4,549 )     (3,880 )     (13,431 )     (10,286 )
 
                       
Other income:
                               
Interest income
    352       208       719       420  
Other income
    5       5       20        
 
                       
Total other income
    357       213       739       420  
 
                       
Net loss
  $ (4,192 )   $ (3,667 )   $ (12,692 )   $ (9,866 )
 
                       
Basic and diluted net loss per share
  $ (0.10 )   $ (0.10 )   $ (0.32 )   $ (0.30 )
 
                       
Shares used in computing basic and diluted net loss per share
    42,626       35,813       39,124       33,223  
 
                       
See accompanying notes

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ENDOLOGIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
                 
    Nine Months Ended  
    September 30,  
    2006     2005  
Cash flows from operating activities:
               
Net loss
  $ (12,692 )   $ (9,866 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    1,708       1,225  
Amortization of stock-based compensation
    1,076       67  
Change in:
               
Accounts receivable
    (1,381 )     (956 )
Inventories
    153       (3,347 )
Other receivables and other assets
    (27 )     (145 )
Accounts payable, accrued expenses and long term liabilities
    (1,434 )     1,249  
 
           
Net cash used in operating activities
    (12,597 )     (11,773 )
 
           
Cash flows provided by investing activities:
               
Purchases of available-for-sale securities
    (11,159 )     (10,733 )
Sales of available-for-sale securities
    10,441       15,714  
Cash paid for property and equipment
    (809 )     (2,989 )
Increase in restricted cash
          (500 )
 
           
Net cash (used in) provided by investing activities
    (1,527 )     1,492  
 
           
Cash flows provided by financing activities:
               
Proceeds from sale of common stock, net of expenses
    18,753       15,497  
Proceeds from sale of common stock under employee stock purchase plan
    319       164  
Proceeds from exercise of common stock options
    934       95  
 
           
Net cash provided by financing activities
    20,006       15,756  
 
           
Effect of exchange rate changes on cash and cash equivalents
    3       (116 )
 
           
Net increase in cash and cash equivalents
    5,885       5,359  
Cash and cash equivalents, beginning of period
    8,191       4,831  
 
           
Cash and cash equivalents, end of period
  $ 14,076     $ 10,190  
 
           
See accompanying notes

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT AND NUMBER OF YEARS)
(Unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results of the periods presented have been included. Operating results for the unaudited three and nine-month period ended September 30, 2006 are not necessarily indicative of results that may be expected for the year ending December 31, 2006 or any other period. For further information, including information on significant accounting policies and use of estimates, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. For the nine months ended September 30, 2006, the Company incurred a net loss of $12,692. As of September 30, 2006, the Company had an accumulated deficit of $111,812. Historically, the Company has relied on the sale and issuance of equity securities to provide a significant portion of funding for its operations. In April 2006, the Company filed a shelf registration statement with the Securities and Exchange Commission that would permit from time to time, the Company to offer and sell up to a total of $50,000 of common stock. In June 2006, the Company completed a sale of its common stock that resulted in gross proceeds of $20,000.
At September 30, 2006, the Company had cash, cash equivalents, restricted cash equivalents and marketable securities available for sale of $24,276. The Company believes that its current cash balance, in combination with cash receipts generated from sales of the Powerlink ® System, will be sufficient to fund ongoing operations through at least December 31, 2007. However, if the Company does not realize its expected revenue and gross margin levels, or if the Company is unable to manage its operating expenses in line with its revenues, it may require additional financing to fund its operations.
In the event that the Company requires additional funding, it would attempt to raise the required capital through either debt or equity arrangements. The Company cannot provide any assurance that the required capital would be available on acceptable terms, if at all, or that any financing activity would not be dilutive to its current stockholders. If the Company were not able to raise additional funds, it would be required to significantly curtail its operations which would have an adverse effect on its financial position, results of operations and cash flows.
2. Stock-Based Compensation
Effective January 1, 2006, the Company adopted Financial Accounting Standards Board Statement No. 123(R) “Share Based Payment,” or FAS 123R. FAS 123R establishes the accounting required for share based compensation, and requires companies to measure and recognize compensation expense for all share-based payments at the grant date based on the fair value of the award. This compensation expense shall be included in the statement of operations over the requisite service

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
period. The provisions of FAS 123R apply to new stock options and stock options outstanding, but not yet vested on the effective date. For all unvested options outstanding as of January 1, 2006, compensation expense previously measured under Statement of Financial Accounting Standards No. 123, or FAS 123, “Accounting for Stock-Based Compensation,” but unrecognized, will be recognized using the straight-line method over the remaining vesting period. For share-based payments granted subsequent to January 1, 2006, compensation expense, based on the fair value on the date of grant, as defined by FAS 123R, will be recognized using the straight-line method from the date of grant over the service period of the employee receiving the award.
FAS 123R requires the estimation of forfeitures when recognizing compensation expense and that this estimate of forfeitures be adjusted over the requisite service period should actual forfeitures differ from such estimates. Changes in estimated forfeitures are recognized through a cumulative catch-up adjustment, which is recorded in the period of change and which impacts the amount of unamortized compensation expense to be recognized in future periods. Share-based compensation expense recognized in the Company’s consolidated statements of operations in 2006 includes (i) compensation expense for share-based payment awards granted prior to, but not vested as of December 31, 2005, based on the grant-date fair value estimated in accordance with the pro forma provisions of FAS 123 and (ii) compensation expense for the share-based payment awards granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the provisions of FAS 123R. As share-based compensation expense recognized in the consolidated statement of operations for the first three quarters of fiscal 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. In the Company’s pro forma information required by FAS 123 for the periods prior to fiscal year 2006, the Company accounted for forfeitures as they occurred.
The Company elected to adopt FAS 123R using the modified prospective application approach which requires the Company to value unvested stock options granted prior to its adoption of FAS 123R under the fair value method and expense these amount in the statement of operations over the stock option’s remaining vesting period. Prior periods are not required to be restated. Prior to the effective date of FAS 123R the Company applied the disclosure-only provisions of FAS 123. In accordance with the provision of FAS 123, the Company applied Accounting Principles Board Opinion No. 25, or APB 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option plans. Under the provisions of APB 25, the Company recognized compensation expense only to the extent that the exercise price of the Company’s employee stock options is less than the market price of the underlying stock at date of grant.
The Company uses the Black-Scholes option pricing model which requires extensive use of financial estimates and accounting judgment, including estimates of the expected period of time employees will retain their vested stock options before exercising them, the expected volatility of the Company’s common stock over the expected term, and the number of shares that are expected to be forfeited before they are vested. Application of alternative assumptions could produce significantly different estimates of the fair value of the stock-based compensation and as a result, significantly different results recognized in the consolidated statements of operations.

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
The following assumptions were used to estimate the fair value of stock options granted using the Black-Scholes valuation method:
         
    Nine Months Ended
    September 30,
    2006
Expected Life (in years) (1)
    5.5  
Expected Volatility (2)
    68.8%-77.3 %
Risk Free Interest Rate (3)
    4.6%-5.0 %
Dividend Yield (4)
    0.0 %
 
1)   Estimated based on historical experience.
 
2)   Volatility based on historical experience over a period equivalent to the expected life in years.
 
3)   Based on the US Treasury constant maturity interest rate with a term consistent with the expected life of the options granted.
 
4)   The Company does not pay dividends on its common stock and the Company currently does not have any plans to pay or declare any cash dividends.
Pursuant to the Company’s 1996 Stock Option/Issuance Plan (the “1996 Plan”) and the Company’s 2006 Stock Incentive Plan (the “2006 Plan”), either incentive stock options or non-qualified options awards may be granted and under the 1997 Supplemental Stock Option Plan (the “1997 Plan” and together with the 1996 Plan and 2006 Plan, the “Plans”), non-qualified option awards may be granted. Under the Plans, options are granted at a price not less than 100% for incentive stock options and 85% for non-qualified stock options of the value of the Company’s common stock on the date of grant and are exercisable over a maximum term of ten years from the date of grant and generally vest over a four-year period. At September 30, 2006, there were approximately 1,920 shares of common stock available for future stock option grants.
The following table summarizes option activity for all plans during the first nine months of 2006:
                                 
            Weighted   Weighted    
            Average   Average    
            Exercise   Remaining   Aggregate
            Price per   Contractual   Intrinsic
    Shares   Share   Life (Years)   Value
 
Outstanding at December 31, 2005
    2,678     $ 4.53                  
Granted
    1,126       3.75                  
Exercised
    (316 )     2.95                  
Forfeited
    (166 )     4.74                  
Expired
    (6 )     2.50                  
 
Outstanding at September 30, 2006
    3,316     $ 4.41       7.73     $ 1,154  
 
Exercisable at September 30, 2006
    1,470     $ 4.48       5.99     $ 650  
 
Vested or expected to vest
    2,866     $ 4.44       7.49     $ 1,015  
 

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
The weighted average fair value per option granted during the three months ended September 30, 2006 and 2005 was $2.54 and $3.29, respectively. During the nine months ended September 30, 2006 and 2005, the weighted average fair value per option granted was $2.53 and $3.56, respectively. These amounts were estimated using the Black-Scholes option pricing model with the assumptions listed above. The aggregate intrinsic value of stock options exercised, represented in the table above, was $1 and $1,347 for the three and nine months ended September 30, 2006, respectively. The stock options granted during the third quarter of 2006 were outstanding for only a portion of the period, and as such, the compensation expense recognized was only for the period that the options were outstanding. As of September 30, 2006 there was $4,109 of total unrecognized compensation cost related to approximately 1,944 non-vested outstanding stock options, with a per share weighted average fair value of $2.11. The unrecognized expense is anticipated to be recognized over a weighted average period of 3.1 years.
Expense recorded pursuant to FAS 123R during was as follows:
                 
    Three Months     Nine Months  
    Ended     Ended  
    September 30,     September 30,  
    2006     2006  
General and Administrative
  $ 123     $ 485  
Marketing and Sales
    124       304  
Research, Development, and Clinical
    92       255  
Cost of Sales
    4       35  
 
           
 
  $ 343     $ 1,079  
In addition, the Company has $112 of stock based compensation capitalized in inventory as of September 30, 2006.
Had the Company previously recognized compensation costs as prescribed by FAS 123, previously reported net loss, basic earnings per share and diluted earnings per share would have changed to the pro forma amounts shown for the three and nine months ended September 30, 2005, as follows:

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
         
    Three Months
    Ended
    September 30,
    2005
Net loss
       
as reported
  $ (3,667 )
Pro forma fair value expense
    (648 )
 
       
 
       
Pro forma net loss
  $ (4,315 )
 
       
Earnings per share:
       
Basic and diluted-as reported
  $ (0.10 )
Basic and diluted-pro forma
  $ (0.12 )
         
    Nine Months
    Ended
    September 30,
    2005
Net loss
       
as reported
  $ (9,866 )
Pro forma fair value expense
    (1,514 )
 
       
Pro forma net loss
  $ (11,380 )
 
Earnings per share:
       
Basic and diluted-as reported
  $ (0.30 )
Basic and diluted-pro forma
  $ (0.34 )
The Company accounts for non-employee stock-based awards, in which goods or services are the consideration received for the stock options issued, in accordance with the provisions of SFAS No. 123R and EITF 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” Compensation expense for non-employee stock-based awards is recognized in accordance with FASB Interpretation 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Options or Award Plans, an Interpretation of APB Opinions No. 15 and 25,” or FIN 28. The Company records compensation expense based on the then-current fair values of the stock options at each financial reporting date. Compensation recorded during the service period is adjusted in subsequent periods for changes in the stock options’ fair value until the options vest.

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
Under the 2004 Performance Compensation Plan (the “Performance Plan”), Performance Units are granted at a discount to the fair market value (as defined in the Performance Plan) of the Company’s common stock on the grant date (“Base Value”). The Performance Units vest over three-years; one-third vests at the end of the first year, and the remainder vests ratably on a quarterly basis. The difference between the twenty-day average closing market price of the Company’s common stock and the Base Value of the vested Performance Unit will be payable in cash at the first to occur of (a) a change of control (as defined in the Performance Plan), (b) the termination of employment for any reason other than Cause (as defined in the Performance Plan), or (c) upon exercise of the Performance Unit, which cannot occur until eighteen months from the grant date.
There were no Performance Units granted during the three and nine month periods ended September 30, 2006. The Company granted a total of 0 and 180 Performance Units at a weighted average Base Value per unit of $0 and $3.33, during the three and nine months ended September 30, 2005. The total accrued compensation expense as of September 30, 2006 was $286, at which time there were an aggregate of 273 Performance Units outstanding. The total accrued compensation expense as of December 31, 2005, was $923 and there were 363 total Performance Units outstanding. The Company recorded a reduction of expense totalling $98 and $467 for the three months and nine months ended September 30, 2006, respectively, and a reduction of expense of $233 and $171 for the three months and nine months ended September 30, 2005, respectively, in accordance with FIN 28. During the three months and nine months ended September 30, 2006, 10 and 48 Performance Units were exercised resulting in a payout of $2 and $168, respectively. The expense was included in marketing and sales expense in the consolidated statements of operations. The Company records changes in the estimated compensation expense over the vesting period of the Performance Units, and once fully vested, records the difference between the closing market price of the Company’s common stock and the Base Value as compensation expense each period until exercised.
3. Net Income (Loss) Per Share
Net income (loss) per common share is computed using the weighted average number of common shares outstanding during the periods presented. Certain options with an exercise price below the average market price for the three and nine month periods ended September 30, 2006 and the three and nine month periods ended September 30, 2005 have been excluded from the calculation of diluted earnings per share, as they are anti-dilutive. If anti-dilutive stock options were included for the three months ended September 30, 2006 and 2005, the number of shares used to compute diluted net loss per share would have been increased by approximately 210 shares and 458 shares, respectively. In addition, options to purchase 2,140 shares and 1,068 shares, respectively, with an exercise price above the average market price for the three months ended September 30, 2006 and 2005, respectively, were excluded from the computation of diluted loss per share because the effect would also have been anti-dilutive.
If anti-dilutive stock options were included for the nine months ended September 30, 2006 and 2005, the number of shares used to compute diluted net loss per share would have been increased by approximately 320 shares and 551 shares, respectively. In addition, options to purchase 1,662 shares and 722 shares, respectively, with an exercise price above the average market price for the nine

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
months ended September 30, 2006 and 2005, respectively, were excluded from the computation of diluted loss per share because the effect would also have been anti-dilutive.
4. Restricted Cash Equivalents
The Company has a $500 line of credit with a bank in conjunction with a corporate credit card agreement. At September 30, 2006, the Company had pledged all of its cash equivalents held at the bank as collateral on the line of credit. Per the agreement, the Company must maintain a balance of at least $500 in cash and cash equivalents with the bank.
5. Marketable Securities Available-For-Sale
The Company accounts for its investments pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.”
The Company has classified its entire investment portfolio as available-for-sale. Available-for-sale securities are stated at fair value with unrealized gains and losses recorded in accumulated other comprehensive income. Management evaluates the classification of its securities based on the Company’s short-term cash needs. The cost of securities sold is based on the specific identification method. During the three and nine month periods ended September 30, 2006 and 2005, the Company had no realized gains or losses.
The Company’s investments in debt securities are diversified among high credit quality securities in accordance with the Company’s investment policy. A major financial institution manages the Company’s investment portfolio. As of September 30, 2006, $8,600 and $1,100 of the Company’s debt securities had original contractual maturities more than 90 days and less than one year, and between one to two years, respectively. As of December 31, 2005, $3,490 and $5,469 of the Company’s debt securities had original contractual maturities more than 90 days and less than one year, and between one to two years, respectively.
                                                 
    September 30, 2006     December 31, 2005  
            Gross                     Gross        
            Unrealized                     Unrealized        
            Holding     Fair             Holding     Fair  
    Cost     Gain     Value     Cost     Loss     Value  
U.S. Treasury and other agencies debt securities
  $ 0     $ 0     $ 0     $ 5,573     $ (14 )   $ 5,559  
Corporate debt securities
    9,699       1       9,700       3,406       (6 )     3,400  
 
                                   
 
  $ 9,699     $ 1     $ 9,700     $ 8,979     $ (20 )   $ 8,959  
 
                                   

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
6. Inventories
Inventories are stated at the lower of cost, determined on a first in, first out basis, or market value. Inventories consist of the following:
                 
    September 30,     December 31,  
    2006     2005  
Raw materials
  $ 1,421     $ 3,885  
Work-in-process
    2,896       1,361  
Finished goods
    3,014       2,126  
 
           
 
  $ 7,331     $ 7,372  
 
           
Inventory reserves, primarily associated with the voluntary catheter recall, were $36 and $426 as of September 30, 2006 and December 31, 2005, respectively.
7. License Revenue
In June 1998, the Company licensed to Guidant Corporation, an international interventional cardiology products company, the right to manufacture and distribute stent delivery products using the Company’s Focus technology. In April 2006, Abbot Laboratories acquired Guidant’s vascular business. This acquisition included all rights under licenses. The Company receives royalty payments based upon the sale of products using the Focus technology. The agreement includes minimum annual royalties of $250 and expires in 2008. During the three months ended September 30, 2006 and 2005, the Company recorded $53 and $66, respectively, in license revenue due on product sales by Guidant or Abbott Laboratories. During the nine months ended September 30, 2006 and 2005, the Company recorded $160 and $194, respectively, in license revenue due on product sales by Guidant or Abbott Laboratories.
8. Product Revenue by Geographic Region
The Company had product sales, based on the locations of the customer, by region as follows:

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
                                 
    Three Months     Nine Months  
    Ended September 30,     Ended September 30,  
    2006     2005     2006     2005  
United States
  $ 3,376     $ 1,581     $ 8,269     $ 3,099  
Netherlands
    258       538       1,136       1,807  
Other
    114       16       464       77  
 
                       
 
  $ 3,748     $ 2,135     $ 9,869     $ 4,983  
 
                       
Product sales to the Netherlands are to a distributor which sells into selected European markets.
9. Concentrations of Credit Risk and Significant Customers
During the three months ended September 30, 2006, no single customer accounted for more than 10% of total revenues. During the nine months ended September 30, 2006, revenue from Edwards Lifesciences AG was $1,136, which represented 11% of total revenues. During the three and nine months ended September 30, 2005, revenues from Edwards Lifesciences AG were $467 and $1,341, which represented 21% and 26% of total revenues, respectively. No other single customer in the three month and nine month periods ended September 30, 2006 or 2005 accounted for more than 10% of total revenues.
As of September 30, 2006 and December 31, 2005, no single customer accounted for more than 10% of the Company’s accounts receivable balance.
10. Comprehensive Loss
The Company’s comprehensive loss included the following:
                                 
    Three Months     Nine Months  
    Ended September 30,     Ended September 30,  
    2006     2005     2006     2005  
Net loss
  $ (4,192 )   $ (3,667 )   $ (12,692 )   $ (9,866 )
Unrealized holding gain/(loss) arising during the period, net
    9       (6 )     23       14  
Foreign currency translation adjustment
    (9 )     (79 )     3       (116 )
 
                       
Comprehensive loss
  $ (4,192 )   $ (3,752 )   $ (12,666 )   $ (9,968 )
 
                       

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
11. Intangible Assets and Goodwill
The following table details the intangible assets, estimated lives, related accumulated amortization and goodwill:
                 
    September 30, 2006     December 31, 2005  
Developed technology (10 year life)
  $ 14,050     $ 14,050  
Accumulated amortization
    (6,088 )     (5,034 )
 
           
 
    7,962       9,016  
 
               
Trademarks and trade names (Indefinite life)
    2,708       2,708  
 
           
Intangible assets, net
  $ 10,670     $ 11,724  
 
           
 
               
Goodwill, (Indefinite life)
  $ 4,631     $ 4,631  
 
           
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill and other intangible assets with indeterminate lives are no longer subject to amortization but are tested for impairment annually or whenever events or changes in circumstances indicate that the asset might be impaired. The Company most recently performed its annual impairment analysis as of June 30, 2006 and will continue to test for impairment annually as of June 30 for each subsequent year. No impairment was indicated in the last analysis. Intangible assets with finite lives continue to be subject to amortization, and any impairment is determined in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”
The Company recognized amortization expense on intangible assets of $351 and $351 during the three months ended September 30, 2006 and 2005, respectively. The Company recognized amortization expense on intangible assets of $1,054 and $1,054 during the nine months ended September 30, 2006 and 2005, respectively. Estimated amortization expense for the remainder of 2006 and the five succeeding fiscal years is as follows:
         
2006
  $ 351  
2007
  $ 1,405  
2008
  $ 1,405  
2009
  $ 1,405  
2010
  $ 1,405  
2011
  $ 1,405  

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ENDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT, AND NUMBER OF YEARS)
(Continued)
(Unaudited)
12. Commitments and Contingencies
Sole-Source, Related-Party Supplier Agreement
     In February 1999, the former Endologix entered into a supply agreement with Bard Peripheral Vascular, Inc., a subsidiary of C.R. Bard, Inc. to purchase a key component for its Powerlink System. The agreement expires in December 2007 and then automatically renews for additional one year periods, unless a party provides notice not to renew at least thirty days prior to the renewal period. Under the terms of a second amendment to the supply agreement dated September 8, 2006, the minimum purchase requirements were reduced and the Company must purchase a certain dollar value of the component for the year, as opposed to quantity of units, for the remaining term of the agreement.
     Under the terms of the second amendment, the Company must purchase a minimum of $2,500 of material in 2006 and $2,875 of material in 2007. During the three months and nine months ended September 30, 2006, the Company purchased approximately $366 and $646, respectively, of such materials toward fulfilling its 2006 purchase commitments. The Company will complete its 2006 commitment by purchasing an additional $1,854 of the material. The Company is economically dependent on this vendor, which is the sole source for this key component.
Legal Matters
     A state court product liability action was served on the Company on October 7, 2003, in the Circuit Court of Cook County, Illinois. Plaintiff seeks damages for pain and suffering, disability and disfigurement, loss of enjoyment of life and loss of capacity to earn a living. Plaintiff claims these injuries arose on or about October 1, 2001, following an abdominal aortic aneurysm repair with a graft designed, manufactured and distributed by the Company. Compensatory damages together with interest, costs and disbursements are sought. Punitive damages are not sought. The Company maintains insurance for compensatory damages for claims of this nature. The Company is contesting the case vigorously. The parties are currently engaged in oral discovery. At the present stage of this matter, management is unable to estimate possible minimum or maximum amounts of loss contingencies, direct or indirect, in regard to this lawsuit. The Company views the prospect of an unfavorable outcome as not probable at this time; accordingly, the Company has not accrued a loss contingency as of September 30, 2006.
     The Company is a party to ordinary disputes arising in the normal course of business. Management believes that the outcome of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.

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NDOLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE, PER UNIT AND NUMBER OF YEARS)
(Unaudited)
      13. Recent Accounting Pronouncements
     In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, or SFAS 157, “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is currently evaluating the impact of SFAS 157.
     In July 2006, the Financial Accounting Standards Board issued Interpretation Number 48, or FIN 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Company’s 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its financial statements.

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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In addition to the historical financial information included herein, this Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that are based on management’s beliefs, as well as on assumptions made by and information currently available to management. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including without limitation, statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and statements located elsewhere herein regarding our financial position and business strategy, may constitute forward-looking statements. You generally can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “may,” “will,” “expects,” “intends,” “estimates,” “anticipates,” “plans,” “seeks,” or “continues,” or the negative thereof or variations thereon or similar terminology. Such forward-looking statements involve known and unknown risks, including, but not limited to, market acceptance of our sole technology, the Powerlink ® System, economic and market conditions, the regulatory environment in which we operate, the availability of third party payor medical reimbursements, competitive activities or other business conditions. Our actual results, performance or achievements may differ materially from any future results, performance or achievements expressed or implied from such forward-looking statements. Important factors that could cause actual results to differ materially from our expectations are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005, including but not limited to those factors discussed in “Item 1A. Risk Factors.” All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. We do not undertake any obligation to update information contained in any forward-looking statement.
Overview
Organizational History
     We were formed in 1992 as Cardiovascular Dynamics, Inc., and our common stock began trading publicly in 1996. The current Endologix, Inc. resulted from the May 2002 acquisition of all of the capital stock of a private company, Endologix, Inc., which we refer to herein as the former Endologix, and the subsequent change of our company name from Radiance Medical Systems, Inc. to Endologix, Inc.
Our Business
     We are engaged in the development, manufacture, sale and marketing of minimally invasive therapies for the treatment of vascular disease. Our primary focus is the development of the Powerlink ® System, a catheter-based alternative treatment to surgery for abdominal aortic aneurysms, or AAA. AAA is a weakening of the wall of the aorta, the largest artery of the body. Once AAA develops, it continues to enlarge and if left untreated becomes increasingly susceptible to rupture. The overall patient mortality rate for ruptured AAA is approximately 75%, making it the 13th leading cause of death in the United States.
     The Powerlink System is a catheter and endoluminal stent graft, or ELG system. The self-expanding cobalt chromium alloy cage is covered by ePTFE, a commonly-used surgical graft

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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued).
material. The Powerlink ELG is implanted in the abdominal aorta by gaining access through the femoral artery. Once deployed into its proper position, the blood flow is shunted away from the weakened or “aneurismal” section of the aorta, reducing pressure and the potential for the aorta to rupture. We believe that implantation of the Powerlink System will reduce the mortality and morbidity rates associated with conventional AAA surgery. We are currently selling the Powerlink System in the United States and Europe, and in other selected markets.
     In 2005, the Japanese Ministry of Health notified us that although they believed the clinical results of the PowerWeb study were good, the structure of the clinical trial was such that they would not grant Shonin Approval for the PowerWeb System. They requested that we submit the data on the FDA-approved Powerlink System and that we would be able to utilize the clinical results from the PowerWeb trial as supplementary data. This permitted us to submit our Powerlink System data for Shonin approval without the need for an additional clinical trial, and upon approval will permit us to have a single technology platform for Europe, the U.S. and Japan. We estimate that we will receive Shonin approval by the end of 2006. Following Shonin approval and the establishment of hospital reimbursement, which we expect to be in place by the second half of 2007, we will commence commercial distribution.
     We also continue to conduct clinical trials for the suprarenal Powerlink System and for other products related to the Powerlink System. As of September 30, 2006, 144 of the 193 patients required have been enrolled for the second arm of a U.S. Pivotal Phase II clinical trial for the suprarenal Powerlink System. As of September 30, 2006, 39 of the 60 patients have been enrolled in a U.S. Pivotal Phase II clinical trial utilizing a 34 mm proximal cuff in conjunction with a commercial bifurcated Powerlink System to treat patients with large aortic necks. We believe that approximately 10-15% of all potential patients are refused minimally invasive treatment due to anatomic considerations.
     We have experienced an operating loss for each of the last five years and expect to continue to incur operating losses for at least the next twelve months. Our business is subject to a number of challenges inherent in a company with a single technology which was recently introduced on a commercial basis, such as the difficulty in predicting physician acceptance of our product and the difficulty of planning for the growth of our operations relative to the market demand for our product. Consequently, our results of operations have varied significantly from quarter to quarter, and we expect that our results of operations will continue to vary significantly in the future.
Other Matters
Accounting Changes
     We began expensing the cost of stock based compensation on January 1, 2006, when it adopted Financial Accounting Standards Board Statement No. 123(R), “Share Based Payment,” or FAS 123R. See Note 2 to the Condensed Consolidated Financial Statements for information regarding this accounting change.

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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued).
Results of Operations
Comparison of the Three Months Ended September 30, 2006 and 2005
      Product Revenue . Product revenue increased 76% to $3.7 million in the three months ended September 30, 2006 from $2.1 million in the three months ended September 30, 2005. Domestic sales increased 114% to $3.4 million in the three months ended September 30, 2006 from $1.6 million in the three months ended September 30, 2005. The increase in domestic sales was due to our investment in additional field sales personnel, and increased market acceptance of the Powerlink System.
     International sales decreased 33% to $372,000 in the three months ended September 30, 2006 from $554,000 for the comparable period in the prior year. This decrease is primarily due to lower sales to Edwards Lifesciences AG in the three months ended September 30, 2006 as compared to the three months ended September 30, 2005. Edwards Lifesciences AG has informed us that they will not renew our distribution agreement beyond its current expiration at December 31, 2006, other than to assist us and their hospital customers in a transition to a new arrangement for supplying the Powerlink System in these territories.
     We expect that product revenue will continue to grow, both sequentially and compared to prior year periods, particularly in the U.S. market where we continue to develop and expand our direct sales force.
      License Revenue . License revenue decreased 20% to $53,000 for the three months ended September 30, 2006 from $66,000 for the three months ended September 30, 2005. We anticipate that license revenue will remain approximately unchanged in 2006 as compared to comparable periods in 2005. The agreement with Guidant, which was assumed by Abbott Laboratories in connection with its acquisition of Guidant’s vascular business, expires in 2008, unless terminated sooner, and provides for minimum annual royalties of $250,000.
      Cost of Product Revenue . The cost of product revenue increased 77% to $1.5 million in the three months ended September 30, 2006 from $866,000 in the three months ended September 30, 2005. Cost of product revenue increased due to the increase in volume of Powerlink System sales. As a percentage of product revenue, cost of product revenue remained relatively consistent at 41% in the third quarter of 2006 as compared to 42% in the same period of 2005. The percentage decrease was primarily due to higher average selling prices for the Powerlink System in the U.S. commercial market. Average selling prices are higher to U.S. customers because we sell direct to hospitals, while international sales are made to distributors. By year end 2006, however, we expect this cost percentage to increase as we expect to recognize the higher cost of acquisition of a key component of the Powerlink System, which we purchase from Bard Peripheral Vascular, Inc., or BPVI, a subsidiary of C.R. Bard, Inc. and as we recognize additional costs associated with FAS 123(R).
      Research, Development and Clinical. Research, development and clinical expense increased 8% to $1.6 million in the three months ended September 30, 2006 as compared to $1.5 million for the three months ended September 30, 2005. The increase in the third quarter of 2006 was primarily due to a $92,000 charge for stock compensation expense pursuant to the adoption of SFAS 123(R) at January 1, 2006.

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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued).
     Also, we continue to conduct product research and development of our Powerlink System product line and complementary technologies, and we anticipate continuing enrollment in the suprarenal arm of the pivotal U.S. clinical trials throughout 2006. We began enrollment in a third arm of our pivotal U.S. clinical trials for study of a larger diameter cuff in the third quarter of 2005. We expect that research, development, and clinical expense will remain in the range of $1.6 million to $1.8 million during the remaining quarter of 2006.
      Marketing and Sales . Marketing and sales expense increased 55% to $4.0 million in the three months ended September 30, 2006 from $2.6 million in the three months ended September 30, 2005. The increase in the third quarter of 2006 resulted primarily from the expansion of our sales force and marketing expenditures to support the U.S. commercial launch of the Powerlink System, somewhat offset by lower European sales and marketing expenses. We anticipate that marketing and sales expense will increase over the remainder of 2006 and will be materially higher than the comparable periods of 2005 as we continue to increase the size of our direct sales force in the U.S. market. Additionally, the increase in the third quarter of 2006 was partially due to a $124,000 charge for stock compensation expense pursuant to the adoption of SFAS 123(R) at January 1, 2006.
      General and Administrative . General and administrative expense increased 5% to $1.2 million in the three months ended September 30, 2006, from $1.1 million in the three months ended September 30, 2005. The increase in the third quarter of 2006 was due to a $123,000 charge for stock compensation expense pursuant to the adoption of SFAS 123(R) at January 1, 2006, partially offset by a decrease in consulting fees. We expect general and administrative expense to increase to the $1.3 million to $1.5 million range in the next two quarters as the majority of costs related to compliance with Section 404 of the Sarbanes-Oxley Act is incurred during these periods.
      Other Income . Other income increased 68% to $357,000 in the three months ended September 30, 2006, from $213,000 in the same period of 2005. The increase in other income was generated primarily from interest income resulting from higher interest rates and higher invested cash balances in the 2006 period. We expect that interest income will decline in upcoming quarters as the level of invested cash decreases.
      Comparison of the Nine Months Ended September 30, 2006 and 2005
      Product Revenue . Product revenue increased 98% to $9.9 million in the nine months ended September 30, 2006 from $5.0 million in the nine months ended September 30, 2005. Domestic sales increased 167% to $8.3 million in the nine months ended September 30, 2006 from $3.1 million in the nine months ended September 30, 2005. The increase in domestic sales was due to our investment in additional field sales personnel, and increased acceptance of the Powerlink System.
     International sales declined 15% to $1.6 million in the nine months ended September 30, 2006 from $1.8 million for the comparable period in the prior year. This decrease is due to lower sales to European distributors during the first nine months of 2006.
      License Revenue . License revenue decreased 18% to $160,000 for the nine months ended September 30, 2006 from $194,000 for the nine months ended September 30, 2005. The agreement with Guidant, which was assumed by Abbott Laboratories, expires in 2008, unless terminated sooner, and provides for minimum annual royalties of $250,000.

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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued).
      Cost of Product Revenue . The cost of product revenue increased 113% to $4.4 million in the nine months ended September 30, 2006 from $2.1 million in the nine months ended September 30, 2005. Cost of product revenue increased due to the increase in volume of Powerlink System sales and because of a charge of $326,000 for a reserve to complete the final phase of our limited catheter recall. As a percentage of product revenue, cost of product revenue increased to 45% in the nine months ended September 30, 2006 from 42% in the same period of 2005. The percentage increase was partially offset by higher average selling prices for the Powerlink System in the U.S. commercial market.
      Research, Development and Clinical. Research, development and clinical expense increased 18% to $5.1 million in the nine months ended September 30, 2006 as compared to $4.3 million for the nine months ended September 30, 2005. The increase primarily resulted from continued product research and development of our Powerlink System product line and complimentary technologies, and continued enrollment in the suprarenal arm of the pivotal U.S. clinical trials. A $255,000 charge for stock compensation expense pursuant to the adoption of SFAS 123(R) at January 1, 2006, also contributed to the increase.
      Marketing and Sales . Marketing and sales expense increased 72% to $9.8 million in the nine months ended September 30, 2006 from $5.7 million in the nine months ended September 30, 2005. The increase resulted primarily from the expansion of our sales force and sales support work force to support the ongoing U.S. commercial launch of the Powerlink System, somewhat offset by lower European sales and marketing expenses. Additionally, the increase was partially due to a $304,000 charge for stock compensation expense pursuant to the adoption of SFAS 123(R) at January 1, 2006.
      General and Administrative . General and administrative expense increased 22% to $4.1 million in the nine months ended September 30, 2006, from $3.3 million in the nine months ended September 30, 2005. The increase was partially due to a $485,000 charge for stock compensation expense pursuant to the adoption of SFAS 123(R) at January 1, 2006, as well as increases in headcount to support infrastructure growth, and recruiting fees.
      Other Income . Other income increased 76% to $739,000 in the nine months ended September 30, 2006, from $420,000 in the same period of 2005. The increase in other income related primarily to increased interest income due to higher interest rates and higher invested cash balances in the 2006 period.
Liquidity and Capital Resources
     For the nine months ended September 30, 2006, we incurred a net loss of $12.7 million. As of September 30, 2006, we had an accumulated deficit of $111.8 million. Historically, we have relied on the sale and issuance of equity securities to provide a significant portion of funding for our operations. In 2004 and 2005, we completed two private placements of our common stock, which resulted in aggregate net proceeds of $30.9 million.
     In April 2006, we filed a shelf registration statement with the Securities and Exchange Commission that permits us to offer and sell from time to time up to a total of $50.0 million of our common stock. In June 2006, we completed a registered direct public offering of our common stock that resulted in gross proceeds to us of $20.0 million.

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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued).
     At September 30, 2006, we had cash, cash equivalents, restricted cash equivalents and marketable securities available for sale of $24.3 million. We believe that current cash and cash equivalents and marketable securities, together with cash receipts generated from sales of the Powerlink System, will be sufficient to meet anticipated cash needs for operating and capital expenditures until Endologix becomes cash flow positive. However, we expect to continue to incur substantial costs and cash outlays in the remainder of 2006 and 2007 to support our operations, and U.S. marketing of the Powerlink System. In the event that our revenues are less than anticipated, our expenses are greater than anticipated, or both, we may be required to seek additional financing to support our operations and the expanded commercial launch of the Powerlink System. We may not be able to obtain such financing on reasonable terms or at all, which would adversely affect the operation of our business and execution of our business strategy. In addition, any such financing, if completed, may dilute existing stockholders.
     We believe that our future cash and capital requirements may be difficult to predict and will depend on many factors, including:
    continued market acceptance of the Powerlink System;
 
    our ability to successfully expand our commercial launch of the Powerlink System;
 
    the development of sales and marketing resources;
 
    the success of our research and development programs for future products;
 
    the clinical trial and regulatory approval processes for future products;
 
    the costs involved in intellectual property rights enforcement or litigation;
 
    the level of hospital reimbursement for ELG procedures and other competitive factors;
 
    viability of our sole manufacturing facility through unforeseen natural or other disasters;
 
    reliance on a sole-source supplier for a key raw material; and
 
    the establishment of collaborative relationships with other parties.
     As of September 30, 2006, inventory decreased 1% to $7.3 million from $7.4 million as of December 31, 2005. The decrease in raw materials to $1.4 million from $3.9 million was partially offset by the increase in work in process to $2.9 million from $1.4 million. In general, our raw material and in-process inventories have an indefinite shelf life, and finished goods have a three year shelf life.

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Item 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued).
     In February 1999, the former Endologix entered into a supply agreement with BPVI to purchase a key component for the Powerlink System. The supply agreement expires in December 2007 and then automatically renews for additional one year periods, unless either party provides notice not to renew at least thirty days prior to the renewal period. The supply agreement was amended for a second time on September 8, 2006. Under the terms of the second amendment, the minimum purchase requirements for 2006 and 2007 were reduced and we will purchase a minimum dollar value of components, as opposed to quantity of components, for the remainder of the term. Our minimum purchase commitment for 2006 is $2.5 million and for 2007 is $2.9 million. During the nine months ended September 30, 2006 and 2005, we purchased approximately $646,000 and $1.9 million, respectively, of such components, toward fulfilling our 2006 and 2005 purchase commitments, respectively. We will complete our 2006 commitment by purchasing an additional $1.9 million of components prior to December 31, 2006. We are economically dependent on this vendor, which is the sole source for this key component.

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
     Our financial instruments include cash, short-term and long-term investment grade debt securities. At September 30, 2006, the carrying values of our financial instruments approximated their fair values based on current market prices and rates. It is our policy not to enter into derivative financial instruments. We do not currently have material foreign currency exposure as the majority of our assets are denominated in U.S. currency and our foreign-currency based transactions are not material. Accordingly, we do not have a significant currency exposure at September 30, 2006.
Item 4. CONTROLS AND PROCEDURES.
     We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our “disclosure controls and procedures” as of the end of the period covered by this report, pursuant to Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this report, were effective to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
     There has been no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II.
OTHER INFORMATION
Item 5. OTHER INFORMATION
     On September 8, 2006, we entered into a second amendment to the supply agreement dated February 12, 1999 between us and BPVI, which we refer to herein as the Amendment. Pursuant to the terms and conditions of the supply agreement, we purchase certain components from BVPI for use in our products. The Amendment amends the supply agreement by establishing minimum component purchase requirements for the remainder of 2006 and 2007 based upon a specified dollar amount of components. Prior to the Amendment, the minimum component purchase requirements set forth in the supply agreement were based upon units of components.
     The foregoing description of the Amendment does not purport to be complete and is qualified in its entirety by reference to the Amendment, which is attached hereto as Exhibit 10.6.2 and incorporated herein by reference.
Item 6. EXHIBITS
The following exhibits are filed herewith:
     
Exhibit 10.1
  Form of Stock Option Agreement under the 2006 Stock Incentive Plan.
 
   
Exhibit 10.2
  Form of Restricted Stock Award Agreement under the 2006 Stock Incentive Plan.
 
   
Exhibit 10.6.2
  Second Amendment to Supply Agreement, dated September 8, 2006, between Endologix, Inc. and Bard Peripheral Vascular, Inc.
 
   
Exhibit 31.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
   
Exhibit 31.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
   
Exhibit 32.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
 
   
Exhibit 32.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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SIGNATURES
     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.
         
 
  ENDOLOGIX, INC.    
 
       
Date: November 9, 2006
  /s/ Paul McCormick    
 
 
 
President and Chief Executive Officer
   
 
  (Principal Executive Officer)    
 
       
Date: November 9, 2006
  /s/ Robert J. Krist    
 
 
 
Chief Financial Officer and Secretary
   
 
  (Principal Financial and Accounting Officer)    

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EXHIBIT INDEX
The following exhibits are filed herewith:
     
Exhibit 10.1
  Form of Stock Option Agreement under the 2006 Stock Incentive Plan.
 
   
Exhibit 10.2
  Form of Restricted Stock Award Agreement under the 2006 Stock Incentive Plan.
 
   
Exhibit 10.6.2
  Second Amendment to Supply Agreement, dated September 8, 2006, between Endologix, Inc. and Bard Peripheral Vascular, Inc.
 
   
Exhibit 31.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
   
Exhibit 31.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
 
   
Exhibit 32.1
  Certification of Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.
 
   
Exhibit 32.2
  Certification of Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350.

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EXHIBIT 10.1

Option Number: _______________
Optionee ID Number: __________

ENDOLOGIX, INC.

STOCK OPTION AGREEMENT
UNDER
2006 STOCK INCENTIVE PLAN

TYPE OF OPTION (CHECK ONE): [ ] INCENTIVE [ ] NONQUALIFIED

This STOCK OPTION AGREEMENT (the "Agreement") is entered into as of __________, 200_, by and between Endologix, Inc., a Delaware corporation ("Company"), and _______________ ("Optionee") pursuant to the Company's 2006 Stock Incentive Plan (the "Plan"). Any capitalized term not defined herein shall have the meaning ascribed to it in the Plan.

RECITALS:

Optionee is an employee or director of the Company, and in connection therewith has rendered services for and on behalf of the Company or any Affiliated Company.

The Company desires to issue Optionee options to purchase shares of the Common Stock of the Company for the consideration set forth herein to provide an incentive for Optionee to remain in the service of the Company and to exert added effort towards its growth and success.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the parties agree as follows:

1. GRANT OF OPTION. The Company hereby grants to Optionee an option ("Option") to purchase all or any portion of a total of _________________ (__________) shares ("Shares") of the Common Stock of the Company at a purchase price of ($_____) per share ("Exercise Price"), subject to the terms and conditions set forth herein and the provisions of the Plan. If the box marked "Incentive" above is checked, then this Option is intended to qualify as an "incentive stock option" as defined in Section 422 of the Internal Revenue Code of l986, as amended (the "Code"). If this Option fails in whole or in part to qualify as an incentive stock option, or if the box marked "Nonqualified" is checked, then this Option shall to that extent constitute a nonqualified stock option.

2. VESTING OF OPTION. The right to exercise this Option shall vest in installments, and this Option shall be exercisable from time to time in whole or in part as to any vested installment, in accordance with the vesting schedule as provided in the Notice of Grant.

No additional Shares shall vest after, and the portion of the Option related to such additional shares shall terminate upon, the date of termination of Optionee's "Continuous Service" (as defined in Section 3 below), but this Option shall continue to be exercisable in accordance with Section 3 hereof with respect to that number of shares that have vested as of the date of termination of Optionee's Continuous Service.


3. TERM OF OPTION. Optionee's right to exercise this Option shall terminate upon the first to occur of the following:

(a) the expiration of ten (10) years from the date of this Agreement;

(b) the expiration of ninety (90) days from the date of termination of Optionee's Continuous Service if such termination occurs for any reason other than permanent disability or death; provided, however, that if Optionee dies during such ninety-day period the provisions of Section 3(d) below shall apply;

(c) the expiration of one year from the date of termination of Optionee's Continuous Service if such termination is due to permanent disability (as defined in Section 22(e)(3) of Code) of the Optionee;

(d) the expiration of one year from the date of termination of Optionee's Continuous Service if such termination is due to Optionee's death or if death occurs during the ninety (90) day period following termination of Optionee's Continuous Service pursuant to Section 3(b) above, as the case may be; or

(e) upon the consummation of a Change in Control, unless otherwise provided pursuant to Section 9 below.

As used herein, the term "Continuous Service" means (i) employment by either the Company or any parent or subsidiary corporation of the Company, or by any successor entity following a Change in Control, which is uninterrupted except for paid vacations or sick days in accordance with Company policy, as applicable, or (ii) service as a member of the Board of Directors of the Company until Optionee resigns, is removed from office, or Optionee's term of office expires and he or she is not reelected. The Optionee's Continuous Service shall not terminate merely because of a change in the capacity in which the Optionee renders service to the Company or a corporation or subsidiary corporation described in clause (i) above. For example, a change in the Optionee's status from an employee to a Non-Employee Director will not constitute an interruption of the Optionee's Continuous Service, provided there is no interruption in the Optionee's performance of such services.

4. EXERCISE OF OPTION. On or after the vesting of any portion of this Option in accordance with Sections 2 or 9 hereof, and until termination of the right to exercise this Option in accordance with Section 3 above, the portion of this Option which has vested may be exercised in whole or in part by the Optionee (or, after his or her death, by the person designated in Section 5 below) upon delivery of the following to the Company at its principal executive offices:

(a) a written notice of exercise which identifies this Agreement and states the number of Shares then being purchased (but no fractional Shares may be purchased) unless the Company has established other procedures;

(b) a check or cash in the amount of the Exercise Price (or payment of the Exercise Price in such other form of lawful consideration as the Administrator may approve from time to time under the provisions of Section 5.3 of the Plan);

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(c) a check or cash in the amount reasonably requested by the Company to satisfy the Company's withholding obligations under federal, state or other applicable tax laws with respect to the taxable income, if any, recognized by the Optionee in connection with the exercise of this Option (unless the Company and Optionee shall have made other arrangements for deductions or withholding from Optionee's wages, bonus or other compensation payable to Optionee, or, if permitted by the Administrator in its discretion, by the withholding of Shares issuable upon exercise of this Option or the delivery of Shares owned by the Optionee, provided such arrangements satisfy the requirements of applicable tax laws); and

(d) a letter, if requested by the Company, in such form and substance as the Company may require, setting forth the investment intent of the Optionee, or person designated in Section 5 below, as the case may be.

5. DEATH OF OPTIONEE; NO ASSIGNMENT. The rights of the Optionee under this Agreement may not be assigned or transferred except by will or by the laws of descent and distribution, and may be exercised during the lifetime of the Optionee only by the Optionee. Any attempt to sell, pledge, assign, hypothecate, transfer or dispose of this Option in contravention of this Agreement or the Plan shall be void and shall have no effect. If the Optionee's Continuous Service terminates as a result of his or her death, and provided Optionee's rights hereunder shall have vested pursuant to Section 2 hereof, Optionee's legal representative, his or her legatee, or the person who acquired the right to exercise this Option by reason of the death of the Optionee (individually, a "Successor") shall succeed to the Optionee's rights and obligations under this Agreement. After the death of the Optionee, only a Successor may exercise this Option.

6. REPRESENTATIONS AND WARRANTIES OF OPTIONEE. Optionee acknowledges receipt of a copy of the Plan and understands that all rights and obligations connected with this Option are set forth in this Agreement and in the Plan.

7. LIMITATION ON COMPANY'S LIABILITY FOR NONISSUANCE. The Company agrees to use its reasonable best efforts to obtain from any applicable regulatory agency such authority or approval as may be required in order to issue and sell the Shares to the Optionee pursuant to this Option. Inability of the Company to obtain, from any such regulatory agency, authority or approval deemed by the Company's counsel to be necessary for the lawful issuance and sale of the Shares hereunder and under the Plan shall relieve the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite authority or approval shall not have been obtained.

8. ADJUSTMENTS UPON CHANGES IN CAPITAL STRUCTURE. In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of a recapitalization, stock split, combination of shares, reclassification, stock dividend or other change in the capital structure of the Company, then appropriate adjustment shall be made by the Administrator to the number of Shares subject to the unexercised portion of this Option and to the Exercise Price per share, in order to preserve, as nearly as practical, but not to increase, the benefits of the Optionee under this Option, in accordance with the provisions of Section 4.2 of the Plan.

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9. CHANGE IN CONTROL. In the event of a Change in Control (as defined in
Section 2.6 of the Plan) of the Company:

(a) The right to exercise this Option shall accelerate automatically and vest in full (notwithstanding the provisions of Section 2 above) effective as of immediately prior to the consummation of the Change in Control unless this Option is to be assumed by the acquiring or successor entity (or parent thereof) or a new option or New Incentives are to be issued in exchange therefor, as provided in subsection (b) below. If vesting of this Option will accelerate pursuant to the preceding sentence, the Administrator in its discretion may provide, in connection with the Change in Control transaction, for the purchase or exchange of this Option for an amount of cash or other property having a value equal to the difference (or "spread") between: (x) the value of the cash or other property that the Optionee would have received pursuant to the Change in Control transaction in exchange for the Shares issuable upon exercise of this Option had this Option been exercised immediately prior to the Change in Control, and (y) the aggregate Exercise Price for such Shares. If the vesting of this Option will accelerate pursuant to this subsection (a), then the Administrator shall cause written notice of the Change in Control transaction to be given to the Optionee not less than fifteen (15) days prior to the anticipated effective date of the proposed transaction.

(b) Notwithstanding the foregoing, the vesting of this Option shall not accelerate if and to the extent that: (i) this Option (including the unvested portion thereof) is to be assumed by the acquiring or successor entity (or parent thereof) or a new option of comparable value is to be issued in exchange therefor pursuant to the terms of the Change in Control transaction, or
(ii) this Option (including the unvested portion thereof) is to be replaced by the acquiring or successor entity (or parent thereof) with other incentives of comparable value under a new incentive program ("New Incentives") containing such terms and provisions as the Administrator in its discretion may consider equitable. If this Option is assumed, or if a new option of comparable value is issued in exchange therefor, then this Option or the new option shall be appropriately adjusted, concurrently with the Change in Control, to apply to the number and class of securities or other property that the Optionee would have received pursuant to the Change in Control transaction in exchange for the Shares issuable upon exercise of this Option had this Option been exercised immediately prior to the Change in Control, and appropriate adjustment also shall be made to the Exercise Price such that the aggregate Exercise Price of this Option or the new option shall remain the same as nearly as practicable.

(c) If the provisions of subsection (b) above apply, then this Option, the new option or the New Incentives shall continue to vest in accordance with the provisions of Section 2 hereof and shall continue in effect for the remainder of the term of this Option in accordance with the provisions of
Section 3 hereof. However, in the event of an Involuntary Termination (as defined below) of Optionee's Continuous Service within twelve (12) months following such Change in Control, then vesting of this Option, the new option or the New Incentives shall accelerate in full automatically effective upon such Involuntary Termination.

For purposes of this Section 9, the following terms shall have the meanings set forth below:

(i) "Cause" shall mean (A) the commission of any act of fraud, embezzlement or dishonesty by Optionee which materially and adversely affects the business of the Company, the acquiring or successor entity (or parent or any subsidiary thereof), (B) any unauthorized use or disclosure by Optionee of confidential information or trade secrets of the

4

Company, the acquiring or successor entity (or parent or any subsidiary thereof), (C) the continued refusal or omission by the Optionee to perform any material duties required of him if such duties are consistent with duties customary for the position held with the Company, the acquiring or successor entity (or parent or any subsidiary thereof), (D) any material act or omission by the Optionee involving malfeasance or gross negligence in the performance of Optionee's duties to, or material deviation from any of the policies or directives of, the Company or the acquiring or successor entity (or parent or any subsidiary thereof), (E) conduct on the part of Optionee which constitutes the breach of any statutory or common law duty of loyalty to the Company, the acquiring or successor entity (or parent or any subsidiary thereof), or (F) any illegal act by Optionee which materially and adversely affects the business of the Company, the acquiring or successor entity (or parent or any subsidiary thereof), or any felony committed by Optionee, as evidenced by conviction thereof. The provisions of this Section shall not limit the grounds for the dismissal or discharge of Optionee or any other individual in the service of the Company, the acquiring or successor entity (or parent or any subsidiary thereof).

(ii) "Involuntary Termination" shall mean the termination of Optionee's Continuous Service by reason of:

(A) Optionee's involuntary dismissal or discharge by the Company, or by the acquiring or successor entity (or parent or any subsidiary thereof employing the Optionee) for reasons other than Cause (as defined above), or

(B) Optionee's voluntary resignation within thirty (30) days following (x) a change in Optionee's position with the Company, the acquiring or successor entity (or parent or any subsidiary thereof) which materially reduces Optionee's duties and responsibilities or the level of management to which Optionee reports, (y) a reduction in Optionee's level of compensation (including base salary, fringe benefits and target bonus under any performance based bonus or incentive programs) by more than ten percent (10%), or (z) a relocation of Optionee's principal place of employment by more than thirty (30) miles, provided and only if such change, reduction or relocation is effected without Optionee's written consent.

In the event that the Optionee is a party to an employment agreement or other similar agreement with the Company or any Affiliated Company that defines a termination on account of "Cause" or "Involuntary Termination" (or terms having similar meanings), such definitions shall apply as the definitions of a termination on account of "Cause" or pursuant to an "Involuntary Termination" for purposes hereof, but only to the extent that such definition provides the Optionee with greater rights.

10. NO EMPLOYMENT CONTRACT CREATED. Neither the granting of this Option nor the exercise hereof shall be construed as granting to the Optionee any right with respect to continuance of employment by, or other service provider relationship with, the Company or any of its subsidiaries. The right of the Company or any of its subsidiaries to terminate at will the Optionee's employment at any time (whether by dismissal, discharge or otherwise), with or without cause, is specifically reserved.

11. RIGHTS AS STOCKHOLDER. The Optionee (or transferee of this option by will or by the laws of descent and distribution) shall have no rights as a stockholder with respect to any Shares

5

covered by this Option until the date of the issuance of a stock certificate or certificates to him or her for such Shares, notwithstanding the exercise of this Option.

12. "MARKET STAND-OFF" AGREEMENT. Optionee agrees that, if requested by the Company or the managing underwriter of any proposed public offering of the Company's securities (including any acquisition transaction where Company securities will be used as all or part of the purchase price), Optionee will not sell or otherwise transfer or dispose of any Shares held by Optionee without the prior written consent of the Company or such underwriter, as the case may be, during such period of time, not to exceed 180 days following the effective date of the registration statement filed by the Company with respect to such offering, as the Company or the underwriter may specify.

13. INTERPRETATION. This Option is granted pursuant to the terms of the Plan, and shall in all respects be interpreted in accordance therewith. The Administrator shall interpret and construe this Option and the Plan, and any action, decision, interpretation or determination made in good faith by the Administrator shall be final and binding on the Company and the Optionee. As used in this Agreement, the term "Administrator" shall refer to the committee of the Board of Directors of the Company appointed to administer the Plan, and if no such committee has been appointed, the term Administrator shall mean the Board of Directors.

14. NOTICES. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given and effective (i) when delivered by hand, (ii) when otherwise delivered against receipt therefor, or (iii) three (3) business days after being mailed if sent by registered or certified mail, postage prepaid, return receipt requested. Any notice shall be addressed to the parties as follows or at such other address as a party may designate by notice given to the other party in the manner set forth herein:

(a) if to the Company:

Endologix, Inc.
11 Studebaker
Irvine, CA 92618
Attention: Chief Financial Officer

(b) if to the Optionee, at the address shown on the signature page of this Agreement or at his most recent address as shown in the employment or stock records of the Company.

15. APPLICABLE LAW. This Agreement shall be construed in accordance with the laws of the State of California without reference to choice of law principles, as to all matters, including, but not limited to, matters of validity, construction, effect or performance.

16. SEVERABILITY. Should any provision or portion of this Agreement be held to be unenforceable or invalid for any reason, the remaining provisions and portions of this Agreement shall be unaffected by such holding.

17. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall be deemed one instrument.

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

THE COMPANY:                            OPTIONEE:

ENDOLOGIX, INC.


By:
    ---------------------------------   ----------------------------------------
Name:
      -------------------------------   ----------------------------------------
Title:                                                [Print Name]
       ------------------------------

                                        Address:

                                        ----------------------------------------

                                        ----------------------------------------

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EXHIBIT 10.2

Restricted Stock Award Number: _______________
Purchase ID Number: ________________

ENDOLOGIX, INC.

RESTRICTED STOCK AWARD AGREEMENT
UNDER
2006 STOCK INCENTIVE PLAN

THIS RESTRICTED STOCK AWARD AGREEMENT (the "Agreement") is entered into as of __________, 200_ by and between __________ (hereinafter referred to as "Purchaser") and Endologix, Inc., a Delaware corporation (hereinafter referred to as the "Company"), pursuant to the Company's 2006 Stock Incentive Plan (the "Plan"). Any capitalized term not defined herein shall have the same meaning ascribed to it in the Plan.

RECITALS:

A. Purchaser is an employee or director of the Company, and in connection therewith has rendered services for and on behalf of the Company or any Affiliated Company.

B. The Company desires to issue shares of the Company's Common Stock to Purchaser for the consideration set forth herein to provide an incentive for Purchaser to remain in the service of the Company and to exert added effort towards its growth and success.

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, and for other good and valuable consideration, the parties agree as follows:

1. ISSUANCE OF SHARES. The Company hereby offers to issue to Purchaser an aggregate of __________ (__________) shares of Common Stock of the Company (the "Shares") on the terms and conditions herein set forth. Unless this offer is earlier revoked in writing by the Company, Purchaser shall have ten (10) days from the date of the delivery of this Agreement to Purchaser to accept the offer of the Company by executing and delivering to the Company two (2) copies of this Agreement, without condition or reservation of any kind whatsoever, together with the consideration to be delivered by Purchaser pursuant to Section 2 below, if applicable.

2. CONSIDERATION. The purchase price for the Shares shall be __________ ($_____) per share, or a total of _____________ ($__________).

3. VESTING OF SHARES.

(A) Subject to Section 3(b) below, the Shares acquired hereunder shall vest and become "Vested Shares" as follows:

[INSERT VESTING SCHEDULE, EITHER TIME-BASED OR PERFORMANCE-BASED]

No additional shares shall vest after the date of termination of Purchaser's Continuous Service.

As used herein, the term "Continuous Service" means (i) employment by either the Company or any parent or subsidiary corporation of the Company, or by any successor entity following a Change in Control, which is uninterrupted except for paid vacations or sick days in accordance with


Company policy, as applicable, or (ii) service as a member of the Board of Directors of the Company until Purchaser resigns, is removed from office, or Purchaser's term of office expires and he or she is not reelected. The Purchaser's Continuous Service shall not terminate merely because of a change in the capacity in which the Purchaser renders service to the Company or a corporation or subsidiary corporation described in clause (i) above. For example, a change in the Purchaser's status from an employee to a Non-Employee Director will not constitute an interruption of the Purchaser's Continuous Service, provided there is no interruption in the Purchaser's performance of such services.

(B) Notwithstanding Section 3(a) above, if Purchaser holds Shares at the time a Change in Control occurs, the acquiring or successor entity (or parent thereof) does not agree to provide for the continuance or assumption of this Agreement or the substitution for this Agreement of a new agreement of comparable value covering shares of a successor corporation (with appropriate adjustments as to the number and kind of shares and the purchase price), then all "Repurchase Rights" (as defined in Section 4 below) shall automatically terminate immediately prior to the consummation of such Change in Control and the Shares subject to those terminated Repurchase Rights shall immediately vest in full. Notwithstanding the foregoing sentence, if pursuant to a Change in Control the acquiring or successor entity (or parent thereof) provides for the continuance or assumption of this Agreement or the substitution for this Agreement of a new agreement of comparable value covering shares of a successor corporation (with appropriate adjustments as to the number and kind of shares and the purchase price), then the Repurchase Rights shall not terminate and vesting of the Shares shall not accelerate in connection with such Change in Control to the extent this Agreement is continued, assumed or substituted for; provided, however, if Purchaser's Continuous Service is terminated without Cause or pursuant to an Involuntary Termination (as defined below) within twelve (12) months following such Change in Control, all Repurchase Rights shall terminate and vesting of the Shares or any substituted shares shall accelerate in full automatically effective upon such termination. For purposes of this Section 3, the following terms shall have the meanings set forth below:

(I) "Cause" shall mean (A) the commission of any act of fraud, embezzlement or dishonesty by Purchaser which materially and adversely affects the business of the Company, the acquiring or successor entity (or parent or any subsidiary thereof), (B) any unauthorized use or disclosure by Purchaser of confidential information or trade secrets of the Company, the acquiring or successor entity (or parent or any subsidiary thereof), (C) the continued refusal or omission by the Purchaser to perform any material duties required of him if such duties are consistent with duties customary for the position held with the Company, the acquiring or successor entity (or parent or any subsidiary thereof), (D) any material act or omission by the Purchaser involving malfeasance or gross negligence in the performance of Purchaser's duties to, or material deviation from any of the policies or directives of, the Company or the acquiring or successor entity (or parent or any subsidiary thereof), (E) conduct on the part of Purchaser which constitutes the breach of any statutory or common law duty of loyalty to the Company, the acquiring or successor entity (or parent or any subsidiary thereof), or (F) any illegal act by Purchaser which materially and adversely affects the business of the Company, the acquiring or successor entity (or parent or any subsidiary thereof), or any felony committed by Purchaser, as evidenced by conviction thereof. The provisions of this Section shall not limit the grounds for the dismissal or discharge of Purchaser or any other individual in the service of the Company, the acquiring or successor entity (or parent or any subsidiary thereof).

2

(II) "Involuntary Termination" shall mean the termination of Purchaser's Continuous Service by reason of:

(A) Purchaser's involuntary dismissal or discharge by the Company, or by the acquiring or successor entity (or parent or any subsidiary thereof employing the Purchaser) for reasons other than Cause (as defined above), or

(B) Purchaser's voluntary resignation within thirty
(30) days following (x) a change in Purchaser's position with the Company, the acquiring or successor entity (or parent or any subsidiary thereof) which materially reduces Purchaser's duties and responsibilities or the level of management to which Purchaser reports, (y) a reduction in Purchaser's level of compensation (including base salary, fringe benefits and target bonus under any performance based bonus or incentive programs) by more than ten percent (10%), or (z) a relocation of Purchaser's principal place of employment by more than thirty (30) miles, provided and only if such change, reduction or relocation is effected without Purchaser's written consent.

In the event that the Purchaser is a party to an employment agreement or other similar agreement with the Company or any Affiliated Company that defines a termination on account of "Cause" or "Involuntary Termination" (or terms having similar meanings), such definitions shall apply as the definitions of a termination on account of "Cause" or pursuant to an "Involuntary Termination" for purposes hereof, but only to the extent that such definition provides the Purchaser with greater rights.

4. RECONVEYANCE UPON TERMINATION OF SERVICE.

(A) REPURCHASE RIGHT. The Company shall have the right (but not the obligation) to repurchase all or any part of the Unvested Shares (the "Repurchase Right") in the event that the Purchaser's Continuous Service terminates for any reason. Upon exercise of the Repurchase Right, the Purchaser shall be obligated to sell his or her Unvested Shares to the Company, as provided in this Section 4. If the Purchase Price paid for the Shares is zero, then upon termination of Continuous Service Purchaser shall be obligated to transfer his or her Unvested Shares to the Company without consideration.

(B) CONSIDERATION FOR REPURCHASE RIGHT. The repurchase price of the Unvested Shares (the "Repurchase Price") shall be equal to the Purchase Price, if any, of such Unvested Shares.

(C) PROCEDURE FOR EXERCISE OF RECONVEYANCE OPTION. For sixty (60) days after the Termination Date or other event described in this Section 4, the Company may exercise the Repurchase Right by giving Purchaser and/or any other person obligated to sell written notice of the number of Unvested Shares which the Company desires to purchase. The Repurchase Price for the Unvested Shares shall be payable, at the option of the Company, by check or by cancellation of all or a portion of any outstanding indebtedness of Purchaser to the Company, or by any combination thereof.

(D) NOTIFICATION AND SETTLEMENT. In the event that the Company has elected to exercise the Repurchase Right as to part or all of the Unvested Shares within the period described above, Purchaser or such other person shall deliver to the Company certificate(s) representing the Unvested Shares to be acquired by the Company within thirty (30) days following

3

the date of the notice from the Company. The Company shall deliver to Purchaser against delivery of the Unvested Shares, checks of the Company payable to Purchaser and/or any other person obligated to transfer the Unvested Shares in the aggregate amount of the Repurchase Price, if any, to be paid as set forth in paragraph 4(b) above.

(E) DEPOSIT OF UNVESTED SHARES. Purchaser shall deposit with the Company certificates representing the Unvested Shares, together with a duly executed stock assignment separate from certificate in blank, which shall be held by the Secretary of the Company. Purchaser shall be entitled to vote and to receive dividends and distributions on all such deposited Unvested Shares.

(F) TERMINATION. The provisions of this Section 4 shall automatically terminate in accordance with Section 3(b) above.

(G) ASSIGNMENT. The Company may assign its Repurchase Right under this Section 4 without the consent of the Purchaser.

5. RESTRICTIONS ON UNVESTED SHARES. Unvested Shares may not be sold, transferred, pledged, or otherwise disposed of, except that such Unvested Shares may be transferred to a trust established for the sole benefit of the Purchaser and/or his or her spouse, children or grandchildren. Any Unvested Shares that are transferred as provided herein remain subject to the terms and conditions of this Agreement.

6. ADJUSTMENTS UPON CHANGES IN CAPITAL STRUCTURE. In the event that the outstanding Shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of a recapitalization, stock split, combination of shares, reclassification, stock dividend, or other change in the capital structure of the Company, then Purchaser shall be entitled to new or additional or different shares of stock or securities, in order to preserve, as nearly as practical, but not to increase, the benefits of Purchaser under this Agreement, in accordance with the provisions of Section 4.2 of the Plan. Such new, additional or different shares shall be deemed "Shares" for purposes of this Agreement and subject to all of the terms and conditions hereof.

7. SHARES FREE AND CLEAR. All Shares purchased by the Company (or otherwise returned to the Company) pursuant to this Agreement shall be delivered by Purchaser free and clear of all claims, liens and encumbrances of every nature (except the provisions of this Agreement and any conditions concerning the Shares relating to compliance with applicable federal or state securities laws), and the purchaser thereof shall acquire full and complete title and right to all of such Shares, free and clear of any claims, liens and encumbrances of every nature (again, except for the provisions of this Agreement and such securities laws).

8. LIMITATION OF COMPANY'S LIABILITY FOR NONISSUANCE; UNPERMITTED TRANSFERS.

(A) The Company agrees to use its reasonable best efforts to obtain from any applicable regulatory agency such authority or approval as may be required in order to issue and sell the Shares to Purchaser pursuant to this Agreement. The inability of the Company to obtain, from any such regulatory agency, authority or approval deemed by the Company's counsel to be necessary for the lawful issuance and sale of the Shares hereunder and under the Plan shall relieve

4

the Company of any liability in respect of the nonissuance or sale of such Shares as to which such requisite authority or approval shall not have been obtained.

(B) The Company shall not be required to: (i) transfer on its books any Shares of the Company which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (ii) treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred.

9. NOTICES. All notices, requests, demands and other communications required or permitted under this Agreement shall be in writing and shall be deemed to have been duly given and effective (i) when delivered by hand, (ii) when otherwise delivered against receipt therefor, or (iii) three (3) business days after being mailed if sent by registered or certified mail, postage prepaid, return receipt requested. Any notice shall be addressed to the parties as follows or at such other address as a party may designate by notice given to the other party in the manner set forth herein:

(A) if to the Company:

Endologix, Inc.
11 Studebaker
Irvine, CA 92618
Attention: Chief Financial Officer

(B) if to the Purchaser, at the address shown on the signature page of this Agreement or at his most recent address as shown in the employment or stock records of the Company.

10. BINDING OBLIGATIONS. All covenants and agreements herein contained by or on behalf of any of the parties hereto shall bind and inure to the benefit of the parties hereto and their permitted successors and assigns.

11. CAPTIONS AND SECTION HEADINGS. Captions and section headings used herein are for convenience only, and are not part of this Agreement and shall not be used in construing it.

12. AMENDMENT. This Agreement may not be amended, waived, discharged, or terminated other than by written agreement of the parties.

13. ENTIRE AGREEMENT. This Agreement and the Plan constitute the entire agreement between the parties with respect to the subject matter hereof and supersede all prior or contemporaneous written or oral agreements and understandings of the parties, either express or implied.

14. ASSIGNMENT. Purchaser shall have no right, without the prior written consent of the Company, to (i) sell, assign, mortgage, pledge or otherwise transfer any interest or right created hereby, or (ii) delegate his or her duties or obligations under this Agreement. This Agreement is made solely for the benefit of the parties hereto, and no other person, partnership, association or corporation shall acquire or have any right under or by virtue of this Agreement.

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15. SEVERABILITY. Should any provision or portion of this Agreement be held to be unenforceable or invalid for any reason, the remaining provisions and portions of this Agreement shall be unaffected by such holding.

16. COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which taken together shall constitute one agreement and any party hereto may execute this Agreement by signing any such counterpart. This Agreement shall be binding upon Purchaser and the Company at such time as the Agreement, in counterpart or otherwise, is executed by Purchaser and the Company.

17. APPLICABLE LAW. This Agreement shall be construed in accordance with the laws of the State of California without reference to choice of law principles, as to all matters, including, but not limited to, matters of validity, construction, effect or performance.

18. NO AGREEMENT TO EMPLOY. Nothing in this Agreement shall affect any right with respect to continuance of employment by the Company or any of its subsidiaries. The right of the Company or any of its subsidiaries to terminate at will the Purchaser's employment at any time (whether by dismissal, discharge or otherwise), with or without cause, is specifically reserved, subject to any other written employment agreement to which the Company and Purchaser may be a party.

19. "MARKET STAND-OFF" AGREEMENT. Purchaser agrees that, if requested by the Company or the managing underwriter of any proposed public offering of the Company's securities (including any acquisition transaction where Company securities will be used as all or part of the purchase price), Purchaser will not sell or otherwise transfer or dispose of any Shares held by Purchaser without the prior written consent of the Company or such underwriter, as the case may be, during such period of time, not to exceed 180 days following the effective date of the registration statement filed by the Company with respect to such offering, as the Company or the underwriter may specify.

20. TAX ELECTIONS. Purchaser understands that Purchaser (and not the Company) shall be responsible for the Purchaser's own tax liability that may arise as a result of the acquisition of the Shares. Purchaser acknowledges that Purchaser has considered the advisability of all tax elections in connection with the purchase of the Shares, including the making of an election under
Section 83(b) under the Internal Revenue Code of 1986, as amended ("Code"); Purchaser further acknowledges that the Company has no responsibility for the making of such Section 83(b) election. In the event Purchaser determines to make a Section 83(b) election, Purchaser agrees to timely provide a copy of the election to the Company as required under the Code.

21. ATTORNEYS' FEES. If any party shall bring an action in law or equity against another to enforce or interpret any of the terms, covenants and provisions of this Agreement, the prevailing party in such action shall be entitled to recover reasonable attorneys' fees and costs.

[Signature Page Follows]

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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written.

THE COMPANY:                            PURCHASER:

ENDOLOGIX, INC.


By:
    ---------------------------------   ----------------------------------------
Name:
      -------------------------------   ----------------------------------------
Title:                                                [Print Name]
       ------------------------------

                                        Address:

                                        ----------------------------------------

                                        ----------------------------------------

7

CONSENT AND RATIFICATION OF SPOUSE

The undersigned, the spouse of _____________________, a party to the attached Restricted Stock Award Agreement (the "Agreement"), dated as of _______________, hereby consents to the execution of said Agreement by such party; and ratifies, approves, confirms and adopts said Agreement, and agrees to be bound by each and every term and condition thereof as if the undersigned had been a signatory to said Agreement, with respect to the Shares (as defined in the Agreement) made the subject of said Agreement in which the undersigned has an interest, including any community property interest therein.

I also acknowledge that I have been advised to obtain independent counsel to represent my interests with respect to this Agreement but that I have declined to do so and I hereby expressly waive my right to such independent counsel.

Date:

(Signature)


(Print Name)

Exhibit 10.6.2

SECOND AMENDMENT TO SUPPLY AGREEMENT

This Second Amendment to Supply Agreement (this "Second Amendment") is entered into as of September 8, 2006 by and between Bard Peripheral Vascular, Inc. (formerly known as IMPRA, Inc. and referred to herein as "BPV"), a subsidiary of C. R. Bard, Inc., with offices at 1625 W. 3rd Street, Tempe, AZ 85281, and Endologix, Inc. a Delaware corporation, with offices at 11 Studebaker, Irvine, CA 92618 ("Endologix").

R E C I T A L S

WHEREAS, BPV and Endologix are parties to that certain Supply Agreement dated February 12, 1999 (the "Supply Agreement"), as amended by the Amendment to Supply Agreement dated January 17, 2002 (the "First Amendment"); and

WHEREAS, BPV and Endologix desire to amend the Supply Agreement on the terms and conditions set forth herein solely to modify the minimum purchase requirements of Components for the remainder of 2006 and all of 2007.

AGREEMENT

In consideration of the foregoing premises, the mutual covenants and agreements set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:

1. Definitions. For purposes of this Second Amendment, unless otherwise set forth herein, capitalized terms established in the Supply Agreement and/or First Amendment shall be applied herein as defined therein.

2. Amendments.

(a) The last sentence of Section (B) of Article IV of the Supply Agreement (as set forth in the First Amendment) provided that the minimum purchase requirements of Components by Endologix for each of the calendar years 2004 through 2007 would be a number of units of Components not less than 115% of the previous year's minimum purchase requirements or actual purchases, whichever is higher. The parties now desire to amend the Supply Agreement to provide for minimum purchase requirements of Components by Endologix of a specified dollar amount of Components (instead of units of Components) solely for the remainder of 2006 and all of 2007. Therefore, the last sentence of Section (B) of Article IV of the Supply Agreement (as set forth in the First Amendment) is hereby deleted and is replaced with the following:


"The minimum purchases of Components by Endologix for calendar year 2006 shall be an aggregate of Two Million Five Hundred Thousand Dollars ($2,500,000.00) (i.e., an amount of units of Components whose aggregate purchase price equals or exceeds $2,500,000.00). The purchase of Components for the remainder of 2006 shall be spread evenly among the remaining months of 2006 (i.e., approximately $500,000.00 per month). The minimum purchases of Components by Endologix for the calendar year 2007 shall be an aggregate of Two Million Eight Hundred Seventy-Five Thousand Dollars ($2,875,000.00) (i.e., an amount of units of Components whose aggregate purchase price equals or exceeds $2,875,000.00). The purchase of Components by Endologix in 2007 shall be in a minimum quarterly amount of $600,000.00 until the aggregate minimum purchase of $2875,000.00 for 2007 is met. Purchase of Components by Endologix in 2006 and 2007 may be in any mix of product codes as set forth on Exhibit C attached to the First Amendment.

(b) Endologix has provided to BPV purchase orders for Components for the remaining months of 2006 in connection with the execution of this Second Amendment in accordance with the terms of subsection 2(a) of this Second Amendment.

3. Miscellaneous

(a) Entire Agreement. The Supply Agreement, as amended by the First Amendment and this Second Amendment, constitutes the entire agreement between the parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions whether oral or written of the parties.

(b) Counterparts. This Second Amendment may be executed in one or more counterparts, each of which shall be deemed an original instrument and all of which together will constitute one and the same instrument. The exchange of copies of this Second Amendment and of signature pages by facsimile transmission shall constitute effective execution and delivery of this Second Amendment as to the parties and may be used in lieu of the original for all purposes. Signatures of parties transmitted by facsimile shall be deemed to be their original signatures for any purpose whatsoever.

(c) Effect of Second Amendment. Except as provided in this Second Amendment, the Supply Agreement (as amended by the First Amendment) shall remain unchanged and shall continue in full force and effect. In the event of a conflict between this Second Amendment and the Supply Agreement (as amended by the First Amendment), the terms of this Second Amendment shall govern and control.

(d) Performance. The price and minimum purchase requirements for Components are set forth in Section 2.a. of the First Amendment and Section 2.a. of this Second Amendment, respectively. Payment terms are 30 days from date of shipment. During each specified period in 2006 and 2007, Endologix agrees that it will purchase and take delivery of the applicable minimum purchase requirements set forth in Section 2.a. of this Second Amendment. If, at the end of any such period, Endologix has not purchased and taken delivery of such

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minimum purchase requirements, other than due to BPV's inability to produce and deliver Components ordered by Endologix, BPV may, at its option, invoice Endologix for the difference between the minimum purchase requirements and the value of the lesser quantity of the Components that Endologix actually purchased and took delivery of during such period. Endologix will pay any such invoice within thirty (30) days of its receipt. The failure of Endologix to pay any such invoice will be deemed to be a material breach of the Supply Agreement.

IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed and delivered by their respective duly authorized officers as of the date first written above.

Bard Peripheral Vascular, Inc.          Endologix, Inc.



By: /s/                                 By: /s/ Robert J. Krist
    ------------------------------          ---------------------------------
    President                               Chief Financial Officer


 

Exhibit 31.1
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
I, Paul McCormick, Chief Executive Officer of Endologix, Inc. (the “Company”), certify that:
1.   I have reviewed this quarterly report on Form 10-Q of the Company;
 
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.   The registrant’s other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principals;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
             
Date: November 9, 2006
  By:   /s/ Paul McCormick    
 
     
 
Paul McCormick
   
 
      President and Chief Executive Officer    

 

 

Exhibit 31.2
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
I, Robert J. Krist, Chief Financial Officer of Endologix, Inc. (the “Company”), certify that:
1.   I have reviewed this quarterly report on Form 10-Q of the Company;
2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.   The registrant’s other certifying officer and I, are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and we have:
  a)   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b)   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principals;
 
  c)   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d)   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
  a)   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
             
Date: November 9, 2006
  By:   /s/ Robert J. Krist    
 
     
 
Robert J. Krist
   
 
      Chief Financial Officer    

 

 

Exhibit 32.1
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350
I, Paul McCormick, Chief Executive Officer of the Company, certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and, 18 U.S.C. Section 1350, that:
  (1)   The Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 780(d)); and
 
  (2)   The information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
             
Date: November 9, 2006
  By:   /s/ Paul McCormick    
 
     
 
Paul McCormick
   
 
      President and Chief Executive Officer    

 

 

Exhibit 32.2
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
and 18 U.S.C. Section 1350
I, Robert J. Krist, Chief Financial Officer of the Company, certify pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that:
  (1)   The Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 780(d)); and
 
  (2)   The information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
             
Date: November 9, 2006
  By:   /s/ Robert J. Krist    
 
     
 
Robert J. Krist
   
 
      Chief Financial Officer