Urologix 10K 2008 Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended June 30, 2008.

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

For the transition period from to .

Commission File Number 0-28414

UROLOGIX, INC.

(Exact name of registrant as specified in its charter)

Minnesota

41-1697237

(State or other jurisdiction of

incorporation or organization)

(IRS Employer

Identification No.)

14405 21st Avenue North, Minneapolis, MN 55447

(Address of principal executive offices)

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

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

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

Common Stock, $.01 par value

Series A Junior Participating Preferred Stock Purchase Rights

Name of Exchange on Which Registered: The NASDAQ Stock Market LLC – Nasdaq Global Market System

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer ¨Accelerated Filer ¨Non-Accelerated Filer ¨Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 126-2 of the Act) Yes ¨ No x

The aggregate value of the Company’s Common Stock held by non-affiliates of the Company was approximately $16,402,548 as of the last day of the Company’s most recently completed second fiscal quarter, when the last reported sales price was $1.16.

As of September 1, 2008, the Company had outstanding 14,463,350 shares of Common Stock, $.01 par value.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information is incorporated into Part III of this report by reference to the Proxy Statement for the Registrant’s 2008 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

TABLE OF CONTENTS


PART I

Item 1.	Business	4
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	18
Item 3.	Legal Proceedings	18
Item 4.	Submission of Matters to a Vote of Security Holders	18

PART II

Item 5.	Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	20
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 8.	Financial Statements and Supplementary Data	33
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	53
Item 9A.	Controls and Procedures	53
Item 9B.	Other Information	53

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	54
Item 11.	Executive Compensation	54
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	54
Item 13.	Certain Relationships and Related Transactions, and Director Independence	54
Item 14.	Principal Accountant Fees and Services	54

PART IV

Item 15.	Exhibits and Financial Statement Schedules	55

SIGNATURES		57

PART I

Forward-Looking Statements

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

ITEM 1. BUSINESS

Overview

Urologix develops, manufactures, and markets non-surgical, catheter-based therapies that use a proprietary cooled microwave technology for the treatment of benign prostatic hyperplasia (BPH), a disease that affects more than 23 million men worldwide. We market our control units under the Targis^® and CoolWave^® names and our procedure kits under the recently approved CTC Advance™, CTC™, Targis and Prostaprobe™ names. All systems utilize the Company’s Cooled ThermoTherapy™ technology, 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 general anesthesia or intravenous sedation and can be performed in a physician’s office or an outpatient clinic. We believe that Cooled ThermoTherapy provides an efficacious, safe and cost-effective solution for BPH with results clinically superior to medication and without the complications and side effects inherent in surgical procedures.

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

Benign Prostatic Hyperplasia

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

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

Due in part to the side effects and complications associated with traditional BPH therapies, many patients diagnosed with BPH are regularly monitored by their physicians but elect not to receive active intervention. This course of inaction is known as “watchful waiting.” If symptoms persist or worsen, drug therapy or surgical

intervention has historically been recommended. Drug therapy is usually the first line of treatment. It is estimated that more than 20% of patients who initially pursue drug therapy discontinue treatment within 12 months for various reasons including cost, ineffectiveness, side effects and the burdens of compliance. Patients may also try multiple drugs or combinations of drugs to improve effectiveness. This leads to a more costly treatment and often more side effects. Traditionally, the most common surgical procedure has been Transurethral Resection of the Prostate (TURP), an invasive surgery in which portions of the prostatic urethra and surrounding tissue are removed, thereby widening the urethra and improving urinary flow. While TURP results in a dramatic improvement in urine flow and reduction in symptoms, the procedure can require a lengthy recovery time and is reported to have a high rate of side effects and complications. Because the TURP procedure requires a highly skilled surgeon with extensive training, the incidence of complications is affected by the experience of the surgeon performing the TURP.

Cooled ThermoTherapy

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

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

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

Clinical Studies

Clinical trials of the Cooled ThermoTherapy procedure have been performed to obtain data to support potential new indications and marketing claims, to obtain long-term durability data, and to gather data for Medicare and other reimbursement approvals in various markets. We continue to monitor multi-center, multi-year studies to evaluate the long-term durability of Cooled ThermoTherapy procedures. In our published results from multi-center clinical trials, conducted both in the United States and internationally, the majority of Cooled ThermoTherapy patients for whom follow-up data is available shows significant long-term relief from the symptoms of BPH, without significant post-procedure complications. This was recently confirmed by the presentation of interim five year data on Cooled ThermoTherapy; results showed that the efficacy of our CTC microwave catheter is durable for five years and the freedom from additional, minimally invasive or surgical procedures is 90 percent.

Sales and Marketing

Thermotherapy compared to other treatment options, (ii) to increase the use of Cooled ThermoTherapy by physicians who already have access to a Cooled ThermoTherapy system, (iii) to increase the number of physicians who provide Cooled ThermoTherapy to their patients, and (iv) to provide more physicians with access to Cooled ThermoTherapy through the expansion of our Cooled ThermoTherapy mobile service in the United States.

United States

We have a sales and marketing team consisting of sales and marketing management, clinical, and direct and independent sales representatives, all of whom are dedicated to marketing our Cooled ThermoTherapy products and our Cooled ThermoTherapy mobile service. Our direct sales force and marketing efforts are targeted at urologists who treat BPH patients in their office. Our Cooled ThermoTherapy mobile service employees transport the Cooled ThermoTherapy system control unit, along with the single-use treatment catheters and all necessary supplies, to physician offices and hospitals on a scheduled basis, making the treatment available to physicians and patients on an efficient and economical basis. As of June 30, 2008, our mobile assets included 16 vans which service 13 mobile routes in select geographies across the United States. In addition to our direct sales force and Cooled ThermoTherapy mobile service employees, we continue to utilize independent third-party mobile service providers to provide hospitals and urology clinics with access to our Cooled ThermoTherapy treatment. As of June 30, 2008, we employed a total of 34 individuals in our sales and marketing department and our Cooled ThermoTherapy mobile service and six independent sales representative groups, some of which have multiple representatives working on behalf of Urologix. The expenses for our Cooled ThermoTherapy mobile service are included in cost of goods sold.

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

International

Although our international sales efforts have historically been modest, we believe that there is a potential market for Cooled ThermoTherapy outside of the United States. While we will continue to utilize local distributors experienced in selling products to hospitals and urologists to assist us in maximizing these opportunities, our principal focus is on the U.S. market opportunity. The inherent challenge outside the United States is that third party reimbursement of our Cooled ThermoTherapy procedure is less prevalent and our revenue in international markets will largely be dependent upon private payors.

Manufacturing

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

Our supply agreement with Accellent Endoscopy for the production of the Prostatron disposable treatment catheter was terminated as of April 2007. Prior to this termination, we signed an agreement with The MedTech Group, Inc. to become a qualified supplier of our Prostatron Cooled ThermoTherapy single-use treatment catheter products. During the fourth quarter of fiscal 2007, in connection with our strategy to develop a next generation catheter, we implemented an end-of-life plan for our Prostatron product line. As a result, we negotiated an end-of-life build with the MedTech Group to support our Prostatron customers until we can transition them to another of our products.

We assemble Targis and CoolWave control units and procedure kits using materials and components supplied by various subcontractors and suppliers, as well as components we fabricate. Several of the components

are currently available to us through a single vendor. We attempt to develop alternative sources for critical components. Where alternative sourcing is not possible, we attempt to enter into supply agreements with each component provider. Nevertheless, failure to obtain components from these providers or delays associated with any future component shortages, particularly as we increase our manufacturing level, could have a material adverse effect on our business, financial condition and operating results.

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

The FDA periodically inspects our facility, documentation and quality systems and to date has noted no significant deficiencies of GMP. Our facility will continue to be subject to periodic inspections by the FDA and by other auditors. We believe that our manufacturing and quality control procedures meet the requirements of the FDA and other regulators and that we have established training and internal audit systems designed to ensure compliance.

We have received and maintained ISO 13485 quality system certification indicating compliance of our manufacturing facilities with international standards for quality assurance and manufacturing process control. We also have received and maintained CE mark certification, which allows us to affix the CE Mark to our Targis and Prostatron system components and market them in the European Union. In addition, the Targis and Prostatron systems have been approved for marketing by the Japanese Ministry of Health and Welfare. As of June 30, 2008, we employed 31 individuals in our manufacturing department.

Research and Development

We intend to build upon our scientific and clinical knowledge and relationships to develop innovative future generations of BPH and other urology products. Our research and development efforts and goals are currently focused on improving the function and features of our Cooled ThermoTherapy systems, improving the treatable population and clinical response to Cooled ThermoTherapy treatment and reducing the manufacturing cost of our products.

During the fiscal years ended June 30, 2008, 2007, and 2006, we spent $2.8 million, $3.0 million, and $3.0 million, respectively, on our research and development efforts. As of June 30, 2008, we employed 14 individuals in our research and development department.

Reimbursement

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

The level of Medicare reimbursement for Cooled ThermoTherapy is dependent on the site of service. Beginning on August 1, 2000, the Centers for Medicare and Medicaid Services (CMS) replaced the reasonable cost basis of reimbursement for outpatient hospital-based procedures, including Cooled ThermoTherapy, with a new fixed rate or prospective payment system. Under this method of reimbursement, a hospital receives a fixed reimbursement for each Cooled ThermoTherapy treatment performed in its facility, approximately $550 in

calendar year 2008, 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. The relatively low facility reimbursement relative to the cost of the procedure limits the number of Cooled ThermoTherapy treatments done in a hospital.

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 2008 for Cooled ThermoTherapy procedures performed in the urologist’s office is $3,118 compared to $3,562 in calendar 2007, which is 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. 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 performed Cooled ThermoTherapy procedures in an ASC were reimbursed at the office-based reimbursement rates, approximately $3,500 in calendar year 2007, subject to geographic adjustment. However, as of January 2008, the CPT Code covering Cooled ThermoTherapy was once again added to the ASC list of Medicare approved procedures. Effective with this latest change, urologists who perform Cooled ThermoTherapy procedures in an ASC are reimbursed under the two-part system in which the ASC receives a fixed fee of $1,872 for calendar year 2008, while the urologist performing the treatment is reimbursed $547 for calendar year 2008. As a result of the decrease in reimbursement rates for an ASC, we expect the number of Cooled ThermoTherapy treatments performed in an ASC to be minimal.

For calendar 2009, CMS is proposing additional reductions in the physician fee schedule covering Cooled ThermoTherapy for treatments performed in a physician’s office. The exact amount of the reduction has not yet been determined however, initial estimates were in the range of a 13 percent decrease. We are actively participating in the comment process related to the proposed reductions, have an active reimbursement strategy, and have retained consultative experts to assist us with dealing with the proposed reimbursement rate reductions.

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

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

Patents and Proprietary Rights

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

Several of our United States patents claim methods and devices that we believe are critical to providing a safe and efficacious treatment for BPH. There can be no assurance that our patents, or any patents that may be

issued as a result of existing or future applications, will offer any degree of protection from competitors or that any of our patents or applications will not be challenged, invalidated or circumvented in the future. In addition, there can be no assurance that our competitors, many of which have substantial resources and have made substantial investments in competing technologies, will not seek to apply for and obtain patents that will prevent, limit or interfere with our ability to manufacture or market Cooled ThermoTherapy in the United States or in international markets. Further, there can be no assurance that our Cooled ThermoTherapy system does not infringe upon the patent rights or other intellectual property rights of other companies, that we will not be required to seek licenses from other companies or that other companies will not pursue claims of infringement against us.

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

Competition

Competition in the market for the treatment of BPH comes from invasive surgical therapies, such as TURP and side-firing lasers (GreenLight Laser PVP (American Medical Systems/ Laserscope), Lumenis, RevoLix, and Biolitec), drug therapy and other minimally invasive, office-based treatments. There are six well-recognized prescription drugs available in the United States for treating the symptoms of BPH: Flomax (Boehringer Ingelheim International GmbH), Hytrin (Abbott Laboratories), Cardura (Pfizer Inc.), UroXatral (Sanofi-Synthelabo), Proscar (Merck & Co., Inc.) and Avodart (GlaxoSmithKline). Drug therapy is currently the first-line therapy prescribed by most physicians in the United States for BPH. The drug companies have significant resources to educate physicians and patients through direct sales and direct to consumer marketing. We must also focus on educating physicians and their patients to the benefits of our Cooled ThermoTherapy in a focused and efficient manner with less resources.

Competition in the market for minimally invasive office-based treatments for BPH is significant. Competitive devices include low energy microwave combined with balloon dilatation (Boston Scientific); non-cooled, low energy microwave (American Medical Systems); radio frequency (Medtronic); high energy microwave with limited cooling (Prostalund); and hot water therapy (ACMI). Additional competitors may enter the market. We believe Cooled ThermoTherapy offers a durable solution as shown in peer reviewed clinical trials and interim five year data as presented at the May 2008 American Urological Association (AUA) conference, and the largest treatable patient population over other office-based BPH therapies. Because Cooled ThermoTherapy does not require punctures or incisions, it can be performed in the physician’s office or other outpatient environments without the need for general anesthesia or intravenous sedation. Further, by combining microwave energy with cooling, we can drive more energy deep into the prostate, creating lasting results while preventing damage to the urethra, enhancing patient comfort and reducing complications.

Government Regulation

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

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

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

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

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

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

Health Care Regulatory Issues

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

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

Product Liability and Insurance

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

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

Employees

As of June 30, 2008, we employed 86 individuals on a full-time basis. We also had several part-time employees, consultants and independent third-party sales representatives. None of our employees are covered under a collective bargaining agreement. We consider our relationship with our employees to be good.

Seasonality

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

Backlog

As of June 30, 2008, we did not maintain any backlog of product orders. Our policy is to stock enough inventory to be able to ship most orders within a few days of receipt or as requested by our customers. Therefore, we rely on orders placed during a given period for sales during that period. Backlog information as of the end of a particular period is not necessarily indicative of future levels of our revenue.

ITEM 1A. RISK FACTORS

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

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

The medical device industry is characterized by rapid technological change, changing customer needs and frequent new product introductions. Our products may be rendered obsolete as a result of future innovations. We face intense competition from other device manufacturers and surgical manufacturers, as well as from pharmaceutical companies. Nearly all of our competitors are significantly larger than we are and have greater

financial, technical, research, marketing, sales, distribution and other resources than we do. We believe that price competition will continue among products developed in our markets. Our competitors may develop or market technologies and products, including drug-based treatments that are more effective or commercially attractive than any we are developing or marketing. Our competitors may succeed in obtaining regulatory approval and introducing or commercializing products before we do. Such developments could have a significant negative effect on our business, financial condition and results of operations. Even if we are able to compete successfully, we may not be able to do so in a profitable manner.

Our products, including our Cooled ThermoTherapy mobile service and our recently approved CTC Advance catheter may not achieve market acceptance, which could limit our future revenue.

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

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

Our future revenues are subject to uncertainties regarding health care reimbursement and reform. In the United States, health care providers, such as hospitals and physicians, generally rely on third-party payers. Third-party reimbursement is dependent upon decisions by the CMS, contract Medicare carriers, individual managed care organizations, private insurers, foreign governmental health programs and other payers of health care cost. Failure to receive or maintain favorable coding, coverage and reimbursement determinations for Cooled ThermoTherapy by these organizations could discourage physicians from using our products. We may be unable to sell our products on a profitable basis if third-party payers deny coverage, provide low reimbursement rates or reduce their current levels of reimbursement.

The continuing efforts of government, insurance companies, health maintenance organizations and other payers of health care costs to contain or reduce costs of health care may affect our future revenues and profitability. With recent federal and state government initiatives directed at lowering the total cost of health care, the United States Congress and state legislatures will likely continue to focus on health care reform including the reform of Medicare and Medicaid systems, and on the cost of medical products and services. Additionally, third-party payers are increasingly challenging the prices charged for medical products and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as HMO’s that could control or significantly influence the purchase of health care services and products, as well as legislative proposals to reform health care or reduce government insurance programs, may also result in lower prices for, or rejection of, our products. The cost containment measures that health care payers and providers are instituting and the effect of any health care reform could cause reductions in the amount of reimbursement available, and could have a materially adverse effect on our revenues and ability to operate profitably. For calendar 2009, CMS is proposing additional reductions in the physician fee schedule covering

Cooled ThermoTherapy for treatments performed in a physician’s office, and we are expecting additional proposed reductions for calendar 2010. We are actively participating in the comment process related to the proposed reductions, have an active reimbursement strategy, and have retained consultative experts to assist us with dealing with the proposed reimbursement rate reductions.

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

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

Government regulation has a significant impact on our business.

Government regulation in the United States and other countries is a significant factor affecting the research and development, manufacture and marketing of our products. In the United States, the FDA has broad authority under the federal Food, Drug and Cosmetic Act and the Public Health Service Act to regulate the distribution, manufacture and sale of medical devices. Sales of medical devices outside the United States are subject to government regulation and restrictions that vary from country to country. In addition, we, along with our distributors and health care providers who purchase our products and services, are subject to state and federal laws prohibiting kickbacks or other forms of bribery in the health care industry. We may be subject to civil and criminal prosecution for violations of any of these laws by our agents or us.

Before any new products we may offer may be introduced into the U.S. market, we must obtain prior authorization from the FDA. This authorization is based on a review by the FDA of the medical device’s safety and effectiveness for its intended uses. The process of obtaining clearances or approvals from the FDA and other applicable regulatory authorities can be expensive, uncertain and time consuming.

In addition, we may not be able to obtain necessary approvals for clinical testing or for the manufacturing or marketing of any of our products in the United States or in other countries. If regulatory approvals for any of our other products are not obtained on a timely basis, or not approved as submitted, or at all, it could have a significant negative effect on our financial condition and results of operations. Additionally, delays in receipt of regulatory approvals for our products or failure to receive such approvals, the loss of previously obtained approvals, or failure to comply with existing or future regulatory requirements would have a significant negative effect on our financial condition and results of operations.

Even if such an approval is obtained, our failure to comply with applicable regulatory approvals could, among other things, result in fines, suspension of regulatory approvals, product recalls, operating restrictions and criminal prosecution. In addition, government regulations may be established that could prevent, delay, modify or rescind regulatory approval of our products. Any such position or change of position by the FDA may adversely impact our business and financial condition. Regulatory approvals, if granted, may include significant limitations on the indicated uses for which our products may be marketed in the United States or in other countries. In addition to obtaining such approvals, the FDA and foreign regulatory authorities may impose numerous other requirements on us. The FDA prohibits the marketing of approved medical devices for unapproved uses. In addition, product approvals can be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing.

In addition, the health care industry in the United States is generally subject to fundamental change due to regulatory, as well as political, influences. We anticipate that Congress and state legislatures will continue to review and assess alternative health care delivery and payment systems. Potential approaches that have been considered include controls on health care spending through limitations on the growth of private purchasing groups and price controls. We cannot predict what impact the adoption of any federal or state health care reform measures may have on our business.

We have a history of unprofitability.

We incurred a net loss of $14.9 million (which includes a net of tax charge of $8.6 million related to a $10.2 million impairment to write-off our goodwill, and the benefit of the reversal of the related deferred tax liability of $1.6 million) for the year ended June 30, 2008. Including the losses described above, since our inception, we have incurred losses of approximately $99.7 million. Although we were profitable in fiscal years 2006, 2005 and 2004, if physicians do not continue to purchase and use our Cooled ThermoTherapy systems to treat patients with BPH, we may not be able to once again achieve profitability. Because we expect to continue to incur additional expenses relating to sales and marketing activities and research and development activities, we will need to increase the revenues we receive from sales of our products in order to operate in a profitable manner. We cannot assure you that we will be able to increase our revenues, once again attain profitable operations, or successfully implement our business plan or future business opportunities.

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

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

Other than the Targis and CoolWave system control units and procedure kits, we outsource the remaining manufacturing for our products. We assemble Targis and CoolWave control units and procedure kits using materials and components supplied by various subcontractors and suppliers, as well as components we fabricate. We rely on single sources for several components, one of which is obtained from a source that has a patent for the technology. Our reliance on outside suppliers for our components involves risks including limited control over the price and uncertainty regarding timely delivery and quality of parts. Our supply agreement with Accellent Endoscopy for the production of the Prostatprobe disposable treatment catheter was terminated as of April 2007. Prior to this termination, we signed an agreement with The MedTech Group, Inc. to become a qualified supplier of our Cooled ThermoTherapy single-use treatment catheter products. During the fourth quarter of fiscal 2007, in connection with our strategy to develop a next generation catheter, we implemented an end-of-life plan for our Prostatron product line. As a result, we negotiated an end-of-life build with the MedTech Group so we can continue to support our Prostatron customers until we can transition them to another of our products.

The start-up, transfer, termination or interruption of any of these relationships or products, or the failure of these manufacturers or suppliers, some of which operate in countries outside of the United States, to supply products or components to us on a timely basis or in sufficient quantities, likely would cause us to be unable to meet customer orders for our products and harm our reputation with customers and our business. Identifying and qualifying alternative suppliers of components or manufacturers of products takes time and involves significant

additional costs and may delay the production of our products. Further, if we obtain a new supplier for a component, manufacture our product with an alternative component or if our products are manufactured by an alternative manufacturer, we may need to obtain FDA approval of a PMA supplement to reflect changes in product manufacturing and the FDA may require additional testing of any component from new suppliers prior to our use of these components. Further, if FDA approval of a PMA supplement is required, any delays in delivery of our product to customers would be extended and our costs associated with the change in product manufacturing would increase.

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

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

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

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

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

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

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

Costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or “know-how” we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others. In connection with the settlement of a patent

infringement suit we filed in March 2002, we granted, in January 2004, ProstaLund AB, ProstaLund Operations AB and Circon Corporation (a/k/a ACMI Corporation) a non-exclusive, royalty free license under certain of our patents to sell the ProstaLund transurethral microwave thermotherapy system marketed in the United States by ACMI Corporation as the CoreTherm device.

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

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

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

We are dependent on key personnel.

Our failure to attract and retain skilled personnel could hinder the management of our business, our research and development, our sales and marketing efforts, and our manufacturing capabilities. Our future success depends to a significant degree upon the continued services of key senior management personnel, including Stryker Warren, Jr., our Chief Executive Officer and Greg Fluet, our Chief Operating Officer. We have employment agreements with Mr. Warren and Mr. Fluet that provide that either party may terminate Mr. Warren’s or Mr. Fluet’s employment at any time with or without cause. If there is a change in control and we terminate Mr. Warren’s or Mr. Fluet’s employment without cause, however, we would be required to make specified payments to them as described in their employment agreement. We do not have key person life insurance on Mr. Warren or Mr. Fluet.

Our future success also depends on our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel. During the past year we experienced turnover in our sales force. Our inability to retain or attract qualified personnel could have a significant negative effect and thereby materially harm our business and financial condition.

We may not have additional financing available to us.

We used approximately $1.0 million of net cash from operating activities in the year ended June 30, 2008 and ended that period with approximately $11.0 million of cash and cash equivalents. We believe our $11.0 million in cash and cash equivalents, together with the funds generated from product sales, will be sufficient to fund our working capital and capital resource needs for the next 12 months. Our business plan and financing needs are subject to change depending on, among other things, success of our efforts to continue to effectively manage expenses, market conditions, business opportunities and cash flow from operations, if any. We may require additional financing to continue our business, the receipt of which cannot be assured. Such additional financing could be sought from a number of sources, including possible sales of equity or debt securities or loans from banks or other financial institutions. We may not be able to obtain additional financing from any source on reasonable terms, if at all. Any future capital that is available may be raised on terms that are dilutive to our shareholders.

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

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

•

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

•

the impact to the marketplace of competitive products and pricing,

•

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

•

product availability, and

•

changes in CMS reimbursement rates.

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

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

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

•

actual or anticipated variations in our operating results,

•

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

•

developments regarding government and third-party reimbursement,

•

changes in government regulation,

•

government investigation of us or our products,

•

result of regulatory process for approval of our next generation catheter,

•

changes in reimbursement rates or methods affecting our products,

•

developments concerning proprietary rights,

•

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

•

investor perception of us and our industry,

•

general economic and market conditions including market uncertainty,

•

national or global political events,

•

difficulties with international expansion or operations,

•

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

•

changes in senior management.

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

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

Future sales of our common stock could have a significant negative effect on the market price of our common stock. In addition, upon exercise of outstanding options, the number of shares outstanding of our common stock could increase substantially. This increase, in turn, could dilute future earnings per share, if any, and could depress the market value of our common stock. Dilution and potential dilution, the availability of a large amount of shares for sale, and the possibility of additional issuances and sales of our common stock may negatively affect both the trading price of our common stock and the liquidity of our common stock. These sales also might make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we would deem appropriate.

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

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

•

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

•

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

•

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

•

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

•

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

We lease approximately 26,000 square feet of office, manufacturing and warehouse space in a suburb of Minneapolis, Minnesota, pursuant to a lease that expires in March 2011. We believe our facilities will be sufficient to meet our current and future requirements and that additional space at or near the current location will be available at a reasonable cost if additional space is required in the future.

ITEM 3. LEGAL PROCEEDINGS

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

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

Not applicable.

PART II

ITEM 5.

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

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


		Quarter
Fiscal Year		First		Second		Third		Fourth
2008	High	$	2.95	$	1.86	$	1.28	$	1.88
	Low		1.82		1.11		0.78		0.86

2007	High	$	3.53	$	2.81	$	3.66	$	3.02
	Low		2.75		2.28		2.52		2.14

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

Dividends

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

Equity Compensation Plan Information

The table below presents our equity compensation plan information as of June 30, 2008:


Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column)
Equity compensation plans approved by security holders	1,469,450	$	3.33	1,049,230
Equity compensation plan not approved by security holders	225,000	$	2.75	None

Total	1,694,450	$	3.25	1,049,230

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

The 225,000 shares listed under “equity compensation plans not approved by security holders” represent an option to purchase 225,000 shares of the Company’s common stock granted to Fred B. Parks, the Company’s former Chairman and Chief Executive Officer, in connection with his original employment agreement dated May 21, 2003. The option is a non-qualified option exercisable at a price of $2.75 per share. The 225,000 share grant was fully vested on May 27, 2007. In connection with Mr. Park’s severance agreement, these options, along with all outstanding and fully vested options of Mr. Park’s were modified to allow them to continue to be exercisable until the earlier of (i) November 26, 2009; or (ii) the expiration date of such options.

ITEM 6. SELECTED FINANCIAL DATA


	Years ended June 30,
	2008			2007			2006			2005		2004
	(in thousands, except per share data)
Statements of Operations Data:
Sales	$	14,906		$	21,317		$	25,885		$	25,813	$	24,324
Cost of goods sold		6,893			13,893	(3)		8,995			7,810		9,047

Gross profit		8,013			7,424			16,890			18,003		15,277

Costs and Expenses:
Selling, general and administrative		11,767			11,086			12,940			11,643		12,338
Research and development		2,780			3,026			2,987			3,073		2,390
Amortization and impairment of identifiable intangible assets		71			2,244	(4)		194			164		164
Impairment of goodwill		10,193	(1)		—			—			—		—
Restructuring		—			—			—			—		(200	)(7)

Total costs and expenses		24,811			16,356			16,121			14,880		14,692

Operating earnings (loss)		(16,798	)		(8,932	)		769			3,123		585
Interest income, net		400			554			371			138		57

Earnings (Loss) before income taxes		(16,398	)		(8,378	)		1,140			3,261		642
Income tax (expense) benefit		(1,501	)(2)		4,859	(5)		(4,354	)(6)		424		286

Net earnings (loss)	$	(14,897	)	$	(13,237	)	$	5,494		$	2,837	$	356

Basic:
Net earnings (loss) per common share	$	(1.04	)	$	(0.92	)	$	0.38		$	0.20	$	0.03
Weighted average shares used in computing net earnings (loss) per share		14,337			14,332			14,319			14,279		14,015
Diluted:
Net earnings (loss) per common share	$	(1.04	)	$	(0.92	)	$	0.38		$	0.19	$	0.02
Weighted average shares used in computing net earnings (loss) per share		14,337			14,332			14,369			14,759		14,649

	2008			2007			2006			2005		2004
Balance Sheet Data:
Cash, cash equivalents and available-for-sale investments	$	11,031		$	12,250		$	11,054		$	10,770	$	7,604
Working capital		11,259			16,067			16,926			13,174		8,556
Total assets		17,480			32,653			43,898			39,106		36,172
Total liabilities		3,633			4,778			3,918			5,961		6,312
Shareholders’ equity		13,847			27,875			39,980			33,145		29,860

(1)	Represents a $10.2 million charge to fully impair our goodwill as of December 31, 2007.

(2)	Represents the reversal of our deferred tax liability of $1.6 million as a result of the impairment of our goodwill, partially offset by state taxes.

(3)	Includes the following non-cash charges as a result of the implementation of an end-of-life plan for our Prostatron control units and Prostaprobe catheters in connection with our strategy to develop a next generation catheter:


Inventory write-down	$	213,000
Fixed asset impairment		178,000
Developed technology intangible asset impairment		4,044,000

	$	4,435,000

(4)	Includes the following non-cash charges as a result of the implementation of an end-of-life plan for our Prostatron control units and Prostaprobe catheters in connection with our strategy to develop a next generation catheter:


Trademark intangible asset impairment	$	969,000
Customer base intangible asset impairment		991,000

	$	1,960,000

(5)	Includes a $4.8 million non-cash income tax expense to increase the valuation allowance to fully reserve our deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period.

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

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

SELECTED QUARTERLY FINANCIAL DATA


	Year Ended June 30, 2008
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in thousands, except per share data)
Sales	$	4,351		$	3,802		$	3,092		$	3,661
Gross profit		2,722			1,874			1,409			2,007
Loss before income taxes		(323	)		(11,692	)(1)		(2,141	)		(2,243	)
Net Loss		(397	)		(10,117	)(2)		(2,141	)		(2,243	)
Basic net loss per share	$	(0.03	)	$	(0.71	)	$	(0.15	)	$	(0.16	)
Diluted net loss per share	$	(0.03	)	$	(0.71	)	$	(0.15	)	$	(0.16	)

	Year Ended June 30, 2007
	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in thousands, except per share data)
Sales	$	5,415		$	6,011		$	5,073		$	4,818
Gross profit (loss)		3,005			3,566			2,709			(1,856	)(3)
Earnings (loss) before income taxes		(526	)		204			(777	)		(7,279	)(4)
Net earnings (loss)		(526	)		147			(777	)		(12,081	)(5)
Basic net earnings (loss) per share	$	(0.04	)	$	0.01		$	(0.05	)	$	(0.84	)
Diluted net earnings (loss) per share	$	(0.04	)	$	0.01		$	(0.05	)	$	(0.84	)

(1)	Includes a $10.2 million charge to fully impair our goodwill as of December 31, 2007.

(2)	In addition to (1) above, includes a $1.6 million income tax benefit as a result of the reversal of our deferred tax liability as a result of the impairment of the goodwill.

(3)	Includes the following non-cash charges as a result of the implementation of an end-of-life plan for our Prostatron control units and Prostaprobe catheters in connection with our strategy to develop a next generation catheter:


Inventory write-down	$	213,000
Fixed asset impairment		178,000
Developed technology intangible asset impairment		4,044,000

	$	4,435,000

(4)	In addition to (3) above, includes the following non-cash charges as a result of the implementation of an end-of-life plan for our Prostatron control units and Prostaprobe catheters in connection with our strategy to develop a next generation catheter:


Trademark intangible asset impairment	$	969,000
Customer base intangible asset impairment		991,000

	$	1,960,000

(5)	In addition to (3) and (4) above includes a $4.8 million non-cash income tax expense to increase the valuation allowance to fully reserve our deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

OVERVIEW

The level of Medicare reimbursement for Cooled ThermoTherapy is dependent on the site of service. In calendar year 2008 the reimbursement rate for a hospital performing our treatment on an outpatient basis is approximately $550, and the reimbursement for the urologist performing the Cooled ThermoTherapy treatment is approximately $500 per procedure. The reimbursement rate (inclusive of the physician’s fee) in calendar year 2008 for Cooled ThermoTherapy procedures performed in the urologist’s office is $3,118, which is subject to geographic adjustment. In January 2008, the CPT Code covering Cooled ThermoTherapy was once again added to the ASC list of Medicare approved procedures. Effective with this latest change, urologists who perform Cooled ThermoTherapy procedures in an ASC are reimbursed under the two-part system in which the ASC receives a fixed fee of $1,872 for calendar year 2008, while the urologist performing the treatment is reimbursed $547 for calendar year 2008.

For calendar 2009, CMS is proposing additional reductions in the physician fee schedule covering Cooled ThermoTherapy. The exact amount of the reduction has not yet been determined however, initial estimates were in the range of a 13 percent decrease. We are actively participating in the comment process related to the proposed reductions, have an active reimbursement strategy, and have retained consultative experts to assist us with dealing with the proposed reimbursement rate reductions.

continue our efforts to gain coverage and reimbursement across the United States. There can be no assurance that we will receive favorable coverage or reimbursement determinations for Cooled ThermoTherapy from these payers or that amounts reimbursed to physicians for performing Cooled ThermoTherapy procedures will be sufficient to encourage physicians to use Cooled ThermoTherapy.

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) to educate both patients and physicians on the benefits of Cooled ThermoTherapy compared to other treatment options, (ii) to increase the use of Cooled ThermoTherapy by physicians who already have access to a Cooled ThermoTherapy system, (iii) to increase the number of physicians who provide Cooled ThermoTherapy to their patients, and (iv) to provide more physicians with access to Cooled ThermoTherapy through the use of third party mobile providers and our own Cooled ThermoTherapy mobile service in the United States.

We expect to continue to invest in research and development and clinical trials, sales and marketing programs and our Cooled ThermoTherapy mobile service as we focus on growing revenues and continuing to improve our therapy. Our future growth 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, as well as the risk of FDA mandated recall of our products, our ability to manufacture at the volumes and quantities the market requires, the fact that our products may be subject to product recalls even after receiving FDA clearance or approval, 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 and Estimates:

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

Revenue Recognition

We recognize revenue from the sale of Cooled ThermoTherapy™ system control units upon delivery to the customer. In addition to our sales of Cooled ThermoTherapy system control units, we place our Cooled ThermoTherapy system control units with customers under a variety of programs for both evaluation and 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 and revenue subject to certain sales incentives is deferred based upon the contract provisions. 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 specific customer-based circumstances. Should actual sales returns differ from our estimates, revisions to the sales return reserve would be required. Sales and use taxes are reported on a net basis, excluding them from revenue.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We consider factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic

conditions that may affect a customer’s ability to pay when determining the adequacy of the allowance. Accounts receivable are written-off after management determines they are uncollectible. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Product Warranty

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

Inventories

We value our inventories, consisting primarily of control units, single-use treatment catheters, and raw materials to produce the control units and treatment catheters, at the lower of cost or market value on the first-in, first-out (“FIFO”) basis. The inventory cost includes both merchandise and freight. A periodic review of the inventory on hand is performed to determine if the inventory is properly stated at the lower of cost or market. In performing this analysis we consider, at a minimum, the following factors: average selling prices, reimbursement changes, and changes in demand for our products due to competitive conditions or market acceptance. Each type of inventory is analyzed to determine net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required.

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

Valuation of Identifiable Intangible Assets and Goodwill

We recorded a $10.2 million charge to fully impair our goodwill as of December 31, 2007. SFAS 142, “Goodwill and Other Intangible Assets”, requires that goodwill be tested for impairment annually or at an interim period when events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. As a result of our decline in stock price, coupled with recent negative operating results and further impairments of our other long-lived assets, we again tested the goodwill for impairment as of December 31, 2007. Based on this impairment test, we concluded that goodwill was fully impaired as of December 31, 2007. See Note 8 for a description of the goodwill impairment charge recorded in fiscal year 2008.

As of June 30, 2008, identifiable intangible assets consist of a customer base of $150,200 and patents of $16,600. In accordance with SFAS No. 144, we review identifiable intangible assets for impairment as changes in circumstance or the occurrence of events suggests the remaining value is not recoverable. These events include continued losses or a projection of continued losses, a significant decrease in the market value of an asset, or a change in the expected use of an asset. When a trigger event occurs, an impairment calculation is performed, comparing projected undiscounted future cash flows, utilizing current cash flow information to the carrying amount of those assets. If impairment is identified for long-lived assets, discounted future cash flows are compared to the asset’s current carrying amount. Impairment is recorded when the carrying amount exceeds the discounted cash flows. At June 30, 2007, in connection with our strategy to develop a next generation catheter, we implemented an end-of-life plan for our Prostatron control units and Prostaprobe catheters which resulted in asset impairment charges of $6,004,000 related to developed technologies, customer base, and trademarks. In addition, the remaining estimated useful life of the developed technologies and trademarks were reduced from 8.25 years to 2.5 years at June 30, 2007. At December 31, 2007, we took additional impairment charges of

$106,000 related to the Prostatron control units and Prostaprobe catheters as a result of declining sales projections for this product line. As a result, our developed technologies and trademark assets have been completely written off. The remaining balance of the customer base is being amortized using the straight-line method over the next 6.25 years, its estimated remaining useful life. The patent intangible assets relate to fees incurred for patents that have not yet been issued. We will begin amortization of these patent costs once the patents have been issued.

Sales Tax Accrual

We maintain an accrual for sales tax liabilities we discover. The amount of the accrual is based on finding from sales tax audits and correspondence with state taxing authorities which indicate we may owe sales tax on items previously considered exempt, charged at incorrect tax rates, or for items which were not taxed by our vendors and we failed to self assess the sales tax. The accrual amount also includes interest and penalties which will result from these finding. Any unanticipated changes in the factors used to determine the amount of the accrual based on continued discussions and negotiations with the various state taxing authorities could result in changes to the amount of sales tax accrual required.

Based on a recent sales tax audit and new information obtained by the Company in the fourth quarter of fiscal 2008, we believe we may have additional sales tax exposure in some states related to our mobile service business. As a result, we felt a liability was probable under Statement of Financial Accounting Standard (SFAS) No. 5 “Accounting for Contingencies” and increased our sales tax accrual by approximately $755,000 in the fourth quarter of fiscal 2008 for sales we previously believed to be exempt. This change in accounting estimate resulted in an increase to our fiscal year 2008 net loss of $755,000 or $0.05 per diluted share.

Income Taxes

We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax basis of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reserve against deferred tax liabilities within the scheduled reversal period. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. At June 30, 2008, we carried a valuation allowance of $39.2 million against our remaining net deferred tax assets.

Stock-Based Compensation

On July 1, 2005, we adopted the fair value recognition provisions of SFAS No. 123R “Share-Based Payment” using the modified prospective method. Under the modified prospective method, we recognize compensation expense on all stock option awards granted subsequent to July 1, 2005, as well as on any existing awards modified, repurchased or cancelled after July 1, 2005. In addition, compensation expense is recognized on the unvested portion of stock options granted prior to July 1, 2005. The amount of compensation expense is based on the fair value of the option award at the date of grant and is recognized over the requisite service period which corresponds to the option vesting period. Options typically vest 25 percent after the first year of service with the remaining vesting 1/36^th each month thereafter. Generally, options granted to non-employee directors are immediately exercisable at the date of grant. Options are priced based on the closing price of a share of our common stock at the date of grant. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model. To determine the inputs for the Black-Scholes option pricing model we use

historical data to estimate expected volatility and the period of time that option grants are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The range of these assumptions and the range of option pricing and number of options granted at the different grant dates will impact our calculation of the fair value of the awards and will therefore impact the amount of expense reflected in our statement of operations for any given period.

Results of Operations

Fiscal Years Ended June 30, 2008 and 2007

Net Sales

Net sales decreased 30 percent to $14.9 million in fiscal 2008 from $21.3 million in fiscal 2007. The decrease in sales from fiscal 2007 is primarily due to reduced orders for procedure kits as a result of lost accounts, both direct and mobile, a reduction in the average order size of accounts, as well as our inability to meet demand for Prostaprobes as we awaited an end-of-life build from our supplier. Sales were also down as a result of continued turnover in our sales force, as well as disruptions in our mobile business from employee turnover.

During fiscal 2008, revenue from catheter sales to direct accounts constituted 53 percent of sales compared to 65 percent in the prior fiscal year, while our mobile treatments comprised 45 percent of total sales in fiscal 2008 compared to 33 percent in the prior year. The remaining one percent of our sales in fiscal 2008 were from sales of our control units and warranty service contracts.

Cost of Goods Sold and Gross Profit

Cost of goods sold includes raw materials, labor, overhead, and royalties incurred in connection with the production of our Cooled ThermoTherapy system control units and single-use treatment catheters, amortization related to developed technologies, as well as costs associated with the delivery of our Cooled ThermoTherapy mobile service. Cost of goods sold for fiscal 2008 decreased to $6.9 million or 50 percent from $13.9 million in fiscal 2007, and is primarily due to the 30 percent decrease in sales from fiscal 2007 to fiscal 2008. Fiscal year 2007 includes a $4.2 million in asset impairment charges related to developed technologies and Prostatron fixed assets, and a $213,000 write-down of Prostatron inventory as a result of the implementation of an end-of-life plan for our Prostatron control units and Prostaprobe catheters.

Gross profit as a percentage of sales increased to 54% in fiscal 2008 from 35% in the prior fiscal year. Gross profit margin rates were lower by 21% in the prior fiscal year as a result of the asset impairment charges and inventory write-down in fiscal 2007 mentioned above. Excluding the asset impairment charges and inventory write-downs, gross profit as a percentage of sales was down approximately 2% in fiscal 2008 as compared to fiscal 2007 as a result of lower sales and production volume of our treatment catheters, which provide a smaller base to absorb our fixed manufacturing overhead costs and an increase in the number of mobile unit treatments as a percentage of sales, which have lower overall margins.

Selling, General & Administrative

Selling, general and administrative expenses in fiscal 2008 increased $681,000 or 6 percent to $11.8 million from $11.1 million in fiscal 2007. The increase in selling, general and administrative expense is largely the result of a $755,000 increase to our sales tax accrual as a result of a recent sales tax audit and new information obtained by the Company in the fourth quarter of fiscal 2008, in which we believe we may have additional sales tax exposure in some states related to our mobile service business. As a result, we felt it was probable under Statement of Financial Accounting Standard (SFAS) No. 5 “Accounting for Contingencies” to increase our sales tax reserve by approximately $755,000 in the fourth quarter of fiscal 2008 for sales we previously believed to be exempt. In addition, there was a $568,000 increase in wages and benefits as a result of $520,000 of severance accruals recorded during the year for former Company executives, and a $258,000 increase in legal

and audit expenses for special projects. These increases were partially offset by $940,000 decrease in sales and marketing expenses largely as a result of a $478,000 decrease in sales and marketing wages and a $224,000 decrease in travel and entertainment due to an average decrease in headcount during fiscal 2008, as well as an $189,000 decrease in commission expense as a result of reduced sales.

Research and Development

Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, decreased to $2.8 million, or 8 percent at June 30, 2008 from $3.0 million at June 30, 2007. The decrease in research and development is mainly due to a $223,000 decrease in wages and benefits as a result of reduced headcount and a $57,000 decrease in consulting, partially offset by an approximate $101,000 increase in product testing and project materials related to our newest catheter, CTC Advance.

Amortization and Impairment of Identifiable Intangible Assets

Amortization and impairment of identifiable intangible assets decreased to $71,000 in fiscal 2008 compared to $2,244,000 in fiscal 2007. The decrease in amortization and impairment expense is the result of the implementation of an end-of-life plan at June 30, 2007 for the Prostatron control units and Prostaprobe catheters in connection with our strategy to develop a next generation catheter. The current year impairment and amortization expense is a result of the write-off of our trademark intangible asset of $16,800, as well as the additional write-down of the customer base of $24,000 in December 2007, and continued amortization of our remaining customer base intangible asset over its remaining useful life of 6.25 years, as compared to asset impairment charges of $991,000 related to the Prostatron customer base and $969,000 related to the Prostatron trademarks in fiscal 2007.

Goodwill Impairment

We recorded a $10.2 million charge to fully impair our goodwill as of December 31, 2007. SFAS 142, “Goodwill and Other Intangible Assets”, requires that goodwill be tested for impairment annually or at an interim period when events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. As a result of our decline in stock price, coupled with recent negative operating results and further impairments of our other long-lived assets, we again tested the goodwill for impairment as of December 31, 2007. Based on this impairment test, we concluded that goodwill was fully impaired as of December 31, 2007. The goodwill impairment charge does not affect the Company’s operations, cash flow or cash position.

Net Interest Income

Net interest income for fiscal 2008 decreased to $400,000 from $554,000 in the prior fiscal year. The decrease is due to lower cash and investment balances and lower interest rates.

Provision for Income Taxes

We recorded $1.5 million of income tax benefit for the fiscal year ended June 30, 2008 compared to an income tax expense of $4.9 million in fiscal 2007. The income tax benefit for the fiscal year ended June 30, 2008 is a result of a $1.6 million reversal of the deferred tax liability balance related to goodwill which was no longer necessary after the impairment of goodwill at December 31, 2007. This was partially offset by approximately $18,000 of tax expense mainly related to state taxes. The $4.8 million of tax expense at June 30, 2007 was to increase our valuation allowance to fully reserve our deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period based on management’s assessment of evidence, including the net loss in fiscal 2007. In addition to the $4.8 million of tax expense to increase our valuation allowance, we recorded $57,000 of income tax expense during the fiscal year related to state taxes.

Fiscal Years Ended June 30, 2007 and 2006

Net Sales

Net sales decreased to $21.3 million in fiscal 2007 from $25.9 million in fiscal 2006. The decrease in sales from fiscal 2006 was primarily due to reduced orders from our direct accounts, which includes both direct office and third party mobile accounts, as well as reduced average selling prices (ASP’s) for our disposable treatment catheters as a result of pricing pressures created by competition and reduced reimbursement rates. This decrease in sales from direct accounts was partially offset by an increase in sales of 86 percent from our mobile services that began operations in September 2005.

The introduction of our mobile services operations in September 2005 had a direct impact to our overall sales mix. During fiscal 2007, 65 percent of sales were derived from treatment catheters, compared to 82 percent in the prior fiscal year, while our mobile treatments comprised 33 percent of total sales in fiscal 2007 compared to 15 percent in the prior year. The remaining 2 percent of our sales in fiscal 2007 were from sales of our control units and warranty service contracts.

Cost of Goods Sold and Gross Profit

Cost of goods sold includes raw materials, labor, overhead, and royalties incurred in connection with the production of our Cooled ThermoTherapy system control units and single-use treatment catheters, amortization related to developed technologies, as well as costs associated with the delivery of our Cooled ThermoTherapy mobile service. Cost of goods sold for fiscal 2007 increased to $13.9 million from $9.0 million in fiscal 2006. The increase in cost of goods sold was primarily due to $4.2 million in asset impairment charges related to developed technologies and Prostatron fixed assets, as well as a $213,000 write-down of Prostatron inventory as a result of the implementation of an end-of-life plan for our Prostatron control units and Prostaprobe catheters in connection with our strategy to develop a next generation catheter.

Gross profit as a percentage of sales decreased to 35% in fiscal 2007 from 65% in the prior fiscal year. Gross profit margin rates decreased 21% as a result of the asset impairment charges and inventory write-down mentioned above, and the remaining decrease resulted from decreased sales and production volume of our treatment catheters, which provide a smaller base to absorb our fixed manufacturing overhead costs, an increase in the number of mobile unit treatments, which have lower overall margins, increases in overall material costs, as well as increased costs during the three month period ended September 30, 2006 related to the resolution of manufacturing issues identified in the fourth quarter of fiscal 2006. These manufacturing issues did not continue into the rest of fiscal 2007.

Selling, General & Administrative

Selling, general and administrative expenses for fiscal 2007 decreased $1.9 million or 14 percent to $11.1 million from $12.9 million in fiscal 2006. The decrease in selling, general and administrative expense was largely the result of a decrease in wages, benefits, commissions, and travel largely due to a decrease in our sales, the size of our sales force, and a decrease in advertising and promotional expense associated with the launch of the new CoolWave control unit. These expense reductions were partially offset by increased legal, audit and consulting fees when compared to fiscal 2006, as well as $121,000 of severance expense as a result of a 7% headcount reduction in June 2007.

Research and Development

Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, remained relatively flat at $3.0 million for both fiscal 2007 and 2006. Research and development expenses for fiscal 2007 related primarily to expenditures incurred in development of our next generation catheter, as compared with fiscal 2006 when expenditures related primarily to activities related to our next generation CoolWave control unit.

Amortization and Impairment of Identifiable Intangible Assets

Amortization and impairment of identifiable intangible assets increased to $2,244,000 in fiscal 2007 compared to amortization of $194,000 in fiscal 2006. The increase in amortization and impairment expense was the result of the implementation of an end-of-life plan at June 30, 2007 for the Prostatron control units and Prostaprobe catheters in connection with our strategy to develop a next generation catheter. This decision resulted in asset impairment charges, in accordance with SFAS No. 144, of $991,000 related to the Prostatron customer base and $969,000 related to the Prostatron trademarks.

Net Interest Income

Net interest income for fiscal 2007 increased to $554,000 from $371,000 in the prior fiscal year. The increase was due to higher cash and investment balances and higher interest rates.

Provision for Income Taxes

We recorded $4.9 million of income tax expense for the fiscal year ended June 30, 2007, compared to an income tax benefit of $4.4 million in fiscal 2006. This increase was a result of our recording $4.8 million of tax expense at June 30, 2007 to increase our valuation allowance to fully reserve our deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. At the end of fiscal 2006, we had reduced our valuation allowance and recorded an income tax benefit of $4.6 million as we had determined that it was more likely than not that we would be able to realize a portion of our deferred tax assets in the future. At June 30, 2007 we increased our valuation allowance to fully reserve our deferred tax assets that would not reverse against deferred tax liabilities within the scheduled reversal period based on management’s assessment of evidence, including the net loss in fiscal 2007. In addition to the $4.8 million of tax expense to increase our valuation allowance, we also recorded $57,000 of income tax expense during fiscal 2007 related to state taxes.

Liquidity and Capital Resources

We have financed our operations since inception through sales of equity securities and, to a lesser extent, sales of our Cooled ThermoTherapy system control units and single-use treatment catheters. As of June 30, 2008, we had total cash and cash equivalents of $11.0 million compared to cash and cash equivalents of $12.3 million as of June 30, 2007. The decrease in cash and cash equivalents resulted primarily from our decreased sales in fiscal 2008 which contributed to a net operating loss of $14.9 million in fiscal 2008.

Cash Provided by Operating Activities

During fiscal 2008, we used $1.0 million of cash from operating activities compared to the generation of $1.5 million in fiscal 2007 primarily as a result of our net operating loss of $14.9 million. The net loss of $14.9 million included non-cash charges of $10.3 million of impairment charges related to goodwill and other identifiable intangible assets, $1.2 million of depreciation and amortization expense, and $830,000 of stock-based compensation expense, offset by a $1.5 million non-cash benefit from the reversal of the deferred tax liability. Changes in operating items contributed $2.9 million of operating cash flow for the period with accounts receivable decreasing $2.2 million as a result of lower sales and improved days sales outstanding, as well as an increase of $548,000 in accrued expenses and deferred income as a result of the sales tax accrual recorded in the fourth quarter of fiscal 2008, and increases in severance accruals for former Company executives, partially offset by decreases in legal and audit accruals. These increases in cash were partially offset by lower accounts payable of $174,000 due to the timing of purchases versus payments. The decrease in accounts payable is due to the receipts and payments of vendor goods and services.

Cash Used for Investing Activities

We used $213,000 for investing activities as a result of the purchase of property and equipment for leasehold improvements to our facilities and to support our manufacturing operations.

Cash Provided by Financing Activities

During fiscal 2007 we generated $39,000 from financing activities as a result of proceeds from the exercise of stock options.

We plan to continue offering customers a variety of programs for both evaluation and longer-term use of our Cooled ThermoTherapy system control units in addition to purchase options, as well as grow our mobile service which provides physicians and patients with efficient access to our Cooled ThermoTherapy system control units on a pre-scheduled basis. As of June 30, 2008, our property and equipment, net, included approximately $1.4 million of control units used in evaluation or long-term use programs and units used in our Company-owned mobile service. Depending on the growth of these programs, we may use additional capital to finance these programs.

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


	2009		2010		2011
Building and equipment leases	$	250	$	257	$	189

We believe our $11.0 million in cash and cash equivalents at June 30, 2008 will be sufficient to fund our operations, working capital and capital resources needs for at least the next 12 months. In addition, we believe the majority of our cash equivalents are secure as they are backed by United States Government Treasures. 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 July 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS No. 109.” FIN 48 creates a single model to address accounting for uncertainty in tax positions and clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. Specifically under FIN 48, the tax benefits from an uncertain tax position may be recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based upon the technical merits of the position. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We adopted FIN 48 effective July 1, 2007 as required. The adoption of FIN 48 had no impact on our financial statements. See Note 6 for further details on the adoption of FIN 48.

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 do not expect the adoption of this statement to have any impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for us beginning on July 1, 2008. We do not expect the adoption of this statement to have any impact on our financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R) (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired in the business combination. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) will impact financial statements at the acquisition date and in subsequent periods. We will be required to apply the new guidance to any business combinations completed on or after July 1, 2009.

In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the Useful Life of Intangible Assets.” FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. 142-3 is effective for us beginning July 1, 2009. We do not expect the adoption of this statement to have any impact on our financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash equivalents instruments. 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 equivalent instruments, we have concluded that we do not have a material market risk exposure.

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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


Management’s Report on Internal Control over Financial Reporting		34
Report of Independent Registered Public Accounting Firm		35
Balance Sheets as of June 30, 2008 and 2007		36
Statements of Operations for the years ended June 30, 2008, 2007 and 2006		37
Statements of Shareholders’ Equity for the years ended June 30, 2008, 2007 and 2006		38
Statements of Cash Flows for the years ended June 30, 2008, 2007 and 2006		39
Notes to Financial Statements		40

Management’s Report on Internal Control over Financial Reporting

The Board of Directors and Shareholders

Urologix, Inc.:

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a15-(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

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

Under the supervision of our Chief Executive Officer and our Controller, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control— Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of June 30, 2008.

* * *

This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm, KPMG LLP, regarding internal controls over financial reporting. Management’s report was not subject to attestation by KPMG LLP pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

Urologix, Inc.:

We have audited the accompanying balance sheets of Urologix, Inc. (the Company) as of June 30, 2008 and 2007, and the related statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended June 30, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Urologix, Inc. as of June 30, 2008 and 2007, and the results of its operations and its cash flows for each of the years in the three-year period ended June 30, 2008, in conformity with U.S. generally accepted accounting principles.

As disclosed in Note 3 and 10 to the financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123 (Revised 2004),Share-Based Payment,on July 1, 2005, and Securities and Exchange Commission Staff Accounting Bulletin No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, as of July 1, 2006.

/s/ KPMG LLP

Minneapolis, Minnesota

September 29, 2008

Urologix, Inc.

Balance Sheets

(In thousands, except per share data)


	June 30,
	2008			2007
ASSETS
Current Assets:
Cash and cash equivalents	$	11,031		$	12,250
Accounts receivable, net of allowance of $153 and $224		1,773			4,071
Inventories		1,634			2,421
Prepaids and other current assets		115			40

Total current assets		14,553			18,782

Property and equipment:
Property and equipment		12,303			12,306
Less accumulated depreciation		(10,295	)		(9,973	)

Property and equipment, net		2,008			2,333
Other assets		752			1,034
Goodwill		—			10,193
Identifiable intangible assets, net		167			311

Total assets	$	17,480		$	32,653

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	774		$	948
Accrued compensation		711			756
Deferred income		227			229
Other accrued expenses		1,582			782

Total current liabilities		3,294			2,715

Deferred tax liability		—			1,519
Deferred income		339			544

Total liabilities		3,633			4,778

Commitments and Contingencies (Note 9)
SHAREHOLDERS’ EQUITY:
Common stock, $.01 par value, 25,000 shares authorized; 14,383 and 14,333 shares issued and outstanding		144			143
Additional paid-in capital		113,413			112,545
Accumulated deficit		(99,710	)		(84,813	)

Total shareholders’ equity		13,847			27,875

Total liabilities and shareholders’ equity	$	17,480		$	32,653

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

Urologix, Inc.

Statements of Operations

(In thousands, except per share data)


	For the Years Ended June 30
	2008			2007			2006
SALES	$	14,906		$	21,317		$	25,885
COST OF GOODS SOLD		6,893			13,893			8,995

Gross profit		8,013			7,424			16,890

COSTS AND EXPENSES
Selling, general and administrative		11,767			11,086			12,940
Research and development		2,780			3,026			2,987
Amortization and impairment of identifiable intangible assets		71			2,244			194
Impairment of goodwill		10,193			—			—

Total costs and expenses		24,811			16,356			16,121

OPERATING EARNINGS (LOSS)		(16,798	)		(8,932	)		769
INTEREST INCOME		400			554			371

EARNINGS (LOSS) BEFORE INCOME TAXES		(16,398	)		(8,378	)		1,140
INCOME TAX EXPENSE (BENEFIT)		(1,501	)		4,859			(4,354	)

NET EARNINGS (LOSS)	$	(14,897	)	$	(13,237	)	$	5,494

NET EARNINGS (LOSS) PER COMMON SHARE—BASIC	$	(1.04	)	$	(0.92	)	$	0.38

NET EARNINGS (LOSS) PER COMMON SHARE—DILUTED	$	(1.04	)	$	(0.92	)	$	0.38

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING—BASIC		14,337			14,332			14,319

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING—DILUTED		14,337			14,332			14,369

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

Urologix, Inc.

Statements of Shareholders’ Equity

(In thousands)


	Common Stock			Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	Shares	Amount		Additional Paid-In Capital		Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance, June 30, 2005	14,308	$	143	$	110,110	$	(77,107	)	$	(1	)	$	33,145
Change in unrealized gains (losses) on investments	—		—		—		—			1			1
Net earnings	—		—		—		5,494			—			5,494

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

Balance, June 30, 2006	14,328		143		111,450		(71,613	)		—			39,980
Cumulative effect adjustment as a result of the adoption of SAB 108							37						37
Net loss	—		—		—		(13,237	)		—			(13,237	)

Comprehensive loss	—		—		—		—			—			(13,237	)
Stock options exercised	5		—		12		—			—			12
Stock-based compensation	—		—		1,083		—			—			1,083

Balance, June 30, 2007	14,333		143		112,545		(84,813	)		—			27,875
Net loss	—		—		—		(14,897	)		—			(14,897	)

Comprehensive loss	—		—		—		—			—			(14,897	)
Stock options exercised	50		1		38		—			—			39
Stock-based compensation	—		—		830		—			—			830

Balance, June 30, 2008	14,383	$	144	$	113,413	$	(99,710	)	$	—		$	13,847

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

Urologix, Inc.

Statements of Cash Flows

(In thousands)


	For the Years Ended June 30
	2008			2007			2006
OPERATING ACTIVITIES
Net earnings (loss)	($	14,897	)	($	13,237	)	$	5,494
Adjustments to reconcile net earnings (loss) to net cash (used for) provided by operating activities:
Depreciation and amortization		1,191			2,260			2,014
Employee stock-based compensation expense		830			1,083			1,270
Impairment of goodwill and long-lived assets		10,299			6,004			—
Provision for bad debts		108			58			19
Deferred income taxes		(1,519	)		4,842			(4,476	)
Loss on disposal of assets		—			20			1
Change in operating assets and liabilities:
Accounts receivable		2,190			1,105			(1,010	)
Inventories		172			(416	)		(1,705	)
Prepaids and other assets		207			398			450
Accounts payable		(174	)		(427	)		(158	)
Accrued expenses and deferred income		548			(194	)		(732	)

Net cash (used for) provided by operating activities		(1,045	)		1,496			1,167

INVESTING ACTIVITIES
Purchase of property and equipment		(213	)		(312	)		(953	)
Proceeds from sales or maturities of investments		—			—			172

Net cash used for investing activities		(213	)		(312	)		(781	)

FINANCING ACTIVITIES
Proceeds from stock option exercises		39			12			69

Net cash provided by financing activities		39			12			69

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(1,219	)		1,196			455
CASH AND CASH EQUIVALENTS
Beginning of year		12,250			11,054			10,599

End of year	$	11,031		$	12,250		$	11,054

Supplemental cash-flow information
Income taxes paid during the period	$	35		$	112		$	93
Net carrying amount of inventory transferred to property and equipment	$	615		$	629		$	813

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

UROLOGIX, INC.

Notes to Financial Statements

1. Nature of Business

Description of Operating Activities

Urologix, Inc. (the “Company,” “Urologix,” “we”) develops, manufactures, and markets non-surgical, catheter-based therapies that use a proprietary cooled microwave technology for the treatment of benign prostatic hyperplasia (BPH), a disease that affects more than 23 million men worldwide. We market our control units under the Targis,^® Prostatron^® and CoolWave^® names and our procedure kits under the CTC Advance™, CTC™, Targis and Prostaprobe™ names. During the fourth quarter of fiscal 2007, in connection with our strategy to develop a next generation catheter, we implemented an end-of-life plan for our Prostatron control units and Prostaprobe catheters. We have converted the majority of the Prostaprobe customers to our Coolwave or Targis platforms. However, we do have a limited number of customers for whom we have committed to perform an end-of-life build, after which we expect the remainder of these customers to convert to one of our other platforms. All systems utilize the Company’s Cooled ThermoTherapy technology, a targeted microwave energy combined with a unique cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH. Cooled ThermoTherapy can be performed without anesthesia or intravenous sedation and can be performed in a physician’s office or an outpatient clinic.

2. Significant Accounting Policies

Cash and Cash Equivalents

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

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 and revenue subject to certain sales incentives is deferred based upon the contract provisions. 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 specific customer-based circumstances. Sales and use taxes are reported on a net basis, excluding them from revenue.

Trade Accounts Receivable

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

Allowance for Doubtful Accounts

UROLOGIX, INC.

Notes to Financial Statements—(Continued)

customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay when determining the adequacy of the allowance. Accounts receivable are written-off after management determines they are uncollectible.

Bad debt and sales returns provisions and accounts receivable write-offs for the years ended June 30, 2008, 2007 and 2006 were as follows (in thousands):


Years Ended	Beginning Balance		Provisions		Write-offs			Ending Balance
June 30, 2008	$	224	$	108	($	179	)	$	153
June 30, 2007		238		8		(22	)		224
June 30, 2006		167		74		(3	)		238

Inventories

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


	June 30, 2008		June 30, 2007
Raw materials	$	786	$	1,306
Work-in-process		264		118
Finished goods		584		997

Total inventories	$	1,634	$	2,421

Goodwill and Identifiable Intangible Assets

As of June 30, 2008, identifiable intangible assets consist of a customer base of $150,200 and patents of $16,600. In accordance with SFAS No. 144, we review identifiable intangible assets for impairment as changes in circumstance or the occurrence of events suggests the remaining amount is not recoverable. These events include continued losses or a projection of continued losses, a significant decrease in the market value of an asset, or a change in the expected use of an asset. When a trigger event occurs, an impairment calculation is performed, comparing projected undiscounted future cash flows, utilizing current cash flow information to the carrying amount of those assets. If impairment is identified for long-lived assets, discounted future cash flows are compared to the asset’s current carrying amount. Impairment is recorded when the carrying amount exceeds the discounted cash flows. See Note 4 for a description of asset impairment charges recorded in fiscal years 2008 and 2007.

Property and Equipment

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

UROLOGIX, INC.

Notes to Financial Statements—(Continued)

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

Property and equipment, net consisted of the following (in thousands):


	June 30, 2008		June 30, 2007
Leasehold improvements, equipment, furniture and vehicles	$	590	$	750
Computer equipment		31		61
Control units		1,387		1,522

Total property and equipment, net	$	2,008	$	2,333

Other Assets

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

Leases and Deferred Rent

We lease all of our office space. Leases are accounted for under the provisions of SFAS No. 13, “Accounting for Leases,” as amended, which requires that leases be evaluated and classified as operating or capital leases for financial reporting purposes. As of June 30, 2008, all of our leases were accounted for as operating leases. For leases that contain rent escalations, we record the total rent payable during the lease term, as determined above, on a straight-line basis over the term of the lease and record the difference between the rents paid and the straight-line rent as a deferred rent. For any lease incentives we receive for items such as leasehold improvements, we record a deferred credit for the amount of the lease incentive and amortize it over the lease term, which may or may not equal the amortization period of the leasehold improvements in accordance with FASB Technical Bulletin 88-1 “Issues Relating to Accounting for Leases.”

Warranty Costs

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

Warranty provisions and claims for the years ended June 30, 2008, 2007 and 2006 were as follows (in thousands):


Years Ended	Beginning Balance		Warranty Provisions			Warranty Claims			Ending Balance
June 30, 2008	$	105	$	(13	)	$	(52	)	$	40
June 30, 2007	$	94	$	100		$	(89	)	$	105
June 30, 2006	$	141	$	92		$	(139	)	$	94

UROLOGIX, INC.

Notes to Financial Statements—(Continued)

Income Taxes

We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax bases of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance necessary to offset our deferred tax assets that will not be recoverable. If we determine in the future that it is more likely than not that we will realize all or a portion of our deferred tax assets, we will adjust our valuation allowance in the period we make the determination. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets. At June 30, 2008, we carried a valuation allowance of $39.2 million against our remaining net deferred tax assets.

Stock-Based Compensation

Net Earnings (Loss) Per Common Share

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


	For the years ended June 30,
	2008	2007	2006
Weighted average common shares outstanding—basic	14,337	14,332	14,319
Dilutive effect of stock options	—	—	50

Weighted average common shares outstanding—diluted	14,337	14,332	14,369

The dilutive effect of stock options in the above table excludes 1.3 million, 1.3 million, and 1.1 million of options for which the exercise price was higher than the average market price for the years ended June 30, 2008, 2007 and 2006, respectively. In addition, dilutive potential common shares of 6,994 and 214 were excluded from diluted weighted average common shares outstanding for the year ended June 30, 2008 and 2007, respectively as they would be anti-dilutive due to our net loss for those years.

Research and Development Costs

Research and development costs are charged to expense as incurred.

UROLOGIX, INC.

Notes to Financial Statements—(Continued)

Financial Instruments

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

Use of Estimates

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

Recently Issued Accounting Standards

In February 2007, the FASB issued SFAS No.159, “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 amends SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” and permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for us beginning on July 1, 2008. We do not expect the adoption of this statement to have any impact on our financial statements.

UROLOGIX, INC.

Notes to Financial Statements—(Continued)

3. Stock Options

We have a stock option plan that provides for the granting of incentive stock options to employees and nonqualified stock options and restricted stock to employees, directors and consultants. As of June 30, 2008, we had reserved 4,450,910 shares of common stock under this plan, and 1,049,230 shares were available for future grants. Options expire ten years from the date of grant and typically vest 25 percent after the first year of service with the remaining vesting 1/36^theach month thereafter. Under the current terms of our stock option plan, persons serving as non-employee directors at the date of the annual 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. Generally, such options are immediately exercisable on the date of grant, and expire 10 years from the date of grant, subject to earlier termination one year after the person ceases to be a director of the Company.

On February 25, 2008 our Interim Chief Executive Officer was granted an option to purchase 40,000 shares of the Company’s stock. The option is a non-qualified option which expires ten years from the grant date and vests 10,000 shares upon the date of grant, with an additional 10,000 shares vesting on the 30, 60, and 90 day anniversary of the grant date.

On June 24, 2008, our newly appointed Chief Executive Officer was granted an option to purchase 355,000 shares of the Company’s stock and 80,000 shares of restricted stock. The options granted, to the greatest extent possible, were issued as incentive stock options under Code Section 422 (the first $100,000 in value vesting in each year) with the remainder, granted as non-qualified stock options. All non-qualified options are immediately exercisable. If exercised before the vesting date, the Company will issue shares of restricted common stock subject to forfeiture until the vesting date of the corresponding option and subject to repurchase by the Company at the lower of (i) the original exercise price; or (ii) the fair market value of such shares upon forfeiture. Such incentive and non-qualified stock options expire ten years from the date of grant and vest 25 percent after the first year of service with the remaining vesting 1/36^theach month thereafter. The restrictions on the restricted stock lapse as to 25 percent of the shares on each of the first four anniversaries of the date of grant.

In addition, during fiscal 2008 non-employee consultants were granted options to purchase a total of 52,500 shares of the Company’s stock. These options are non-qualified options which expire ten years from the grant date and become fully vested either based on performance criteria, or over periods ranging from three months from the date of grant to over 24 months from the date of grant provided the consultants are still providing services to the Company. As these options were granted to non-employees, in accordance with the Emerging Issues Task Force (EITF) 96-18 “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services” the value of these options will need to be determined at their vesting dates, rather than the date of grant, using the Black Scholes option pricing model and will be marked to market at each reporting date until they become fully vested.

In addition to the stock option plan described above, the Company’s former Chairman and Chief Executive Officer, Fred B. Parks, 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 fully vested on May 27, 2007. In connection with Mr. Park’s severance agreement, these options, along with all outstanding and fully vested options of Mr. Park’s were modified to allow them to continue to be exercisable until the earlier of (i) November 26, 2009; or (ii) the expiration date of such options.

UROLOGIX, INC.

Notes to Financial Statements—(Continued)

Under the terms of the original option grants, Mr. Park’s outstanding and fully vested options would have expired 30 days from the date of his termination of employment with the Company. This modification resulted in the Company recognizing approximately $4,500 of additional stock-based compensation during the year ended June 30, 2008.

On July 1, 2005 we adopted the fair value recognition provisions of SFAS No. 123R “Share-Based Payment” using the modified prospective method. As a result, our fiscal 2008, 2007 and 2006 results of operations reflect compensation expense for new stock options granted and vested under our stock incentive plan, and the unvested portion of previous stock option grants which vested during the year. Amounts recognized in the financial statements related to stock-based compensation for the fiscal years ended June 30, 2008, 2007 and 2006 were as follows (in thousands, except per share amounts):


	2008		2007		2006
Cost of goods sold	$	127	$	140	$	78
Selling, general and administrative		580		777		1,051
Research and development		123		166		141

Total cost of stock-based compensation		830		1,083		1,270
Tax benefit of options issued		—		—		—

Total stock-based compensation, net of tax	$	830	$	1,083	$	1,270

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. For restricted stock awards, the fair value is calculated as the market price on date of grant and we amortize the fair value on a straight-line basis over the requisite service period of the award. The following weighted-average assumptions were used to estimate the fair value of options granted during the fiscal years ended June 30 2008, 2007 and 2006 using the Black-Scholes option-pricing model:


	2008		2007		2006
Volatility	59.1	%	69.4	%	86.6	%
Risk-free interest rate	3.6	%	4.9	%	4.1	%
Expected option life	3 years		3 years		4 years
Stock dividend yield	—		—		—

A summary of our option activity for the fiscal year ended June 30, 2008 is as follows:


Options Outstanding						Options Exercisable
Range of Exercise Prices		Outstanding as of June 30, 2008	Weighted-avg. Remaining Contractual Life	Weighted-avg. Exercise Price		Exercisable as of June 30, 2008	Weighted-avg. Exercise Price
$	— $ 2.43	603,000	8.43	$	1.65	77,979	$	1.27
$	2.44 $ 4.86	868,966	5.27	$	3.52	725,295	$	3.66
$	4.87 $ 7.29	73,687	4.88	$	5.95	67,870	$	6.00
$	7.30 $ 9.72	13,000	1.11	$	8.81	13,000	$	8.81
$	9.73 $12.15	12,500	2.51	$	12.13	12,500	$	12.13
$	12.16 $14.58	29,570	2.49	$	13.00	29,307	$	13.01
$	14.59 $17.01	10,000	3.35	$	15.82	10,000	$	15.82
$	17.02 $19.44	3,727	2.50	$	18.93	3,727	$	18.93

		1,614,450	6.31	$	3.32	939,678	$	4.29

UROLOGIX, INC.

Notes to Financial Statements—(Continued)


	Number of Options		Weighted-avg. Exercise Price Per Option		Weighted-avg. Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at July 1, 2007	1,121,134		$	4.47		$	—
Options granted	871,000			1.86
Options forfeited	(229,251	)		3.13
Options expired	(98,433	)		5.22
Options exercised	(50,000	)		0.78

Outstanding at June 30, 2008	1,614,450			3.32	6.3	$	99,943
Exercisable at June 30, 2008	939,678			4.29	5.3	$	36,080

The aggregate intrinsic value in the table above is based on our closing stock price of $1.77 as of the last business day of the fiscal year ended June 30, 2008, which would have been received by the optionees had all options been exercised on that date. There is no aggregate intrinsic value for options outstanding or exercisable at June 30, 2007 as the price of our stock at June 30, 2007 was less than the exercise price of all options outstanding or exercisable.

The weighted average fair value of our options at their grant date was approximately $0.82, $1.42 and $3.16 for the fiscal years ended June 30, 2008, 2007 and 2006, respectively. The total intrinsic value of options exercised during the fiscal years ended June 30, 2008, 2007 and 2006 was $29,000, $4,000 and $15,000, respectively.

A summary of the status of our nonvested options as of June 30, 2008 is as follows:


	Number of Options		Weighted-avg. Grant- Date Fair Value
Nonvested at July 1, 2007	279,237		$	1.98
Options granted	871,000			0.82
Options forfeited	(229,251	)		1.55
Options vested	(246,214	)		2.52

Nonvested at June 30, 2008	674,772			0.89

A summary of restricted stock award activity for the fiscal year ended June 30, 2008 is as follows:


	Number of Restricted Stock Awards	Weighted-avg. Grant- Date Fair Value
Nonvested at July 1, 2007	—	$	—
Options granted	80,000		1.79
Options forfeited	—		—
Options vested	—		—

Nonvested at June 30, 2008	80,000	$	1.79

As of June 30, 2008, total unrecognized compensation cost related to nonvested stock options and restricted stock awards granted under our plan was $835,000 and $101,000, respectively. That cost is expected to be recognized over a weighted-average period of 2.5 years for non-vested stock options and 4 years for restricted stock awards. The total fair value of options vested during the fiscal years ended June 30, 2008, 2007 and 2006 was $0.3 million, $0.9 million and $1.4 million, respectively. There were no restricted stock awards which vested in the fiscal years ending June 30, 2008, 2007 or 2006.

UROLOGIX, INC.

Notes to Financial Statements—(Continued)

4. Identifiable Intangible Assets, Net

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


	As of June 30, 2008								As of June 30, 2007
	Carrying Amount		Accumulated Amortization		Impairment		Net		Carrying Amount		Accumulated Amortization		Impairment		Net
Developed technologies	$	7,500	$	3,391	$	4,109	$	—	$	7,500	$	3,375	$	4,044	$	81
Customer base		2,300		1,135		1,015		150		2,300		1,109		991		200
Trademarks		1,140		154		986		—		1,140		150		969		21
Patents		17		—		—		17		9		—		—		9

Total identifiable intangible assets, net	$	10,957	$	4,680	$	6,110	$	167	$	10,949	$	4,634	$	6,004	$	311

At June 30, 2007, in connection with our strategy to develop a next generation catheter, we implemented an end-of-life plan for our Prostatron control units and Prostaprobe catheters which resulted in asset impairment charges of $6,004,000 related to developed technologies, customer base, and trademarks in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”. In addition, the remaining estimated useful life of the developed technologies and trademarks were reduced from 8.25 years to 2.5 years at June 30, 2007. The estimated remaining useful life of the customer base remained unchanged at 7.25 years. The patent intangible assets relate to fees incurred for patents that have not yet been issued. We will begin amortization of these patent costs once the patents have been issued. At December 31, 2007, we took additional impairment charges of $106,000 related to the Prostatron control units and Prostaprobe catheters as a result of declining sales projections for this product line. As a result, our developed technologies and trademark assets are now completely written off. Future annual amortization expense for the customer base is expected to be approximately $24,000 through September 2014, its estimated remaining useful life.

5. Other Accrued Expenses

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


	2008		2007
Accrued severance	$	405	$	146
Sales tax accrual		762		25
Other		415		611

Total other accrued expenses	$	1,582	$	782

UROLOGIX, INC.

Notes to Financial Statements—(Continued)

6. Income Taxes

The components of income tax expense (benefit) for each of the years in the three-year period ended June 30, 2008 consist of the following (in thousands):


	For the fiscal year ended June 30,
	2008								2007						2006
	Current		Deferred			Total			Current		Deferred		Total		Current		Deferred			Total
Federal	$	—	$	(1,369	)	($	1,369	)	$	—	$	4,158	$	4,158	$	48	$	(3,836	)	($	3,787	)
State		18		(150	)		(132	)		17		684		701		58		(624	)		(567	)

Total	$	18	$	(1,519	)	$	(1,501	)	$	17	$	4,842	$	4,859	$	106	$	(4,460	)	$	(4,354	)

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


	For the years ended June 30,
	2008			2007			2006
Federal statutory rate at 34 percent	$	(5,575	)	$	(2,849	)	$	388
State taxes, net of federal tax expense (benefit) and state valuation allowance		(531	)		11			38
Nondeductible expenses		41			49			(3	)
Stock –based compensation		205			253			321
General business credits		—			(135	)		—
Other		5			—			(24	)
Change in valuation allowance		4,354			7,530			(5,074	)

	$	(1,501	)	$	4,859		$	(4,354	)

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


	June 30,
	2008			2007
Deferred Tax Assets:
Net operating loss carry forward	$	33,301		$	31,055
Definite-lived intangibles		3,922			2,038
Property, plant and equipment		—			2
Charitable contribution carryforward		—			—
AMT credit		93			91
Federal and state general business credits		822			837
Accrued expenses		853			595
Non-qualified stock-based compensation		331			245
Other		—			—

Gross deferred tax assets		39,322			34,863
Deferred Tax Liabilities:
Amortization of indefinite-lived intangibles		—			(1,610	)
Property, plant and equipment		(113	)		—

Gross deferred tax liabilities		(113	)		(1,610	)

Net deferred tax assets before valuation allowance		39,209			33,253
Less: valuation allowance		(39,209	)		(34,772	)

Total net deferred tax (liability)/asset	$	—		$	(1,519	)

UROLOGIX, INC.

Notes to Financial Statements—(Continued)

As of June 30, 2008 and June 30, 2007, the valuation allowance was $39.2 million and $34.8 million, respectively. Of these amounts, $535,000 as of June 30, 2008 and 2007 was attributable to increases in the net operating loss carry forwards resulting from the exercise of stock options. These amounts will be recorded as an increase to additional paid-in-capital if it is determined in the future that this portion of the valuation allowance is no longer required.

At June 30, 2008, the expiration dates and amounts of our net operating loss carryforwards and credits for federal income tax purposes are as follows:


Years expiring (in thousands)	Net Operating Loss		Credits
2008 - 2010	$	5,758	$	132
2011 - 2015		31,046		156
2016 - 2020		21,389		—
2021 - 2027		26,338		380

	$	84,531	$	668

We also have a credit for alternative minimum tax of approximately $93,000 that has no expiration date.

We adopted FIN 48 effective July 1, 2007 as required. As of July 1, 2007, we believed we had approximately $35,000 of unrecognized tax benefits related to state tax liabilities which would favorably impact the effective income tax rate in any future period, if recognized. Included in the amount of unrecognized benefits was accrued interest and penalties of approximately $15,000. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. After further analysis of our state tax liabilities we reduced our FIN 48 liability to zero at June 30, 2008.

We file income tax returns in the United States (U.S.) federal jurisdiction as well as various state jurisdictions. We are subject to U.S. federal income tax examinations by tax authorities for fiscal years after 1993. Income tax examinations we may be subject to for the various state taxing authorities vary by jurisdiction.

7. Deferred Income

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


	2008		2007
Deferred royalty income	$	524	$	708
Deferred warranty service income		42		65

Total deferred income	$	566	$	773

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

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

UROLOGIX, INC.

Notes to Financial Statements—(Continued)

8. Goodwill Impairment and Reversal of Related Deferred Tax Liability

As of December 31, 2007 we recorded a $10.2 million charge to fully impair our goodwill. SFAS 142, “Goodwill and Other Intangible Assets”, requires that goodwill be tested for impairment annually or at an interim period when events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. We conducted our annual test of goodwill for impairment in May 2007 and then updated for our year-end in June 2007 and found no impairment due to the conditions at that time. However, due to our decline in stock price, coupled with recent negative operating results and further impairments of our other long-lived assets in our quarter ended December 31, 2007, we again tested the goodwill for impairment as of December 31, 2007. Based on this impairment test, we concluded that goodwill was fully impaired as of December 31, 2007.

In addition, as a result of the impairment of the goodwill, we also recorded an income tax benefit as of December 31, 2007 of $1.6 million due to the reversal of the deferred tax liability balance related to goodwill which is no longer necessary after the goodwill impairment.

9. Commitments and Contingencies

401(k) Plan

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

Leases

The Company leases its facility and certain equipment under noncancelable operating leases that expire at various dates through fiscal 2011. Rent expense related to operating leases was approximately $226,000, $342,000, and $330,000 for the years ended June 30, 2008, 2007 and 2006, respectively. Future minimum annual lease commitments under noncancelable operating leases with initial terms of one year or more are $250,000 in fiscal 2009, $257,000 in fiscal 2010, and $189,000 in fiscal 2011.

Contingencies

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. The ultimate liabilities, if any, cannot be determined at this time. However, 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.

10. Cumulative Effect Adjustment Upon Adoption of SAB 108

We applied the provisions of SAB 108 using the cumulative effect transition method in connection with the preparation of our annual financial statements for the year ended June 30, 2007. The application of SAB 108 resulted in an increase in deferred income of approximately $60,000, a decrease in accrued professional fees of $97,000 and a corresponding net decrease in accumulated deficit as of July 1, 2006 of $37,000.

Prior to the adoption of SAB 108, we quantified misstatements using the income statement approach. We do not believe that any of the errors included in the table below are material under the income statement approach. However, using the balance sheet approach upon the adoption of SAB 108, we have determined that the

UROLOGIX, INC.

Notes to Financial Statements—(Continued)

quantitative errors aggregating approximately $37,000 that existed as of June 30, 2006 are individually material to the fiscal 2006 financial statements. As permitted, when first applying the guidance in SAB 108, prior periods were not restated. The cumulative effect of the initial application of SAB 108 for quantification and correction of the error is included in the accumulated deficit as of July 1, 2006 in the accompanying balance sheet.

Our SAB 108 adjustment relates to a customer arrangement whereby certain revenues of $60,000 that were recorded in fiscal 2006 and 2005 should have been deferred, and the method used to accrue a professional fee which resulted in overstated accrued expenses of $97,000 as of June 30, 2006. In January 2005, we entered into an agreement with a customer in which they were entitled to a partial rebate. Prior to the adoption of SAB 108, we were not properly deferring revenue at the time of sale, but rather we reduced revenue when the rebate requests were received. Additionally, prior to the adoption of SAB108, we had been recording expense for a professional fee ratably throughout the fiscal year. However, this fee should have been recorded as expense as the fee was incurred. Based on our approach for assessing misstatements prior to the adoption of SAB 108, we had previously concluded that these amounts were immaterial under the income statement approach.

The following table illustrates the effect of the cumulative effect adjustment recorded as of July 1, 2006 ($ in thousands):


	Deferred income		Other accrued expenses			Accumulated deficit
Balance as of June 30, 2006, as reported	$	242	$	729		$	(71,613	)
Cumulative effect adjustment for adoption of SAB 108		60		(97	)		37

Balance as of July 1, 2006, as adjusted	$	302	$	632		$	(71,576	)

11. Geographic Segment Data

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


	2008		2007		2006
United States	$	14,800	$	21,091	$	25,609
Europe		22		57		94
Asia		5		137		94
Canada		70		25		56
Other		9		7		32

Total	$	14,906	$	21,317	$	25,885

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to reasonably ensure that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we are required to apply our judgment in evaluating the cost-benefit relationship of possible internal controls.

The Company’s Chief Executive Officer, Stryker Warren, Jr., and Controller and Director of Finance, Rebecca J. Weber have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon their review, they have concluded that these controls and procedures are effective.

(b) Changes in Internal Controls over Financial Reporting

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

The Company’s internal control report is included in this report under Item 8, under the caption “Management’s Report on Internal Control over Financial Reporting.”

ITEM 9B.

OTHER INFORMATION

None.

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information required under this item is contained in the following sections of the Company’s Proxy Statement for the 2008 Annual Meeting of Shareholders (the “2008 Proxy Statement”), a definitive copy of which will be filed with the Commission within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K and is incorporated herein by reference: Election of Directors, Information Regarding Executive Officers, Section 16(a) Beneficial Ownership Reporting Compliance, Corporate Governance, and Code of Ethics.

ITEM 11.

EXECUTIVE COMPENSATION

Information required under this item is contained in the following sections of the Company’s 2008 Proxy Statement and is incorporated herein by reference: Executive Compensation, Compensation of Directors, and Employment and Change in Control Arrangements.

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required under this item with respect to Item 403 of Regulation S-K is contained in the following sections of the Company’s 2008 Proxy Statement and is incorporated herein by reference: Security Ownership of Principal Shareholders and Management. The information required under this item with respect to Item 201(d) of Regulation S-K is contained in Item 5 of this Annual Report on Form 10-K.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required under this item is contained in the following sections of the Company’s 2008 Proxy Statement and is incorporated herein by reference: Certain Relationships and Related Persons Transactions, Policy Regarding Transactions with Related Persons, and Corporate Governance.

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required under this item is contained in the following sections of the Company’s 2008 Proxy Statement and is incorporated herein by reference: Independent Registered Public Accountants.

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES

(a)Documents filed as part of this report.

(1)Financial Statements.

The financial statements of the Company are set forth at Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

(2)Financial Statement Schedules for years ended June 30, 2008, 2007 and 2006.

None.

(b)Exhibits.


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

3.2	Amended and Restated Bylaws of Urologix, Inc., as amended on December 5, 2006.	Exhibit 3.2 of the Company’s Form 8-K dated December 5, 2006.

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

10.1	* Amended and Restated Urologix, Inc. 1991 Stock Option Plan, as amended through June 21, 2008	Attached hereto.

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

10.3	Amendment of Lease Agreement dated October 4, 2002 between Parkers Lake I Realty Corp. and the Company.	Exhibit 10.9 to the Company’s Annual Report on Form 10-K for the year ended June 30, 2003.

10.4	Tenth Amendment to Lease dated October 22, 2007 between Urologix, Inc. and Parkers Lake I Realty LLC.	Exhibit 10.1 to Current Report on Form 8-K dated October 22, 2007.

10.5	Letter Agreement between Urologix, Inc. and Fred B. Parks dated February 22, 2008 and effective February 25, 2008	Exhibit 10.1 to Current Report on Form 8-K dated February 25, 2008.

10.6	Letter Agreement between Urologix, Inc. and Elissa J. Lindsoe dated April 15, 2008.	Exhibit 10.1 to Current Report on Form 8-K dated April 15, 2008.

10.7	Letter Agreement Regarding Offer of Employment between Urologix, Inc. and Stryker Warren Jr. dated June 24, 2008.	Exhibit 10.1 to Current Report on Form 8-K dated June 24, 2008.

10.8	Letter Agreement Regarding Change In Control Benefits between Urologix, Inc. and Stryker Warren Jr. dated June 24, 2008.	Exhibit 10.2 to Current Report on Form 8-K dated June 24, 2008.

10.9	Letter Agreement Regarding Offer of Employment between Urologix, Inc. and Gregory Fluet dated July 14, 2008.	Exhibit 10.1 to Current Report on Form 8-K dated July 14, 2008.

10.10	Letter Agreement Regarding Change In Control Benefits between Urologix, Inc. and Gregory Fluet dated July 14, 2008.	Exhibit 10.2 to Current Report on Form 8-K dated July 14, 2008.


Exhibit Number	Document	Incorporated by Reference To:
10.11	Letter Agreement between Urologix, Inc. and Kirsten Doerfert dated August 1, 2008.	Exhibit 10.1 to Current Report on Form 8-K dated August 1, 2008.

23.1	Consent of KPMG LLP, Independent Registered Public Accounting Firm	Attached hereto.

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

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

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

*	Indicates a management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


Dated: September 29, 2008	UROLOGIX, INC.

	By:	/s/ STRYKER WARREN, JR.
		Stryker Warren, Jr., Chief Executive Officer
		(principal executive officer)

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the registrant by the following persons in the capacities indicated on September 29, 2008.


Signature		Title

/s/ STRYKER WARREN, JR. Stryker Warren, Jr.		Chief Executive Officer and Director (principal executive officer)

/s/ REBECCA J. WEBER Rebecca J. Weber		Controller and Director of Finance (principal financial officer and principal accounting officer)

/s/ MITCHELL DANN Mitchell Dann		Director

/s/ JERRY C. CIRINO Jerry C. Cirino		Director

/s/ SIDNEY W. EMERY, JR. Sidney W. Emery, Jr.		Director

/s/ DANIEL J. STARKS Daniel J. Starks		Director

/s/ GUY C. JACKSON Guy C. Jackson		Director

/s/ WILLIAM M. MOORE William M. Moore		Director

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Good

Urologix (ULGX) Inactive 10-K2008 FY Annual report

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