---

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 SEPTEMBER 30, 2006

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 incorporation or organization) |  | (I.R.S. 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



---

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 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

As of November 1, 2006, the Company had outstanding 14,333,350 shares of common stock, $.01 par value.



---



---

PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Urologix, Inc.

Condensed Balance Sheets

(In
thousands, except per share data)



|                                                                                                        |  |                   |         |   |               |   |         |  
|------------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                        |  | September 30,2006 |         |   | June 30, 2006 |  
|                                                                                                        |  | (unaudited)       |         |   | (*)           |  
|ASSETS                                                                                                  |  |                   |         |   |               |   |         |  
|Current assets:                                                                                         |  |                   |         |   |               |   |         |  
|Cash and cash equivalents                                                                               |  | $                 | 10,820  |   |               | $ | 11,054  |  
|Accounts receivable, net of allowances of $261 and $238                                                 |  |                   | 4,193   |   |               |   | 5,234   |  
|Inventories                                                                                             |  |                   | 2,894   |   |               |   | 2,634   |  
|Deferred tax asset                                                                                      |  |                   | 992     |   |               |   | 992     |  
|Prepaids and other current assets                                                                       |  |                   | 334     |   |               |   | 184     |  
|                                                                                                        |  |                   |         |   |               |   |         |  
|Total current assets                                                                                    |  |                   | 19,233  |   |               |   | 20,098  |  
|                                                                                                        |  |                   |         |   |               |   |         |  
|Property and equipment:                                                                                 |  |                   |         |   |               |   |         |  
|Machinery, equipment and furniture                                                                      |  |                   | 11,928  |   |               |   | 11,562  |  
|Less accumulated depreciation                                                                           |  |                   | (8,993  | ) |               |   | (8,665  | )
|                                                                                                        |  |                   |         |   |               |   |         |  
|Property and equipment, net                                                                             |  |                   | 2,935   |   |               |   | 2,897   |  
|Other assets                                                                                            |  |                   | 1,208   |   |               |   | 1,288   |  
|Goodwill                                                                                                |  |                   | 10,193  |   |               |   | 10,193  |  
|Other intangible assets, net                                                                            |  |                   | 6,894   |   |               |   | 7,090   |  
|Deferred tax asset, net                                                                                 |  |                   | 2,332   |   |               |   | 2,332   |  
|                                                                                                        |  |                   |         |   |               |   |         |  
|Total assets                                                                                            |  | $                 | 42,795  |   |               | $ | 43,898  |  
|                                                                                                        |  |                   |         |   |               |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                    |  |                   |         |   |               |   |         |  
|Current liabilities:                                                                                    |  |                   |         |   |               |   |         |  
|Accounts payable                                                                                        |  | $                 | 951     |   |               | $ | 1,375   |  
|Accrued compensation                                                                                    |  |                   | 480     |   |               |   | 826     |  
|Other accrued expenses                                                                                  |  |                   | 637     |   |               |   | 729     |  
|Deferred income                                                                                         |  |                   | 224     |   |               |   | 242     |  
|                                                                                                        |  |                   |         |   |               |   |         |  
|Total current liabilities                                                                               |  |                   | 2,292   |   |               |   | 3,172   |  
|Deferred income                                                                                         |  |                   | 665     |   |               |   | 712     |  
|Other accrued expenses                                                                                  |  |                   | 23      |   |               |   | 34      |  
|                                                                                                        |  |                   |         |   |               |   |         |  
|Total liabilities                                                                                       |  |                   | 2,980   |   |               |   | 3,918   |  
|                                                                                                        |  |                   |         |   |               |   |         |  
|COMMITMENTS AND CONTINGENCIES (Note 10)                                                                 |  |                   |         |   |               |   |         |  
|Shareholders equity:                                                                                   |  |                   |         |   |               |   |         |  
|Common stock, $.01 par value, 25,000 shares authorized; 14,332 and 14,328 shares issued and outstanding |  |                   | 143     |   |               |   | 143     |  
|Additional paid-in capital                                                                              |  |                   | 111,811 |   |               |   | 111,450 |  
|Accumulated deficit                                                                                     |  |                   | (72,139 | ) |               |   | (71,613 | )
|                                                                                                        |  |                   |         |   |               |   |         |  
|Total shareholders equity                                                                              |  |                   | 39,815  |   |               |   | 39,980  |  
|                                                                                                        |  |                   |         |   |               |   |         |  
|Total liabilities and shareholders equity                                                              |  | $                 | 42,795  |   |               | $ | 43,898  |  
|                                                                                                        |  |                   |         |   |               |   |         |  

---

|(*) | The Balance Sheet at June 30, 2006 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



---

Urologix, Inc.

Condensed Statements of Operations

(In thousands, except per share data)

(Unaudited)



|                                                                         |  |                                 |        |   |      |   |        |  
|------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                         |  | Three Months EndedSeptember 30, |       
|                                                                         |  | 2006                            |        |   | 2005 |  
|Sales                                                                    |  | $                               | 5,415  |   |      | $ | 6,157  |  
|Cost of goods sold                                                       |  |                                 | 2,410  |   |      |   | 2,032  |  
|                                                                         |  |                                 |        |   |      |   |        |  
|Gross profit                                                             |  |                                 | 3,005  |   |      |   | 4,125  |  
|                                                                         |  |                                 |        |   |      |   |        |  
|Costs and expenses:                                                      |  |                                 |        |   |      |   |        |  
|Selling, general and administrative                                      |  |                                 | 2,973  |   |      |   | 3,171  |  
|Research and development                                                 |  |                                 | 616    |   |      |   | 796    |  
|Amortization of intangible assets                                        |  |                                 | 71     |   |      |   | 41     |  
|                                                                         |  |                                 |        |   |      |   |        |  
|Total costs and expenses                                                 |  |                                 | 3,660  |   |      |   | 4,008  |  
|                                                                         |  |                                 |        |   |      |   |        |  
|Operating (loss) earnings                                                |  |                                 | (655   | ) |      |   | 117    |  
|Interest income                                                          |  |                                 | 129    |   |      |   | 57     |  
|                                                                         |  |                                 |        |   |      |   |        |  
|Net (loss) earnings before taxes                                         |  | $                               | (526   | ) |      | $ | 174    |  
|                                                                         |  |                                
|Provision for income taxes                                               |  |                                 |       |   |      |   | (28    | )
|                                                                         |  |                                 |        |   |      |   |        |  
|Net (loss) earnings                                                      |  | $                               | (526   | ) |      | $ | 146    |  
|                                                                         |  |                                 |        |   |      |   |        |  
|Net (loss) earnings per common share - basic                             |  | $                               | (0.04  | ) |      | $ | 0.01   |  
|                                                                         |  |                                 |        |   |      |   |        |  
|Net (loss) earnings per common share - diluted                           |  | $                               | (0.04  | ) |      | $ | 0.01   |  
|                                                                         |  |                                 |        |   |      |   |        |  
|Weighted average number of shares used in basic per share calculations   |  |                                 | 14,330 |   |      |   | 14,311 |  
|                                                                         |  |                                 |        |   |      |   |        |  
|Weighted average number of shares used in diluted per share calculations |  |                                 | 14,330 |   |      |   | 14,404 |  
|                                                                         |  |                                 |        |   |      |   |        |  

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



---

Urologix, Inc.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                        |  |                                 |        |   |      |   |        |  
|--------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                        |  | Three Months EndedSeptember 30, |       
|                                                                                        |  | 2006                            |        |   | 2005 |  
|Operating Activities:                                                                   |  |                                 |        |   |      |   |        |  
|Net (loss) earnings                                                                     |  | $                               | (526   | ) |      | $ | 146    |  
|Adjustments to reconcile net (loss) earnings to net cash used for operating activities: |  |                                 |        |   |      |   |        |  
|Depreciation and amortization                                                           |  |                                 | 514    |   |      |   | 473    |  
|Provision for bad debts                                                                 |  |                                 | 47     |   |      |   | 18     |  
|Loss on disposal of assets                                                              |  |                                 |       |   |      |   | 1      |  
|Employee stock-based compensation expense                                               |  |                                 | 353    |   |      |   | 337    |  
|Deferred income taxes                                                                   |  |                                 |       |   |      |   | 56     |  
|Change in operating items:                                                              |  |                                 |        |   |      |   |        |  
|Accounts receivable                                                                     |  |                                 | 994    |   |      |   | (23    | )
|Inventories                                                                             |  |                                 | (397   | ) |      |   | (555   | )
|Prepaids and other assets                                                               |  |                                 | (70    | ) |      |   | (27    | )
|Accounts payable                                                                        |  |                                 | (424   | ) |      |   | 98     |  
|Accrued expenses and deferred income                                                    |  |                                 | (514   | ) |      |   | (639   | )
|                                                                                        |  |                                 |        |   |      |   |        |  
|Net cash used for operating activities                                                  |  |                                 | (23    | ) |      |   | (115   | )
|                                                                                        |  |                                 |        |   |      |   |        |  
|Investing Activities:                                                                   |  |                                 |        |   |      |   |        |  
|Purchase of property and equipment                                                      |  |                                 | (219   | ) |      |   | (396   | )
|Proceeds from sale/maturity of available-for-sale investments                           |  |                                 |       |   |      |   | 145    |  
|                                                                                        |  |                                 |        |   |      |   |        |  
|Net cash used for investing activities                                                  |  |                                 | (219   | ) |      |   | (251   | )
|                                                                                        |  |                                 |        |   |      |   |        |  
|Financing Activities:                                                                   |  |                                 |        |   |      |   |        |  
|Proceeds from exercise of stock options                                                 |  |                                 | 8      |   |      |   | 22     |  
|                                                                                        |  |                                 |        |   |      |   |        |  
|Net cash provided by financing activities                                               |  |                                 | 8      |   |      |   | 22     |  
|                                                                                        |  |                                 |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                               |  |                                 | (234   | ) |      |   | (344   | )
|Cash and cash equivalents:                                                              |  |                                 |        |   |      |   |        |  
|Beginning of period                                                                     |  |                                 | 11,054 |   |      |   | 10,599 |  
|                                                                                        |  |                                 |        |   |      |   |        |  
|End of period                                                                           |  |                                 | 10,820 |   |      |   | 10,255 |  
|                                                                                        |  |                                 |        |   |      |   |        |  
|Supplemental cash-flow information                                                      |  |                                 |        |   |      |   |        |  
|Net value of inventory transferred to property and equipment                            |  | $                               | 137    |   |      | $ | 241    |  

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



---

Urologix, Inc.

Notes to Condensed Financial Statements

September 30, 2006

(Unaudited)

1. Basis of Presentation

The accompanying unaudited condensed financial statements of Urologix, Inc. (the Company, Urologix,
We or Our) 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
September 30, 2006 and the statements of operations and cash flows for the three months ended September 30, 2006 and 2005 are unaudited but include all adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of the financial position at such date and the operating results and cash flows for those periods. 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 included
in Urologix Annual Report on Form 10-K for the year ended June 30, 2006.

Results for any interim period shown in this report
are not necessarily indicative of results to be expected for any other interim period or for the entire year. Certain prior year amounts have been reclassified to conform to current year presentation.

2. Significant Accounting Policies

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 long-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.

3. 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 and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.



---

Urologix, Inc.

Notes to Condensed Financial Statements

September 30, 2006

(Unaudited)

4. Stock-Based Compensation

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 September 30, 2006, we had reserved 4,450,910 shares of common stock under this plan, and 1,283,829 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 1/36theach month thereafter.
Under the current terms of our stock option plan, persons serving as non-employee directors at the date of the annual shareholder 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. 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.

In addition to the stock option plan described above, Fred B. Parks, our 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, as of September 30, 2006 and 2005, our results of operations reflect compensation expense recognized over the requisite service period for new stock options granted since July 1, 2005, and the unvested
portion of stock option grants made prior to July 1, 2005 which vested during the quarter. Amounts recognized in the financial statements related to stock-based compensation were as follows (in thousands, except per share amounts):



|                                           |  |                                 |       |   |      |   |       |  
|------------------------------------------ |  | ------------------------------- | ----- | - | ---- | - | ----- | -
|                                           |  | Three months endedSeptember 30, |      
|                                           |  | 2006                            |       |   | 2005 |  
|Cost of goods sold                         |  | $                               | 36    |   |      | $ | 14    |  
|Selling, general and administrative        |  |                                 | 266   |   |      |   | 272   |  
|Research and development                   |  |                                 | 51    |   |      |   | 51    |  
|                                           |  |                                 |       |   |      |   |       |  
|Total cost of stock-based compensation     |  |                                 | 353   |   |      |   | 337   |  
|Tax benefit of options issued              |  |                                 |      |   |      |   |      |  
|                                           |  |                                 |       |   |      |   |       |  
|Total stock-based compensation, net of tax |  | $                               | 353   |   |      | $ | 337   |  
|                                           |  |                                 |       |   |      |   |       |  
|Impact on net (loss) earnings per share:   |  |                                 |       |   |      |   |       |  
|Basic                                      |  | $                               | (0.02 | ) |      | $ | (0.02 | )
|Diluted                                    |  | $                               | (0.02 | ) |      | $ | (0.02 | )



---

Urologix, Inc.

Notes to Condensed Financial Statements

September 30, 2006

(Unaudited)

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, the period of time that option grants are expected to be outstanding, as well as employee
termination behavior. 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 assumptions were used to estimate the fair value of options granted during the
three-month periods ended September 30, 2006 and 2005 using the Black-Scholes option-pricing model:



|                         |  |           |   |  |           |  
|------------------------ |  | --------- | - |  | --------- | -
|                         |  | 2006      |   |  | 2005      |  
|Volatility               |  | 70.6      | % |  | 86.9      | %
|Risk-free interest rates |  | 5.0       | % |  | 3.9       | %
|Expected option life     |  | 3.2 years |   |  | 3.6 years |  
|Stock dividend yield     |  |          |   |  |          |  

As of September 30, 2006, there was $1.8 million of total unrecognized compensation cost
related to unvested share-based compensation expense granted under our plan. That cost is expected to be recognized over a weighted-average period of 2.3 years.

5. Basic and Diluted (Loss) Earnings Per Share

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



|                                                     |  |                                 |  |       
|---------------------------------------------------- |  | ------------------------------- |  | ------
|                                                     |  | Three months endedSeptember 30,
|                                                     |  | 2006                            |  | 2005  
|Weighted average common shares outstanding - basic   |  | 14,330                          |  | 14,311
|Dilutive effect of stock options                     |  |                                |  | 93    
|                                                     |  |                                 |  |       
|Weighted average common shares outstanding - diluted |  | 14,330                          |  | 14,404
|                                                     |  |                                 |  |       

The dilutive effect of stock options in the above table excludes 1,023,000 of options for which
the exercise price was higher than the average market price for both the three month periods ended September 30, 2006 and 2005. Dilutive potential common shares of 4,709 were excluded from diluted earnings per share as they would be
anti-dilutive due to our net loss during the three months ended September 30, 2006.

6. Inventories

Inventories consisted of the following as of September 30, 2006 and June 30, 2006 (in thousands):



|                  |  |                   |       |              |   |      
|----------------- |  | ----------------- | ----- | ------------ | - | -----
|                  |  | September 30,2006 |       | June 30,2006
|Raw materials     |  | $                 | 1,654 |              | $ | 1,511
|Work in process   |  |                   | 293   |              |   | 498  
|Finished goods    |  |                   | 947   |              |   | 625  
|                  |  |                   |       |              |   |      
|Total inventories |  | $                 | 2,894 |              | $ | 2,634
|                  |  |                   |       |              |   |      



---

Urologix, Inc.

Notes to Condensed Financial Statements

September 30, 2006

(Unaudited)

7. Other Intangible Assets, Net



|                                          |  |                          |        |                         |   |       |  |                |       |                         |   |        |  |   |       |  |   |      
|----------------------------------------- |  | ------------------------ | ------ | ----------------------- | - | ----- |  | -------------- | ----- | ----------------------- | - | ------ |  | - | ----- |  | - | -----
|                                          |  | As of September 30, 2006 |        | As of June 30, 2006    
|                                          |  | CarryingAmount           |        | AccumulatedAmortization |   | Net   |  | CarryingAmount |       | AccumulatedAmortization |   | Net   
|Developed technologies                    |  | $                        | 7,500  |                         | $ | 3,000 |  | $              | 4,500 |                         | $ | 7,500  |  | $ | 2,875 |  | $ | 4,625
|Customer base                             |  |                          | 2,300  |                         |   | 986   |  |                | 1,314 |                         |   | 2,300  |  |   | 945   |  |   | 1,355
|Trademarks                                |  |                          | 1,140  |                         |   | 60    |  |                | 1,080 |                         |   | 1.140  |  |   | 30    |  |   | 1,110
|                                          |  |                          |        |                         |   |       |  |                |       |                         |   |        |  |   |       |  |   |      
|Total identifiable intangible assets, net |  | $                        | 10,940 |                         | $ | 4,046 |  | $              | 6,894 |                         | $ | 10,940 |  | $ | 3,850 |  | $ | 7,090
|                                          |  |                          |        |                         |   |       |  |                |       |                         |   |        |  |   |       |  |   |      

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 of
fiscal 2006 over its remaining estimated useful life of 9.5 years.

8. Comprehensive (Loss) Earnings

Comprehensive (loss) earnings includes all changes in equity during a period except those resulting from investments by and distributions to shareholders,
as well as stock-based compensation expense. Our comprehensive (loss) earnings is as follows (in thousands):



|                                              |  |                                 |      |   |      |   |    
|--------------------------------------------- |  | ------------------------------- | ---- | - | ---- | - | ---
|                                              |  | Three months endedSeptember 30,
|                                              |  | 2006                            |      |   | 2005
|Net (loss) earnings                           |  | $                               | (526 | ) |      | $ | 146
|Change in net unrealized gains on investments |  |                                 |     |   |      |   | 7  
|                                              |  |                                 |      |   |      |   |    
|Comprehensive (loss) earnings                 |  | $                               | (526 | ) |      | $ | 153
|                                              |  |                                 |      |   |      |   |    



---

Urologix, Inc.

Notes to Condensed Financial Statements

September 30, 2006

(Unaudited)

9. Warranty

Some 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 three month periods ended September 30, 2006 and 2005 were as follows
(in thousands):



|            |  |                             |     |                     |   |                 |  |   |                                |   |  |   |    
|----------- |  | --------------------------- | --- | ------------------- | - | --------------- |  | - | ------------------------------ | - |  | - | ---
|Fiscal Year |  | Beginning Balance at
July 1 |     | Warranty Provisions |   | Warranty Claims |  |   | Ending Balance at September 30
|2007        |  | $                           | 94  |                     | $ | 97              |  | $ | (79                            | ) |  | $ | 112
|2006        |  | $                           | 141 |                     | $ | 136             |  | $ | (149                           | ) |  | $ | 128

10. 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 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Managements Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical
information, forward-looking statements that are based on our current expectations, beliefs, intentions or future strategies. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the
statements as a result of certain factors, including those set forth under Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended June 30, 2006, as well as in other filings we make with the
Securities and Exchange Commission and include factors such: the impact of competitive treatments, products and pricing; our dependence upon third-party reimbursement for our products and reimbursement rates for Cooled ThermoTherapy; our
dependence on Cooled ThermoTherapy for all of our revenues; our ability to develop and market new products, including the Urologix-owned Cooled ThermoTherapy mobile service and the CoolWave control unit, and our ability to generate revenue
from new products; the rate of adoption by the medical community of Cooled ThermoTherapy products and the effectiveness of our sales organization and marketing efforts to the medical and patient community; our limited experience in manufacturing
some of our products and our dependence upon third-party suppliers to produce and supply products; our ability to successfully defend our intellectual property against infringement and the expense associated with that effort; product liability
claims inherent in the testing, production, marketing and sale of medical devices; approval by the FDA of our products and compliance with FDA requirements for the manufacture, labeling, marketing and sale of our products. 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.

The following is a discussion and analysis of Urologix financial condition and results of operations as of and for the three month periods ended
September 30, 2006 and 2005. This section should be read in conjunction with the condensed financial statements and related notes in Item 1 of this report and Urologix Annual Report on Form 10-K for the year ended June 30, 2006.

OVERVIEW

We are based in Minneapolis,
MN and develop, manufacture and market 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 benign prostatic hyperplasia (BPH), a disease that dramatically affects more than 23 million men worldwide by causing
adverse changes in urinary voiding patterns. We market our control units under the Targis®, Prostatron® and CoolWave names, and our catheter families under the Cooled ThermoCath®, Targis®, and Prostaprobe®
names. 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.

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 $2,600 in calendar year 2006, and projected to be approximately $2,500 in calendar
year 2007, 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. Preliminary reimbursement rates for calendar year 2007 were recently released and the projected
reimbursement for Cooled ThermoTherapy procedures preformed in the urologists office is $3,400, subject to geographic adjustment.

In
July 2003, CMS added the CPT Code covering Cooled ThermoTherapy to the ASC list of Medicare approved procedures providing a reimbursement rate for ambulatory surgical centers (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, urologists who perform 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.

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.

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 July of 2006. 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.

Critical Accounting Policies:

A description of our critical accounting policies was provided in the Managements
Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended June 30, 2006. At September 30, 2006, our critical accounting policies and estimates continue to
include revenue recognition, allowance for doubtful accounts, product warranty, inventories, valuation of identifiable intangible assets and goodwill, income taxes and stock-based compensation.

RESULTS OF OPERATIONS

Net Sales

Net sales for the three month period ended September 30, 2006 were $5.4 million compared to $6.2 million during the same period of the prior fiscal
year. The decrease in revenue in the three month period ended September 30, 2006 is primarily attributable to reduced orders from our direct office accounts, as well as the fact that our third party mobile accounts, which have lower overall
average selling prices (ASPs) accounted for a greater proportion of our sales mix when compared to the prior year quarter. This decrease in revenue from direct office accounts was partially offset by an increase in sales from our mobile service that
did not begin until September of the prior fiscal quarter.



---

Sales of our disposable treatment catheters accounted for 96% of our revenue in the first quarter of fiscal 2007 compared
to 95% of revenue in the prior-year period. At September 30, 2006, we had a domestic installed base of 568 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 554 units at June 30, 2006 and 518 units at September 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 the three month period ended September 30, 2006 increased to $2.4 million from $2.0 million during the three month period ended September 30, 2005.

Gross profit as a percentage of sales for the three month period ended September 30, 2006 decreased to 56% from 67% in the three month period ended
September 30, 2005. The decrease in gross profit rates primarily resulted from a decrease in volume of our treatment catheters, which provided a smaller base to absorb our fixed manufacturing overhead costs, an increase in the number of mobile
unit treatments, which have lower overall margins, decreased year-over-year average per unit selling prices of our single-use treatment catheters, as well as increased costs related to the resolution of the manufacturing issues identified in the
fourth quarter of fiscal 2006.

Selling, General & Administrative

Selling, general and administrative expenses decreased to $3.0 million for the three month period ended September 30, 2006 from $3.2 million in the
same period of fiscal year 2006. The decrease in expense is primarily the result of a decrease in wages, benefits and travel due to a decrease in the sales force as we continue to grow the Urologix mobile business, partially offset by an increase in
legal and audit fees when compared to the prior year period.

Research and Development

Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, decreased to $616,000
from $796,000 for the three month periods ended September 30, 2006 and 2005, respectively. The decrease in expenses resulted primarily from decreased contract labor costs as well as decreased expenditures on product development activities
related to our next generation Coolwave control unit.

Amortization of Intangible Assets

Amortization of intangible assets was $71,000 and $41,000 for the three month periods ended September 30, 2006 and 2005, respectively. 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 manufacturing additional Prostatron control units.

Net Interest Income

Net interest income for the three month period ended September 30, 2006 increased to $129,000 from $57,000 in the same period
of the prior fiscal year due primarily to the combination of higher cash and cash equivalent balances and higher interest rates.

Provision for
Income Taxes

Income tax expense decreased to zero for the three month period ended September 30, 2006 from $28,000 in the
prior year period primarily as a result of our operating loss in the first quarter of fiscal 2007. We did not recognize an income tax benefit related to our first quarter loss as we believe our existing net deferred tax asset of $3.3 million
represents our current estimate of the maximum future benefit that will be realized from our net operating loss carryforwards. 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 or loss and our fiscal year 2007 tax rate is likely to significantly exceed the statutory rate. 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 September 30, 2006, we carried a valuation allowance of $27.1 million against our remaining deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal
period. Our tax expense will continue to be primarily non-cash.

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 September 30, 2006, we had total cash and cash equivalents of $10.8 million compared to $11.1 million as of June 30, 2006. Working capital was unchanged at $16.9 million at both
September 30, 2006 and June 30, 2006.

During the three months ended September 30, 2006, we used $23,000 of cash from
operating activities primarily as a result of our net loss of $526,000, decreases in our accrued expenses and deferred income of $514,000, decreases in our accounts payable of $424,000 and increases in inventories of $397,000. The decrease in
accrued expenses and deferred income resulted primarily from the payment of fiscal 2006 year-end sales commissions, payroll accrual and sales taxes during the first quarter of fiscal 2007 which were higher when compared to the accruals for these
accounts as of September 30, 2006. The decrease in accounts payable is due to the timing of purchases versus payments, and the increase in inventory is a result of increased production of our disposable catheters in anticipation of greater
sales than were achieved in the first quarter of fiscal year 2007. These decreases in accrued expenses and deferred income and accounts payable and increases in inventory were partially offset by decreases in accounts receivable of $994,000.

During the first three months of fiscal 2006, we used $219,000 from investing activities resulting from the purchase of $219,000 of
property and equipment largely related to equipment purchased to support the growth of our mobile initiative.

During the three months
ended September 30, 2006, we generated $8,000 in 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 to 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 September 30, 2006, our property and equipment, net, included approximately $1.9 million of control units used in evaluation or
longer-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.

We believe our $10.8 million in cash and cash equivalents at September 30, 2006, will be sufficient to fund our working capital and capital
resources needs for 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 us beginning on July 1, 2007. We are still evaluating the impact the adoption of this pronouncement will have
on our financial statements.



---

In June 2006, the FASB ratified the consensuses reached by the Emerging Issues Task Force (EITF)
regarding EITF Issue No. 06-03, How Taxes Collected from Customers and Remitted to Government Authorities Should be Presented in the Income Statement (That Is, Gross versus Net Presentation). This guidance requires that companies
disclose their accounting policy related to sales tax and other similar taxes effective for us beginning July 1, 2007. We report these taxes on a net basis, excluding them from revenue.

In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements. SFAS No. 157
establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair-value measurements. This Statement applies only to fair-value measurements that are already
required or permitted by other accounting standards, except for measurements of share-based payments and measurements that are similar to, but not intended to be, fair value. This statement is expected to increase the consistency of fair value
measurements, but imposes no requirements for additional fair-value measures in financial statements. The provisions under SFAS No. 157 are effective for us beginning on July 1, 2008. We are still evaluating the impact the adoption of this
pronouncement will have on our financial statements.

In September 2006, the SEC Office of the Chief Accountant and Divisions of
Corporation Finance and Investment Management released SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, (SAB 108), that provides
interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance
sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. This pronouncement is effective for fiscal
years ending after November 15, 2006. We do not expect the adoption of this pronouncement to have any impact on our financial statements.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE 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 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Companys Chief Executive Officer, Fred B. Parks, and Chief Financial Officer, Elissa J. Lindsoe, have evaluated the Companys disclosure controls and
procedures as of the end of the period covered by this report. Based upon this review, they have concluded that these controls and procedures are effective.



---

(b) Changes in Internal Control Over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the fiscal period covered by this report that have materially affected, or
are reasonably likely to materially affect, the Companys internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. 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 our financial position, liquidity or results of operations.

ITEM 1A. RISK FACTORS

The most significant risk factors applicable to the Company are described
in Part I, Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended June 30, 2006. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS
UPON SENIOR SECURITIES

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION

On
November 6, 2006, the Compensation Committee (the Committee) of our Board of Directors established goals for the last three quarters of fiscal year 2007 for our executive cash bonus program for executive officers. The Committee
established performance goals for quarterly net earnings before taxes and determined the total cash bonus amount available under the 2007 bonus program if these quarterly performance goals are met at the 100% level. The total cash bonus amount
available will be adjusted if our 2007 financial performance either exceeds or is less than the established performance goals relating to net earnings before taxes. The total cash bonus amount available may be decreased or increased by 50%,
depending upon our fiscal year 2007 financial performance against the goals established by the Committee. If our quarterly net earnings before taxes do not meet at least the minimum amount set by the Committee for that quarter, no cash bonuses will
be earned by our executive officers for such quarter. Assuming that at least the minimum quarterly earnings targets are met, our current executive officers other than Fred B. Parks, Chief Executive Officer, will be eligible for bonuses representing
20% to 60% of their base salaries. Under the 2007 bonus program, our Chief Executive Officer is eligible for a cash bonus ranging from 25% to 75% of his base salary, assuming that the minimum quarterly net earnings before taxes targets are met.
While bonus amounts will be earned on a quarterly basis, payouts under the 2007 bonus program will be made following the end of fiscal year 2007 to eligible employees who continue to be employed at that time.

ITEM 6. EXHIBITS



|             |  |                                                                                                    
|------------ |  | ---------------------------------------------------------------------------------------------------
|Exhibit 31.1 |  | Certification of Chief Executive Officer Pursuant to Section 13a-14 and 15d-14 of the Exchange Act.
|             | 
|Exhibit 31.2 |  | Certification of Chief Financial Officer Pursuant to Section 13a-14 and 15d-14 of the Exchange Act.
|             | 
|Exhibit 32   |  | Certification pursuant to 18 U.S.C. 1350.                                                          



---

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.



Urologix, Inc.(Registrant)/s/ Fred B. Parks.Fred B. ParksChairman and Chief Executive Officer(Principal Executive Officer)/s/ Elissa J. LindsoeElissa J. LindsoeChief Financial Officer(Principal Financial Officer)Date November 9, 2006