<PAGE>
 
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


[x]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998

                                       or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

         For the transaction 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                    (I.R.S. Employer
  incorporation or organization)                    Identification No.)

                 14405 21st Avenue North, Minneapolis, MN 55447
                    (Address of principal executive offices)

       Registrant's telephone number, including area code: (612) 475-1400


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 [ ]


As of January 27, 1999, the Company had outstanding 11,417,911 shares of common
stock, $.01 par value.
<PAGE>
 
UROLOGIX, INC.
BALANCE SHEETS

<TABLE>
<CAPTION>

                                                       December 31, 1998   June 30, 1998
                                                       -----------------   -------------
ASSETS                                                     (Unaudited)
<S>                                                       <C>              <C>        
Current assets:
    Cash and cash equivalents                             $  1,087,543     $   882,801
    Available-for-sale securities                           30,572,939      35,616,726
    Accounts receivable                                      1,346,079       4,013,533
    Inventories                                              2,912,997       4,313,895
    Prepaids and other current assets                          747,022         691,102
                                                          ------------     -----------
         Total current assets                               36,666,580      45,518,057
                                                          ------------     -----------
Property and equipment:
    Machinery, equipment and furniture                       4,349,815       4,902,773
    Less - accumulated depreciation                         (1,951,396)     (1,703,293)
                                                          ------------     -----------
         Property and equipment, net                         2,398,419       3,199,480
Other assets, net                                            4,601,529       4,771,222
                                                          ------------     -----------
                                                          $ 43,666,528     $53,488,759
                                                          ============     ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Current maturities of capitalized lease obligations   $     20,450     $    28,138
    Accounts payable                                           926,985       1,960,768
    Accrued liabilities                                      2,309,918       2,154,078
                                                          ------------     -----------
         Total current liabilities                           3,257,353       4,142,984
Capitalized lease obligations, less current maturities           5,520           8,871
                                                          ------------     -----------
         Total liabilities                                   3,262,873       4,151,855
                                                          ------------     -----------
Commitments and contingencies
Shareholders' equity
    Common stock, $.01 par value, 25,000,000 shares            113,632         112,399
      authorized; 11,363,161 and 11,239,892 shares 
      issued and outstanding
    Additional paid-in capital                              91,066,801      91,016,366
    Accumulated deficit                                    (50,915,607)    (41,780,353)
    Cumulative other comprehensive income(loss)                138,829         (11,508)
                                                          ------------     -----------
         Total shareholders' equity                         40,403,655      49,336,904
                                                          ------------     -----------
                                                          $ 43,666,528     $53,488,759
                                                          ============     ===========
</TABLE>

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


                                       2
<PAGE>
 
UROLOGIX, INC.
STATEMENTS OF OPERATIONS
(Unaudited)

<TABLE>
<CAPTION>

                                              Three Months Ended         Six Months Ended
                                                 December 31,              December 31,
                                        --------------------------  -------------------------
                                            1998          1997          1998         1997
                                        -------------  -----------  ------------  -----------
<S>                                     <C>            <C>           <C>          <C>      
Sales                                   $   1,233,947  $ 3,203,845  $  2,858,552  $ 5,802,980
Cost of goods sold                            896,291    2,140,126     3,742,702    3,878,427
                                        -------------  -----------  ------------  -----------
       Gross profit (loss)                    337,656    1,063,719     (884,150)    1,924,553
                                        -------------  -----------  ------------  -----------

Costs and expenses:
    Research and development                1,028,937    1,444,241     2,525,840    2,818,406
    Sales and marketing                     2,037,712    1,520,866     3,694,362    2,853,832
    General and administrative                658,724      631,200     2,957,153    1,132,005
                                        -------------  -----------  ------------  -----------
       Total costs and expenses             3,725,373    3,596,307     9,177,355    6,804,243
                                        -------------  -----------  ------------  -----------

Operating loss                             (3,387,717)  (2,532,588)  (10,061,505)  (4,879,690)
Interest income, net                          451,011      392,281       926,251      723,723
                                        -------------  -----------  ------------  -----------
       Net loss                         $  (2,936,706) $(2,140,307) $ (9,135,254) $(4,155,967)
                                        =============  ===========  ============  ===========
       Basic and diluted net loss per   
       common share                     $       (0.26) $     (0.21)      $ (0.81) $     (0.43)   
                                        =============  ===========  ============  ===========
Basic and diluted weighted average         
    number of common shares
    outstanding                            11,357,694   10,140,194    11,307,914    9,725,045  
</TABLE>
                                        


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


                                       3
<PAGE>
 
UROLOGIX, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)

<TABLE>
<CAPTION>

                                                             For The Six Months Ended
                                                                   December 31,
                                                           ---------------------------
                                                               1998           1997
                                                           ------------  -------------
<S>                                                        <C>           <C>           
OPERATING ACTIVITIES:
    Net loss                                               $ (9,135,254) $  (4,155,967)
    Adjustments to reconcile net loss to net cash used
     for operating activities -
      Loss on impairment of assets                              771,362              -
      Depreciation and Amortization                             775,875        928,620
      Change in operating items:
         Accounts receivable                                  2,667,454     (2,511,054)
         Inventories                                          1,400,898     (1,700,080)
         Prepaids and other current assets                      (55,919)       222,815
         Accounts payable and accrued liabilities              (877,943)       420,326
                                                           ------------  -------------
            Net cash used for operating activities           (4,453,527)    (6,795,340)
                                                           ------------  -------------

INVESTING ACTIVITIES:
    Purchases of property and equipment, net                   (576,484)      (807,498)
    Purchase of available-for-sale securities               (43,110,348)  (235,146,258)
    Proceeds from sale of available-for-sale securities      48,304,472    211,279,723
                                                           ------------  -------------
           Net cash provided by (used in) investing
             activities                                       4,617,640    (24,674,032)
                                                           ------------  -------------

FINANCING ACTIVITIES:
    Proceeds from the sale of common stock, net                       -     31,527,102
    Proceeds from exercise of stock options                      51,668        237,977
    Payments made on capital lease obligations                  (11,039)        (9,835)
                                                           ------------  -------------
           Net cash provided by financing activities             40,629     31,755,244
                                                           ------------  -------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                       204,742        285,872
CASH AND CASH EQUIVALENTS:
    Beginning of period                                         882,801        275,571
                                                           ------------  -------------
    End of Period                                          $  1,087,543  $     561,443
                                                           ------------  -------------

Supplemental cash flow disclosure:

Cash paid for interest                                     $      1,909  $       2,175
                                                           ============  =============
</TABLE>


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

                                       4
<PAGE>
 
UROLOGIX, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 1998
(Unaudited)

1. Basis of presentation

The accompanying unaudited condensed financial statements of Urologix, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions for Form
10-Q and Article 10 of Regulation S-X. The balance sheet as of December 31, 1998
and the statements of operations for the three and six-month periods ended
December 31, 1998 and 1997, and the statements of cash flows for the six-month
periods ended December 31, 1998 and 1997, are unaudited but include all
adjustments (consisting of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial position at such
dates and the operating results and cash flows for those periods. Although the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading, certain information normally
included in financial statements and related footnotes prepared in accordance
with generally-accepted accounting principles has been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
The accompanying financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended June 30, 1998.

Results for any interim period are not necessarily indicative of results for any
other interim period or for the entire year.

2. Basic and diluted net loss per share

Basic and diluted net loss per common share was computed by dividing basic and
diluted net loss by the weighted average number of shares of common stock
outstanding during each period. The impact of common stock equivalents has been
excluded from the computation of weighted average common shares outstanding, as
the effect would be antidilutive.

3. Inventories

Inventories consisted of the following as of:

                   December 31, 1998   June 30, 1998
                  ------------------   --------------
Raw materials         $1,636,191        $2,349,717
Work in process          526,477           132,559
Finished goods           750,329         1,831,619
                      ----------        ----------
                      $2,912,997        $4,313,895
                      ==========        ==========

4. Recently Issued Accounting Standards

The Company adopted SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting in the financial statements all changes in
equity during a period, except those resulting from investments by and
distributions to owners. For the Company, comprehensive income represents net
income adjusted for unrealized gains/losses on available for sale securities.
Comprehensive income(loss) as defined by SFAS No. 130, was $(2,907,217) and
($8,984,917) for the three and six-month periods ended December 31, 1998 and
$(2,028,971) and ($4,028,491) for the three and six-month periods ended
December 31, 1998.


                                       5
<PAGE>
 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

OVERVIEW

         Urologix develops, manufactures and markets minimally invasive medical
devices for the treatment of urological diseases. The Company's initial product,
the Targis(TM) System, is designed to treat benign prostatic hyperplasia
("BPH"), commonly known as "enlarged prostate." BPH dramatically affects the
quality of life of millions of men by causing adverse changes in urinary voiding
patterns. The Targis System has been approved for marketing in the United
States, the 15 European Union countries, Japan and Canada. The Company is
currently selling the Targis System outside the United States through
distributors and in the United States through its direct sales force.

         The Targis procedure is a non-surgical, catheter-based therapy that
uses a proprietary microwave technology that preferentially heats diseased areas
of the prostate to a temperature sufficient to cause cell death, while
simultaneously cooling and protecting the pain-sensitive urethral tissue.
Because the urethra is protected from heat and is not punctured or penetrated, a
Targis procedure can be performed without general or regional anesthesia or
intravenous sedation. Accordingly, the procedure can be performed in a low cost
setting such as a physician's office or an outpatient clinic. The Company
believes that the Targis System provides an efficacious, safe and cost effective
procedure for the treatment of BPH without the complications and side effects
inherent in most current treatments, and as such, is well positioned to address
the needs of physicians, patients and payors.

         The Company's clinical studies demonstrated that most patients who
received the Targis therapy experienced a significant improvement in BPH
symptoms and urine flow rates, minimal complications and post-treatment
discomfort, and were able to return to normal activities within a few days. The
Company submitted results of its clinical studies to the United States Food and
Drug Administration (the "FDA") in its premarket approval application ("PMA") in
February 1997 and subsequently received FDA approval to market the Targis System
in August 1997.

         The Company markets the Targis System in the United States through a
direct sales force and its co-marketing partner, Boston Scientific Corporation
("Boston Scientific"), a world wide developer, manufacturer and marketer of
medical devices. Urologix' direct sales force has sole responsibility for
completing and transacting the sales of the Targis system, while Boston
Scientific, through its Microvasive Urology sales force, assists in the
promotion and marketing of the Targis System among urologists throughout the
United States. The Company has developed a sales and marketing team consisting
of sales and marketing management, product managers, communication specialists
and direct domestic sales representatives, who are all dedicated to marketing
the Targis System. Outside the United States, the Company has developed broad-
based relationships with two parties for market development and sales of the
Targis System. Boston Scientific markets the Targis System in all countries
outside the United States, except Japan. Nihon Kohden Corporation ("Nihon
Kohden"), a major Japanese developer, manufacturer and marketer of medical
devices, markets the Targis System in Japan.

RESULTS OF OPERATIONS

         Sales decreased to $1.2 million and $2.9 million for the three and
six-month peroids ended December 31, 1998 from $3.2 million and $5.8 million for
the same periods in the prior fiscal year due to a decrease in sales to the
Company's international distributors as a result of adequate inventory levels of
the Targis System at international distributors. Sales in the United States
represented approximately 91% of revenue during the first six months of 1998,
compared to 16% of revenue in the first six months of 1997. The Company expects
United States sales of the Targis System to increase in fiscal year 1999
compared to fiscal year 1998; however, international sales are expected to be
minimal due to existing inventory levels of Targis Systems at the Company's
international distributors.

         Cost of goods sold includes raw materials, labor and royalties, as well
as costs incurred in connection with the production of the Targis Systems. Cost
of goods sold decreased to $896,000 during the three-months ended December 31,
1998 compared to $2.1 million for the same period in 1997. Cost of goods sold
was affected primarily by lower sales volumes during the three-months ended
December 31, 1998 when compared to the same period in the prior fiscal year.
Cost of goods sold decreased to $3.7 million during the first six-months of 1998
compared to $3.9 during the first six months of 1997. Costs of goods sold were
affected by two events during the 


                                       6
<PAGE>
 
first six months of 1999. First, as a result of a downward revision to its
forecasted Fiscal 1999 sales in the first fiscal quarter and design changes to
the Targis System, the Company established a reserve of $1.3 million for
inventory that exists in excess quantities. Second, the Company operated under a
reduced production schedule as production was transitioned to a new catheter
design, resulting in the allocation of overhead over a lower production volume.
The new catheter design is expected to have significantly higher production
yields and field reliability. The Company began production of the catheter
in August 1998.

         Research and development expenses include those costs associated with
product development, protection of the Company's intellectual property,
treatment of patients participating in clinical trials, the accumulation of
outcome data to substantiate clinical results and the preparation and submission
of applications for regulatory approvals. Research and development expenses
decreased to $1.0 million and $2.5 million for the three and six-month periods
ended December 31, 1998 from $1.4 million and $2.8 million for the same periods
in the prior fiscal year, due primarily to the conclusion of several clinical
studies, lower regulatory expenses and the settlement of litigation.

         Sales and marketing expenses for the three and six-months ended
December 31, 1998 increased to $2.0 million and $3.7 million from $1.5 million
and $2.9 million during the same periods in the prior fiscal year due primarily
to costs associated with the Company's U.S. marketing launch of the Targis
System and supporting the marketing of the Targis System in Europe and Japan.
These costs included the hiring of sales and marketing management, preparation
of promotional materials, recruitment of field sales representatives and efforts
related to obtaining third-party reimbursement for the Targis System. The
Company expects sales and marketing expenses to increase as it increases its
sales efforts in the United States, and continues supporting its international
distributors' sales efforts.

         General and administrative expenses increased to $659,000 and $3.0
million for the three and six-month periods ended December 31, 1998 from
$631,000 and $1.1 million for the same periods in the prior fiscal year. General
and Administrative expenses for the six month period ended December 31, 1998
reflect a non-recurring charge of $1.6 million incurred in connection with a
reduction in workforce that resulted from the downward revision of the Company's
sales forecast. The charge includes severance costs paid to employees, future
lease costs related to facilities no longer occupied and the impairment of
assets no longer used as a result of the reduction in work force.

         Interest income increased to $451,000 and $926,000 for the three and
six-month periods ended December 31, 1998 from $392,000 and $724,000 for the
same periods in the prior fiscal year, due primarily to higher cash and
investment balances.

LIQUIDITY AND CAPITAL RESOURCES

         The Company has financed its operations since inception primarily
through sales of equity securities and, to a lesser extent, sales of the Targis
System. As of December 31, 1998, the Company had total cash, cash equivalents
and available-for-sale securities of $31.7 million and working capital of $33.4
million. During the six months ended December 31, 1998 the Company used
approximately $5.0 million of cash for operating activities and property and
equipment purchases, which amounts were funded primarily by proceeds from
available-for-sale securities.

         At December 31, 1998, the Company had committed to purchase
approximately $500,000 in components for the Targis Systems from a third-party
vendor.

         The Company expects to continue to incur additional losses, and will
use its working capital as it incurs substantial expenses related to the
marketing and sale of the Targis System, clinical trials and research and
development activities. In addition, should the Company choose to rent Targis
System control units to customers in the future, substantial capital could be
required. Although the Company believes that existing cash, cash equivalents and
available-for-sale securities will be sufficient to fund its operations for the
next 24 months, there can be no assurance that the Company will not require
additional financing in the future or that any additional financing will be
available to the Company on satisfactory terms, if at all.


                                       7
<PAGE>

YEAR 2000 ISSUE
 
         The Company is evaluating the potential impact of what is commonly
referred to as the Year 2000 issue, concerning the inability of certain
information systems to properly recognize and process dates containing the year
2000 and beyond. The Company has established a dedicated Year 2000 team working
with every operational area throughout the Company, and this team has worked
with management to commence the following steps: (i) implementing a Year 2000
Assessment and Testing Plan for all internal information systems and other
systems that contain microcontrollers that may be affected by the Year 2000 date
change; (ii) implementing a Year 2000 Assessment and Testing Plan for all
Company products, (iii) communicating with third parties that supply product to
the Company to ensure they are addressing the Year 2000 issue; and (iv)
contingency and disaster recovery planning to ensure Year 2000 problem
resolution.

         The Company has completed testing and established compliance with
respect to all of its systems and products, subject to possible equipment
upgrades during 1999 and ongoing communications with third parties. Regardless
of the Year 2000 compliance of the Company's systems and products, there can be
no assurance that the Company will not be adversely affected by the failure of
others to become Year 2000 compliant.

         The Company estimates that its direct costs for Year 2000 compliance
will consist of costs related to the staff time devoted to Year 2000 compliance.
The Company does not expect capital expenditures will be necessary related to
Year 2000 compliance. Costs and capital expenditures in these areas have not
been material for historical periods.

As noted below under "Forward-Looking Statements," statements in this section
that are not historical or current facts are forward-looking statements made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, including statements regarding the timetable for Year 2000
compliance, the Company's costs and capital expenditures, the success of the
Company's efforts and others' efforts to achieve compliance, and the effects of
the Year 2000 issue on the Company's future financial condition and results of
operations. These statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from historical results and
those presently anticipated or projected. The following important factors, among
others, could affect the accuracy of these statements: (i) the inherent
uncertainty of the costs and timing of achieving compliance on the wide variety
of systems used by the Company, (ii) the reliance on the efforts of vendors,
customers, government agencies and other third parties to achieve adequate
compliance and avoid disruption of the Company's business in early 2000 and
(iii) the uncertainty of the ultimate costs and consequences of any
unanticipated disruption in the Company's business resulting from the failure of
one of the Company's applications or of a third party's systems. The foregoing
list is not exhaustive, and the Company disclaims any obligation subsequently to
revise any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.

FORWARD-LOOKING STATEMENTS

         Statements included in this Form 10-Q that are not historical or
current facts are "forward-looking statements" made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995 and are
subject to certain risks and uncertainties that could cause actual results to
differ materially. These factors include (i) competition from other existing or
new BPH treatments; (ii) the Company's ability to successfully market its
product in the United States through sales representatives; (iii) the ability of
the Company's distributors to successfully market and sell the Company's
products in markets outside the United States; (iv) the Company's ability to
successfully manufacture the Targis System in sufficient quantities to meet
future demand for the products; and (v) the extent to which the physicians
performing the Targis System procedures are able to obtain third party
reimbursement. A detailed discussion of risks and uncertainties may be found in
the Section entitled "Business - Forward Looking Statements" in Urologix Form
10-K for the year ended June 30, 1998.


                                       8
<PAGE>
 
PART II - OTHER INFORMATION

Item 1.  Submission of Matters to a Vote of Securities Holders

         On January 14, 1999 the Company held its Annual Shareholders' Meeting.
There were two matters submitted to vote of security holders, (i) the election
of three directors; (ii) the approval of certain amendments to the Urologix,
Inc. 1991 Amended and Restated Stock Option Plan. The directors were elected to
serve a three year term expiring at the Annual Meeting following the year 2001,
or until their respective successors are duly elected. Listed below are the
names of the three directors elected and their respective vote counts.

           Bobby I. Griffin                For:           9,634,135
                                           Withheld:        120,798
           Robert R. Momsen                For:           9,581,506
                                           Withheld:        173,427
           Michael M. Selzer Jr.           For:           9,632,835
                                           Withheld:        122,098

Listed below is the vote count related to the second matter submitted:

Proposal to approve certain amendments to the Urologix, Inc. 1991 Amended and
Restated Option Plan.

                        For:            8,423,393
                        Against:        1,206,754
                        Abstain:          124,786

Item 2.  Exhibits and Reports on Form 8-K

(a)      Exhibits

         10.1   Co-Marketing Agreement dated October 6, 1998 between Urologix, 
                Inc. and Boston Scientific Corporation (1)

         27.1   Financial Data Schedule

(b)      Reports on Form 8-K

         During the quarter for which this Quarterly Report is filed, the
Company filed no Reports on form 8-K.


--------------
(1) Certain information has been deleted from this exhibit and filed separately
    with the Securities and Exchange Commission pursuant to a request for 
    confidential treatment under Rule 24b-2.

                                       9
<PAGE>
 
                                   SIGNATURES


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

Date February 8, 1999



Urologix, Inc.                   
---------------------------
(Registrant)



/s/ Michael M. Selzer, Jr.                  
---------------------------
Michael M. Selzer, Jr.
President and Chief Executive Officer
 (Duly Authorized Officer)




/s/ Wesley E. Johnson, Jr.                  
---------------------------
Wesley E. Johnson, Jr.
Vice President/Finance and Chief
     Financial Officer
(Principal Financial Officer)




                                       10