<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 MARCH 31, 1998

                                      OR

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
      EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

            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 MAY 5, 1998, THE COMPANY HAD OUTSTANDING 11,080,963 SHARES OF COMMON
STOCK, $.01 PAR VALUE.
<PAGE>
 
PART I - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS
 
UROLOGIX, INC.
BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
                                                          March 31, 1998   June 30, 1997
                                                          --------------   -------------
<S>                                                        <C>             <C>
ASSETS                                                                  
Current assets:
  Cash and cash equivalents                                 $    573,701    $    275,571
  Available-for-sale securities                               46,162,742      25,825,238
  Accounts receivable                                          2,843,855       1,272,994
  Inventories                                                  3,869,588       2,119,373
  Prepaids and other                                             583,008         667,593
                                                            ------------    ------------
     Total current assets                                     54,032,894      30,160,769
                                                            ------------    ------------
PROPERTY AND EQUIPMENT:
  Machinery, equipment and furniture                           3,895,288       2,680,661
Less--accumulated depreciation                                (1,429,242)       (832,604)
                                                            ------------    ------------
     Property and equipment, net                               2,466,046       1,848,057
OTHER ASSETS, NET                                              3,017,646       3,573,261
                                                            ------------    ------------
                                                            $ 59,516,586    $ 35,582,087
                                                            ============    ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Current maturities of capitalized lease obligations       $     19,531    $     19,531
  Accounts payable                                             1,349,640       2,087,443
  Accrued expenses and other                                   1,558,259       1,040,345
                                                            ------------    ------------
     Total current liabilities                                 2,927,430       3,147,319
CAPITALIZED LEASE OBLIGATIONS, less current maturities            22,761          37,725
                                                            ------------    ------------
     Total liabilities                                         2,950,191       3,185,044
                                                            ------------    ------------
Commitments and contingencies
SHAREHOLDERS' EQUITY
  Common stock, $.01 par value, 25,000,000 shares
   Authorized:  11,120,524 and 9,256,594 shares issued
   and outstanding                                               111,205          92,566
  Additional paid-in capital                                  90,902,823      59,131,097
  Accumulated deficit                                        (34,424,931)    (26,767,362)
  Net unrealized losses on investments                           (22,702)        (59,258)
                                                            ------------    ------------
     Total shareholders' equity                               56,566,395      32,397,043
                                                            ------------    ------------
                                                            $ 59,516,586    $ 35,582,087
                                                            ============    ============
</TABLE>

The accompanying notes to financial statements are an integral part of these
balance sheets.
<PAGE>
 
UROLOGIX, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)


<TABLE>
<CAPTION>
 
 
                                       Three Months Ended March 31,    Nine Months Ended March 31,
                                           1998            1997            1998           1997
                                      --------------  --------------  --------------  -------------
<S>                                   <C>             <C>             <C>             <C>
 
SALES                                   $ 2,508,515     $ 1,789,500     $ 8,311,495    $ 3,661,300
COST OF GOODS SOLD                        2,601,553       1,524,123       6,479,980      3,400,144
                                        -----------     -----------     -----------    -----------
     Gross profit (loss)                    (93,038)        265,377       1,831,515        261,156
                                        -----------     -----------     -----------    -----------
 
COSTS AND EXPENSES:
  Research and development                1,913,307       1,245,730       4,731,713      3,564,086
  Sales and marketing                     1,671,194         730,601       4,525,025      1,757,419
  General and administrative                567,320         576,895       1,699,326      1,600,053
                                        -----------     -----------     -----------    -----------
     Total costs and expenses             4,151,821       2,553,226      10,956,064      6,921,558
                                        -----------     -----------     -----------    -----------
 
OPERATING LOSS                           (4,244,859)     (2,287,849)     (9,124,549)    (6,660,402)
INTEREST INCOME, NET                        743,256         418,083       1,466,980      1,403,503
                                        -----------     -----------     -----------    -----------
     Net loss                           $(3,501,603)    $(1,869,766)    $(7,657,569)   $(5,256,899)
                                        ===========     ===========     ===========    ===========
BASIC AND DILUTED NET LOSS
PER COMMON SHARE                             $(0.32)         $(0.20)         $(0.75)        $(0.57)
                                        ===========     ===========     ===========    ===========
 
BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING                              11,102,222       9,158,231      10,184,104      9,149,020
 
</TABLE>

  The accompanying notes to financial statements are an integral part of these
  statements.
<PAGE>
 
UROLOGIX, INC.
STATEMENT OF CASH FLOWS
(Unaudited)
 
                                                      For the Nine Months 
                                                        Ended March 31,
                                                  ---------------------------
                                                       1998          1997
                                                  -------------   -----------
OPERATING ACTIVITIES:
 Net loss                                         $  (7,657,569)  $(5,256,899)
 Adjustments to reconcile net loss to net cash
 used for operating activities -
  Depreciation and amortization                       1,160,888       180,955
  Change in operating items:
   Accounts receivable                               (1,570,861)   (1,492,989)
   Inventories                                       (1,750,215)   (1,296,119)
   Prepaids and other assets                             84,585        85,327
   Accounts payable and accrued expenses               (219,889)    1,179,784
   Other assets                                          (8,635)   (2,827,172)
                                                  -------------   -----------
    Net cash used for operating activities           (9,961,696)   (9,427,113)
                                                  -------------   -----------
INVESTING ACTIVITIES:
 Purchase of property and equipment                  (1,214,627)   (1,131,443)
 Purchase of available-for-sale securities         (449,494,901)            -
 Proceeds from sale of available-for-sale
  securities                                        429,193,953    11,144,257
                                                  -------------   -----------
   Net cash provided by (used for)
    Investing activities                            (21,515,575)   10,012,814
                                                  -------------   -----------
FINANCING ACTIVITIES:
 Sale of common stock, net                           31,659,351             -
 Proceeds from exercise of stock options                131,014        60,463
 Payments made on capital lease obligations             (14,964)      (13,857)
                                                  -------------   -----------
   Net cash provided by financing
    Activities                                       31,775,401        46,606
                                                  -------------   -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS               298,130       632,307
CASH AND CASH EQUIVALENTS:
 Beginning of period                                    275,571        65,042
                                                  -------------   -----------
 End of period                                    $     573,701   $   697,349
                                                  =============   ===========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
 Cash paid for interest                           $       4,461   $     6,530
                                                  =============   ===========
 
The accompanying notes to financial statements are an integral part of these
balance sheets.
<PAGE>
 
UROLOGIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 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 March 31, 1998
and the statements of operations for the three and nine month periods ended
March 31, 1998 and 1997, and the statements of cash flows for the nine month
periods ended March 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, 1997.  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 Common and Common Equivalent Share

Basic and diluted net loss per common and common equivalent share was computed
by dividing net loss by the basic and diluted weighted average number of shares
of Common Stock.  In accordance with the requirements of Financial Accounting
Standard No. 128, which the Company adopted as of March 31, 1997, common stock
equivalents have been excluded from the calculation as their inclusion would be
antidilutive.
<PAGE>
 
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

OVERVIEW

Urologix, Inc., incorporated in 1991, develops, manufactures and markets
minimally invasive medical devices for the treatment of urological diseases. The
Company has developed the Targis System, a non-surgical, anesthesia-free,
catheter-based therapy that uses a proprietary microwave technology for the
treatment of benign prostatic hyperplasia (BPH), a disease that affects over 23
million men worldwide.  In August 1997, the Company received Food and Drug
Administration (FDA) approval to market the Targis System in the United States
and launched the Targis System in the United States during the fourth calendar
quarter of 1997.  Regulatory approvals necessary to market the Targis System in
Japan and the European Union countries were obtained in fiscal year 1997.  The
Company's Targis System consists of a control unit and a procedure kit, which
includes the microwave delivery system incorporated in a catheter, a cooling bag
and a rectal thermosensing unit.

The Company markets the Targis System through a direct sales force in the United
States.  Internationally, the Company has developed broad based relationships
with two parties for market development and sales of the Targis System.  Boston
Scientific Corporation, a worldwide developer, manufacturer and marketer of
medical devices, has exclusive distribution rights for the Targis System in all
countries outside the United States, except Japan.  Nihon Kohden Corporation, a
major Japanese developer, manufacturer and marketer of medical devices, has
exclusive distribution rights for the Targis System in Japan.

Since inception, the Company has experienced operating losses and anticipates
that its operating losses will continue for the foreseeable future.
Expenditures will be primarily related to the Targis System market introduction
in the United States, scale-up of commercial manufacturing, clinical trials and
research and development activities.

The Company expects sales of the Targis System to account for all of its
revenues for the foreseeable future.  In the United States, the Company offers
urologists or hospitals the option to purchase or lease the Targis System
control unit.  The leases are offered by a third-party lessor directly to the
Company's customer, allowing the Company to record the transaction as a sale.
Revenues from the sale of Targis System control units and disposable procedure
kits are recognized upon shipment.

RESULTS OF OPERATIONS

Sales increased to $2.5 million and $8.3 million for the three and nine months
ended March 31, 1998, respectively, from $1.8 million and $3.7 million,
respectively, for the same periods in the prior fiscal year. These increases are
due to an increase in shipments of the Targis System to the Company's
international distributors resulting from regulatory marketing approvals
obtained in the European Union and Japan and initial sales in the U.S. resulting
from FDA commercial marketing approval. Sales in the U.S. represented
approximately 21% and 16% of total sales for the three and nine months ended
March 31, 1998, respectively, versus no U.S. sales in the same periods in the
prior fiscal year. Sales in the three months ended March 31, 1998 were
negatively impacted by approximately $750,000 due to an inventory shortage of
Targis System procedure kits as a result of a purchased component that exhibited
an occasional failure. The Company wrote down the affected inventory and began
shipping only new procedure kits as they were produced and became available.
Sales for the three months ended June 30, 1998 may also be somewhat affected by
inventory availability. In addition, the Company recently lowered its internal
sales projections as a result of a longer than expected selling cycle for the
Targis System and lower than expected utilization rates of Targis System
procedure kits. Although sales projections have been lowered, the Company
expects sales growth in the next several quarters.

Cost of goods sold includes raw materials, labor and royalties, as well as costs
incurred in connection with the production of Targis Systems including
manufacturing and quality assurance overhead.  Cost of goods sold increased to
$2.6 million and $6.5 million for the three and nine months ended March 31, 1998
from $1.5 million and $3.4 million for the same periods in the prior fiscal
year, due primarily to the significant increase in sales and production of the
Company's Targis System.  Cost of goods sold for the three and nine months ended
March 31, 1998 includes a charge of $700,000 resulting from the inventory
writedown described in the preceding paragraph. The Company expects further
increases in cost of goods sold as sales increase and production capacity is
increased due to the United States launch of the Targis System. If sales of the
Targis System increase, the Company expects cost of goods sold, as a percent of
sales, to decrease due to efficiencies obtained from higher production volumes.
<PAGE>
 
Research and development expenses include those costs associated with the
development and 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 for the three and
nine months ended March 31, 1998 increased to $1.9 million and $4.7 million,
respectively, from $1.2 million and $3.6 million, respectively, for the same
periods in the prior fiscal year, due primarily to costs related to new and on-
going clinical studies of the Targis System, costs associated with product
development activities related to Targis System improvements and alternative
applications for the Company's technology and costs related to the Company's
ongoing litigation described in Part II, Item 1.  Research and development
expenses are expected to increase for the remainder of fiscal 1998 due to
continuing clinical study expenses, product development projects to further
develop the Company's technologies and the ongoing litigation.

Sales and marketing expenses for the three and nine months ended March 31, 1998
increased to $1.7 million and $4.5 million, respectively, from $731,000 and $1.8
million, respectively, in the same periods in the prior fiscal year due
primarily to costs associated with supporting the marketing of the Targis System
in Europe and Japan, as well as the Company's U.S. marketing launch of the
Targis System.  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, including the expected
expansion of its direct sales force, and continues supporting its international
distributors' sales efforts.

General and administrative expenses for the three months ended March 31, 1998
were substantially the same as the three month period a year ago. General and
administrative expenses increased to $1.7 million for the nine months ended
March 31, 1998 from $1.6 million in the same period a year ago, due to
administrative costs associated with an increase in employees in connection with
the Company's growth and commencement of sales activities.

Interest income increased for the three and nine months ended March 31, 1998
from the same periods in the prior fiscal year, due primarily to higher average
cash and investment balances resulting from the Company's common stock offering
in November 1997.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception through sales of equity
securities and, to a lesser extent, sales of the Targis System.  During the nine
months ended March 31, 1998, the Company sold 1.725 million shares of common
stock in a public stock offering for net proceeds of approximately $31.7
million. During the nine months ended March 31, 1998 the Company used
approximately $11.2 million of cash for operating activities and property and
equipment purchases, which amounts were funded primarily by proceeds from
available-for-sale securities.  As of March 31, 1998, the Company had total
cash, cash equivalents and available-for-sale securities of $46.7 million, and
working capital of $51.1 million.

The Company expects to continue to incur additional losses, and will use its
working capital as it incurs substantial expenses related to the Targis System
market introduction in the United States, expansion of manufacturing capacity,
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 at least 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, it at all.

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 risks and uncertainties include: competition from other BPH treatments;
the ability of the Company's distributors and representatives to successfully
market and sell the Targis System; the Company's ability to manufacture the
Targis Systems in sufficient quantities; the Company's ability to maintain
intellectual property protection for its proprietary products and to defend its
existing intellectual property rights from challenges by third parties; and the
extent to which the physicians performing the Targis System procedures are able
to obtain third-party reimbursement. In addition, a detailed discussion of risks
and uncertainties may be found in the Risk Factors section of the company's
Prospectus dated November 12, 1997.
<PAGE>
 
PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

     As previously reported, on July 30, 1996, the Company filed a lawsuit under
seal in United States  District Court for the District of Minnesota (the
"Court") against BSD Medical Corporation ("BSD") to enforce the terms of a
settlement and patent license agreement between the Company and BSD ("the BSD
Settlement  Agreement").  See "Legal Proceedings" in the Company's Form 10-K
for the year ended June 30, 1997 and in the Form 10-Q for the quarter ended
December 31, 1997.   A trial in front of the Court was held during the third
quarter of fiscal 1998.  The timing of the Court's decision is difficult to
predict at the current time.

     Although the Company continues to believe that it did not violate the terms
of the BSD Settlement, there can be no assurance that the District Court's
previous finding that the Company breached the BSD Settlement Agreement will not
enable BSD to terminate the BSD Settlement Agreement.  Nor can there be
assurance that the Court's finding will be reversed on appeal.  A final
resolution of the lawsuit in favor of BSD could result in patent litigation
against the Company.  The Company believes that the patent that was the subject
of the previous litigation between the Company and BSD is invalid, unenforceable
and not infringed by the Company's product.

Item 2.  Exhibits and Reports on Form 8-K

(a) Exhibits
    (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.
<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    MAY 14, 1998                    UROLOGIX, INC.
    ----------------------              --------------------------------------
                                        (REGISTRANT)
 
 
 
                                        /S/ JACK E. MEYER
                                        --------------------------------------
                                        JACK E. MEYER
                                        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)