Form 10-K

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A0s2CI5T+1YDIK5EsyIQnJYUQieJ1AbSiuK98jo1eqQt4tRVLoI7A0bSTyzgafL1 hN6/RhkNXtel5G0S1akMSg== 0001193125-06-190162.txt : 20060913 0001193125-06-190162.hdr.sgml : 20060913 20060913162653 ACCESSION NUMBER: 0001193125-06-190162 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060913 DATE AS OF CHANGE: 20060913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UROLOGIX INC CENTRAL INDEX KEY: 0000882873 STANDARD INDUSTRIAL CLASSIFICATION: ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS [3845] IRS NUMBER: 411697237 STATE OF INCORPORATION: MN FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-28414 FILM NUMBER: 061088770 BUSINESS ADDRESS: STREET 1: 14405 21ST AVE N CITY: MINNEAPOLIS STATE: MN ZIP: 55447 BUSINESS PHONE: 6124751400 MAIL ADDRESS: STREET 1: 14405 21ST AVENUE NORTH CITY: MINNEAPOLIS STATE: MN ZIP: 55447 10-K 1 d10k.htm FORM 10-K Form 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended June 30, 2006.

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

For the transition period from to .

Commission File Number 0-28414

UROLOGIX, INC.

(Exact name of registrant as specified in its charter)

Minnesota

41-1697237

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

14405 21st Avenue North, Minneapolis, MN 55447

(Address of principal executive offices)

Registrant’s telephone number, including area code: (763) 475-1400

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class: (1) Common Stock, $.01 par value.

(2) Series A Junior Participating Preferred Stock Purchase Rights

Name of Exchange on Which Registered: The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes ¨ No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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:

Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨

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

The aggregate value of the Company’s Common Stock held by non-affiliates of the Company was approximately $54,757,825 as of the last day of the Company’s most recently completed second fiscal quarter, when the last reported sales price was $3.86.

As of September 1, 2006, the Company had outstanding 14,331,650 shares of Common Stock, $.01 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information is incorporated into Part III of this report by reference to the Proxy Statement for the Registrant’s 2006 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

TABLE OF CONTENTS


PART I

Item 1.		Business
Item 1A.		Risk Factors
Item 1B.		Unresolved Staff Comments
Item 2.		Properties
Item 3.		Legal Proceedings
Item 4.		Submission of Matters to a Vote of Security Holders

PART II

Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.		Selected Financial Data
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.		Quantitative and Qualitative Disclosures about Market Risk
Item 8.		Financial Statements and Supplementary Data
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.		Controls and Procedures
Item 9B.		Other Information

PART III

Item 10.		Directors and Executive Officers of the Registrant
Item 11.		Executive Compensation
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.		Certain Relationships and Related Transactions
Item 14.		Principal Accountant Fees and Services

PART IV

Item 15.		Exhibits and Financial Statement Schedules

SIGNATURES

PART I

Forward-Looking Statements

Statements included in this Annual Report on Form 10-K that are not historical or current facts are forward-looking statements. In addition, our officers may make forward-looking statements in the future. We wish to caution readers that these statements are not predictions of actual future results. Our actual results could differ materially from any such forward-looking statements as a result of risks and uncertainties, including those set forth below in Item 1A “Risks Factors” and in other documents we file from time to time with the Securities and Exchange Commission, including our Quarterly Reports on Form 10-Q. Any such forward-looking statements reflect management’s opinions only as of the date of this Annual Report on Form 10-K, and we undertake no obligation to update any such forward-looking statements.

ITEM 1. BUSINESS

Overview

Urologix has developed and offers non-surgical, catheter-based therapies that use a proprietary cooled microwave technology for the treatment of benign prostatic hyperplasia (BPH), a disease that affects more than 23 million men worldwide. We market our products under the Targis^{^®} and Prostatron^{^®} names during fiscal 2006 and CoolWave ™ name beginning in July, 2006. All systems utilize the Company’s Cooled ThermoTherapy^™, a targeted microwave energy combined with a unique cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH. Cooled ThermoTherapy can be performed without anesthesia or intravenous sedation and can be performed in a physician’s office or an outpatient clinic. We believe that Cooled ThermoTherapy provides an efficacious, safe and cost-effective solution for BPH with results clinically superior to medication and without the complications and side effects inherent in surgical procedures.

We maintain a website at www.urologix.com. Our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our periodic reports on Form 8-K (and any amendments to these reports) are available free of charge on our website as soon as reasonably practical after we file these reports with the SEC. To obtain copies of these reports, go to www.urologix.com.

Benign Prostatic Hyperplasia

BPH is a non-cancerous disease in which the prostate enlarges and constricts the urethra causing adverse changes in urinary voiding patterns. The prostate is a walnut-size gland surrounding the male urethra (the channel that carries urine from the bladder out of the body) that is located just below the bladder and adjacent to the rectum. While the actual cause of BPH is not fully understood, it is known that as men reach middle age, cells within the prostate begin to grow at an increasing rate. As the prostate expands, it compresses or impinges upon other portions of the prostate gland and the urethra, thereby restricting the normal passage of urine. BPH patients typically suffer from a variety of troubling symptoms that can have a significant impact on their quality of life. Symptoms of BPH include frequent urination during the day and night, urgency and painful urination. A delay in treatment can have serious consequences, including complete obstruction (acute retention of urine), urinary tract infections, loss of bladder functions and, in extreme cases, kidney failure.

BPH generally affects men after the age of 50, and medical experts suggest that nearly every man will be affected by this condition at some time in his life. The BPH market is large and can be expected to continue to grow due to the general aging of the world’s population, as well as increasing life expectancies.

Due in part to the side effects and complications associated with traditional BPH therapies, many patients diagnosed with BPH are regularly monitored by their physicians but elect not to receive active intervention. This course of inaction is known as “watchful waiting.” If symptoms persist or worsen, drug therapy or surgical intervention has historically been recommended. Drug therapy is usually the first line of treatment. It is estimated that more than 20% of patients who initially pursue drug therapy discontinue treatment within 12 months due to various reasons including cost, ineffectiveness, side effects and the burdens of compliance. Patients may also try multiple drugs or combinations of drugs to improve effectiveness. This leads to a more costly treatment and often, more side effects. Traditionally, the most common surgical procedure has been Transurethral Resection of the Prostate (TURP), an invasive surgery in which portions of the prostatic urethra and surrounding tissue are removed, thereby widening the urethra and improving urinary flow. While TURP results in a dramatic improvement in urine flow and reduction in symptoms, the procedure can require a lengthy recovery time and is reported to have a high rate of side effects and complications. Because the TURP procedure requires a highly skilled surgeon with extensive training, the incidence of complications are affected by the experience of the surgeon performing the TURP.

Cooled ThermoTherapy

Our Targis, Prostatron, and our recently approved CoolWave systems utilize Cooled ThermoTherapy, a catheter-based treatment for BPH that is clinically superior to medication and less invasive than surgery. Cooled ThermoTherapy was developed to be the treatment of choice for patients who have tried drugs unsuccessfully and wish to avoid surgery. Today, some patients choose Cooled ThermoTherapy before trying medications.

Cooled ThermoTherapy utilizes a proprietary microwave technology, delivered through a flexible catheter that targets energy into the enlarged area of the prostate to a temperature sufficient to cause cell death, while simultaneously cooling and protecting the healthy, pain-sensitive urethral tissue. During a Cooled ThermoTherapy procedure, a catheter is inserted into the urethra, and a rectal thermosensing unit is placed into the rectum. Chilled water is then circulated through the catheter in order to lower the temperature of the urethra and protect it from heat and discomfort during the treatment. Temperatures in the urethra and rectum are monitored continuously during the treatment while microwave energy is delivered into the prostatic tissue, ultimately resulting in a reduction in the size of the prostate and relief of symptoms, as the body re-absorbs the destroyed tissue during the months following treatment.

Cooled ThermoTherapy provides significant advantages over other BPH therapies, producing lasting results that are clinically superior to drug therapy while avoiding the complications associated with surgery. Because Cooled ThermoTherapy does not require incisions and protects the urethra during treatment, it can be performed in the physician’s office or other outpatient environments without the need for anesthesia or intravenous sedation and results in fewer complications.

Clinical Studies

Clinical trials of the Cooled ThermoTherapy procedure have been performed to obtain data to support new indications and marketing claims, to obtain long-term durability data, and to gather data for Medicare and other reimbursement approvals in various markets. We continue to monitor multi-center, multi-year studies to evaluate the long-term durability of Cooled ThermoTherapy procedures. In our published results from multi-center clinical trials, conducted both in the United States and internationally, the majority of Cooled ThermoTherapy patients for whom follow-up data are available show significant long-term relief from the symptoms of BPH, without significant post-procedure complications.

Sales and Marketing

Our goal is to grow Cooled ThermoTherapy as a standard of care for the treatment of BPH. Our business strategy to achieve this goal is (i) educate both patients and physicians on the benefits of CooledThermoTherapy compared to other treatment options, (ii) increase the use of Cooled ThermoTherapy by physicians who already have access to a Cooled ThermoTherapy system, (iii) increase the number of physicians who provide Cooled ThermoTherapy to their patients, (iv) efficiently provide more physicians with access to Cooled ThermoTherapy through the expansion of our Cooled ThermoTherapy mobile service in the United States, and (v) increase the use of Cooled ThermoTherapy for the treatment of BPH in international markets.

United States

We have a sales and marketing team consisting of sales and marketing management, marketing communications, clinical and reimbursement specialists, and direct sales representatives, all of whom are dedicated to marketing our Cooled ThermoTherapy products and our Cooled ThermoTherapy mobile service. Our direct sales force and marketing efforts are targeted at urologists who treat BPH patients in their office. Our Cooled ThermoTherapy mobile service employees transport the Cooled ThermoTherapy system control unit, along with the single-use treatment catheters and all necessary supplies, to physician offices and hospitals on a pre-scheduled basis, making the treatment available to physicians and patients on an efficient and economic basis. During the last three quarters of fiscal 2006 we established nine new mobile routes resulting in mobile service being offered in select geographies in the United States as of June 30, 2006. In addition to our direct sales force and Cooled ThermoTherapy mobile service employees, we continue to utilize independent third-party mobile service providers to provide hospitals and urology clinics with access to our Cooled ThermoTherapy treatment. As of June 30, 2006, we employed a total of 32 individuals in our sales and marketing department and our Cooled ThermoTherapy mobile service. The expenses for our Cooled ThermoTherapy mobile service are included in cost of goods sold.

We offer our Cooled ThermoTherapy systems to our customers on a direct purchase or on an evaluation or longer-term use basis. Pricing for single-use treatment catheters and our Cooled ThermoTherapy mobile service varies based upon volume.

International

We have distribution agreements with Nihon Kohden Corporation and EDAP Technomed Co. Ltd. for the market development and sale of the Targis and Prostatron systems, respectively, in Japan. In addition, during fiscal 2006, we reached agreement with Medishare, Inc. to act as our distributor of Cooled ThermoTherapy products in India and Mediland Enterprise Corporation to act as our distributor of Cooled ThermoTherapy products in China and Taiwan. Although our selling efforts outside of Japan have historically been relatively modest, we believe that there is a potentially significant market for Cooled ThermoTherapy outside of the United States, and we will continue to utilize local distributors and independent agents experienced in selling products to hospitals and urologists to assist us in maximizing these opportunities.

Manufacturing

We manufacture the Targis control unit, our recently approved CoolWave control unit, and single-use treatment catheters for use with our Targis and CoolWave control units at our suburban Minneapolis facility. We outsource the remaining manufacturing.

We had previously entered into a supply agreement for the production of the Prostatron control unit with EDAP TMS S.A., a French corporation; Technomed Medical Systems S.A., a French corporation and EDAP Technomed Inc., a Delaware corporation (collectively EDAP) that ended on October 1, 2003. At this time, we do not have plans to enter into another supply agreement for the manufacture of Prostatron control units, as we believe our current inventory of Prostatron control units combined with Company owned control units located at customer sites will adequately support customer requirements.

We have a supply agreement with Accellent Endoscopy (formerly Venusa) for the production of the Prostatron disposable treatment catheter that extends through April 2007. In accordance with our contract, Accellent Endoscopy has notified us of their intentions to cancel the supply agreement at the end of its current term. Prior to this notification, we had already signed an agreement with The MedTech Group, Inc. to become a qualified supplier of our Cooled ThermoTherapy single-use treatment catheter products. As a result, we are currently in the process of transitioning the manufacture of our Prostatron catheters to our future supplier, and in addition, we intend to purchase what we believe are sufficient quantities of Prostatron catheters from our existing supplier prior to April 2007 in order to meet customer demand during this transition. We expect to have this transition complete by the end of fiscal 2007.

We assemble Targis and CoolWave control units and procedure kits using materials and components supplied by various subcontractors and suppliers, as well as components we fabricate. Failure to obtain components from these providers or delays associated with any future component shortages, particularly as we increase our manufacturing level, could have a material adverse effect on our business, financial condition and operating results.

Our manufacturing operations and the operations of our third-party suppliers must comply with the U.S. Food and Drug Administration’s (FDA) quality system regulation, which includes, but is not limited to, the FDA’s Good Manufacturing Practices (GMP) requirements, and with certain requirements of state, local and foreign governments for assuring quality by controlling components, processes and document traceability and retention, among other things.

In June 1997, July 1998, September 2000, September 2002 and March 2004, the FDA completed inspections of our facility, documentation and quality systems with no significant deficiencies of GMP noted. Our facility will continue to be subject to periodic inspections by the FDA and by other auditors. We believe that our manufacturing and quality control procedures meet the requirements of these regulations and that we have established training and self-audit systems designed to ensure compliance.

We have received ISO 13485 certification indicating compliance of our manufacturing facilities with European standards for quality assurance and manufacturing process control. We also have received CE mark certification, which allows us to affix the CE Mark to our Targis and Prostatron products and market them in the European Union. In addition, the Targis and Prostatron systems have been approved for marketing by the Japanese Ministry of Health and Welfare. As of June 30, 2006, we employed 42 individuals in our manufacturing department.

Research and Development

We intend to build upon our scientific and clinical knowledge and relationships to develop innovative future generations of BPH and other urology products. Our research and development efforts are currently focused on improving the function and features of our Cooled ThermoTherapy systems, improving the treatable population and clinical response to Cooled ThermoTherapy treatment and reducing the manufacturing cost of our products. During fiscal year 2006, we received pre-market approval (PMA) from the FDA for the manufacture and sale of our new generation control unit, CoolWave.

During the fiscal years ended June 30, 2006, 2005 and 2004, we spent $3.0 million, $3.1 million, and $2.4 million, respectively, on our research and development efforts. As of June 30, 2006, we employed 16 individuals in our research and development department.

Reimbursement

We believe that third-party reimbursement is essential to the continued adoption of Cooled ThermoTherapy, and that clinical efficacy, overall cost-effectiveness and physician advocacy will be keys to obtaining such reimbursement. We estimate that 60% to 80% of patients who receive Cooled ThermoTherapy treatment in the United States will be eligible for Medicare coverage. The remaining patients will either be covered by private insurers, including traditional indemnity health insurers and managed care organizations, or they will be private-paying patients. As a result, Medicare reimbursement is particularly critical for widespread market adoption of Cooled ThermoTherapy in the United States.

The level of Medicare reimbursement for Cooled ThermoTherapy is dependent on the site of service. Beginning on August 1, 2000, the Centers for Medicare and Medicaid Services (CMS) replaced the reasonable cost basis of reimbursement for outpatient hospital-based procedures, including Cooled ThermoTherapy, with a new fixed rate or prospective payment system. Under this method of reimbursement, a hospital receives a fixed reimbursement for each Cooled ThermoTherapy treatment performed in its facility, approximately $2,100 in calendar year 2006, although the rate varies depending on a wage index and other factors for each hospital. The urologist performing the Cooled ThermoTherapy treatment receives reimbursement of approximately $500 per procedure.

In January 2001, CMS began to reimburse for Cooled ThermoTherapy treatments performed in the urologist’s office. The reimbursement rate (inclusive of the physician’s fee) in calendar year 2006 for Cooled ThermoTherapy procedures performed in the urologist’s office is approximately $3,800 compared to $3,900 in calendar 2005, which is subject to geographic adjustment. Reimbursement rates for calendar year 2007 will be published in the November 2006 edition of the Federal Register.

In July 2003, CMS added the CPT Code covering Cooled ThermoTherapy to the ambulatory surgical centers (ASC) list of Medicare approved procedures providing a reimbursement rate for ASC. As a result, procedures performed in an ASC were reimbursed under a two-part system similar to hospitals: the ASC received a fixed fee of approximately $1,300, the highest amount allowable under this system, while the urologist performing the procedure was reimbursed the same amount as if the treatment occurred in a hospital, approximately $500. The relatively low facility reimbursement relative to the cost of the procedure potentially limited the number of Cooled ThermoTherapy treatments done in an ASC. Effective July 2005, the CPT code covering Cooled ThermoTherapy was deleted from the ASC list of Medicare approved procedures. As a result, effective with that change, urologist who performed Cooled ThermoTherapy procedures in an ASC are reimbursed at the office-based reimbursement rates, approximately $3,800 in calendar year 2006, subject to geographic adjustment.

Private insurance companies and HMO’s make their own determinations regarding coverage and reimbursement based upon “usual and customary” fees. To date, we have received coverage and reimbursement in various geographies from private insurance companies and HMOs throughout the United States. We intend to continue our efforts to gain coverage and reimbursement across the United States. There can be no assurance that we will receive favorable coverage or reimbursement determinations for Cooled ThermoTherapy from these payers or that amounts reimbursed to physicians for performing Cooled ThermoTherapy procedures will be sufficient to encourage physicians to use Cooled ThermoTherapy.

Internationally, reimbursement approvals for the Cooled ThermoTherapy procedure are awarded on an individual-country basis.

Patents and Proprietary Rights

We currently own 46 U.S. and 14 non-U.S. patents. We also have one patent application pending in the United States and in a number of non-U.S. jurisdictions, and we intend to file additional patent applications in the future.

Several of our United States patents claim methods and devices that we believe are critical to providing a safe and efficacious treatment for BPH. There can be no assurance that our patents, or any patents that may be issued as a result of existing or future applications, will offer any degree of protection from competitors or that any of our patents or applications will not be challenged, invalidated or circumvented in the future. In addition, there can be no assurance that our competitors, many of which have substantial resources and have made substantial investments in competing technologies, will not seek to apply for and obtain patents that will prevent, limit or interfere with

our ability to manufacture or market Cooled ThermoTherapy in the United States or in international markets. Further, there can be no assurance that our Cooled ThermoTherapy system does not infringe upon the patent rights or other intellectual property rights of other companies, that we will not be required to seek licenses from other companies or that other companies will not pursue claims of infringement against us.

In addition to patents, we also rely on trade secrets and proprietary know-how that we intend to protect, in part, through proprietary information agreements with employees, consultants and other parties. Our proprietary information agreements with employees and most of our consultants contain standard industry provisions requiring that the individuals assign to us, without additional consideration, any inventions conceived or reduced to practice while employed by or under contract with us, subject to customary exceptions. Our officers and other key employees also agree not to compete with us for a period following termination. There can be no assurance that proprietary information or non-compete agreements with employees, consultants and others will not be breached, that we will have adequate remedies for any such breach, or that third parties will not otherwise gain access to our technology.

Competition

Competition in the market for the treatment of BPH comes from invasive surgical therapies, such as TURP and side-firing lasers (Laserscope, recently purchased by American Medical Systems, and Luminess), drug therapy and other minimally invasive, office-based treatments. There are six well-recognized prescription drugs available in the United States for treating the symptoms of BPH: Flomax (Boehringer Ingelheim International GmbH), Hytrin (Abbott Laboratories), Cardura (Pfizer Inc.), UroXatral (Sanofi-Synthelabo), Proscar (Merck & Co., Inc.) and Avodart (GlaxoSmithKline). Drug therapy is currently the first-line therapy prescribed by most physicians in the United States for BPH. Due to the large yet still uninformed marketplace of men suffering from BPH, we do not consider the drug manufacturers as major threats, but more as alternative therapies that have significant resources to bring awareness to this quality of life condition for which we believe our Cooled ThermoTherapy can provide a safe, effective and long-lasting treatment.

Competition in the market for minimally invasive office-based treatments for BPH continues to grow. Competitive devices include radio frequency (Medtronic); interstitial laser (Johnson & Johnson); non-cooled, low energy microwave (American Medical Systems); low energy microwave combined with balloon dilatation (Boston Scientific/Celsion); high energy microwave with limited cooling (Gyrus Medical); and hot water therapy (Gyrus Medical). Additional competitors may enter the market. We believe Cooled ThermoTherapy provides significant advantages over other office-based BPH therapies. Because Cooled ThermoTherapy does not require punctures or incisions, it can be performed in the physician’s office or other outpatient environments without the need for anesthesia or intravenous sedation. Further, by combining microwave energy with cooling, we can drive more energy deep into the prostate, creating lasting results while preventing damage to the urethra, enhancing patient comfort and reducing complications.

Government Regulation

Governmental regulation in the United States and other countries is a significant factor affecting the research and development, manufacture and marketing of our products. In the United States, the FDA has broad authority under the Federal Food, Drug and Cosmetic Act and the Public Health Service Act to regulate the distribution, manufacture and sale of medical devices. Foreign sales of medical devices are subject to foreign governmental regulation and restrictions that vary from country to country.

Medical devices intended for human use in the United States are classified into one of three categories. Such devices are classified by regulation into either class I (general controls), class II (performance standards) or class III (pre-market approval or PMA) depending upon the level of regulatory control required to provide reasonable assurance of the safety and effectiveness of the device. Good Manufacturing Practices, labeling, maintenance of records and filings with the FDA also apply to medical devices.

Our Cooled ThermoTherapy systems have received FDA clearance for sale in the United States as a class III medical device. In addition, we have obtained CE Mark certification for distribution in Europe and product registration for distribution in Canada and Japan.

The FDA’s regulations require agency approval of a PMA supplement for a class III medical device when certain changes are made to a product if the changes affect the safety and effectiveness of the device. Such changes include, but are not limited to, new indications for use; the use of a different facility or establishment to manufacture, process or package the device; changes in manufacturing methods or quality control systems; changes in vendors used to supply components of the device; changes in performance or design specifications; and certain labeling changes. Any such changes will require FDA approval of a PMA supplement prior to marketing of the device. There can be no assurance that the required approvals of PMA supplements for any changes will be granted on a timely basis or at all, and delays in receipt of, or failure to receive such approvals, or the loss of the approval of the PMA for either of our Cooled ThermoTherapy systems would have a material adverse effect on our business.

The process of obtaining FDA and other required regulatory clearances or approvals is lengthy and expensive. There can be no assurance that we will be able to obtain or maintain the necessary clearances or approvals for clinical testing or for manufacturing or marketing of our products. Failure to comply with applicable regulatory approvals can, among other things, result in warning letters, fines, suspensions of regulatory approvals, product recalls, operating restrictions and criminal prosecution. In addition, government regulation may be established that could prevent, delay, modify or rescind regulatory clearance or approval of our products.

Medical device laws are also in effect in many of the countries outside of the United States in which we do business. These laws range from comprehensive device approval and quality system requirements for some or all of our medical device products to simple requests for product data or certifications. The number and scope of these requirements are increasing. All medical devices sold in Europe must meet the European Medical Device Directive standards and receive CE Mark certification. CE Mark certification involves a comprehensive Quality System program and submission of data on a product to the Notified Body in Europe.

Health Care Regulatory Issues

The health care industry is highly regulated, and there can be no assurance that the regulatory environment in which we operate will not change significantly in the future. In general, regulation of health care related companies is increasing. We anticipate that Congress and state legislatures will continue to review and assess alternative health care delivery and payment systems. We cannot predict what impact the adoption of any federal or state health care reform measures may have on our business.

We regularly monitor developments in laws and regulations relating to our business. We may be required to modify our agreements, operations, marketing and expansion strategies from time to time in response to changes in the statutory and regulatory environment. Although we plan to structure all of our agreements, operations, marketing and strategies in accordance with applicable law, there can be no assurance that our arrangements will not be challenged successfully or that required changes will not have a material adverse effect on operations or profitability.

Product Liability and Insurance

Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Like other participants in the medical device market, we are from time to time involved in lawsuits, claims and proceedings alleging product liability and related claims such as negligence. If product liability claims become substantial, our reputation could be damaged significantly, thereby harming our business. We may be required to pay substantial damage awards as a result of any successful product liability claims. Any product liability claim against us, whether with or without merit, could result in costly litigation, and divert the time, attention, and resources of our management.

As a result of our exposure to product liability claims, we currently carry product liability insurance covering our products with policy limits per occurrence and in the aggregate that we have deemed to be sufficient. We cannot predict, however, whether this insurance is sufficient, or if not, whether we will be able to obtain sufficient insurance to cover the risks associated with our business or whether such insurance will be available at premiums that are commercially reasonable. In addition, these insurance policies must be renewed annually. Although we have been able to obtain liability insurance, such insurance may not be available in the future on acceptable terms, if at all. A successful claim against us or settlement by us with respect to uninsured liabilities or in excess of our insurance coverage, or our inability to maintain insurance in the future, or any claim that results in significant costs to or adverse publicity against us, could have a material adverse effect on our business, financial condition and results of operations.

Employees

As of June 30, 2006, we employed 99 individuals on a full-time basis. We also had several part-time employees and consultants. Although we believe that we have been successful in attracting experienced and capable personnel, there can be no assurance that we will continue to attract and retain qualified personnel. None of our employees are covered under a collective bargaining agreement. We consider our relationship with our employees to be good.

Seasonality

We believe that holidays, major medical conventions and vacations taken by physicians, patients and patient families may have a seasonal impact on our sales. We continue to monitor and assess the impact seasonality may have on demand for our products.

Backlog

As of June 30, 2006, we maintained a modest backlog of product orders. Our policy is to stock enough inventory to be able to ship most orders within a few days of receipt or as requested by our customers. Therefore, we rely on orders placed during a given period for sales during that period. Backlog information as of the end of a particular period is not necessarily indicative of future levels of our revenue.

ITEM 1A. RISK FACTORS

The occurrence of any of the following risks could harm our business. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations. If any of these risks materialize, the trading price of our common stock could decline, and investors may lose all or part of their investment.

We are faced with intense competition and rapid technological and industry change.

The medical device industry is characterized by rapid technological change, changing customer needs and frequent new product introductions. Our products may be rendered obsolete as a result of future innovations. We face intense competition from other device manufacturers and surgical manufacturers, as well as from pharmaceutical companies. Nearly all of our competitors are significantly larger than we are and have greater financial, technical, research, marketing, sales, distribution and other resources than we do. We believe that price competition will continue among products developed in our markets. Our competitors may develop or market technologies and products, including drug-based treatments that are more effective or commercially attractive than any we are developing or marketing. Our competitors may succeed in obtaining regulatory approval and introducing or commercializing products before we do. Such developments could have a significant negative effect on our business, financial condition and results of operations. Even if we are able to compete successfully, we may not be able to do so in a profitable manner.

Our products, including our Cooled ThermoTherapy mobile service and recently approved CoolWave control unit, may not achieve market acceptance, which could limit our future revenue.

Physicians will not recommend Cooled ThermoTherapy procedures unless they conclude, based on clinical data and other factors, that it is an effective alternative to other methods of enlarged prostate treatment, including more established methods. Patient acceptance of the procedure will depend in part upon physician recommendations and on other factors, including the degree of invasiveness and the rate and severity of complications associated with the Cooled ThermoTherapy procedure compared with other therapies. Patient acceptance of the Cooled ThermoTherapy procedure also will depend upon the ability of physicians to educate these patients on their treatment choices. Health care payer acceptance of our procedure will require, among other things, evidence of the cost effectiveness of Cooled ThermoTherapy compared to other BPH therapies. Although we believe Cooled ThermoTherapy offers physicians and patients advantages over competitive therapies for BPH, the success of our product also will depend upon the extent to which physicians and patients perceive our procedure as having these advantages and the extent to which these advantages are relevant to their treatment decision. Our marketing strategy must overcome the difficulties inherent in the introduction of new technology to the medical community. If our Cooled ThermoTherapy procedure is not widely accepted by physicians, patients or payers, or is accepted more slowly than expected, our business will be harmed. Further, we recently introduced our own Cooled ThermoTherapy mobile service and recently received FDA approval of our CoolWave control unit that we launched in the first quarter of fiscal 2007. If our mobile service or our CoolWave control unit are not accepted by physicians, patients, or payers, or are accepted more slowly than expected, our business will be harmed.

Third- party reimbursement is critical to market acceptance of our products.

Our future revenues are subject to uncertainties regarding health care reimbursement and reform. In the United States, health care providers, such as hospitals and physicians, generally rely on third-party payers. Third-party reimbursement is dependent upon decisions by the CMS, contract Medicare carriers, individual managed care organizations, private insurers, foreign governmental health programs and other

payers of health care cost. Failure to receive or maintain favorable coding, coverage and reimbursement determinations for Cooled ThermoTherapy by these organizations could discourage physicians from using our products. We may be unable to sell our products on a profitable basis if third-party payers deny coverage, provide low reimbursement rates or reduce their current levels of reimbursement.

The continuing efforts of government, insurance companies, health maintenance organizations and other payers of health care costs to contain or reduce costs of health care may affect our future revenues and profitability. With recent federal and state government initiatives directed at lowering the total cost of health care, the United States Congress and state legislatures will likely continue to focus on health care reform including the reform of Medicare and Medicaid systems, and on the cost of medical products and services. Additionally, third-party payers are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMO’s that could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may also result in lower prices for, or rejection of, our products. The cost containment measures that health care payers and providers are instituting and the effect of any health care reform could cause reductions in the amount of reimbursement available, and could have a materially adverse effect on our revenues and ability to operate profitably.

We depend upon our Cooled ThermoTherapy products for all of our revenues.

All of our revenues are derived from sales of our Cooled ThermoTherapy system control units and single-use treatment catheters and treatments delivered through our Cooled ThermoTherapy mobile service. As a result, our success is solely dependent upon the success of our Cooled ThermoTherapy products. To date, our Cooled ThermoTherapy systems have not achieved widespread market adoption. If we are unable to widely commercialize the use of these systems successfully through our marketing initiatives, including our company-owned Cooled ThermoTherapy mobile service, our business, financial condition and results of operations will be materially and adversely affected. Further, higher than expected manufacturing, marketing and distribution costs, lower than expected reimbursement levels, lower than expected usage by physicians, and/or other competitive forces may require us to alter our pricing or marketing structure in a manner that could have a material adverse effect on us.

Government regulation can have a significant impact on our business.

Government regulation in the United States and other countries is a significant factor affecting the research and development, manufacture and marketing of our products. In the United States, the FDA has broad authority under the federal Food, Drug and Cosmetic Act and the Public Health Service Act to regulate the distribution, manufacture and sale of medical devices. Sales of medical devices outside the United States are subject to government regulation and restrictions that vary from country to country. The process of obtaining FDA and other required regulatory approvals is lengthy and expensive.

We may not be able to obtain necessary approvals for clinical testing or for the manufacturing or marketing of our products in the United States or in other countries. Failure to comply with applicable regulatory approvals can, among other things, result in fines, suspension of regulatory approvals, product recalls, operating restrictions and criminal prosecution. In addition, government regulations may be established that could prevent, delay, modify or rescind regulatory approval of our products. Any such position or change of position by the FDA may adversely impact our business and financial condition. Regulatory approvals, if granted, may include significant limitations on the indicated uses for which our products may be marketed in the United States or in other countries. In addition to obtaining such approvals, the FDA and foreign regulatory authorities may impose numerous other requirements on us. The FDA prohibits the marketing of approved medical devices for unapproved uses. In addition, product approvals can be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing.

We may not be able to obtain regulatory approvals for our products. If regulatory approvals for our products are not obtained on a timely basis, or not approved as submitted, or at all, it could have a significant negative effect on our financial condition and results of operations. Additionally, delays in receipt of regulatory approvals for our products or failure to receive such approvals, the loss of previously obtained approvals, or failure to comply with existing or future regulatory requirements would have a significant negative effect on our financial condition and results of operations. In addition, the health care industry in the United States is generally subject to fundamental change due to regulatory, as well as political, influences. We anticipate that Congress and state legislatures will continue to review and assess alternative health care delivery and payment systems. Potential approaches that have been considered include controls on health care spending through limitations on the growth of private purchasing groups and price controls. We cannot predict what impact the adoption of any federal or state health care reform measures may have on our business.

We, along with our distributors and health care providers who purchase our products and services, are subject to state and federal laws prohibiting kickbacks or other forms of bribery in the health care industry. We may be subject to civil and criminal prosecution for violations of any of these laws by our agents or us.

We have only attained profitability recently.

Although we produced net earnings of $5.5 million (which includes a $4.6 million non-cash income tax benefit to reduce our valuation allowance related to deferred tax assets) for the year ended June 30, 2006 and $2.8 million for the year ended June 30, 2005, we have incurred losses of approximately $71.6 million since our inception. If physicians do not continue to purchase and use our Cooled ThermoTherapy systems to treat patients with BPH, we may not be able to maintain profitability. Because we expect to continue to incur additional expenses relating to sales and marketing activities and research and development activities, we will need to maintain or increase the revenues we receive from sales of our products in order to continue to operate in a profitable manner. If we are unable to maintain our profitability, we would need to increase our valuation allowance against our gross deferred tax assets which would result in an increase in tax expense in the period we make the determination. We cannot assure you that we will be able to increase our revenues, maintain profitable operations, or successfully implement our business plan or future business opportunities.

We have limited experience manufacturing some of our products and are dependent upon a limited number of third-party suppliers to manufacture our products.

We manufacture the Targis system control unit, our recently approved CoolWave control unit, and single-use treatment catheters for use with our Targis and CoolWave control units at our suburban Minneapolis facility. Our success will depend upon our ability to cost-effectively manufacture a reliable product and deliver that product in a timely manner. Because we lack extensive manufacturing experience, we may encounter difficulties in maintaining production efficiencies, quality control and assurance, component supply and qualified personnel. We cannot assure you that we will be able to manufacture a reliable product and deliver that product to customers in a timely fashion. Our failure to maintain a reputation among our customers as a timely, responsive manufacturer, or our failure to remedy manufacturing issues in a timely manner and to our customers’ satisfaction, or higher than expected manufacturing costs, would adversely affect our business.

Other than the Targis and CoolWave system control units and procedure kits, we outsource the remaining manufacturing for our products. We assemble Targis and CoolWave control units and procedure kits using materials and components supplied by various subcontractors and suppliers, as well as components we fabricate. We rely on single sources for several components, one of which is obtained from a source that has a patent for the technology. Our reliance on outside suppliers for our components involves risks including limited control over the price and uncertainty regarding timely delivery and quality of parts. We have a supply agreement with Accellent Endoscopy (formerly Venusa) for the production of the Prostatron disposable treatment catheters that extends through April 2007. In accordance with our contract, Accellent Endoscopy has notified us of their intentions to cancel the supply agreement at the end of its current term. Prior to this notification, we had already signed an agreement with The MedTech Group, Inc., to become a qualified supplier of our Cooled ThermoTherapy single-use treatment catheter products. As a result, we are currently in the process of transitioning the manufacture of our Prostatron catheters to our future supplier, and in addition, we intend to purchase what we believe are sufficient quantities of Prostatron catheters from our existing supplier prior to April, 2007 in order to meet customer demand during this transition. We expect to have this transition complete by the end of fiscal 2007.

The start-up, transfer, termination or interruption of any of these relationships or products, or the failure of these manufacturers or suppliers, some of which operate in countries outside of the United States, to supply products or components to us on a timely basis or in sufficient quantities, likely would cause us to be unable to meet customer orders for our products and harm our reputation with customers and our business. Identifying and qualifying alternative suppliers of components or manufacturers of products takes time and involves significant additional costs and may delay the production of our products. Further, if we obtain a new supplier for a component, manufacture our product with an alternative component or if our products are manufactured by an alternative manufacturer, we may need to obtain FDA approval of a PMA supplement to reflect changes in product manufacturing and the FDA may require additional testing of any component from new suppliers prior to our use of these components. Further, if FDA approval of a PMA supplement is required, any delays in delivery of our product to customers would be extended and our costs associated with the change in product manufacturing would increase.

The failure of our third-party manufacturers to manufacture the products for us, and the failure of our components suppliers to supply us with the components, consistent with our requirements as to quality, quantity and timeliness, would materially harm our business.

We are dependent on adequate protection of our patent and proprietary rights.

We rely on patents, trade secrets, trademarks, copyrights, know-how, license agreements and contractual provisions to establish and protect our intellectual property rights. However, these legal means afford us only limited protection and may not adequately protect our rights or remedies to gain or keep any advantages we may have over our competitors.

We cannot assure you that others may not independently develop the same or similar technologies or otherwise obtain access to our technology and trade secrets. Our competitors, many of which have substantial resources and may make substantial investments in competing technologies, may apply for and obtain patents that will prevent, limit, or interfere with our ability to manufacture or market our products. Further, while we do not believe that any of our products or processes interfere with the rights of others, third parties may nonetheless assert patent infringement claims against us in the future.

Costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or “know-how” we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others. In connection with the settlement of a patent infringement suit we filed in March 2002, we granted, in January 2004, ProstaLund AB, ProstaLund Operations AB and Circon Corporation (a/k/a ACMI Corporation) a non-exclusive, royalty free license under certain of our patents to sell the ProstaLund transurethral microwave thermotherapy system marketed in the United States by ACMI Corporation as the CoreTherm device.

Any claim of infringement against us may involve significant liabilities to third parties, could require us to seek licenses from third parties, and could prevent us from manufacturing, selling, or using our products. The occurrence of this litigation or the effect of an adverse determination in any of this type of litigation could have a material adverse effect on our business, financial condition and results of operations.

Our business of the manufacturing, marketing, and sale of medical devices involves the risk of liability claims and such claims could seriously harm our business, particularly if our insurance coverage is inadequate.

Our business exposes us to potential product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Like other participants in the medical device market, we are from time to time involved in lawsuits, claims and proceedings alleging product liability and related claims such as negligence. If any current or future product liability claims become substantial, our reputation could be damaged significantly, thereby harming our business. We may be required to pay substantial damage awards as a result of any successful product liability claims. Any product liability claim against us, whether with or without merit, could result in costly litigation, and divert the time, attention, and resources of our management.

As a result of our exposure to product liability claims, we currently carry product liability insurance covering our products with policy limits per occurrence and in the aggregate that we have deemed to be sufficient. Our insurance may not cover certain product liability claims or our liability for any claims may exceed our coverage limits. Therefore, we cannot predict whether this insurance is sufficient, or if not, whether we will be able to obtain sufficient insurance to cover the risks associated with our business or whether such insurance will be available at premiums that are commercially reasonable. In addition, these insurance policies must be renewed annually. Although we have been able to obtain liability insurance, such insurance may not be available in the future on acceptable terms, if at all. A successful claim against us or settlement by us with respect to uninsured liabilities or in excess of our insurance coverage, or our inability to maintain insurance in the future, or any claim that results in significant costs to or adverse publicity against us, could have a material adverse effect on our business, financial condition and results of operations.

Our products may be subject to product recalls even after receiving FDA clearance or approval, which would harm our reputation and our business.

The FDA and similar governmental authorities in other countries in which our products are sold, have the authority to request and, in some cases, require the recall of our products in the event of material deficiencies or defects in design or manufacture. A government-mandated or voluntary recall by us could occur as a result of component failures, manufacturing errors or design defects. Any recall of product would divert managerial and financial resources, harm our reputation with our customers and damage our business.

In December 2003, we determined that a component of one of our Cooled ThermoTherapy system control units may not perform properly under certain conditions. We advised our customers who were using the affected units of an appropriate product protocol to follow pending our implementation of a software solution to resolve the performance issue. We submitted the software update addressing the problem to the FDA and received its approval. We completed the installation of the approved software update during the third quarter of fiscal 2005.

We have limited inventory of Prostatron control units and if customer demand exceeds our expectations, we will experience delays and expense in meeting customer demand that could be significant.

We have previously contracted with third parties for the production of the Prostatron product line pursuant to written supply agreements. Our supply agreement for the production of the Prostatron control unit with EDAP ended on October 1, 2003. At this time, we do not have plans to enter into another supply agreement for the manufacture of Prostatron control units, as we believe our current inventory of Prostatron control units combined with Company owned control units located at customer sites will adequately support customer requirements. If, for any reason, customer demand exceeds our current projections, we could experience significant delays and expend significant resources in obtaining a new supply agreement with EDAP or another manufacturer to meet this customer demand. Therefore, we are likely to experience significant delays in fulfilling unexpected, significant customer demand for our Prostatron control units.

We are dependent on key personnel.

Our failure to attract and retain skilled personnel could hinder the management of our business, our research and development, our sales and marketing efforts, and our manufacturing capabilities. Our future success depends to a significant degree upon the continued services

of key senior management personnel, including Fred B. Parks, our Chairman of the Board and Chief Executive Officer. We have an employment agreement with Mr. Parks that provides that Mr. Parks will serve as our Chairman and Chief Executive Officer and that either party may terminate Mr. Parks’ employment at any time with or without cause. If we terminate Mr. Parks’ employment without cause, however, we would be required to make specified payments to him as described in his employment agreement. We do not have key person life insurance on Mr. Parks. Our future success also depends on our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel. Our inability to retain or attract qualified personnel could have a significant negative effect and thereby materially harm our business and financial condition.

We may not have additional financing available to us.

We generated approximately $1.2 million of net cash from operating activities in the year ended June 30, 2006 and ended that period with approximately $11.1 million of cash and cash equivalents. We believe our $11.1 million in cash and cash equivalents, together with the funds generated from product sales, will be sufficient to fund our working capital and capital resources needs for at least the next 12 months. Our business plan and financing needs are subject to change depending on, among other things, success of our efforts to continue to effectively manage expenses, market conditions, business opportunities and cash flow from operations, if any. We may require additional financing to continue our business, the receipt of which cannot be assured. Such additional financing could be sought from a number of sources, including possible sales of equity or debt securities or loans from banks or other financial institutions. We may not be able to obtain additional financing from any source on reasonable terms, if at all. Any future capital that is available may be raised on terms that are dilutive to our shareholders.

Fluctuations in our future operating results may negatively affect the market price of our common stock.

Our operating results have fluctuated in the past and can be expected to fluctuate from time to time in the future. Some of the factors that may cause these fluctuations include but are not limited to:

•

the timing, volume and pricing of customer orders for both control units and single-use treatment catheters,

•

the impact to the marketplace of competitive products and pricing,

•

the timing of expenditures related to sales and marketing, and research and development, and

•

product availability.

If our operating results are below the expectations of securities analysts or investors, the market price of our common stock may fall abruptly and significantly.

Our stock price may be volatile and a shareholder’s investment could decline in value.

Our stock price has fluctuated in the past and may continue to fluctuate significantly, making it difficult for an investor to resell shares or to resell shares at an attractive price. The market prices for securities of emerging companies have historically been highly volatile. Future events concerning us or our competitors could cause such volatility, including:

•

actual or anticipated variations in our operating results,

•

technological innovations or new commercial products introduced by us or our competitors,

•

developments regarding government and third-party reimbursement,

•

changes in government regulation,

•

government investigation of us or our products,

•

changes in reimbursement rates or methods affecting our products,

•

developments concerning proprietary rights,

•

litigation or public concern as to the safety of our products or our competitors’ products,

•

investor perception of us and our industry,

•

general economic and market conditions including market uncertainty,

•

national or global political events,

•

public confidence in the securities markets and regulation by or of the securities markets, and

•

changes in senior management.

In addition, the stock market is subject to price and volume fluctuations that affect the market prices for companies in general, and small-capitalization, high-technology companies in particular, which are often unrelated to the operating performance of these companies. Any failure by us to meet or exceed estimates of financial analysts is likely to cause a decline in our common stock price.

Future sales of shares of our common stock may negatively affect our stock price.

Future sales of our common stock could have a significant negative effect on the market price of our common stock. In addition, upon exercise of outstanding options, the number of shares outstanding of our common stock could increase substantially. This increase, in turn,

could dilute future earnings per share, if any, and could depress the market value of our common stock. Dilution and potential dilution, the availability of a large amount of shares for sale, and the possibility of additional issuances and sales of our common stock may negatively affect both the trading price of our common stock and the liquidity of our common stock. These sales also might make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we would deem appropriate.

Provisions of Minnesota law, our governing documents and other agreements may deter a change of control of us and may have a possible negative effect on our stock price.

Certain provisions of Minnesota law, our articles of incorporation and bylaws and other agreements may make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of us, including:

•

the provisions of Minnesota law relating to business combinations and control share acquisitions;

•

the provisions of our bylaws regarding the business properly brought before shareholders;

•

the provisions of our articles of incorporation and bylaws regarding our staggered board of directors;

•

the right of our board of directors to establish more than one class or series of shares and to fix the relative rights and preferences of any such different classes or series;

•

our shareholder rights plan, which would cause substantial dilution to any person or group attempting to acquire our company on terms not approved in advance by our board of directors; and

•

the provisions of our stock option plans allowing for the acceleration of vesting or payments of awards granted under the plans in the event of specified events that result in a “change in control” and provisions of agreements with certain of our executive officers requiring payments if their employment is terminated and there is a “change in control.”

These measures could discourage or prevent a takeover of us or changes in our management, even if an acquisition or such changes would be beneficial to our shareholders. This may have a negative effect on the price of our common stock.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

We lease approximately 37,000 square feet of office, manufacturing and warehouse space in a suburb of Minneapolis, Minnesota, pursuant to a lease that expires in March 2008. We believe our facilities will be sufficient to meet our current and future requirements and that additional space at or near the current location will be available at a reasonable cost if additional space is required in the future.

ITEM 3. LEGAL PROCEEDINGS

We have been and are involved in various legal proceedings and other matters that arise in the normal course of our business, including product liability claims that are inherent in the testing, production, marketing and sale of medical devices. Based upon currently available information, we believe that the ultimate resolution of these matters will not have a material effect on the financial position, liquidity or results of operations of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the Nasdaq Global Market System of the NASDAQ Stock Market LLC under the symbol “ULGX.” The following table sets forth quarterly high and low last-sale prices of our common stock for the past two years.


		Quarter
Fiscal Year		First		Second		Third		Fourth
2006	High	$	5.79	$	4.44	$	4.17	$	4.27
	Low		3.89		3.82		3.21		3.00

2005	High	$	15.58	$	7.37	$	6.52	$	5.44
	Low		6.32		4.84		4.54		3.81

The foregoing prices reflect inter-dealer prices, without dealer markup, markdown or commissions, and may not represent actual transactions.

Dividends

To date, we have not declared or paid any cash dividends on our common stock, and we do not intend to do so in the foreseeable future.

Equity Compensation Plan Information

The table below presents our equity compensation plan information as of June 30, 2006:


	(a)	(b)		(c)
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders	1,294,835	$	6.44	1,279,400
Equity compensation plan not approved by security holders	225,000	$	2.75	None
Total	1,519,835	$	5.90	1,279,400

The “equity compensation plans approved by security holders” listed above represent shares issuable under the Urologix, Inc. Amended and Restated 1991 Stock Option Plan, an “employee benefit plan” as defined by Rule 405 of Regulation C of the Securities Act of 1933. Shareholders approved the most recent amendment to the Amended and Restated 1991 Stock Option Plan, which, among other things, increased the number of shares of common stock available under the plan by 1,000,000 shares at the 2004 Annual Meeting of Shareholders held on November 9, 2004.

The 225,000 shares listed under “equity compensation plans not approved by security holders” represent an option to purchase 225,000 shares of the Company’s common stock granted to Fred B. Parks, the Company’s Chairman and Chief Executive Officer. The option was granted to Mr. Parks in connection with his original employment agreement dated May 21, 2003. The option is a non-qualified option exercisable at a price of $2.75 per share. The 225,000 share grant began vesting over the period commencing on May 27, 2003 and ending on May 27, 2007, with 56,268 shares vesting on May 27, 2004, and 1/36th of the remaining 168,732 shares vesting on the 27th of each of the 36 months following May 27, 2004.

ITEM 6. SELECTED FINANCIAL DATA


	Years ended June 30,
	2006			2005			2004			2003			2002
	(in thousands, except per share data)
Statements of Operations Data:
Sales	$	25,885		$	25,813		$	24,324		$	18,775		$	22,742
Cost of goods sold		8,995	(1)		7,810			9,047			8,442	(2)		8,344

Gross profit		16,890			18,003			15,277			10,333			14,398

Costs and Expenses:
Selling, general and administrative		12,940	(1)		11,643			12,338			15,390			12,046
Research and development		2,987	(1)		3,073			2,390			3,675			4,073
Amortization of identifiable intangible assets		194			164			164			164			164
Restructuring (3)		—			—			(200	)		1,275			—

Total costs and expenses		16,121			14,880			14,692			20,504			16,283

Operating earnings (loss)		769			3,123			585			(10,171	)		(1,885	)
Interest income, net		371			138			57			123			234

Earnings (loss) before income taxes		1,140			3,261			642			(10,048	)		(1,651	)
Income tax benefit (expense)		4,354	(4)		(424	)		(286	)		(286	)		(286	)

Net earnings (loss)	$	5,494		$	2,837		$	356		$	(10,334	)	$	(1,937	)

Basic:
Net earnings (loss) per common share	$	0.38		$	0.20		$	0.03		$	(0.74	)	$	(0.14	)
Weighted average shares used in computing net earnings (loss) per share		14,319			14,279			14,015			13,915			13,810
Diluted:
Net earnings (loss) per common share	$	0.38		$	0.19		$	0.02		$	(0.74	)	$	(0.14	)
Weighted average shares used in computing net earnings (loss) per share		14,369			14,759			14,649			13,915			13,810

	2006			2005			2004			2003			2002
Balance Sheet Data:
Cash, cash equivalents and available-for-sale investments	$	11,054		$	10,770		$	7,604		$	4,619		$	12,713
Working capital		16,926			13,174			8,556			5,023			15,534
Total assets		43,898			39,106			36,172			35,862			46,437
Total liabilities		3,918			5,961			6,312			7,329			7,776
Shareholders’ equity		39,980			33,145			29,860			28,533			38,661

(1)	Includes equity-based compensation expense as a result of the adoption of SFAS 123R “Share-Based Payment” on July 1, 2005 as follows:


Cost of goods sold	$	78,000
Selling, general and administrative	$	1,051,000
Research and development	$	141,000

Total	$	1,270,000

(2)	Includes a $610,000 lower of cost or market write-down of control unit inventory and future control unit purchase commitments.

(3)	Represents a fiscal 2003 fourth quarter restructuring charge related to a workforce reduction and facilities consolidation and subsequent $200,000 recovery in fiscal 2004 due to a reduction in the severance related liabilities.

(4)	Includes a $4.6 million non-cash income tax benefit to reduce the valuation allowance related to deferred tax assets.

SELECTED QUARTERLY FINANCIAL DATA


	Year Ended June 30, 2006
	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter
	(in thousands, except per share data)
Sales	$	6,157	$	6,535	$	6,551	$	6,643
Gross profit		4,125		4,353		4,368		4,045
Earnings before income taxes (1)		174		393		487		86
Net earnings		146		319		364		4,665	(2)
Basic net earnings per share	$	0.01	$	0.02	$	0.03	$	0.33
Diluted net earnings per share	$	0.01	$	0.02	$	0.03	$	0.32

	Year Ended June 30, 2005
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	First Quarter		Second Quarter		Third Quarter		Fourth Quarter
	(in thousands, except per share data)
Sales	$	6,051	$	6,350	$	6,524	$	6,888
Gross profit		4,213		4,439		4,522		4,829
Earnings before income taxes		829		835		794		803
Net earnings		720		725		686		706
Basic net earnings per share	$	0.05	$	0.05	$	0.05	$	0.05
Diluted net earnings per share	$	0.05	$	0.05	$	0.05	$	0.05

(1)	Includes approximately $337,000, $364,000, $290,000 and $279,000 for the quarters ended September 30, 2005, December 31, 2005, March 31, 2006 and June 30, 2006, respectively, of equity-based compensation expense as a result of the adoption of SFAS 123R “Share-Based Payment” on July 1, 2005.

(2)	Includes a $4.6 million non-cash income tax benefit to reduce the valuation allowance related to deferred tax assets.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our financial statements and related notes contained elsewhere in this Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of selected factors, including those set forth under “Risk Factors” in Item 1A. All forward-looking statements included herein are based on information available to us as of the date hereof, and we undertake no obligation to update any such forward-looking statements.

OVERVIEW

Urologix, Inc., based in Minneapolis, develops, manufactures and markets minimally invasive medical products for the treatment of urological disorders.

We have developed and offer non-surgical, catheter-based therapies that use a proprietary cooled microwave technology for the treatment of BPH, a disease that dramatically affects more than 23 million men worldwide by causing adverse changes in urinary voiding patterns. We market our products under the Targis and Prostatron names during fiscal 2006 and CoolWave name beginning in July, 2006. Our systems utilize Cooled ThermoTherapy, a targeted microwave energy combined with a unique cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH. Cooled ThermoTherapy can be performed without anesthesia or intravenous sedation and, as a result, can be performed in a physician’s office or an outpatient clinic. We believe Cooled ThermoTherapy provides an efficacious, safe and cost-effective solution for BPH that is clinically superior to medication and is without the complications and side effects inherent in surgical procedures.

We believe that third-party reimbursement is essential to the adoption of Cooled ThermoTherapy, and that clinical efficacy, overall cost effectiveness and physician advocacy is key to obtaining this reimbursement. We estimate that 60% to 80% of patients who receive treatment in the United States will be eligible for Medicare coverage. The remaining patients will either be covered by private insurers, including traditional indemnity health insurers and managed care organizations, or they will be private-paying patients. As a result, Medicare reimbursement is particularly critical for widespread market adoption of Cooled ThermoTherapy in the United States.

We expect to continue to invest in sales and marketing programs, the expansion of our Cooled ThermoTherapy mobile service, and research and development and clinical trials as we focus on growing revenues and continuing to improve our therapy. In addition, we recently received FDA approval for our CoolWave control unit which we launched in the first quarter of fiscal 2007. Our future profitability will be dependent upon, among other factors, our success in achieving increased treatment volume and market adoption of the Cooled ThermoTherapy procedures in the physician’s office, including treatments delivered through our Cooled ThermoTherapy mobile service, our success in obtaining and maintaining necessary regulatory clearances, our ability to manufacture at the volumes and quantities the market requires, the extent to which Medicare and other health care payers continue to reimburse costs of Cooled ThermoTherapy procedures performed in physicians’ offices, hospitals, and ambulatory surgery centers and the amount of reimbursement provided.

In addition, on July 1, 2005 we adopted the fair value recognition provisions of SFAS No. 123R “Share-Based Payment.” The adoption of this statement resulted in the Company recognizing approximately $1.3 million of stock-based compensation expense in fiscal 2006. This expense is reflected as follows:


	For the year ended June 30, 2006
Cost of goods sold	$	78,000
Selling, general and administrative		1,051,000
Research and development		141,000

Total stock-based compensation	$	1,270,000

The decrease in stock-based compensation expense compared to the pro-forma expense of approximately $2.4 million in fiscal 2005 is due primarily to the reduction in unvested options as of the beginning of fiscal 2006, and to the final vesting of options granted in fiscal 2001 and 2002 with weighted average fair values of $4.76 and $8.99, respectively, compared to the continuing vesting and expense associated with options granted in fiscal 2003 and 2004 with lower weighted-average fair values of $2.72 and $2.70, respectively.

Critical Accounting Policies:

In accordance with Securities and Exchange Commission guidance, we set forth below those material accounting policies that we believe are the most critical to an investor’s understanding of our financial results and condition, and require complex management judgment.

Revenue Recognition

We recognize revenue from the sale of Cooled ThermoTherapy system control units upon delivery to the customer. In addition to our sales of Cooled ThermoTherapy system control units, we place our Cooled ThermoTherapy system control units with customers under a variety of programs for both evaluation and longer-term use, and also provide access to Cooled ThermoTherapy treatments via our Cooled ThermoTherapy mobile service. We retain title to the control units placed with our customers for evaluation and longer-term use and do not recognize any revenue on these control units until title has transferred. These programs, as well as our Cooled ThermoTherapy mobile service, are designed to expand access to our technology, and thus expand the market for our single-use treatment catheters. Revenue from our mobile service is recognized upon treatment of the patient. Revenue from the sale of single-use treatment catheters is recognized at the time of shipment. Revenue for warranty service contracts is deferred and recognized over the contract period. We record a provision for estimated sales returns on product sales in the same period as the related revenue is recorded. The provision for estimated sales returns is based on historical sales returns, analysis of credit memo data and other known factors.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is a significant estimate and is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Product Warranty

We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the product failure rates, material usage and service delivery costs, the historical length of time between the sale and resulting warranty claim and other factors. Should actual product failure rates, material usage or repair costs differ from our estimates, revisions to the estimated warranty liability would be required.

Inventories

We value our inventories, consisting primarily of control units, single-use treatment catheters, and raw materials to produce the control units and treatment catheters, at the lower of cost or market value on the first-in, first-out (“FIFO”) basis. The inventory cost includes

both merchandise and freight. A periodic review of the inventory on hand is performed to determine if the inventory is properly stated at the lower of cost or market. In performing this analysis we consider, at a minimum, the following factors: average selling prices, reimbursement changes, and changes in demand for our products due to competitive conditions or market acceptance. Each type of inventory is analyzed to determine net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required.

We also analyze the level of inventory on hand on a periodic basis, in relation to estimated customer requirements to determine whether write-downs for excess, obsolete, or slow-moving inventory are required. Any significant or unanticipated change in the factors noted above could have a significant impact on the value of our inventories and on our reported operating results.

Valuation of Identifiable Intangible Assets and Goodwill

At June 30, 2006, the carrying value of goodwill was $10.2 million. Goodwill is tested for impairment annually or more frequently if changes in circumstance or the occurrence of events suggests an impairment exists. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows.

As of June 30, 2006, identifiable intangible assets consist of developed technologies, customer base and trademarks of $4.6 million, $1.4 million and $1.1 million, respectively. Developed technologies and customer base are amortized using the straight-line method over their estimated useful lives of 15 and 14 years, respectively. The trademark asset, which represents the Prostatron and TUMT trademarks acquired from EDAP on October 1, 2000, was considered to be an intangible asset with an indefinite useful life. During the fourth quarter of fiscal 2006, due to the approval of the CoolWave control unit and our intent to focus marketing on this control unit and trademark, and due to the fact that we are not currently planning to manufacture additional Prostatron control units, it was determined that the trademark intangible no longer had an indefinite life and that amortization of the asset should begin. As a result, we began amortizing the trademark, using the straight-line method, at the beginning of the fourth quarter over its remaining estimated useful life of 9.5 years. We review identifiable intangible assets for impairment as changes in circumstance or the occurrence of events suggests the remaining value is not recoverable.

Income Taxes

We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax bases of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. Based upon management’s assessment of all available evidence, including our cumulative net income for fiscal years 2004, 2005 and 2006, and estimates of future profitability and the overall prospects of our business, we determined that it is more likely than not that we will be able to realize a portion of our deferred tax assets in the future, and as a result recorded a $4.6 million income tax benefit in the fourth quarter of fiscal 2006. To determine the amount of the reduction in the valuation allowance, we projected our income over the remaining estimated life of our definite-lived intangible assets of approximately nine years. The amount of the valuation allowance reduction was based on our projected taxable income. We will continue to assess the potential realization of our deferred tax assets on an annual basis, or on an interim basis if circumstances warrant. If our actual results and updated projections vary significantly from our projections, we would need to increase or decrease our valuation allowance against our gross deferred tax assets. We would adjust our earnings for the deferred tax in the period we make the determination. At June 30, 2006, we carried a valuation allowance of $26.9 million against our remaining deferred tax assets that we do not expect to reverse against deferred tax liabilities within the scheduled reversal period.

Stock-Based Compensation

On July 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123R “Share-Based Payment” using the modified prospective method. Under the modified prospective method, we recognize compensation expense on all stock option awards granted subsequent to July 1, 2005, as well as on any existing awards modified, repurchased or cancelled after July 1, 2005. In addition, compensation expense is recognized on the unvested portion of stock options granted prior to July 1, 2005. The amount of compensation expense is based on the fair value of the option award at the date of grant and is recognized over the requisite service period which corresponds to the option vesting period. Options typically vest 25 percent after the first year of service with the remaining vesting 1/36^th each month thereafter. Generally, options granted to non-employee directors are immediately exercisable at the date of grant. Options are priced based on the closing price of a share of our common stock at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. To determine the inputs for the Black-Scholes option pricing model we use historical data to estimate expected volatility and the period of time that option grants are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The range of these assumptions and the range of option pricing and number of options granted at the different grant dates will impact our calculation of the fair value of the awards and will therefore impact the amount of expense reflected in our statement of operations for any given period.

Results of Operations

Fiscal Years Ended June 30, 2006 and 2005

Net Sales

Net sales increased slightly to $25.9 million in fiscal 2006 from $25.8 million in fiscal 2005. The modest sales growth from fiscal 2005 to fiscal 2006 is attributable to sales from our Cooled ThermoTherapy mobile service which was launched in September 2005. This increase was partially offset by a decrease in average per unit selling prices of single-use treatment catheters primarily due to increased competition in the office-based BPH treatment. Sales of our single-use treatment catheters and mobile treatments accounted for approximately 96% of our revenue for the fiscal year ended June 30, 2006 compared to approximately 95% of revenue in fiscal 2005.

At June 30, 2006, we had a domestic installed base of 554 Cooled ThermoTherapy systems, including the units that are being used by customers pursuant to our evaluation and longer-term use programs and units being used in our Company-owned mobile service, compared to an installed base of 498 units at June 30, 2005.

Cost of Goods Sold and Gross Profit

Cost of goods sold includes raw materials, labor, overhead, and royalties incurred in connection with the production of our Cooled ThermoTherapy system control units and single-use treatment catheters, amortization related to developed technologies, as well as costs associated with the delivery of our Cooled ThermoTherapy mobile service. Cost of goods sold for fiscal 2006 increased to $9.0 million from $7.8 million in fiscal 2005. The increase in cost of goods sold is primarily the result of an increase in the number of treatment catheters sold, additional costs associated with the delivery of our Cooled ThermoTherapy mobile service that was launched in September 2005, an increase in manufacturing variances as a result of manufacturing challenges incurred in the second half of fiscal 2006, as well as approximately $78,000 of equity-based compensation expense related to the adoption of SFAS No. 123R on July 1, 2005.

Gross profit as a percentage of sales decreased to 65% in fiscal 2006 from 70% in the prior fiscal year. The decrease in gross profit rates is primarily the result of decreased year-over-year average per unit selling prices of our single-use treatment catheters, lower overall margins on our mobile unit treatments, as well as the fourth quarter manufacturing variances and the equity-based compensation expense mentioned above.

Selling, General & Administrative

Selling, general and administrative expenses in fiscal 2006 increased to $12.9 million from $11.6 million in fiscal 2005. The increase in selling, general and administrative expense is largely the result of $1.1 million of equity-based compensation expense, as well as increased expenses associated with sales and marketing programs designed to increase the awareness of Cooled ThermoTherapy.

Research and Development

Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, decreased slightly to $3.0 million in fiscal 2006 from $3.1 million in the prior fiscal year. The decrease in expenses is primarily from decreased expenditures on product development activities related to our CoolWave control unit.

Amortization of Identifiable Intangible Assets

Amortization of identifiable intangible assets increased to $194,000 in fiscal 2006 from $164,000 fiscal 2005. The increase in amortization expense is the result of the determination in the fourth quarter of fiscal 2006 to begin amortizing our indefinite-lived trademark on a straight-line basis over its estimated remaining life of 9.5 years at April 1, 2006. The decision to begin amortizing our trademark, which represents the Prostatron and TUMT trademarks acquired from EDAP on October 1, 2000, was due to the approval of the CoolWave control unit and our intent to focus marketing on this control unit and trademark, and due to the fact that we are not currently planning to manufacture additional Prostatron control units.

Net Interest Income

Net interest income for fiscal 2006 increased to $371,000 from $147,000 in the prior fiscal year. The increase is due to higher cash and investment balances and higher interest rates.

Provision for Income Taxes

We recognized an income tax benefit of $4.4 million in fiscal 2006 compared to income tax expense of $424,000 in fiscal 2005. Historically we have carried a full valuation allowance against our deferred tax assets, the majority of which represent net operating loss tax carry forwards which we generated prior to achieving profitability. Based upon management’s assessment of all available evidence, including our cumulative net income for fiscal years 2004, 2005 and 2006, and estimates of future profitability and the overall prospects of our business, we determined that it is more likely than not that we will be able to realize a portion of our deferred tax assets in the future, and as a result recorded a $4.6 million income tax benefit in the fourth quarter of fiscal 2006. The deferred tax benefit of $4.6 million was partially offset by $221,000 of income tax expense related to state taxes and other deferred tax items. Our fiscal 2007 tax rate is expected to exceed 34%. We will no longer be offsetting regular federal income tax expense against our net operating loss carryforwards (as we have in prior years) since we have now established a net deferred tax asset and a portion of equity-based compensation expense will not provide a tax benefit. Because of our tax situation, our future tax rate will be very sensitive to the amount of pre-tax income. Our tax expense will continue to be primarily non-cash.

Fiscal Years Ended June 30, 2005 and 2004

Net Sales

Net sales increased to $25.8 million in fiscal 2005 from $24.3 million in fiscal 2004. The sales growth resulted primarily from increased revenues from the sale of our single-use treatment catheters in the United States partially offset by a decrease in the number of Cooled ThermoTherapy system control units sold during the period as well as lower revenues internationally. Sales of single-use treatment catheters accounted for 95% of revenue in fiscal 2005, compared to 93% in fiscal 2004. Average per unit selling prices of our single-use treatment catheters increased over fiscal 2004 prices primarily due to our price standardization initiative implemented in the second half of fiscal 2004 as well as a stronger mix of sales to our direct office accounts.

At June 30, 2005, we had a domestic installed base of 498 Cooled ThermoTherapy systems, including the units that are being used by customers pursuant to our evaluation and longer-term use programs, compared to an installed base of 427 units at June 30, 2004.

Cost of Goods Sold and Gross Profit

Cost of goods sold includes raw materials, labor, overhead, royalties incurred in connection with the production of our Cooled ThermoTherapy system control units and single-use treatment catheters, and amortization expense related to developed technologies. Cost of goods sold for fiscal 2005 decreased to $7.8 million from $9.0 million in fiscal 2004, due primarily to a decrease in the number of Cooled ThermoTherapy system control units sold during the year, combined with lower per unit manufacturing costs of our single –use treatment catheters, as well as a $160,000 charge we incurred in fiscal 2004 related to a commitment to purchase additional control unit inventory at prices which exceeded the expected future sales value.

Gross profit as a percentage of sales increased to 70% in fiscal 2005 from 63% in the prior fiscal year. The increase in the gross profit rate resulted primarily from an increase in the average per unit selling prices of our single-use treatment catheters combined with a reduction in their average per unit manufacturing costs. Additionally, fiscal 2004 gross profit rates were negatively impacted by the $160,000 charge described above.

Selling, General & Administrative

Selling, general and administrative expenses in fiscal 2005 decreased to $11.6 million from $12.3 million in fiscal 2004. The decrease in expense was due primarily to a reduction in legal expenses related to the patent infringement suit we filed to protect our intellectual property that was settled in January 2004 as well as a reduction in corporate overhead and variable selling expenses, partially offset by an increase in expenses related to Sarbanes-Oxley Section 404 compliance.

Research and Development

Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, increased to $3.1 million in fiscal 2005 from $2.4 million in the prior fiscal year. The increase in expenses resulted primarily from increased expenditures on product development activities related to our next generation CoolWave control unit partially offset by lower clinical trial expenses.

Amortization of Identifiable Intangible Assets

Amortization of identifiable intangible assets was $164,000 for both fiscal 2005 and 2004. This amortization expense is related to the acquired customer base that resulted from the purchase of the Prostatron Cooled ThermoTherapy product line from EDAP in October 2000.

Restructuring

In May 2003, we announced plans for organizational restructuring that eliminated 28 positions within the Company and also resulted in our vacating a portion of our leased facility. During the fourth quarter of fiscal 2003, we recorded a $1.3 million restructuring charge to cover the expenses associated with these items. All of the targeted headcount reductions were completed by June 2003, and we sublet the vacated space beginning in the second quarter of fiscal 2004.

There were no restructuring amounts in fiscal 2005. During fiscal 2004, we recorded a $200,000 restructuring benefit, which resulted from a reduction in our severance obligations related to the May 2003 workforce reduction. All severance obligations have been paid. The lease term on the vacated space runs through fiscal 2008.

Net Interest Income

Net interest income for fiscal 2005 increased to $138,000 from $57,000 in the prior fiscal year. The increase was due to higher cash and investment balances, higher interest rates, as well as a reduction in interest expense associated with the lease obligation assumed as part of the Prostatron acquisition in October 2000. The lease obligation was completed during the third fiscal quarter of 2004.

Provision for Income Taxes

Income tax expense increased to $424,000 for fiscal 2005 from $286,000 in the prior year. The majority of income tax expense represents the increase in the deferred tax liability resulting from the amortization of goodwill and trademarks for tax purposes. The deferred tax liability related to the indefinite lived intangible assets cannot be offset against deferred tax assets with finite lives. The increase in income tax expense in fiscal 2005 was due to federal alternative minimum taxes and state taxes.

Liquidity and Capital Resources

We have financed our operations since inception through sales of equity securities and, to a lesser extent, sales of our Cooled ThermoTherapy system control units and single-use treatment catheters. As of June 30, 2006, we had total cash and cash equivalents of $11.1 million compared to cash, cash equivalents and available-for-sale investments of $10.8 million as of June 30, 2005. The increase in cash and cash equivalents resulted primarily from our net earnings and from the exercise of stock options of approximately $69,000.

Cash Provided by Operating Activities

During fiscal 2006, we generated $1.2 million of cash from operating activities. Our net earnings of $5.5 million combined with depreciation and amortization of $2.0 million and stock-based compensation expense of $1.3 million, were partially offset by an increase in deferred tax assets of $4.5 million, increase in inventories of $1.7 million, increase in accounts receivable of $1.0 million, and decreases in accrued expenses and deferred income of $732,000. The increase in our deferred tax assets is the result of a partial take-down in our valuation allowance of approximately $4.6 million due to the determination in the fourth quarter of fiscal 2006 that it is more likely than not that we will be able to realize a partial benefit from deferred tax assets largely related to net operating loss carryforwards. The increase in inventory is a result of purchases related to the anticipated release of our CoolWave product, as well as inventory to support increased production of Targis catheters. A portion of this inventory was transferred to property and equipment in support of our customer evaluation and longer-term use programs and to support the expansion of our Cooled ThermoTherapy mobile service. The increase in accounts receivable was mainly driven by higher sales volume in June 2006 versus June 2005 and an increase in our days sales outstanding. The decrease in accrued expenses and deferred income is the result of previously accrued fiscal 2005 employee bonuses and June 2005 sales commissions paid in fiscal 2006, as well as decreases in the amount accrued for employee bonuses and sales commissions in fiscal 2006.

Cash Provided by Investing Activities

We used $781,000 for investing activities as a result of the purchase of $953,000 of property and equipment, partially offset by the maturity of $172,000 of available-for-sale investments. The increase in the purchase of property and equipment is the result of the purchase of approximately $309,000 of equipment from three regional mobile service providers in the first quarter of fiscal 2006 to facilitate the launch of our own Cooled ThermoTherapy mobile service. The equipment purchased for the mobile service providers consisted of vans, control units, ultrasounds and monitors and patient monitoring equipment. The remaining increase in property and equipment is largely the result of additional equipment purchased during fiscal 2006 to expand our mobile service offering. During the last three quarters of fiscal 2006 we established nine new mobile routes resulting in mobile service being offered in fourteen select geographies in the United States as of June 30, 2006.

Cash Provided by Financing Activities

During fiscal 2006 we generated $69,000 from financing activities as a result of proceeds from the exercise of stock options.

We plan to continue offering customers a variety of programs for both evaluation and longer-term use of our Cooled ThermoTherapy system control units in addition to purchase options, as well as grow our mobile service which provides physicians and patients with efficient access to our Cooled ThermoTherapy system control units on a pre-scheduled basis. As of June 30, 2006, our property and equipment, net, included approximately $1.9 million of control units used in evaluation or long-term use programs and units used in our Company-owned mobile service. Depending on the growth of these programs, we may use additional capital to finance these programs.

Future contractual commitments, including interest, that will affect cash flows are as follows (in thousands):


	Total		2007	2008
Building and equipment leases	$	615	351	264

We have no contractual commitments beyond fiscal year 2008.

Based upon our financial performance in fiscal 2006, we believe our $11.1 million in cash and cash equivalents at June 30, 2006, together with the funds generated from operations, will be sufficient to fund our working capital and capital resources needs for at least the next 12 months. There can be no assurance, however, that we will not require additional financing in the future or that any additional financing will be available to us on satisfactory terms, if at all.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements.

Recently Issued Accounting Standards

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109.” This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for the Company beginning in fiscal year 2008. We are still evaluating the impact the adoption of this pronouncement will have on our financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents. Increases and decreases in prevailing interest rates generally translate into decreases and increases, respectively, in the fair value of these instruments. Also, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative instruments, the liquidity of the instrument and other general market conditions.

Market risk was estimated as the potential decrease in fair value resulting from a hypothetical 1% change in interest rates and was not materially different from the quarter-end carrying value. Due to the nature of our cash and cash equivalents, we have concluded that we do not have a material market risk exposure.

Our policy is not to enter into derivative financial instruments. We do not have any significant foreign currency exposure since we do not generally transact business in foreign currencies. Therefore, we do not have significant overall currency exposure. In addition, we do not enter into any futures or forward commodity contracts since we do not have significant market risk exposure with respect to commodity prices.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following financial statements are included in the Form 10-K.


Reports of Independent Registered Public Accounting Firm		28
Balance Sheets as of June 30, 2006 and 2005		30
Statements of Operations for the years ended June 30, 2006, 2005 and 2004		31
Statements of Shareholders’ Equity for the years ended June 30, 2006, 2005 and 2004		32
Statements of Cash Flows for the years ended June 30, 2006, 2005 and 2004		33
Notes to Financial Statements		34

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Urologix, Inc.:

We have audited the accompanying balance sheets of Urologix, Inc. (the Company) as of June 30, 2006 and 2005, and the related statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended June 30, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Urologix, Inc. as of June 30, 2006 and 2005, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in note 3 to the financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment, on July 1, 2005.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Urologix, Inc.’s internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated September 8, 2006 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Minneapolis, Minnesota

September 8, 2006

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Urologix, Inc.:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting (Item 9A.(b)), that Urologix, Inc. (the Company) maintained effective internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Urologix, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Urologix, Inc. maintained effective internal control over financial reporting as of June 30, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, Urologix, Inc. maintained, in all material respects, effective internal control over financial reporting as of June 30, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of Urologix, Inc. as of June 30, 2006 and 2005, and the related statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended June 30, 2006, and our report dated September 8, 2006 expressed an unqualified opinion on those financial statements.

/s/ KPMG LLP

Minneapolis, Minnesota

September 8, 2006

Urologix, Inc.

Balance Sheets

(In thousands, except per share data)


	June 30,
	2006			2005
ASSETS
Current Assets:
Cash and cash equivalents	$	11,054		$	10,599
Available-for-sale investments		—			171
Accounts receivable, net of sales and bad debt allowances of $238 and $167		5,234			4,243
Inventories, net		2,634			1,742
Deferred tax asset		992			—
Prepaids and other current assets		184			252

Total current assets		20,098			17,007

Property and equipment:
Property and equipment		11,562			9,977
Less accumulated depreciation		(8,665	)		(7,526	)

Property and equipment, net		2,897			2,451
Other assets		1,288			1,670
Goodwill		10,193			10,193
Identifiable intangible assets, net		7,090			7,785
Deferred tax asset, net		2,332			—

Total assets	$	43,898		$	39,106

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,375		$	1,533
Accrued compensation		531			918
Other accrued expenses		1,024			1,068
Deferred income		242			314

Total current liabilities		3,172			3,833

Deferred tax liability		—			1,152
Deferred income		712			896
Other accrued expenses		34			80

Total liabilities		3,918			5,961

COMMITMENTS AND CONTINGENCIES (Note 9)
Shareholders’ equity:
Common stock, $.01 par value, 25,000 shares authorized; 14,328 and 14,308 shares issued and outstanding		143			143
Additional paid-in capital		111,450			110,110
Accumulated deficit		(71,613	)		(77,107	)
Accumulated other comprehensive income (loss)		—			(1	)

Total shareholders’ equity		39,980			33,145

Total liabilities and shareholders’ equity	$	43,898		$	39,106

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

Urologix, Inc.

Statements of Operations

(In thousands, except per share data)


	For the Years Ended June 30
	2006		2005			2004
SALES	$	25,885	$	25,813		$	24,324
COST OF GOODS SOLD		8,995		7,810			9,047

Gross profit		16,890		18,003			15,277

COSTS AND EXPENSES
Selling, general and administrative		12,940		11,643			12,338
Research and development		2,987		3,073			2,390
Amortization of identifiable intangible assets		194		164			164
Restructuring		—		—			(200	)

Total costs and expenses		16,121		14,880			14,692

OPERATING EARNINGS		769		3,123			585

INTEREST INCOME		371		147			110
INTEREST EXPENSE		—		(9	)		(53	)

EARNINGS BEFORE INCOME TAXES		1,140		3,261			642
INCOME TAX BENEFIT (EXPENSE)		4,354		(424	)		(286	)

NET EARNINGS	$	5,494	$	2,837		$	356

NET EARNINGS PER COMMON SHARE - BASIC	$	0.38	$	0.20		$	0.03

NET EARNINGS PER COMMON SHARE - DILUTED	$	0.38	$	0.19		$	0.02

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - BASIC		14,319		14,279			14,015

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING - DILUTED		14,369		14,759			14,649

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

Urologix, Inc.

Statements of Shareholders’ Equity

(In thousands)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit						Total Shareholders’ Equity
Balance, June 30, 2003	13,962	$	140	$	108,606	$	(80,300	)	$	87		$	28,533
Change in unrealized gains (losses) on investments	—		—		—		—			(78	)		(78	)
Net earnings	—		—		—		356			—			356

Comprehensive earnings	—		—		—		—			—			278
Value of options issued to consultants	—		—		5		—			—			5
Stock options exercised	220		2		1,012		—			—			1,014
Common shares issued under employee stock purchase plan	12		—		30		—			—			30

Balance, June 30, 2004	14,194		142		109,653		(79,944	)		9			29,860
Change in unrealized gains (losses) on investments	—		—		—		—			(10	)		(10	)
Net earnings	—		—		—		2,837			—			2,837

Comprehensive earnings	—		—		—		—			—			2,827
Stock options exercised	114		1		451		—			—			452
Income tax benefit related to employee stock options	—		—		6		—			—			6

Balance, June 30, 2005	14,308		143		110,110		(77,107	)		(1	)		33,145
Change in unrealized gains (losses) on investments	—		—		—		—			1			1
Net earnings	—		—		—		5,494			—			5,494

Comprehensive earnings	—		—		—		—			—			5,495
Stock options exercised	20		—		69		—			—			69
Income tax benefit related to employee stock options	—		—		1		—			—			1
Stock-based compensation	—		—		1,270		—			—			1,270

Balance, June 30, 2006	14,328	$	143	$	111,450	$	(71,613	)	$	—		$	39,980

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

Urologix, Inc.

Statements of Cash Flows

(In thousands)


	For the Years Ended June 30
	2006			2005			2004
OPERATING ACTIVITIES
Net earnings	$	5,494		$	2,837		$	356
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		2,015			1,881			2,001
Employee stock-based compensation expense		1,270			—			—
Value of options issued to consultants		—			—			5
Provision for bad debts		19			63			1
Deferred income taxes		(4,476	)		294			286
Change in operating assets and liabilities:
Accounts receivable		(1,010	)		(1,617	)		(561	)
Inventories		(1,705	)		(502	)		665
Prepaids and other assets		450			498			681
Accounts payable		(158	)		584			(322	)
Accrued expenses and deferred income		(732	)		(1,119	)		(220	)

Net cash provided by operating activities		1,167			2,919			2,892

INVESTING ACTIVITIES
Purchase of property and equipment		(953	)		(91	)		(112	)
Proceeds from sales or maturities of investments		172			2,281			1,352

Net cash (used for) provided by investing activities		(781	)		2,190			1,240

FINANCING ACTIVITIES
Proceeds from issuance of common stock		69			452			1,044
Payments made on capital lease obligations		—			—			(351	)
Payments made on note payable		—			(104	)		(410	)

Net cash provided by financing activities		69			348			283

NET INCREASE IN CASH AND CASH EQUIVALENTS		455			5,457			4,415

CASH AND CASH EQUIVALENTS
Beginning of year		10,599			5,142			727

End of year	$	11,054		$	10,599		$	5,142

Supplemental cash-flow information

Cash paid during the period for interest	$	—		$	16		$	157
Income taxes paid during the period	$	93		$	130		$	9
Net value of inventory transferred to (from) property and equipment	$	813		$	904		$	(84	)

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

UROLOGIX, INC.

Notes to Financial Statements

1. Nature of Business

Description of Operating Activities

Urologix, Inc. (Urologix or “the Company”) designs, develops, manufactures and markets medical devices for the treatment of benign prostatic hyperplasia (BPH), a disease that affects more than 23 million men worldwide by causing adverse changes in urinary voiding patterns. We have developed a catheter-based therapy that uses a proprietary cooled microwave technology for the treatment of BPH. We market our products under the Targis and Prostatron names during fiscal 2006 and CoolWave name beginning in July, 2006. All systems utilize Cooled ThermoTherapy, a targeted microwave energy combined with a unique cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH. Cooled ThermoTherapy can be performed without anesthesia or intravenous sedation and can be performed in a physician’s office or an outpatient clinic. Although we began actively selling our products in 1997, we operated profitably for the first time in fiscal 2004.

2. Significant Accounting Policies

Cash and Cash Equivalents

We classify highly liquid investments with original maturities of 90 days or less as cash equivalents. Cash equivalents are stated at cost, which approximates market value.

Available-for-Sale Investments

We invest in money market funds and U.S. government and investment-grade corporate debt investments with original maturities ranging from 91 days to two years. These investments are considered to be available for sale and are stated at market value, with the resulting unrealized gains or losses reported as a component of comprehensive earnings (loss) in the statements of shareholders’ equity. The gross realized gains and losses on sales of available-for-sale investments were not material for the years ended June 30, 2006, 2005 and 2004. We had no remaining available-for-sale investments at June 30, 2006. Available-for-sale investments consist of corporate and governmental bonds and are quoted at their estimated fair value based on market quotes at June 30, 2005 and 2004 (in thousands) as follows:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Market Value
2005	$	172	$	—	$	(1	)	$	171
2004		2,453		9		—			2,462

Revenue Recognition

Stock-Based Compensation

Trade Accounts Receivable

Trade accounts receivable are recorded at fair value upon the sale of goods or services to customers. They are stated net of allowances for doubtful accounts.

UROLOGIX, INC.

Notes to Financial Statements – (Continued)

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay when determining the adequacy of the allowance. Accounts receivable are charged off after management determines they are uncollectible.

Bad debt provisions and accounts receivable write-offs for the years ended June 30, 2006, 2005 and 2004 were as follows (in thousands):


Years Ended	Beginning Balance		Provisions		Write-offs			Ending Balance
June 30, 2006	$	157	$	19	$	(3	)	$	173
June 30, 2005		262		63		(168	)		157
June 30, 2004		294		1		(33	)		262

Inventories

Inventories are stated at the lower of first-in, first-out cost or market and consist of (in thousands):


	June 30, 2006		June 30, 2005
Raw materials	$	1,511	$	1,153
Work-in-process		498		320
Finished goods		625		269

Total inventories	$	2,634	$	1,742

Goodwill and Identifiable Intangible Assets

At June 30, 2006, the net carrying value of goodwill was $10.2 million. Goodwill is tested for impairment annually or more frequently if changes in circumstance or the occurrence of events suggests an impairment exists. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows. We completed our fiscal 2006 assessment as of May 31, 2006 and have concluded that no impairment existed.

As of June 30, 2006, identifiable intangible assets consist of developed technologies, customer base and trademarks, net of accumulated amortizations, of $4.6 million, $1.4 million and $1.1 million, respectively. Developed technologies and customer base are amortized using the straight-line method over their estimated useful lives of 15 and 14 years, respectively. The trademark asset, which represents the Prostatron and TUMT trademarks acquired from EDAP on October 1, 2000, was considered to be an intangible asset with an indefinite useful life. During the fourth quarter of fiscal 2006, due to the approval of the CoolWave control unit and our intent to focus marketing on this control unit and trademark, and due to the fact that we are not currently planning to manufacturing additional Prostatron control units, it was determined that the trademark intangible no longer had an indefinite life and that amortization of the asset should begin. As a result, we began amortizing the trademark, using the straight-line method, at the beginning of the fourth quarter over its remaining estimated useful life of 9.5 years. We review identifiable intangible assets for impairment as changes in circumstance or the occurrence of events suggests the remaining value is not recoverable.

Property and Equipment

Property and equipment are stated at cost. Company owned Cooled ThermoTherapy system control units located at customer sites for evaluation and longer-term use programs are classified as property and equipment, valued at cost and

UROLOGIX, INC.

Notes to Financial Statements – (Continued)

depreciated over a useful life of four years. Improvements that extend the useful lives of property and equipment are capitalized at cost and depreciated over their remaining useful lives. Repairs and maintenance are charged to expense as incurred. Depreciation is provided using the straight-line method based upon estimated useful lives of three to seven years for machinery, equipment, furniture and vehicles. Leasehold improvements are amortized over the shorter of the useful life of the assets or term of the lease.

Property and equipment, net consisted of the following at June 30, 2006 and 2005 (in thousands):


	June 30, 2006		June 30, 2005
Leasehold improvements, equipment, furniture and vehicles	$	855	$	388
Computer equipment		87		60
Control units		1,955		2,003

Total property and equipment, net	$	2,897	$	2,451

Other Assets

Other assets consist primarily of prepaid royalties resulting from patent licensing agreements. The agreements require us to pay a royalty on sales of Cooled ThermoTherapy products. Royalties are charged to cost of goods sold as sales are recognized.

Warranty Costs

Certain of our products are covered by warranties against defects in material and workmanship for periods of up to twenty-four months. We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of product failure rates, material usage and service delivery costs to sales, the historical length of time between the sale and resulting warranty claim and other factors.

Warranty provisions and claims for the years ended June 30, 2006, 2005 and 2004 were as follows (in thousands):


Years Ended	Beginning Balance		Warranty Provisions		Warranty Claims			Ending Balance
June 30, 2006	$	141	$	92	$	(139	)	$	94
June 30, 2005	$	215	$	62	$	(136	)	$	141
June 30, 2004	$	159	$	127	$	(71	)	$	215

Income Taxes

UROLOGIX, INC.

Notes to Financial Statements – (Continued)

adjust our earnings for the deferred tax in the period we make the determination. At June 30, 2006, we carried a valuation allowance of $26.9 million against our remaining deferred tax assets that we do not expect to reverse against deferred tax liabilities within the scheduled reversal period.

Net Earnings Per Common Share

Basic earnings per share was computed by dividing the net earnings by the weighted average number of shares of common stock outstanding during the periods presented. Diluted net earnings per share was computed by dividing the net earnings by the weighted average number of shares of common stock outstanding plus all potentially dilutive common shares that result from stock options. The number of shares used in earnings per share computations is as follows (in thousands):


	For the years ended June 30,
	2006	2005	2004
Weighted average common shares outstanding - basic	14,319	14,279	14,015
Dilutive effect of stock options	50	480	634

Weighted average common shares outstanding - diluted	14,369	14,759	14,649

The dilutive effect of stock options in the above table excludes 1.1 million, 445,000 and 261,000 of options for which the exercise price was higher than the average market price for the years ended June 30, 2006, 2005 and 2004, respectively.

Research and Development Costs

Research and development costs are charged to expense as incurred.

Financial Instruments

The carrying amounts of our financial instruments approximate fair value, as the majority of these instruments are short-term in nature.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Reclassification

Certain prior year amounts have been reclassified to conform to current year presentation.

Recently Issued Accounting Standards

3. Stock Options

We have a stock option plan that provides for the granting of incentive stock options to employees and nonqualified stock options to employees, directors and consultants. As of June 30, 2006, we had reserved 4,450,910 shares of common stock under this plan, and 1,279,400 shares were available for future grants. Options expire ten years from the date of grant and typically vest 25 percent after the first year of service with the remaining vesting 1/36^theach month thereafter. Under the current terms of our stock option plan, persons serving as non-employee directors at the date of the annual shareholders’ meeting automatically receive a grant to purchase 10,000 shares of common stock at a price equal to fair market value on the date of grant. Generally, such options are immediately exercisable on the date of grant, and expire 10 years from the date of grant, subject to earlier termination one year after the person ceases to be a director of the Company.

UROLOGIX, INC.

Notes to Financial Statements – (Continued)

In addition to the stock option plan described above, Fred B. Parks, the Company’s Chairman and Chief Executive Officer, received an option to purchase 225,000 shares in connection with his original employment agreement dated May 21, 2003. The option is a non-qualified option exercisable at a price of $2.75. The 225,000 share grant began vesting over the period commencing on May 27, 2003 and ends on May 27, 2007, with 56,268 shares vesting on May 27, 2004, and 1/36th of the remaining 168,732 shares vesting on the 27th of each of the 36 months following May 27, 2004.

On July 1, 2005 we adopted the fair value recognition provisions of SFAS No. 123R “Share-Based Payment” using the modified prospective method. As a result, our fiscal 2006 results of operations reflect compensation expense for new stock options granted and vested under our stock incentive plan, and the unvested portion of previous stock option grants which vested during the year. Amounts recognized in the financial statements related to stock-based compensation for the fiscal year ended June 30, 2006 were as follows (in thousands, except per share amounts):


Cost of goods sold	$	78
Selling, general and administrative		1,051
Research and development		141

Total stock-based compensation		1,270
Tax benefit of options issued		—

Total stock-based compensation, net of tax	$	1,270

Impact on net earnings per share:
Basic	$	0.09
Diluted	$	0.09

Prior to July 1, 2005, we accounted for stock-based employee compensation arrangements in accordance with the provisions and related interpretations of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees.” Had compensation cost for stock-based compensation been determined consistent with SFAS No. 123, the net earnings and net earnings per share would have been adjusted to the following pro-forma amounts for the fiscal years ended June 30, 2005 and 2004 (in thousands, except for per share data):


	2005			2004
Net earnings, as reported	$	2,837		$	356

Employee stock-based compensation included in net earnings		—			—
Total stock-based employee compensation expense determined under fair value based method, net of tax		(2,387	)		(2,590	)

Pro forma net earnings (loss)	$	450		$	(2,234	)

Net earnings (loss) per share:
Basic - as reported	$	0.20		$	0.03
Basic - pro forma	$	0.03		$	(0.16	)

Diluted - as reported	$	0.19		$	0.02
Diluted - pro forma	$	0.03		$	(0.16	)

UROLOGIX, INC.

Notes to Financial Statements – (Continued)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. We use historical data to estimate expected volatility and the period of time that option grants are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The following weighted-average assumptions were used to estimate the fair value of options granted during the fiscal years ended June 30 2006, 2005 and 2004 using the Black-Scholes option-pricing model:


	2006		2005		2004
Volatility	86.6	%	88.4	%	87.4	%
Risk-free interest rate	4.1	%	2.9	%	3.3	%
Expected option life	4 years		4 years		4 years
Stock dividend yield	—		—		—

A summary of our option activity for the fiscal year ended June 30, 2006 is as follows:


Options Outstanding							Options Exercisable
Range of Exercise Prices			Outstanding as of June 30, 2006	Weighted-avg. Remaining Contractual Life	Weighted-avg. Exercise Price		Exercisable as of June 30, 2006	Weighted-avg. Exercise Price
$ —	$	2.43	3,334	0.2	$	2.14	2,500	$	2.14
$ 2.44	$	4.86	890,331	6.3	$	3.81	653,584	$	3.79
$ 4.87	$	7.29	355,223	5.9	$	5.72	132,620	$	6.09
$ 7.30	$	9.72	39,688	3.2	$	8.95	37,396	$	9.01
$ 9.73	$	12.15	12,500	4.5	$	12.13	12,500	$	12.13
$12.16	$	14.58	159,295	5.4	$	12.68	101,991	$	12.94
$14.59	$	17.01	40,000	1.6	$	15.82	40,000	$	15.82
$17.02	$	19.44	9,464	5.2	$	18.15	9,464	$	18.15
$19.45	$	21.87	10,000	4.6	$	20.28	10,000	$	20.28

			1,519,835	5.9	$	5.90	1,000,055	$	6.11


	Number of Options	Weighted-avg. Exercise Price Per Option		Weighted-avg. Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at July 1, 2005	1,574,800	$	6.60
Options granted	387,500		5.11
Options forfeited	188,703		6.79
Options expired	233,693		8.79
Options exercised	20,069		3.44

Outstanding at June 30, 2006	1,519,835		5.90	5.9	—
Exercisable at June 30, 2006	1,000,055		6.11	5.9	—

There is no aggregate intrinsic value for options outstanding or exercisable at June 30, 2006 as the average price of our stock for the year ended June 30, 2006 was less than the average exercise price of options outstanding or exercisable.

The weighted average fair value of our options at their grant date was approximately $3.16, $6.56 and $2.86 for the fiscal years ended June 30, 2006, 2005 and 2004, respectively. The total intrinsic value of options exercised during the fiscal years ended June 30, 2006, 2005 and 2004 was $15,000, $572,000 and $1.5 million, respectively.

UROLOGIX, INC.

Notes to Financial Statements – (Continued)

A summary of the status of our nonvested shares as of June 30, 2006 is as follows:


	Number of Options		Weighted-avg. Grant- Date Fair Value
Nonvested at July 1, 2005	668,584		$	4.15
Options granted	387,500			3.16
Options forfeited	(188,703	)		4.25
Options vested	(347,601	)		3.92

Nonvested at June 30, 2006	519,780			3.43

As of June 30, 2006, there was $1.9 million of total unrecognized compensation cost related to nonvested share-based compensation granted under our plan. That cost is expected to be recognized over a weighted-average period of 2.2 years. The total fair value of shares vested during the fiscal years ended June 30, 2006, 2005 and 2004 were $1.4 million, $1.6 million and $1.4 million, respectively.

Employee Stock Purchase Plan

We established an Employee Stock Purchase Plan (the Plan) and reserved 100,000 common shares for issuance under the Plan. Under the terms of the Plan, employees may purchase common shares at prices ranging from 85% to 100% of the shares’ fair market value, as determined by the Company’s board of directors. Eligible employees elect to participate through payroll deductions at the maximum level established by the board of directors, but not to exceed 10% of the participant’s base pay, as defined. As of June 30, 2005, 100,000 shares had been issued under the Plan since inception for gross proceeds of $434,672 and no shares remained available for issuance under the Plan.

4. Identifiable Intangible Assets, Net

Balances of identifiable intangible assets, net, were as follows (in thousands):


	As of June 30, 2006						As of June 30, 2005
	Carrying Amount		Accumulated Amortization		Net		Carrying Amount		Accumulated Amortization		Net
Developed technologies	$	7,500	$	2,875	$	4,625	$	7,500	$	2,375	$	5,125
Customer base		2,300		945		1,355		2,300		780		1,520
Trademarks		1,140		30		1,110		1,140		—		1,140

Total identifiable intangible assets, net	$	10,940	$	3,850	$	7,090	$	10,940	$	3,155	$	7,785

Prior to fiscal 2006, the trademark asset, which represents the Prostatron and TUMT trademarks acquired from EDAP on October 1, 2000, was considered to be an intangible asset with an indefinite useful life. During the fourth quarter of fiscal 2006, due to the approval of the CoolWave control unit and our intent to focus marketing on this control unit and trademark, and due to the fact that we are not currently planning to manufacture additional Prostatron control units, it was determined that the trademark intangible no longer had an indefinite life and that amortization of the asset should begin. As a result, we began amortizing the trademark, using the straight-line method, at the beginning of the fourth quarter over its remaining estimated useful life of 9.5 years.

Future annual amortization expense for identifiable intangible assets is expected to be approximately $784,000 for each of the next five fiscal years.

UROLOGIX, INC.

Notes to Financial Statements – (Continued)

5. Other Accrued Expenses

Other accrued expenses were comprised of the following as of June 30 (in thousands):


	2006		2005
Accrued vacation	$	295	$	251
Other		763		897

Total other accrued expenses	$	1,058	$	1,148

6. Income Taxes

The components of income tax benefit (expense) for each of the years in the three-year period ended June 30, 2006 consist of the following (in thousands):


	For the fiscal year ended June 30,
	2006							2005									2004
	Current			Deferred		Total		Current			Deferred			Total			Current		Deferred			Total
Federal	$	(48	)	$	3,836	$	3,788	$	(46	)	$	(206	)	$	(252	)	$	—	$	(262	)	$	(262	)
State		(58	)		624		566		(84	)		(88	)		(172	)		—		(24	)		(24	)

Total	$	(106	)	$	4,460	$	4,354	$	(130	)	$	(294	)	$	(424	)	$	—	$	(286	)	$	(286	)

A reconciliation of our statutory tax (benefit) expense to our actual tax (benefit) expense is as follows:


	For the years ended June 30,
	2006			2005			2004
Federal statutory rate at 34 percent	$	388		$	1,109		$	218
State taxes, net of federal tax benefit and state valuation allowance		38			114			15
Nondeductible expenses		(3	)		62			37
Stock –based compensation		321			—			—
General business credits		—			39			(50	)
Other		(24	)		—			—
Valuation allowance		(5,074	)		(900	)		66

	$	(4,354	)	$	424		$	286

UROLOGIX, INC.

Notes to Financial Statements – (Continued)

The components of our net deferred tax assets and liabilities are as follows (in thousands):


	June 30,
	2006			2005
Deferred Tax Assets:
Net operating loss carry forward	$	30,596		$	31,528
Charitable contribution carry forward		83			98
Federal and state general business credits		568			568
AMT credit		91			42
Accrued expenses		522			523
Non-qualified stock-based compensation		119			—
Other		45			—

Gross deferred tax assets		32,024			32,759
Deferred Tax Liabilities:
Amortization of definite-lived intangibles		(410	)		(411	)
Amortization of indefinite-lived intangibles		(1,342	)		(1,194	)
Property, plant and equipment		(15	)		(117	)

Gross deferred tax liabilities		(1,767	)		(1,722	)

Net deferred tax assets before valuation allowance		30,257			31,037
Less: valuation allowance		(26,933	)		(32,189	)

Total net deferred tax asset/(liability)	$	3,324		$	(1,152	)

We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. Based upon management’s assessment of all available evidence, including our cumulative net income for the three years ended June 30, 2006, and estimates of future profitability and the overall prospects of our business, we determined that it is more likely than not that we will be able to realize a portion of our deferred tax assets in the future, and as a result recorded a $4.6 million income tax benefit in the fourth quarter of fiscal 2006. To determine the amount of the reduction in the valuation allowance, we projected our income over the remaining estimated life of our definite-lived intangible assets of approximately nine years. The amount of the valuation allowance reduction was based on our projected taxable income. We will continue to assess the potential realization of our deferred tax assets on an annual basis, or on an interim basis if circumstances warrant. If our actual results and updated projections vary significantly from our projections we would need to increase or decrease our valuation allowance against our gross deferred tax assets. We would adjust earnings for the deferred tax in the period we make the determination. As of June 30, 2006 and June 30, 2005, the valuation allowance was $26.9 million and $32.2 million, respectively. Of these amounts, $534,000 as of June 30, 2006 and $529,000 as of June 30, 2005 was attributable to increases in the net operating loss carry forwards resulting from the exercise of stock options. These amounts will be recorded as an increase to additional paid-in-capital if it is determined in the future that this portion of the valuation allowance is no longer required.

At June 30, 2006, the expiration dates and amounts of our net operating loss carryforwards and credits for federal income tax purposes are as follows:


Years expiring (in thousands)	Net Operating Loss		Credits
2008 - 2010	$	935	$	132
2011 - 2015		35,764		156
2016 - 2020		15,555		—
2021 - 2025		25,185		115

	$	77,439	$	403

UROLOGIX, INC.

Notes to Financial Statements – (Continued)

We also have a credit for alternative minimum tax of $91,000 that has no expiration date.

7. Deferred Income

Deferred income as of June 30 consisted of the following (in thousands):


	2006		2005
Deferred royalty income	$	892	$	1,077
Deferred warranty service income		62		133

Total deferred income	$	954	$	1,210

Deferred royalty income consists of a prepaid non-exclusive license previously granted to a third party for the use of technologies. Deferred royalty income is recognized as the greater of amounts due based on actual sales or amortization of the license fee over the remaining license period of five years.

Deferred revenue for prepayments made to us on warranty service contracts is recognized over the contract period ranging from 12 to 24 months.

8. Restructuring

In May 2003, we announced plans for organizational restructuring that eliminated 28 positions within the Company and also resulted in our vacating a portion of our leased facility. During the fourth quarter of fiscal 2003 we recorded a $1.3 million restructuring charge to cover the expenses associated with these items. All of the targeted headcount reductions were completed by June 2003, and we reached an agreement to sublet the vacated space beginning in the second quarter of fiscal 2004.

During fiscal 2004, we recorded a $200,000 restructuring benefit, which resulted from a reduction in our severance obligations related to the May 2003 workforce reduction. All severance obligations have been paid. The lease term on the vacated space runs through fiscal 2008.

Restructuring activity was as follows (in thousands):


	Severance			Lease			Total
Balance, June 30, 2002	$	—		$	—		$	—
Expense accurals		1,000			275			1,275
Cash payments		(364	)		(11	)		(375	)

Balance, June 30, 2003		636			264			900
Expense accurals (reversals)		(210	)		10			(200	)
Cash payments		(426	)		(105	)		(531	)

Balance, June 30, 2004		—			169			169
Cash payments		—			(44	)		(44	)

Balance, June 30, 2005		—			125			125
Cash payments		—			(45	)		(45	)

Balance, June 30, 2006	$	—		$	80		$	80

UROLOGIX, INC.

Notes to Financial Statements – (Continued)

9. Commitments and Contingencies

401(k) Plan

The Company provides a 401(k) savings plan to which eligible employees may make pretax payroll contributions up to IRS allowed limits. Company matching contributions are discretionary, and none have been made to date.

Leases

The Company leases its facility and certain equipment under noncancelable operating leases that expire at various dates through fiscal 2008. Rent expense related to operating leases was approximately $330,000, $328,000, and $311,000, for the years ended June 30, 2006, 2005 and 2004, respectively. Future minimum annual lease commitments under noncancelable operating leases with initial terms of one year or more are $351,000 in fiscal 2007, $264,000 in fiscal 2008, and none thereafter. The future minimum lease payments under noncancelable operating leases have not been reduced by sublease rentals under a noncancelable sublease. As of June 30, 2006, future minimum rentals to be received under a noncancelable sublease were approximately $281,000.

Contingencies

10. Geographic Segment Data

Our business activities include the design, development, marketing and sales of Cooled ThermoTherapy products and have been organized into one operating segment. Our domestic operations primarily consist of product development, sales and marketing. Our foreign operations consist of a network of distributors. There were no long-lived assets located outside of the United States. Revenue attributed to geographic areas based on the location of the customers for the years ended June 30 is as follows (in thousands):


	2006		2005		2004
United States	$	25,609	$	25,578	$	23,867
Europe		94		124		204
Asia		94		103		253
Canada		56		6		—
Other		32		2		—

Total	$	25,885	$	25,813	$	24,324

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and principal financial officer, Fred B. Parks, has evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon this review, he has concluded that these controls and procedures are effective.

(b) Management’s Report On Internal Control Over Financial Reporting

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of June 30, 2006.

KPMG LLP, the independent registered public accounting firm that audited the financial statements in this Form 10-K, has issued an auditors’ report on management’s assessment of the effectiveness of the Company’s internal control over financial reporting, which report is included in this Form 10-K under Item 8. Financial Statements and Supplementary Data.

There have been no changes in internal control over financial reporting that occurred during the fourth quarter of fiscal 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required under this item with respect to directors is contained in the sections “Election of Directors,” “Information Regarding Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Corporate Governance,” and “Code of Ethics” in the Company’s Proxy Statement for the 2006 Annual Meeting of Shareholders (the “2006 Proxy Statement”), a definitive copy of which will be filed with the Commission within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Information required under this item is contained in the sections entitled “Executive Compensation and Other Information,” “Compensation of Directors,” and “Employment and Change in Control Agreements” in the Company’s 2006 Proxy Statement and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information required under this item is contained in the section entitled “Security Ownership of Principal Shareholders and Management” in the Company’s 2006 Proxy Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required under this item is contained in the section entitled “Independent Registered Public Accountants” in the Company’s 2006 Proxy Statement and is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	Documents filed as part of this report.

(1)

Financial Statements.

The financial statements of the Company are listed at Item 8 of this Form 10-K.

(2)

Financial Statement Schedules for years ended June 30, 2006, 2005 and 2004.

None.

(b)

Exhibits.


Exhibit Number	Document	Incorporated by Reference To:
3.1	Amended and Restated Articles of Incorporation.	Exhibit 3.1 of the Company’s Registration Statement on Form S-1 (File No. 333-03304) filed on May 28, 1996 (the “1996 Registration Statement”).

3.2	Amended and Restated Bylaws of the Company.	Exhibit 3.2 of the Company’s Form 10-K for the year ended June 30, 2003 (the “2003 Form 10-K”).

4.1	Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock	Exhibit 1 of the Company’s Registration Statement on Form 8-A (File No. 000-28414) filed on January 16, 1997 (the “1997 Registration Statement”).

4.2	Form of Rights Agreement dated January 14, 1997, between Urologix, Inc. and Norwest Bank Minnesota, N.A. as Rights Agent	Exhibit 1 of the Company’s 1997 Registration Statement.

10.1	* Amended and Restated Urologix, Inc. 1991 Stock Option Plan	Exhibit 4.1 of the Company’s Registration Statement on Form S-8 (File No. 333-124939).

10.2	Lease Agreement dated January 20, 1992, between the Company and Parkers Lake Pointe I Limited Partnership, including Addendum to Lease Agreement dated April 5, 1995	Exhibit 10.5 of the Company’s 1996 Registration Statement.

10.3	* Form of Change In Control Agreement between the Company and its Executive Officers dated as of July 19, 2004.	Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.

10.4	* Letter between Urologix, Inc. and Fred B. Parks dated as of May 29, 2003.	Exhibit 10.11 of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.

10.5	* Letter between Urologix, Inc. and Fred B. Parks dated as of July 19, 2004.	Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2004.

10.6	* Stock Option Agreement with grant date of May 27, 2003 between the Company and Fred B. Parks.	Exhibit 10.6 of the 2003 Form 10-K.

10.9	Amendment of Lease Agreement dated October 4, 2002 between Parkers Lake I Realty Corp. and the Company.	Exhibit 10.9 of the 2003 Form 10-K.

23.1	Consent of KPMG LLP	Attached hereto.

31.1	Certification of Chief Executive Officer (principal executive officer) pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.	Attached hereto.

31.2	Certification of Chief Executive Officer (principal financial officer) pursuant to Rules 13a-14 and 15d-14 of the Exchange Act.	Attached hereto.

32	Certification pursuant to 18 U.S.C. §1350.	Attached hereto.

*	Indicates a management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


UROLOGIX, INC.

By:		/s/ Fred B. Parks
		Fred B. Parks, Chief Executive Officer
		(principal executive officer and principal financial officer)

Each person whose signature appears below hereby constitutes and appoints Fred B. Parks as his true and lawful attorney-in-fact and agent, with full power of substitution, to sign on his behalf, individually and in each capacity stated below, all amendments and post-effective amendments to this Form 10-K and to file the same, with all exhibits thereto and any other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as each might or could do in person, hereby ratifying and confirming each act that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant by the following persons in the capacities indicated on September 13, 2006.


Signature		Title

/s/ Fred B. Parks		Director and Chief Executive Officer
Fred B. Parks		(principal executive officer and principal financial officer)

/s/ Jerry C. Cirino		Director
Jerry C. Cirino

/s/ Sidney W. Emery, Jr.		Director
Sidney W. Emery, Jr.

/s/ Daniel J. Starks		Director
Daniel J. Starks

/s/ Guy C. Jackson		Director
Guy C. Jackson

EX-23.1 2 dex231.htm CONSENT OF KPMG LLP Consent of KPMG LLP

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors

Urologix, Inc.:

We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 333-11981, 333-13271, 333-41385, 333-84869, 333-53634, 333-82854, 333-109259 and 333-124939) of Urologix, Inc. of our reports dated September 8, 2006, with respect to the balance sheets of Urologix, Inc. as of June 30, 2006 and 2005, and the related statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended June 30, 2006, management’s assessment of the effectiveness of internal control over financial reporting as of June 30, 2006 and the effectiveness of internal control over financial reporting as of June 30, 2006, which reports appear in the June 30, 2006 annual report on Form 10-K of Urologix, Inc.

Our report on the financial statements refers to the Company’s adoption of the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment, on July 1, 2005.

/s/ KPMG LLP

Minneapolis, Minnesota

September 13, 2006

EX-31.1 3 dex311.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

EXHIBIT 31.1

CERTIFICATIONS

I, Fred B. Parks, certify that:

I have reviewed this Form 10-K of Urologix, Inc.

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;

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;

The registrant’s other certifying officer(s) 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 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 purposes in accordance with generally accepted accounting principles;

(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;

(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

The registrant’s other certifying officer(s) 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 the 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: September 13, 2006

/s/ Fred B. Parks

Fred B. Parks

Chief Executive Officer

(principal executive officer)

EX-31.2 4 dex312.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

EXHIBIT 31.2

CERTIFICATIONS

I, Fred B. Parks, certify that:

I have reviewed this Form 10-K of Urologix, Inc.

(a)

(b)

(c)

(d)

(a)

(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: September 13, 2006

/s/ Fred B. Parks

Fred B. Parks

Chief Executive Officer

(principal financial officer)

EX-32 5 dex32.htm SECTION 906 CEO AND CFO CERTIFICATION Section 906 CEO and CFO Certification

EXHIBIT 32

CERTIFICATION

The undersigned certifies pursuant to 18 U.S.C. §1350, that:

(1)	The accompanying Annual Report on Form 10-K for the period ended June 30, 2006, fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of Urologix, Inc.

Date: September 13, 2006

/s/ Fred B. Parks

Fred B. Parks

Chief Executive Officer

(principal executive officer and principal financial officer)

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