UROLOGIX INC, 424B4, 1997-11-12

UROLOGIX INC
424B4, 1997-11-12
ELECTROMEDICAL & ELECTROTHERAPEUTIC APPARATUS

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<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-38053

1,500,000 Shares

LOGO

Common Stock

------------
All of the shares of common stock, $.01 par value per share (the "Common
Stock") offered hereby are being sold by Urologix, Inc. ("Urologix" or the
"Company"). The Company's Common Stock is traded on the Nasdaq Stock Market's
National Market (the "Nasdaq National Market") under the symbol "ULGX." On
November 11, 1997, the last reported sale price for the Company's Common Stock
was $19.875 per share. See "Price Range of Common Stock."

------------

THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" APPEARING ON PAGES 6 TO 11.
------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Per share........................ $19.625 $1.18 $18.445
- -----------------------------------------------------------------------
Total(2)......................... $29,437,500 $1,770,000 $27,667,500
- -----------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------

(1) Before deducting expenses of the offering estimated at $500,000 payable by
the Company.

(2) The Company has granted the Underwriters a 30-day option to purchase up to
225,000 additional shares of Common Stock solely to cover over-allotments,
if any. To the extent that the option is exercised, the Underwriters will
offer the additional shares at the Price to Public shown above. If the
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $33,853,125,
$2,035,500 and $31,817,625, respectively. See "Underwriting."

------------

The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject
to the right of the Underwriters to reject any order in whole or in part. It
is expected that delivery of the shares of Common Stock will be made at the
offices of BT Alex. Brown Incorporated, Baltimore, Maryland on or about
November 17, 1997.

BTALEX.BROWN

DAIN BOSWORTH
Incorporated

PAINEWEBBER INCORPORATED

THE DATE OF THIS PROSPECTUS IS NOVEMBER 12, 1997.
<PAGE>

[UROLOGIX LOGO APPEARS HERE]

The Targis System includes the
stand-alone portable Targis
Control Unit that provides all
necessary patient connections and
user interfaces.

[PHOTO OF TARGIS SYSTEM]

The single-use Targis Catheter
emits microwave energy from a
proprietary antenna contained
within the catheter.

[PHOTO OF TARGIS CATHETER]

The proprietary Urologix Targis
technology uses microwave energy
to preferentially heat targeted
regions of the diseased prostate
causing cell death. Catheter
cooling protects the urethra,
minimizing risk and discomfort to
the patient both during and after
treatment.

[PHOTO OF TRANSVERSE
SECTION OF BPH PROSTATE]

Transverse section of BPH
prostate showing temperature
profile created by the
Targis System.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING
THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR
MAINTAIN THE PRICE OF THE COMMON STOCK, AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND OTHER SELLING
GROUP MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."

Urologix, "The Issue is Quality of Life" and Targis are trademarks of the
Company.
Trademarks of others are also referred to in this Prospectus.

2
<PAGE>

PROSPECTUS SUMMARY

The following summary information is qualified in its entirety by the more
detailed information and financial statements and notes thereto appearing
elsewhere in this Prospectus. Except as otherwise indicated, all information in
this Prospectus assumes no exercise of the Underwriters' over-allotment option.
See "Underwriting."

THE COMPANY

Urologix develops, manufactures and markets minimally invasive medical
devices for the treatment of urological diseases. The Company's initial
product, the Targis System, is designed to treat benign prostatic hyperplasia
("BPH"), commonly known as "enlarged prostate." BPH dramatically affects the
quality of life of millions of men by causing adverse changes in urinary
voiding patterns. The Targis System has been approved for marketing in the
United States, the 15 European Union countries, Japan and Canada. The Company
is currently selling the Targis System outside the United States through
distributors and intends to begin marketing the Targis System in the United
States through its direct sales force in the fourth calendar quarter of 1997.

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

Evidence of BPH typically begins to appear in men in their 50s, and by age 70
the quality of life of most men is negatively affected by BPH symptoms. These
troubling symptoms include increased frequency of urination, a sudden urge to
urinate and a weak flow of urine. It is estimated that at least 23 million men
worldwide, including six million men in the United States, suffer moderate to
severe symptoms of BPH. It is further estimated that in the United States over
70% of these men live with the symptoms of the disease, an approach known as
"watchful waiting," rather than pursue surgery or prolonged drug treatment.
Despite the fact that only a small portion of sufferers receive treatment, BPH-
related expenditures are estimated to be $8 billion worldwide annually, with $3
billion spent annually in the United States.

BPH has historically been treated by surgical intervention or by drug
therapy. The primary surgical treatment for BPH is transurethral resection of
the prostate ("TURP"), a procedure in which an electrosurgical loop is used to
cut away the prostatic urethra and surrounding diseased tissue in the prostate,
thereby widening the urethral channel for urine flow. The TURP procedure
requires the use of general or spinal anesthesia and almost always results in
post-treatment hospitalization, both of which add significantly to the total
treatment cost. A significant number of patients who undergo TURP encounter
both short- and long-term complications. These complications can include
painful urination, retrograde ejaculation, infection, impotence, long-term
incontinence, excessive bleeding and complications related to anesthesia. Drug
therapy has emerged as an alternative to surgery in the last several years.
While it is estimated that 1.5 million men in the United States will use drug
therapy for BPH in 1997, independent clinical studies have shown that many men
using drug therapy do not realize clinically significant relief from BPH
symptoms. An estimated 30% to 40% of patients who initially pursue drug therapy
to treat their

3
<PAGE>

BPH symptoms discontinue treatment within 12 months for various reasons,
including the inconvenience of the daily regimen, dissatisfaction with symptom
relief and undesirable side effects ranging from dizziness, headache and
fatigue to impotence, decreased libido and other sexual dysfunctions, depending
on the type of drug therapy used.

The Company's clinical studies demonstrated that most patients who received
the Targis therapy experienced a significant improvement in BPH symptoms and
urine flow rates, minimal complications and post-treatment discomfort, and were
able to return to normal activities within a few days. As of August 1, 1997,
755 patients affected with BPH have been treated with the Company's Targis
System in controlled clinical studies, including 46 patients with three-year
follow-up data. The Company submitted results of its clinical studies to the
United States Food and Drug Administration (the "FDA") in its premarket
approval application ("PMA") in February 1997 and subsequently received FDA
approval in August 1997 to market the Targis System.

The Company will market the Targis System in the United States with a direct
sales force. Beginning with the hiring of the Company's Executive Vice
President of Sales and Marketing in February 1997, the Company has developed a
sales and marketing team consisting of a director of marketing and a director
of North American sales, geographic marketing managers, product managers,
communication specialists and direct domestic sales representatives, who are
all dedicated to marketing the Targis System. To date, the Company has hired
and trained three sales representatives and is actively recruiting additional
sales representatives. Outside the United States, the Company has developed
broad-based relationships with two parties for market development and sales of
the Targis System. Boston Scientific Corporation ("Boston Scientific"), a
worldwide developer, manufacturer and marketer of medical devices, markets the
Targis System in all countries outside the United States, except Japan. Nihon
Kohden Corporation ("Nihon Kohden"), a major Japanese developer, manufacturer
and marketer of medical devices, markets the Targis System in Japan. Both
Boston Scientific and Nihon Kohden have marketing and sales specialists
dedicated to the Targis System.

The Company's objective is to establish itself as a leader in the design,
development and commercialization of clinically effective, minimally invasive
solutions for urological disorders. To date, the Company has focused on
developing the Targis System for treating BPH. Key elements of the Company's
strategy are to: (i) focus on the large and growing urology market; (ii)
develop a domestic direct sales organization and build upon strong clinical
relationships worldwide; (iii) partner with physicians to increase acceptance
of the Targis System; (iv) establish and enhance strategic partnerships; and
(v) maintain technological leadership and protect technology advantages through
patents.

4
<PAGE>

THE OFFERING

<TABLE>
<S> <C>
Common Stock offered hereby................ 1,500,000 shares
Common Stock to be outstanding after the
offering(1)............................... 10,841,696 shares
Use of proceeds............................ To fund sales and marketing expenditures
and expansion of manufacturing capacity and
for working capital and other general
corporate purposes.
Nasdaq National Market symbol.............. ULGX
</TABLE>
- --------
(1) Excludes outstanding options to purchase 1,084,550 shares of Common Stock
as of November 11, 1997 at a weighted average exercise price of $9.54 per
share under the Company's 1991 Stock Option Plan.

SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
JUNE 30,
1997 SEPTEMBER 30, 1997
-------- ----------------------
ACTUAL ACTUAL AS ADJUSTED(2)
-------- ------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and available-for-sale
securities.................................. $26,101 $22,535 $49,703
Working capital.............................. 27,013 25,250 52,418
Total assets................................. 35,582 33,122 60,290
Total shareholders' equity................... 32,397 30,554 57,722
</TABLE>
- --------
(1) Computed on the basis described for net loss per common share in Note 2 of
Notes to Financial Statements.
(2) Adjusted to give effect to the application of the estimated net proceeds of
this offering.

5
<PAGE>

RISK FACTORS

In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus. Statements included in this
Prospectus that are not historical or current facts are "forward-looking
statements" made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and are subject to certain risks and
uncertainties that could cause actual results to differ materially. In
particular, the Company's forward looking statements, including those
regarding the Company's ability to: (i) successfully commercialize the Targis
System, (ii) obtain satisfactory reimbursement for the Targis procedure from
governmental and private payors, and (iii) achieve acceptable profit margins,
could be affected by a number of risks and uncertainties including those
described below.

Uncertainty of Market Acceptance. The Targis procedure represents a new
therapy for BPH, and there can be no assurance that the Targis System will
gain any significant degree of market acceptance among physicians, health care
payors or patients. Physicians may elect not to perform the procedure unless
adequate reimbursement from health care payors is available. Health care payor
acceptance of the Targis procedure will require, among other things, evidence
of the cost effectiveness of the Targis procedure as compared to other BPH
therapies. Patient acceptance of the procedure will depend in part on
physician recommendations, as well as other factors, including the degree of
invasiveness, the rate and severity of complications and other side effects
associated with the procedure, as compared to other therapies. There can be no
assurance as to whether and, if so, how frequently patients receiving the
Targis procedure will require retreatment and whether any such retreatment
would be effective or would have a negative impact on patient, physician and
payor acceptance of the Targis procedure. Failure of the Targis System to
achieve significant market acceptance among physicians, health care payors and
patients would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business--Clinical
Status," "--Sales and Marketing" and "--Third-Party Reimbursement."

Uncertainty Relating to Third-Party Reimbursement. The Company's success
will be largely dependent upon the extent to which satisfactory reimbursement
for the Targis procedure can be obtained from health care payors for
physicians performing the Targis procedure and for costs of the Targis System.
In the United States and in international markets, third-party reimbursement
is generally available for certain existing therapies used for treatment of
BPH. Third-party reimbursement will be dependent upon decisions by the Health
Care Financing Administration ("HCFA") and contract Medicare carriers for
Medicare, individual managed care organizations, private insurers, foreign
governmental health programs and other payors. Failure to establish sufficient
reimbursement from health care payors or adverse changes in governmental and
private third-party payors' policies toward reimbursement for BPH procedures
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Third-Party
Reimbursement."

Dependence on Patents and Proprietary Rights. The Company's success depends
in part on its ability to protect its Targis System and technology under
United States and international patent laws and other intellectual property
laws and to operate without infringing upon the proprietary rights of third
parties. The validity and breadth of claims covered in medical technology
patents involve complex legal and factual questions and, therefore, may be
highly uncertain. The medical device industry has been characterized by
extensive litigation regarding patents and other intellectual property rights.
Companies in the medical device industry have employed intellectual property
litigation to gain a competitive advantage. Other companies have developed or
are in the process of developing medical methods and devices to
transurethrally treat BPH with microwave energy. Several companies have
applied for, and in some cases received, patents related to such medical
methods and devices.

One of the Company's competitors, BSD Medical Corp. ("BSD"), initiated a
patent infringement lawsuit against the Company in 1992. In March 1994, the
Company chose to enter into a Settlement

6
<PAGE>

Agreement with BSD under which BSD granted the Company a license for the
patent at issue, as well as several other patents (the "BSD Settlement
Agreement"). In addition, in August 1996, the Company entered into a non-
exclusive, worldwide patent license agreement with EDAP TMS S.A., a French
corporation, and its subsidiary, EDAP Technomed, Inc. (collectively referred
to as "EDAP"), for certain EDAP patents relating to the microwave treatment of
BPH.

In June 1996, BSD accused the Company of breaching a confidentiality
provision of the BSD Settlement Agreement, and notified the Company that BSD
was terminating the BSD Settlement Agreement. On July 30, 1996, the Company
initiated a lawsuit against BSD to obtain a declaratory judgment that the
Company had not breached the confidentiality provision of the BSD Settlement
Agreement, and that the BSD Settlement Agreement remained in full force and
effect. This lawsuit was filed under seal in the United States District Court
for the District of Minnesota. BSD answered the Company's complaint and
counterclaimed for a declaratory judgment of breach and termination of the BSD
Settlement Agreement. The formal discovery period in the lawsuit has closed
and the case is currently set for trial no later than April 1998. The Company
believes that it has fully complied with the BSD Settlement Agreement and
intends to continue complying with the BSD Settlement Agreement. The Company
believes that BSD's allegations and purported termination of the BSD
Settlement Agreement are without merit, although there can be no assurance
that the Court will resolve the lawsuit in the Company's favor. A resolution
of the Company's lawsuit in favor of BSD could result in patent litigation
between the Company and BSD. See "Business--Legal Proceedings."

There can be no assurance that the Company's Targis System does not infringe
upon the patent rights or other intellectual property rights of other
companies, that the Company will not be required to seek licenses from other
companies, or that other companies will not pursue claims of infringement
against the Company. The defense and prosecution of intellectual property
suits, United States Patent and Trademark Office interference proceedings and
related legal and administrative proceedings are both costly and time
consuming and would result in a significant diversion of effort and resources
by the Company's technical and management personnel. An adverse determination
in any such litigation or proceedings to which the Company may become a party
could subject the Company to significant liabilities to third parties, require
the Company to seek licenses from third parties and pay ongoing royalties,
require the Company to redesign the Targis System, or subject the Company to
an injunction preventing the manufacture, use or sale of the Targis System in
the United States or foreign markets. There can be no assurance that the
Company could prevail in any such actions or that necessary licenses would be
available to the Company on satisfactory terms or at all, or that the Company
could satisfactorily redesign the Targis System. In addition to being costly,
protracted litigation to defend or prosecute intellectual property could
result in the Company's customers or potential customers deferring or limiting
their purchase or use of the Company's products until resolution of such
litigation. The occurrence of any of the foregoing could have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company has been issued 12 United States patents covering its technology
and has 20 additional patent applications pending in the United States. The
Company also has applied for patent coverage in a number of foreign
jurisdictions. The Company either has filed or is preparing to file
international applications under the Patent Cooperation Treaty ("PCT") for
qualifying United States applications and is now pursuing the national phase
in designated PCT countries for the first four applications. There can be no
assurance, however, that any of such applications will result in patents being
issued, or that the Company's issued patents, or any patents which may be
issued as a result of existing or future applications, will offer any degree
of protection. There can be no assurance that any of the Company's patents or
patent applications will not be challenged, invalidated or circumvented in the
future. In addition, litigation may be necessary to enforce patents issued to
the Company, to protect trade secrets or know-how owned by the Company or to
determine the enforceability, scope and validity of the proprietary rights of
others. There can be no assurance that competitors, many of which have
substantial

7
<PAGE>

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 the Company's ability to manufacture or market its products
either in the United States or in international markets.

The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, through non-disclosure agreements with employees,
consultants and other parties. There can be no assurance that these non-
disclosure agreements will not be breached, that the Company will have
adequate remedies for any breach, or that the Company's trade secrets will not
otherwise become known to or independently developed by competitors. See
"Business--Patents and Proprietary Rights."

Reliance on Single Product. The Targis System is the Company's sole product.
As such, the Company's future success is entirely reliant upon its ability to
market the Targis System commercially in the United States and elsewhere. If
the Company is unable to commercialize the Targis System successfully, the
Company's business, financial condition and results of operations would be
materially adversely affected.

Limited Manufacturing Experience. The Company has only limited experience in
manufacturing its Targis System and has only recently begun expanding its
manufacturing capabilities for commercial quantities. The Company's facilities
and the facilities of certain of its contract manufacturers will need to
comply with applicable regulations including the FDA's quality system
regulation which includes the FDA's current good manufacturing practice
("GMP") requirements, and with ISO 9001 certification requirements and other
regulations. Any failure to comply with applicable requirements and
regulations by the Company or its contract manufacturers could interrupt or
delay manufacturing of the Targis System, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. As commercialization occurs, the Company will need to hire and
train additional staff, which may result in delays in meeting manufacturing
quality and quantity requirements. If the Company is unable to make the
transition to commercial production at acceptable costs, the Company's
business, financial condition and results of operations could be materially
adversely affected. See "Business--Manufacturing," "--Government Regulation"
and "--Employees."

Dependence on Third-Party Distributors. To date, substantially all of the
Company's revenues have been derived from sales of its Targis System through
third-party distributors outside the United States. Boston Scientific has
exclusive distribution rights for the Targis System in all countries outside
the United States, except Japan, and Nihon Kohden has exclusive distribution
rights in Japan. If either Boston Scientific or Nihon Kohden breached or
terminated their agreement with the Company or encountered financial
difficulties, it could have a material adverse effect on the Company's
business, financial condition and results of operations. Further, the failure
of either of these companies to effectively market the Company's Targis System
could have an adverse effect on the Company's ability to achieve penetration
of these markets and establish long-term acceptance of the Targis System.

Contract Manufacturing; Dependence Upon Key Suppliers. The control unit for
the Targis System is assembled by a contract manufacturer pursuant to a supply
agreement with the Company. If for any reason the contract manufacturer is
unable or unwilling to manufacture the control unit for the Company in the
future, the Company could incur significant delays in obtaining a substitute
contract manufacturer. In addition, the Company purchases additional
components used in the Targis System from various suppliers and relies on
single sources for several components. One such component is obtained from a
source that has a patent for the technology. Delays could be caused if supply
of this component or other components were interrupted. These delays could be
extended in certain situations where a substitute contract manufacturer or a
component substitution would require approval by the FDA of a PMA supplement.
The Company expects to be dependent upon such manufacturers and subcontractors
for the foreseeable future. Therefore, failure to obtain components from such
sources or delays associated with

8
<PAGE>

any future component shortages could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Manufacturing."

Competition and Technological Advances. Competition in the market for
treatment of BPH is intense and is expected to increase. The Company believes
its principal competition will come from existing surgical therapies, such as
TURP, and non-surgical alternatives, including drug therapy and watchful
waiting. The Company faces and expects increasing competition from numerous
other companies developing drugs and laser, radio frequency, microwave and
other procedures for the treatment of BPH. Many of the Company's competitors
have significantly greater financial, technical, research, marketing, sales,
distribution and other resources than the Company. In addition, the Company's
competitors may succeed in developing or marketing technologies and products
that are more effective or commercially attractive than the Targis System. In
addition, some of the Company's competitors have introduced commercially
marketable competitive products prior to the Company. There can be no
assurance that Urologix will be able to compete successfully against any
competitors. See "Business--BPH Therapies and Their Limitations" and "--
Competition."

Need to Comply with Government Regulation. Government regulation in the
United States and other countries is a significant factor in the development
and marketing of the Company's Targis System and in the Company's ongoing
manufacturing and research and development activities. The Company is
regulated in the United States by the FDA with respect to preclinical and
clinical testing, manufacturing, labeling, distribution, sales, marketing,
advertising and promotion of the Targis System. In order to market and sell
the Targis System, the Company was first required to obtain marketing approval
from the FDA. In August 1997, the Company received FDA approval of the PMA for
the Targis System. The FDA made the Targis System a restricted device which
means that its labeling specifies requirements for the training of physicians
who may use the device and that the FDA has greater control over advertising
for the Targis System. The FDA also imposed a post-approval study requirement.
Failure of the Company to comply with these and other post-approval
requirements could result in the FDA withdrawing its approval of the PMA for
the Targis System. The Company intends to comply with all post-approval
requirements. The FDA's regulations require agency approval of a PMA
supplement prior to marketing for certain changes if they 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. When clinical data are required to obtain FDA approval of a
PMA supplement, such as in the event of a change in the indication for use of
the Targis System, the Company will be required to obtain an investigational
device exemption ("IDE") to gather the data. Approval of such an IDE could not
be assured on a timely basis, or at all. There can be no assurance that the
required approvals of PMA supplements for any changes to the Targis System
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
the Targis System, would have a material adverse effect on the business,
financial condition and results of operations of the Company. The FDA also
imposes post-marketing controls on the Company and its products, including
quality system (e.g., current good manufacturing practice), medical device
reporting and other requirements. Failure to meet these extensive FDA
requirements or the receipt of adverse FDA determinations regarding the
Company's preclinical studies or clinical trials could subject the Company
and/or its employees to injunction, fines, recall or seizure of products,
total or partial suspension of production, distribution, sales and marketing,
suspension or withdrawal of existing product approvals or clearances, refusals
to approve or clear new applications or notices and criminal prosecution. See
"Business--Government Regulation."

Sales of medical devices outside the United States are subject to United
States export requirements and foreign regulatory requirements. Legal
restrictions on the sale of imported medical devices vary from country to
country. The time and requirements to obtain approval by a foreign country may
differ substantially from those required for FDA approval. There can be no
assurance that the Company will be able to obtain regulatory approvals or
clearances for its products in foreign countries. See "Business--Government
Regulation."

9
<PAGE>

Product Liability Risk; Limited Insurance Coverage. The manufacture and sale
of medical products entail significant risk of product liability claims. The
Company maintains product liability insurance coverage of $1.0 million per
occurrence and an annual aggregate maximum of $2.0 million. The Company also
carries a $10.0 million umbrella insurance policy. There can be no assurance
that the Company's existing insurance coverage limits are adequate to protect
the Company from any liabilities it might incur in connection with the
clinical trials or sales of the Targis System. In addition, the Company may
require increased product liability coverage as the Targis System is
commercialized. Such insurance is expensive and in the future may not be
available on acceptable terms, if at all. A product liability claim or series
of claims brought against the Company with respect to uninsured liabilities or
in excess of the Company's insurance coverage could have a material adverse
effect on the Company's business, financial condition and results of
operations. In addition, failure to comply with the FDA's GMP regulations
could have a material adverse effect on the ability of the Company to defend
against product liability lawsuits. See "Business--Product Liability and
Insurance."

Need For Additional Future Capital. The Company's capital requirements have
been and will continue to be significant. To date, the Company has been
dependent primarily on the net proceeds of sales of its equity securities,
aggregating approximately $59.0 million. The Company currently has no
committed sources of, or other arrangements with respect to, additional
financing. There can be no assurance that the Company's existing capital
resources, together with the net proceeds from this offering and future
operating cash flows, will be sufficient to fund the Company's future
operations. The Company's capital requirements will depend on numerous
factors, including the expense of market introduction of the Targis System in
the United States, the cost involved in protecting the proprietary rights of
the Company, the cost involved in maintaining regulatory approval for the
Targis System, the time and cost involved in expanding manufacturing capacity,
the cost of establishing marketing, distribution, training and technical
support networks and the effectiveness of these and other commercialization
activities. Financing production of the Targis System in quantities necessary
for commercialization will require a significant investment in working
capital. This need for working capital is likely to increase to the extent
that demand for the Targis System increases. In addition, should the Company
choose to lease Targis System control units to customers, substantial capital
could be required to finance the lease arrangements. Although the Company may
finance part or all of the capital requirements associated with these leasing
arrangements through equipment financing with a commercial lender, the Company
has not yet obtained a commitment for such equipment financing. If the Company
requires additional funding, there is no assurance that such funding will be
available on acceptable terms, if at all. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

Dependence Upon Key Employees. The Company is dependent upon a number of key
management, sales and marketing, and technical personnel. The Company's
ability to manage its transition from the development stage to a commercial
entity will depend in large part on the efforts of these individuals. The
Company's success will also depend on its ability to attract and retain
additional highly qualified management, sales and marketing, and technical
personnel. The Company faces intense competition for qualified personnel, and
there can be no assurance that the Company will be able to attract and retain
such personnel. The loss of the services of one or more members of management
or the inability to hire additional personnel as needed could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Employees" and "Management."

Possible Issuances of Undesignated Shares; Anti-Takeover Provisions. The
Board of Directors of the Company is authorized to issue up to 4,750,000
undesignated shares of capital stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the Company's shareholders. The rights of the
holders of the Common Stock will be subject to, and may be adversely affected
by, the rights of the holders of any undesignated shares that may be issued in
the future. The issuance of undesignated shares could have the effect of
delaying,

10
<PAGE>

deferring or preventing a change in control of the Company, which could
deprive the Company's shareholders of opportunities to sell their shares of
Common Stock at a premium. The Company's Board of Directors is divided into
three classes serving staggered three-year terms. The staggered terms of
directors may limit the shareholders' ability to change control of the Company
even if a change in control were in the shareholders' interest. Additionally,
the Company has in place a shareholder rights plan, which could have the
effect of discouraging tender offers or other transactions which could result
in shareholders receiving a premium over the market price of Common Stock. The
Company is also subject to provisions of the Minnesota Business Combination
Act and the Minnesota Control Share Acquisition Act that make certain business
combinations more difficult. See "Description of Capital Stock."

Possible Volatility of Stock Price. There have been fluctuations in the
market price for the Company's Common Stock. Factors such as announcements of
variations in revenues or earnings or achievements of regulatory milestones by
the Company or its competitors could cause the market price of the Common
Stock to fluctuate substantially. In addition, the stock market has
experienced price and volume fluctuations that have particularly affected
companies in the health care market, resulting in changes in the market price
of the stock of many companies which may not have been directly related to the
operating performance of those companies. Such broad market fluctuations may
adversely affect the market price of the Common Stock. See "Price Range of
Common Stock."

Immediate and Substantial Dilution. Purchasers of shares of Common Stock in
this offering will incur immediate and substantial dilution in the net
tangible book value of their purchased shares of Common Stock (approximately
$14.31 per share). Investors may also experience additional dilution as a
result of the exercise of outstanding stock options. See "Dilution."

No Dividends. The Company has never paid any cash dividends on its Common
Stock and does not anticipate paying such dividends for the foreseeable
future. See "Dividend Policy."

THE COMPANY

The Company was incorporated in Minnesota in 1991. The Company's executive
offices are located at 14405 21st Avenue North, Minneapolis, Minnesota 55447,
and its telephone number is (612) 475-1400.

11
<PAGE>

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Common Stock
offered by the Company hereby are estimated to be approximately $27.2 million
($31.3 million if the Underwriters' over-allotment option is exercised in
full), after deducting the underwriting discounts and commissions and
estimated offering expenses payable by the Company. The Company intends to use
the net proceeds from this offering to fund the United States commercial
market launch of the Company's Targis System, including expansion of the
Company's sales and marketing force; to expand manufacturing capacity to
support expected product demand in the United States and internationally; to
support general corporate expansion in support of United States distribution
activities; to continue research and development efforts related to the Targis
System, including lowering manufacturing costs, developing product
enhancements and new applications for the Company's technologies and funding
continued clinical studies to further support the long-term safety and
efficacy of the Targis System.

The balance of the net proceeds will be used for working capital and other
general corporate purposes. The amount and timing of the expenditures of the
net proceeds for these purposes depends on numerous factors, including the
status of the Company's product development efforts, competition, market
acceptance of the Company's Targis System and any other products introduced by
the Company. The Company has no current plans to introduce any other products
in the foreseeable future. The Company may also use a portion of the net
proceeds to acquire complementary businesses, products or technologies,
although the Company has no agreements and is not involved in any negotiations
with respect to any such transactions. Pending such uses, the Company plans to
invest the net proceeds from this offering in short-term, investment-grade,
interest-bearing securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."

12
<PAGE>

PRICE RANGE OF COMMON STOCK

The Company completed an initial public offering of its Common Stock on May
30, 1996 and its shares are publicly traded on the Nasdaq National Market
under the symbol "ULGX." The following table sets forth the high and low
closing prices of the Company's Common Stock for the periods indicated as
reported by the Nasdaq National Market:

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
FISCAL YEAR 1996
Fourth Quarter................................................. $16.50 $12.75
FISCAL YEAR 1997
First Quarter.................................................. $15.75 $10.38
Second Quarter................................................. $16.50 $13.25
Third Quarter.................................................. $19.88 $15.00
Fourth Quarter................................................. $18.13 $12.63
FISCAL YEAR 1998
First Quarter.................................................. $23.75 $16.00
Second Quarter (through November 11, 1997)..................... $25.25 $19.25
</TABLE>

On October 3, 1997, the Company had 236 shareholders of record. On November
11, 1997, the last reported sales price of the Common Stock on the Nasdaq
National Market was $19.875 per share.

DIVIDEND POLICY

The Company has never declared or paid any cash dividends on its Common
Stock and does not intend to pay cash dividends on its Common Stock in the
foreseeable future. The Company presently expects to retain its earnings to
finance the development and expansion of its business. The payment by the
Company of cash dividends, if any, on its Common Stock in the future is
subject to the discretion of the Board of Directors and will depend on the
Company's earnings, financial condition, capital requirements and other
relevant factors. See "Description of Capital Stock."

13
<PAGE>

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to reflect the receipt and application of
the estimated net proceeds from the sale of shares of Common Stock pursuant to
this offering.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Capital lease obligations, less current maturities....... $ 32 $ 32
Shareholders' equity(1):
Undesignated stock; $.01 par value, 4,750,000 shares au-
thorized, no shares issued or outstanding ............. -- --
Series A Junior Participating Preferred Stock; 250,000
shares authorized, no shares issued or outstanding..... -- --
Common stock; $.01 par value, 25,000,000 shares autho-
rized, 9,340,846 shares outstanding actual, 10,840,846
shares outstanding as adjusted......................... 93 108
Additional paid-in capital............................... 59,287 86,440
Accumulated deficit...................................... (28,783) (28,783)
Net unrealized loss on investments....................... (43) (43)
-------- --------
Total shareholders' equity............................. 30,554 57,722
-------- --------
Total capitalization................................. $ 30,586 $ 57,754
======== ========
</TABLE>
- --------
(1) Excludes outstanding options to purchase 1,085,400 shares of Common Stock
as of September 30, 1997 at a weighted average exercise price of $9.54 per
share under the Company's 1991 Stock Option Plan. The Company's
shareholders will consider a proposal at the Annual Meeting on November
19, 1997 to increase the number of shares of Common Stock reserved for
issuance under the 1991 Stock Option Plan by 400,000 shares.

14
<PAGE>

DILUTION

The net tangible book value of the Company as of September 30, 1997 was
$30.6 million, or $3.27 per share of Common Stock outstanding. Net tangible
book value per share represents the total amount of the Company's
shareholders' equity, less intangible assets, divided by 9,340,846 shares of
Common Stock outstanding.

Net tangible book value dilution per share represents the difference between
the amount per share paid by purchasers of shares of Common Stock in the
offering made hereby and the pro forma net tangible book value per share of
Common Stock immediately after completion of this offering. After giving
effect to the sale of 1,500,000 shares of Common Stock in this offering and
the application of the estimated net proceeds therefrom, the pro forma net
tangible book value of the Company as of September 30, 1997 would have been
$57.7 million or $5.32 per share. This represents an immediate increase in net
tangible book value of $2.05 per share to existing shareholders and an
immediate dilution in net tangible book value of $14.31 per share to
purchasers of Common Stock in this offering, as illustrated in the following
table:

<TABLE>
<S> <C> <C>
Public offering price per share................................... $19.625
Net tangible book value per share at September 30, 1997......... $3.27
Increase per share attributable to new investors................ 2.05
Pro forma net tangible book value per share after the offering.... 5.32
-------
Net tangible book value dilution per share to new investors....... $ 14.31
=======
</TABLE>

15
<PAGE>

SELECTED FINANCIAL DATA

The following selected financial data as of June 30, 1996 and 1997 and for
the three fiscal years ended June 30, 1997 have been derived from the
financial statements of the Company which have been audited by Arthur Andersen
LLP, independent public accountants, whose report appears elsewhere in this
Prospectus. The following selected financial data as of June 30, 1993, 1994
and 1995 and the two years ended June 30, 1994 are derived from audited
financial statements not included herein. The financial data as of September
30, 1997 and for the three months ended September 30, 1996 and 1997 has been
derived from the Company's unaudited financial statements. The unaudited
financial statements reflect, in the opinion of management, all adjustments of
a normal recurring nature necessary for a fair presentation of financial
position and results of operations. The results for the three months ended
September 30, 1997 are not necessarily indicative of the results to be
expected for the entire year. The selected financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEARS ENDED JUNE 30, SEPTEMBER 30,
-------------------------------------------- ----------------
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Sales................. $ 164 $ 9 $ 489 $ 362 $ 5,504 $ 586 $ 2,599
Cost of goods sold.... 254 179 785 1,177 4,866 721 1,738
------- ------- ------- ------- -------- ------- -------
Gross profit (loss)... (90) (170) (296) (815) 638 (135) 861
Costs and expenses:
Research and
development.......... 1,478 1,598 4,099 4,811 5,049 1,239 1,374
Sales and marketing... 22 124 477 1,007 3,430 485 1,333
General and
administrative....... 468 677 884 1,192 2,226 451 501
------- ------- ------- ------- -------- ------- -------
Total costs and
expenses............. 1,968 2,399 5,460 7,010 10,705 2,175 3,208
------- ------- ------- ------- -------- ------- -------
Operating loss........ (2,058) (2,569) (5,756) (7,825) (10,067) (2,310) (2,347)
Interest income, net.. 61 44 329 232 1,833 520 331
------- ------- ------- ------- -------- ------- -------
Net loss.............. $(1,997) $(2,525) $(5,427) $(7,593) $ (8,234) $(1,790) $(2,016)
======= ======= ======= ======= ======== ======= =======
Net loss per common
share(1)............. $ (0.91) $ (1.22) $ (0.90) $ (0.20) $ (0.22)
Shares used in
computing net loss
per common share(1).. 5,996 6,235 9,173 9,129 9,310
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------------------------------ -------------
1993 1994 1995 1996 1997 1997
------ ------ ------ ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
available-for-sale
securities............... $2,004 $9,093 $3,571 $40,844 $26,101 $22,535
Working capital........... 1,930 8,897 3,372 39,940 27,013 25,250
Total assets.............. 2,487 9,801 4,876 42,368 35,582 33,122
Total shareholders'
equity................... 2,065 9,393 3,977 40,588 32,397 30,554
</TABLE>
- --------
(1) Computed on the basis described for net loss per common share in Note 2 of
Notes to Financial Statements.

16
<PAGE>

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

OVERVIEW

Urologix, Inc., incorporated in May 1991, has been engaged primarily in
developing its proprietary Targis System to treat BPH; conducting clinical
trials for the Targis System; seeking various regulatory approvals necessary
to market the Targis System; and producing Targis Systems for sale outside the
United States. Regulatory approvals necessary to market the Targis System in
Japan and the 15 European Union countries were obtained in fiscal year 1997.
In August 1997, the Company also received FDA approval to market the Targis
System in the United States and intends to launch the Targis System in the
United States during the fourth calendar quarter of 1997. The Company's Targis
System consists of a control unit and a procedure kit, which includes the
microwave delivery system incorporated in a catheter, a cooling bag and a
rectal thermosensing unit. The Company's revenues to date consist primarily of
Targis System sales to its two international distributors.

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

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

The Company expects sales of the Targis System to account for all of its
revenues for the foreseeable future. In the United States, the Company intends
to offer urologists the option to purchase or lease the Targis System control
unit. The leases will either be offered under a third-party leasing
arrangement or directly from the Company. Revenues from the sale of Targis
System control units and disposable procedure kits will be recognized upon
shipment.

RESULTS OF OPERATIONS

Three months ended September 30, 1997 and 1996

Sales increased to $2.6 million for the three months ended September 30,
1997 from $586,000 for the same period in the prior fiscal year. The increase
in sales is due to sales to the Company's international distributors following
the Company's obtaining the CE mark for its Targis System in July 1996 and the
Company's Japanese distributor obtaining Japanese Ministry of Health and
Welfare marketing approval in February 1997.

Cost of goods sold includes costs incurred in connection with the production
of Targis Systems, including manufacturing and quality assurance overhead.
Cost of goods sold increased to $1.7 million for the three months ended
September 30, 1997 from $722,000 for the same period in the prior fiscal year,
due primarily to the significant increase in sales and production of the
Company's Targis System. The Company expects further increases in cost of
goods sold as sales increase and production capacity is increased in
anticipation of the United States launch of the Targis System. If sales of the
Targis System increase, the Company expects costs of goods sold, as a percent
of sales, to decrease due to efficiencies obtained from higher production
volumes.

Research and development expenses include those costs associated with the
development and protection of the Company's Targis System intellectual
property, treatment of patients participating in

17
<PAGE>

clinical trials, the accumulation of outcome data to substantiate clinical
results and the preparation and submission of applications for regulatory
approvals. Research and development expenses for the three months ended
September 30, 1997 increased to $1.4 million from $1.2 million for the same
period in the prior fiscal year, due primarily to costs related to new and on-
going clinical studies of the Targis System and costs associated with product
development activities related to Targis System improvements and alternative
applications for the Company's technology. Research and development expenses
are expected to increase in fiscal 1998 due to continuing clinical study
expenses and product development projects to further develop the Company's
technologies.

Sales and marketing expenses for the three months ended September 30, 1997
increased to $1.3 million from $485,000 in the same period in the prior fiscal
year due primarily to costs associated with supporting the marketing of the
Targis System in Europe and Japan, as well as the Company's preparation for
the United States marketing launch, following FDA marketing approval received
in August 1997. These preparations included the hiring of sales and marketing
management, preparation of promotional materials, recruitment of field sales
representatives and efforts related to obtaining third-party reimbursement for
the Targis System. The Company expects sales and marketing expenses to
increase significantly as it commercially launches the Targis System in the
United States, including the expected significant expansion of its direct
sales force, and continues supporting its international distributors' sales
efforts.

General and administrative expenses increased to $501,000 for the three
month period ended September 30, 1997 from $451,000 for the same period in the
prior fiscal year, due to administrative costs associated with an increase in
employees in connection with the Company's growth and commencement of sales
activities.

Interest income decreased to $331,000 for the three month period ended
September 30, 1997 from $521,000 for the same period in the prior fiscal year,
due primarily to lower cash and investment balances.

Fiscal Years Ended June 30, 1997 and 1996

Sales increased to $5.5 million in fiscal year 1997 from $362,000 in fiscal
year 1996 due to sales of the Targis System to the Company's international
distributors following marketing approvals obtained during fiscal 1997 in the
European Union and Japan. Following United States FDA marketing approval of
the Targis System in August 1997, the Company expects sales to increase in
fiscal 1998.

Costs of goods sold increased to $4.9 million in fiscal year 1997 from $1.2
million in fiscal year 1996 due primarily to the increase in sales of the
Targis System.

Research and development expenses increased slightly in fiscal 1997 over
fiscal 1996 due primarily to costs associated with the filing of the PMA for
the Targis System with the FDA and clinical studies conducted to establish the
safety and efficacy of the Targis System.

Sales and marketing expenses increased to $3.4 million in fiscal 1997 from
$1.0 million in fiscal 1996, due primarily to costs associated with the
marketing launch of the Targis System in Europe and Japan and preparation for
the United States marketing launch.

General and administrative expenses increased to $2.2 million in fiscal 1997
from $1.2 million in fiscal 1996 due to administrative costs associated with
an increase in employees in connection with the

18
<PAGE>

Company's growth and commencement of sales activities, and costs related to
the Company's external reporting obligations as a public company.

Interest income increased significantly during fiscal year 1997, due
primarily to income from the investment of proceeds from the Company's initial
public offering, completed in June 1996.

Fiscal Years Ended June 30, 1996 and 1995

Sales decreased to $362,000 in fiscal 1996, from $489,000 in fiscal 1995,
due primarily to a higher number of Targis Control Units being placed in
clinical sites and reimbursed in 1995 than in 1996.

Cost of goods sold increased to $1.2 million for fiscal 1996 from $785,000
for fiscal 1995 due to increased production levels, expansion costs incurred
in preparation for commercial sales of the Targis System and costs related to
bringing the Company's manufacturing process into compliance with ISO 9001
standards.

Research and development expenses increased to $4.8 million for fiscal 1996
from $4.1 million in fiscal 1995. The increase was the result of several
factors, including increased contract development expenditures to upgrade the
Targis System to its latest generation; higher employee compensation due to
the addition of technical and supervisory personnel, an increase worldwide in
the number of patients treated; and additional submissions to the FDA of
certain Targis System IDE supplements.

Sales and marketing expenses increased to $1.0 million for fiscal 1996 from
$477,000 for fiscal 1995, due primarily to the establishment of a sales office
in the United Kingdom during the latter part of fiscal 1995. The Company
closed this sales office during fiscal 1997.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations since inception through sales of
equity securities and, to a lesser extent, sales of the Targis System to its
distributors. Through September 30, 1997, the Company had received
approximately $59.0 million in net proceeds from equity financings. During
fiscal 1997 and during the three months ended September 30, 1997, the Company
used approximately $11.5 million and $3.7 million of cash, respectively, for
operating activities and property and equipment purchases, which amounts were
funded primarily by proceeds from the sale of available-for-sale securities.
As of September 30, 1997, the Company had total cash, cash equivalents and
available-for-sale securities of $22.5 million, and working capital of $25.3
million.

The Company expects to continue to incur additional losses, and will require
additional working capital, as it incurs substantial expenses related to the
Targis System market introduction in the United States, expansion of
manufacturing capacity, clinical trials and research and development
activities. In addition, should the Company choose to lease Targis System
control units to customers, substantial capital could be required to finance
the lease arrangements. Although the Company may finance part or all of the
capital requirements associated with these leasing arrangements through
equipment financing with a commercial lender, the Company has not yet obtained
a commitment for such equipment financing. Although the Company believes that
existing cash, cash equivalents and available-for-sale securities will be
sufficient to fund its operations for at least the next 12 months, there can
be no assurance that the Company will not require additional financing in the
future or that any additional financing will be available to the Company on
satisfactory terms, if at all.

19
<PAGE>

BUSINESS

OVERVIEW

Urologix develops, manufactures and markets minimally invasive medical
devices for the treatment of urological diseases. The Company's initial
product, the Targis System, is designed to treat benign prostatic hyperplasia
("BPH"), commonly known as "enlarged prostate." BPH dramatically affects the
quality of life of millions of men often by causing adverse changes in urinary
voiding patterns. The Targis System has been approved for marketing in the
United States, the 15 European Union countries, Japan and Canada. The Company
is currently selling the Targis System outside the United States through
distributors and intends to begin marketing the Targis System in the United
States through its direct sales force in the fourth calendar quarter of 1997.

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

The Company's clinical studies demonstrated that most patients who received
the Targis therapy experienced a significant improvement in BPH symptoms and
urine flow rates, minimal complications and post-treatment discomfort, and
were able to return to normal activities within a few days. As of August 1,
1997, 755 patients affected with BPH have been treated with the Company's
Targis System in controlled clinical studies, including 46 patients with
three-year follow-up data. The Company submitted results of its clinical
studies to the United States Food and Drug Administration (the "FDA") in its
premarket approval application ("PMA") in February 1997 and subsequently
received FDA approval to market the Targis System in August 1997.

The Company will market the Targis System in the United States with a direct
sales force. Beginning with the hiring of its Executive Vice President of
Sales and Marketing in February 1997, the Company has developed a sales and
marketing team consisting of a director of marketing and a director of North
American sales, geographic marketing managers, product managers, communication
specialists and direct domestic sales representatives, who are all dedicated
to marketing the Targis System. To date, the Company has hired and trained
three sales representatives and is actively recruiting additional sales
representatives. Outside the United States, the Company has developed broad-
based relationships with two parties for market development and sales of the
Targis System. Boston Scientific Corporation ("Boston Scientific"), a
worldwide developer, manufacturer and marketer of medical devices, markets the
Targis System in all countries outside the United States, except Japan. Nihon
Kohden Corporation ("Nihon Kohden"), a major Japanese developer, manufacturer
and marketer of medical devices, markets the Targis System in Japan. Both
Boston Scientific and Nihon Kohden have marketing and sales specialists
dedicated to the Targis System.

BENIGN PROSTATIC HYPERPLASIA

BPH is a non-cancerous urological disease in which the prostate enlarges and
constricts the urethra. Symptoms associated with BPH affect the quality of
life of millions of sufferers worldwide and BPH can lead to irreversible
bladder or kidney damage. The prostate is a walnut-size gland surrounding the
male urethra (the channel that carries urine from the bladder out of the body)
that is located just below the bladder and adjacent to the rectum. The
prostate produces seminal fluid and plays a key role in sperm
preservation and transportation. While the actual cause of BPH is not fully
understood, it is known that as

20
<PAGE>

men reach middle age, cells within the prostate that are located primarily
lateral, medial and anterior to the urethra (the "transition zone") begin to
grow at an increasing rate. As the transition zone of the prostate expands, it
compresses or impinges upon other portions of the prostate gland and the
urethra, thereby restricting the normal passage of urine. This constriction of
the urethra may require a patient to exert excessive bladder pressure to begin
urination. If the patient cannot generate sufficient force to adequately void
urine from the bladder, the possibility of infection and bladder and kidney
damage increases. BPH patients also typically suffer from a variety of
troubling symptoms, which primarily relate to changes in urinary voiding and
may have a significant impact on a patient's quality of life. These symptoms
include:

. increased frequency of urination . stopping and starting of flow
duringthe day and night during urination
. sudden urge to urinate . weak flow of urine
. difficulty in starting urination . sensation of incompleteness in
emptying of the bladder

The American Urological Association ("AUA") has developed and statistically
validated a system of evaluating and monitoring BPH symptom severity called the
AUA Symptom Score. This score is composed of the sum of the patient's responses
to seven questions generally relating to the symptoms described above. The
patient ranks a symptom on a scale of 0-5, with 5 being most severe. The Agency
for Health Care Policy and Research ("AHCPR") has recommended that patients
with a total score of less than 8 not be considered candidates for BPH
treatment of any kind. A patient with a total score of 8 to 19 is considered to
have moderate symptoms of BPH, and a patient with a total score of 20 or
greater is classified as having severe symptoms. Other methods of diagnosing
BPH and its severity include measuring urinary flow rates (a ratio of the
volume of urine voided to duration of voiding expressed in milliliters per
second), pressure flow data (intravesical pressure required to urinate) and
residual urine in the bladder after voiding.

Following is a diagram of the anatomy affected by BPH:

Transverse Section AnteriorCapsule
Normal Prostate

TransitionOpen ZoneUrethra

[ART]

Posterior
BladderProstate

BPH Prostate
RectumUrethra

[ART]

21
<PAGE>

Evidence of BPH typically begins to appear in men in their 50s, and by age
70, the quality of life of most men is negatively affected by BPH symptoms.
Medical sources estimate that the percentage of men suffering from symptoms of
BPH is approximately 30% for men in their 50s and increases to more than 75%
for men over age 80. The following chart sets forth the Company's estimates of
the number of men, both in the United States, and in Europe, Japan and Canada,
who suffer moderate to severe symptoms of BPH and reduced urine flow rates,
and the approximate number of men who elected to pursue treatment for their
symptoms in 1996:

<TABLE>
<CAPTION>
EUROPE, JAPAN
MALE POPULATION UNITED STATES AND CANADA TOTAL
- --------------- ------------- ------------- -----------
<S> <C> <C> <C>
Over age 50 .......................... 31 million 90 million 121 million
Moderate to severe BPH symptoms and
reduced urine flow rates ............ 6 million 17 million 23 million
Treated for BPH ...................... 1.7 million 1.7 million 3.4 million
</TABLE>

Because BPH is an age-related disorder, the number of men with moderate to
severe symptoms of BPH is expected to double in the United States by the year
2020 as a result of the aging population. The Company expects similar
increases to occur worldwide. Total BPH related expenditures in the United
States are currently estimated to be approximately $3 billion annually.
Outside the United States, BPH expenditures are currently estimated at $5
billion annually. Europe and Japan are estimated to account for 70% of the BPH
treatment market outside the United States.

With the introduction of drug therapies, which cause fewer complications
than surgery, as well as substantial advertising by pharmaceutical companies,
the number of men receiving treatment has grown dramatically over the last few
years. As the above table indicates, however, the vast majority of men with
moderate to severe symptoms of BPH and reduced urine flow rates have elected
to live with the symptoms of this chronic disease rather than pursue any of
the currently available treatments. The Company believes the percentage of men
with moderate to severe symptoms of the disease who seek treatment will
increase in the future as a result of increased awareness of the disease and
the development of treatments, like the Targis System, that are less invasive
and result in less severe complications and side effects than traditional
treatments.

BPH THERAPIES AND THEIR LIMITATIONS

Historically, over 70% of men suffering moderate to severe symptoms of BPH
in the United States have elected to live with the discomfort and
inconvenience of the disease, an approach known as "watchful waiting." This
has been due primarily to a lack of understanding of the disease and
limitations of existing therapies. For many BPH sufferers, watchful waiting
may represent only a temporary option due to the significant impact BPH has on
a patient's quality of life. Of those receiving treatment in the United
States, approximately 85% elect drug therapy and approximately 15% elect
surgical intervention. The Company believes that many health care payors have
encouraged watchful waiting or drug therapy over surgical intervention due in
large part to the costs and potential complications of surgical therapies.

Drug Therapy

Drug therapy for BPH has been available in the United States since the FDA
approved marketing of four orally administered pharmaceutical products--
Proscar (sold by Merck & Co., Inc.) in 1992, Hytrin(R) (sold by Abbott
Laboratories) in 1993, Cardura(R) (sold by Pfizer Inc.) in 1995 and FLOMAX(R)
(sold by Boehringer Ingelheim Pharmaceuticals, Inc.) in 1997. Drug therapy was
used by approximately 1.5 million men in the United States in 1996 for the
treatment of BPH symptoms. The Company believes the dramatic acceptance of
drug therapy in the short period since FDA approval is due to extensive drug
company marketing, resulting in increased patient awareness, and the desire of
these patients for effective treatments which have less severe complications
and side effects than currently available surgical

22
<PAGE>

procedures. The annual cost of drug therapy is approximately $1,300 to $1,400
in the first year, and the typical total cost ranges from $12,000 to $17,000,
depending on the age of the patient when drug therapy is initiated. Drug
therapy requires daily administration for the duration of the patient's life.

Alpha blockers, such as Hytrin(R), Cardura(R), and FLOMAX(R) treat BPH by
relaxing the muscles in the prostate and bladder neck to relieve urethral
obstruction. While alpha blockers have demonstrated some ability to relieve a
patient's BPH symptoms and improve urine flow rates, they still carry the
potential for significant side effects such as dizziness, headache, asthenia
(shortness of breath) and fatigue. Proscar(R) is designed to treat BPH by
shrinking the prostate. As much as six months of Proscar(R) treatment may be
necessary to determine efficacy and, after 12 months, at least 40% of patients
taking Proscar(R) do not experience an increase in urine flow rate or improved
AUA symptom scores. Side effects for Proscar(R) include impotence and
decreased libido. An estimated 30% to 40% of those patients who initially
pursue drug therapy discontinue treatment within 12 months due to various
reasons including ineffectiveness, side effects and the burdens of compliance
and cost.

Surgical Treatments for BPH

Surgical treatments for BPH typically use various means to completely remove
the prostatic urethra along with a substantial portion of the diseased tissue
within the prostate. Approximately 1.0 million prostatic surgeries were
performed worldwide in 1995, of which 216,000 were performed in the United
States. The reimbursement of a prostatic surgery ranges from approximately
$7,000 to $12,000 in the United States. Because the average age of a patient
undergoing prostatic surgery in the United States is 66, Medicare is the
primary payor for these surgeries. The current average Medicare reimbursement
for surgery and associated complications is approximately $8,600.

The most common surgical procedure for the treatment of BPH is TURP, whereby
a rigid instrument is inserted into the patient's urethra through which the
surgeon passes an electrosurgical loop that is used to remove the urethra and
the diseased tissue within the prostate. While TURP has been the established
standard for treating BPH since the 1930s, this procedure requires general or
spinal anesthesia and almost always requires post-treatment hospitalization.
The Company estimates approximately 800,000 TURPs were performed worldwide in
1995, making it the second most common surgical procedure performed on men
over age 55. During the past several years, the number of TURPs performed
worldwide has been decreasing, which the Company believes is due to increased
awareness of the complications of surgery and the availability of drugs as an
alternative treatment. While TURP results in a dramatic improvement in urine
flow in 90% of the patients and a reduction in the AUA Symptom Score in 85% of
the patients, a significant number of patients experience serious
complications. Virtually all patients experience a burning sensation upon
urination that lasts for up to three weeks following the procedure. Other
complications, as reported by AHCPR, include retrograde ejaculation--the
reverse flow of semen--(73.4% of patients), infection (15.5%), impotence
(13.6%), excessive hemorrhaging requiring transfusion (12.5%), immediate
surgery to stop the bleeding (2.0%), long-term incontinence (3.1%) and
urethral stricture (3.1%). In addition, approximately 1.5% of TURP patients
die as a result of the procedure and related complications. The TURP procedure
requires a highly skilled surgeon with extensive training, and the incidence
of these complications may be affected by the experience of the surgeon
performing the TURP. At least 10% of TURP patients develop BPH symptoms again
and require retreatment within five years.

Other surgical techniques have been developed in an attempt to address the
complications and side effects of TURP. The three most prevalent procedures
are: (i) transurethral incision of the prostate ("TUIP"); (ii) transurethral
vaporization of the prostate ("TVP"); and (iii) laser assisted prostatectomy.
TUIP is a surgical procedure performed under general or spinal anesthesia,
whereby a surgical cutting tool is passed through a cystoscope in the urethra
to make one or more incisions in the prostatic urethra near the bladder neck,
thereby reducing urethral obstruction. TVP is a surgical procedure performed
under general or spinal anesthesia, similar to a TURP, except the
electrosurgical element is a tissue vaporizing cylinder or ball rather than a
loop. TVP removes the prostatic urethra and vaporizes and coagulates

23
<PAGE>

prostatic tissue, thereby widening the channel for urinary flow. Laser
assisted prostatectomy includes two similar procedures--visual laser ablation
of the prostate ("V-LAP") and contact laser ablation of the prostate ("C-
LAP"), in which a laser fiber catheter is guided through a cystoscope and used
to ablate and coagulate the prostatic urethra and prostatic tissue. Recently,
studies have been conducted using holmium lasers to surgically remove the
prostatic urethra and tissue. While these alternative surgical treatments have
been effective in reducing some side effects associated with a TURP, such as
reduced risk of blood loss, they still remove or damage the urethra, require
general or regional anesthesia and are performed in an operating room.

Less-Invasive BPH Treatments

In an effort to eliminate hospitalization and the complications arising from
surgical treatments, other technologies have been developed or are under
development for the treatment of BPH. Two of these technologies are
interstitial radio frequency therapy ("RF"), which is being marketed in the
United States, and interstitial laser therapy, which is in clinical trials and
has not yet been commercialized in the United States. In an interstitial
therapy procedure, a rigid scope is inserted into the patient's urethra and
either needle electrodes or laser fibers pierce the urethra and are advanced
into the lobes of the prostate. RF or laser energy is then delivered, causing
necrosis of the surrounding tissues. Due to the limited amount of tissue
necrosis caused by each electrode or laser fiber, multiple punctures of the
urethra are required during this procedure in order to coagulate a sufficient
amount of tissue. The Company believes that a highly trained and skilled
physician is required to make judgments regarding the number and depth of
punctures and to effectively perform the procedure. While these procedures are
designed to be performed in approximately 30 to 45 minutes using local
anesthesia, the Company believes that intravenous sedation or regional
anesthesia will be required in addition to local anesthesia in most patients
due to the need to repeatedly puncture the urethra and manipulate the large,
rigid instrument within the urethra. As a result, the Company believes that it
will be difficult to consistently perform interstitial therapies in an office
setting.

Other technologies to treat BPH have been developed or are under various
stages of development, including stents, dilatation balloons, transurethral
and transrectal hyperthermia and high intensity focused ultrasound. See "--
Competition."

THE UROLOGIX APPROACH

The Targis System is a non-surgical, catheter-based technology to treat BPH.
The Targis System utilizes a proprietary microwave technology, delivered
through a flexible catheter, that preferentially heats the diseased area of
the prostate to a temperature sufficient to cause cell death, while
simultaneously cooling and protecting the pain sensitive urethral tissue. The
Targis procedure does not require punctures or incisions, thereby leaving the
urethra intact. As a result, the procedure can be performed without general or
regional anesthesia or intravenous sedation. Consequently, the procedure has
been, and is expected to be, performed in an outpatient setting and does not
require an overnight hospital stay. Unlike other FDA-approved microwave-based
systems, the Company's Targis System employs proprietary preferential heating
to target energy away from the rectum and impedance matching to maximize
energy delivery to the diseased prostatic tissue. In addition, the Targis
System's Control Unit is substantially smaller than other microwave-based
systems and thus more easily transportable. The Company believes that this
will make the Targis System easier to use in outpatient settings, which are
generally less costly than operating rooms.

The Company's clinical studies demonstrated that most patients who received
the Targis procedure experienced a significant improvement in AUA Symptom
Scores and urine flow rates, minimal complications and post-treatment
discomfort, and were able to return to normal activities within a few days.

24
<PAGE>

BUSINESS STRATEGY

The Company's objective is to be a leader in the design, development and
commercialization of clinically effective solutions for urological diseases.
To date, Urologix has focused on developing the Targis System for treating
BPH. The following are the key elements of the Company's strategy:

Focus on the Large and Growing Urology Market. The Company will develop
minimally invasive, cost-effective solutions to urological problems. The
urological market is a highly fragmented market with expenditures of at least
$14 billion annually worldwide and is expected to experience rapid growth due
to the aging population. Many of the currently available treatments are
inadequate for the diseases they address and as a result there are significant
unmet needs in the market. The Company believes a major opportunity exists for
it to build a business around designing, developing and commercializing
innovative products for the treatment of urological diseases.

Develop a Domestic Direct Sales Organization and Build Upon Strong Clinical
Relationships Worldwide. Most major urological procedures are performed by
urologists. There are approximately 7,500 urologists practicing in the United
States. The Company believes that this relatively small number of physicians
affords it a unique opportunity to develop a cost-effective direct sales
effort. Accordingly, the Company has retained all the sales and marketing
rights to its products in the United States and is developing a sales and
marketing team consisting of experienced marketing and sales professionals.
The Company has hired an Executive Vice President of Sales and Marketing and
is currently hiring and training its domestic sales force in preparation for
the United States product launch. In its sales and marketing efforts, the
Company intends to utilize the strong relationships it has established with
its clinical investigators and medical advisory board to accelerate the market
acceptance of its products.

Partner with Physicians to Increase Acceptance of the Targis System. The
Company intends to work closely with physicians who use the Targis System and
assist them in educating their patients on the benefits of the system,
obtaining reimbursement and measuring clinical outcome data. The Company
intends to provide physicians with informational and educational materials to
facilitate obtaining publicity and enabling presentations in the community.
Urologix has also devoted resources and has developed expertise in
reimbursement, enabling the Company to advise and assist the physician in
obtaining reimbursement for Targis procedures. Urologix will also make
available to Targis System users a Clinical Outcome Data Management System by
which physicians will be able to track patient outcomes. This data will be
used to support reimbursement and refine expectations of a Targis treatment.
By assisting the physician in educating and informing a large audience of
potential patients, efficiently obtaining reimbursement and capturing clinical
data, Urologix believes it can increase the acceptance and utilization of the
Targis System as a preferred treatment for BPH.

Establish and Enhance Strategic Partnerships. The Company has established
broad-based relationships for market development and sales of the Targis
System in Japan with Nihon Kohden, and for all countries outside the United
States and Japan, with Boston Scientific. The Company works closely with
Boston Scientific and Nihon Kohden to maximize market awareness and
penetration of the Targis System. The Company may pursue strategic corporate
partnerships with these or other medical device manufacturers and marketers to
assist the Company in commercializing its technology and for other corporate
purposes.

Maintain Technological Leadership and Protect Technology Advantages through
Patents. The Company's strategy is to be a technological leader in the
urological market. Urologix believes that the Targis System enjoys performance
advantages over alternative BPH treatment methods. These advantages derive
from the Company's core technologies, including preferential heating and
antenna design. The Company intends to continue to invest substantial
resources in research, development and clinical testing programs. The Company
spent approximately $5.0 million in fiscal 1997 and expects to continue to
commit significant resources in the future for research and development.
Urologix aggressively seeks to

25
<PAGE>

protect its proprietary technology by filing patent applications throughout
the world, as appropriate. The Company has been issued 12 United States
patents, some of which cover the key aspects of the Targis System, and has
pending applications for foreign protection and 20 additional United States
patents.

TARGIS SYSTEM

The Company's Targis System consists of the Targis Control Unit and the
Targis Procedure Kit, which includes the Targis Catheter, Cooling Bag and
Rectal Thermosensing Unit ("RTU"). The Targis Control Unit contains the
microwave generator, a solid-state refrigerant device, a circulation pump and
electronic circuitry to monitor therapy. The Targis Control Unit supplies
microwave energy and coolant to the Targis Catheter and collects and processes
data from the Targis Catheter and the RTU. The Targis Catheter contains a
microwave antenna for delivering microwave energy to the prostate and a
thermosensor for monitoring the urethral temperature. The Coolant Bag holds
the coolant that is circulated during therapy. The RTU monitors rectal
temperatures. The Targis Catheter, Coolant Bag and RTU are single-use devices.

In a Targis procedure, the Targis Catheter is inserted into the urethra and
the RTU is inserted into the rectum. Chilled water is then circulated through
the catheter. The coolant is designed to lower the temperature of the urethra
to protect it from heat and discomfort. When the urethra is sufficiently
cooled, the microwave energy is turned on. Temperatures in the urethra and
rectum are monitored continuously to ensure that the appropriate level of
energy is supplied. The targeted prostatic tissue that is sufficiently heated
by the microwave energy is necrosed. Following treatment, a small catheter is
inserted and the patient is released. The small catheter is typically left in
place for two to four days to drain urine while swelling subsides. Following
necrosis of the prostatic tissue, pressure on the urethra is decreased and BPH
symptoms are reduced.

Balloon in
bladder

Bladder
Microwave

Prostate antenna

Transition Preferential
Zone heating

Urethra Urethral
cooling

[INSERT DIAGRAM OF BLADDER & PROSTRATE]

26
<PAGE>

The exposure time required to produce cell death decreases exponentially
with increasing temperatures. Virtually all cells heated to above 45(degrees)C
for one hour will die. As temperatures increase above 45(degrees)C, the time
required for cell death decreases. The challenge to providing effective
microwave therapy relates to producing and maintaining adequate temperature
elevation in the diseased tissue while, at the same time, preventing excessive
thermal exposure to the urethra and the rectum, as well as the internal and
external urinary sphincters. Protection against injury to the rectum is
particularly important, as serious complications could occur should the rectum
be thermally damaged. Protection of the urethra is important because it
decreases the pain associated with the procedure and shortens recovery time.
In addition, protection of the external and internal urinary sphincters
maintains urinary continence and may preserve ejaculatory function.

Continuous energy delivery is required to most effectively necrose diseased
tissue in the prostate and thereby relieve BPH symptoms. The prostate is
highly vascularized and, in response to increased temperature, blood supply
within the prostate is dramatically increased during therapy. This produces an
efficient heat sink which reduces the temperature in the prostate beneath the
temperature threshold required for cell death within only a few minutes after
microwave energy is discontinued. In order to prevent damage to the rectum,
FDA guidelines provide that rectal temperatures not exceed 42.5(degrees)C. If
this temperature is exceeded, FDA guidelines mandate that microwave energy be
discontinued to allow the rectal temperature to decrease. Because of the
time/temperature relationship to cell death, a decrease in temperature in the
prostate below the threshold for cell death during the treatment has a
diminished effect on treatment outcome.

The Company's Targis System addresses these challenges through a unique
integration of the following proprietary technologies.

Transurethral Microwave Heating and Catheter Cooling

A specially designed antenna within the Targis Catheter radiates microwave
energy, at approximately 915 MHz, preferentially into the prostatic tissue.
The tissue absorbs this energy, and heat is inductively generated to increase
tissue temperature above 45(degrees)C. Meanwhile, chilled water is circulated
through outer channels in the catheter to draw heat away from the surface of
the urethra, thereby cooling it and protecting it from damage. This
combination of inductive microwave heating and conductive urethral cooling
results in a temperature pattern which varies in a predictable and
controllable way within the prostate, starting relatively low at the urethral
surface, increasing in temperature rapidly within the prostate and then
decreasing toward the capsule at the perimeter of the gland.

The Company's human clinical studies demonstrated that the Targis procedure
produced and maintained an extensive zone within the prostate which exceeded
45(degrees)C and consistently produced tissue necrosis in all patients
evaluated. Because of urethral cooling, however, the temperature close to the
urethra was only slightly elevated. The Targis System is designed to maintain
urethral temperatures below 45(degrees)C during the Targis procedure, thus
providing a crucial barrier to pain and allowing the procedure to be
accomplished in a physician's office or outpatient setting without the need
for general or regional anesthesia or intravenous sedation. In addition, post-
therapy recovery is improved as compared to existing surgical procedures
because the urethra remains intact.

Preferential Heating and Continuous Energy Delivery

Because the rectum is located close to the prostate, some of the thermal
energy from the heated prostate conducts into the rectal tissue. Serious
complications could result from significant temperature increases to the
rectal tissue; therefore, the prostate tissue closest to the rectum must be
prevented from reaching temperatures that could be damaging. The Company has a
patented technology that enables the delivery of microwave energy in a
radially preferential fashion. This is employed to direct a greater amount of
energy toward the anterior and lateral regions of the prostate than toward the
rectum. With the use of preferential heating, limitations on heat delivery
into the prostate imposed by the proximity of the

27
<PAGE>

prostate to the rectum are minimized. The Company's Targis System is designed
to continuously deliver greater amounts of energy to the diseased areas of the
prostate, resulting in sustained higher temperatures in these areas, a larger
area of cell death and thus a more effective treatment.

The Targis System is designed to maintain rectal temperatures beneath the
FDA's guideline of 42.5(degrees)C. Only on rare occasions in the Company's
clinical trials has a patient's rectal temperature reached 42.5(degrees)C. In
the event that this limit is reached, the Targis System is designed to
automatically shut off microwave power until the rectal temperature returns to
an acceptable level. Attempts by others to use microwave energy non-
preferentially to heat the prostate have been hindered by frequent elevation
of rectal temperatures which cause treatment to be temporarily suspended until
rectal temperatures decrease.

Impedance Matching and Heat Generation

Transfer of microwave energy from the antenna in the Targis Catheter to the
prostate tissue is affected by the balance between the electrical impedance of
the antenna and the tissue surrounding it. Without adequate matching of the
antenna to its environment, a large portion of the electrical energy can be
reflected back through the antenna cable instead of being radiated to the
prostate as intended, which may cause two compromising effects. The reflection
of microwave energy may cause radiant emissions to occur along the
transmission cable and could result in temperature elevation to areas outside
the target tissue in the prostate. More importantly, a mismatched system may
result in the antenna generating resistive heat. This heat is absorbed by the
cooling channels within the catheter, thereby diminishing the catheter's heat
carrying capacity. This can be important because changes to the temperature of
the catheter's cooling fluid result in urethral temperature changes. The
Targis System addresses these problems by diminishing the amount of energy
reflected and therefore maximizing the radiation of energy in the prostate by
matching the electrical impedance of the antenna with the surrounding tissue
for each patient prior to treatment.

Controlled Energy Delivery

The Targis Catheter utilizes a helical shaped antenna, which produces an
electrical field that is confined to a region of the prostate gland closely
related to the antenna length. Beyond the antenna's boundaries, the electrical
field strength drops rapidly, thus little induced heat is generated beyond the
length of the antenna. Within its length, the field is generally uniform,
resulting in uniform heat induction along the antenna length. This ensures
effective control over the zone of tissue damage and provides better assurance
against injury to the internal or external urinary sphincters, which could
affect ejaculation and urinary control.

CLINICAL STATUS

As of August 1, 1997, 755 patients affected with BPH had been treated with
the Targis System in controlled clinical studies. These patients were treated
at 20 clinical sites in the United States, Europe, Canada and South America.
The primary endpoints of the Company's clinical trials were to reduce the
patient's AUA Symptom Scores, increase flow rate during urination and improve
the patient's quality of life, with minimal complications.

Data were collected prior to treatment, and at six weeks, three months, six
months, nine months (AUA & quality of life questionnaire only), one year, two
years and three years post-treatment. The clinical results discussed below
reflect the data from 630 patients treated with the Targis System in
controlled clinical studies with a standard clinical treatment as of August 1,
1997. The remaining 125 patients not included below were enrolled in (i)
feasibility studies to determine temperature distribution in the prostatic
tissue and evaluate patient tolerance and other treatment parameters or (ii)
studies with alternative protocols to determine the ability of the Targis
procedure to effectively treat patients with urinary retention or other
urinary conditions. Improvements in AUA Symptom Scores, peak flow rates and
quality of life were statistically significant compared to initial pre-
treatment scores. However, there can be no assurance that future clinical
results will be consistent with those achieved to date.

28
<PAGE>

Clinical Results

LOWER AUA SYMPTOM SCORES. The following chart demonstrates the change in AUA
Symptom Scores for 577 patients who received the standard clinical treatment.
The chart excludes data from 53 patients (8%) whose treatments were recent and
for whom six-week follow up data are not yet available. The results
demonstrated that the Targis System was effective in reducing AUA Symptom
Scores by 58% at three months and that the results were maintained for at least
three years (p(Less than)0.001).

[GRAPH]

AUA 20.4 11.3 8.5 8.6 8.5 9.1 8.4
SCORE

INITIAL 6 WEEK 3 MONTH 6 MONTH 12 MONTH 24 MONTH 36 MONTH
N=577 N=577 N=559 N=499 N=387 N=146 N=46

TIMEPOINT/# OF PATIENTS

INCREASED FLOW RATES. The following chart demonstrates the change in peak
flow rates for 491 patients who received the standard clinical treatment. The
chart excludes data from 139 patients (22%) whose treatments were recent and
for whom six-week follow up data are not yet available, or for whom initial
peak flow data were not collected, or for patients who did not have a voided
urine volume of at least 125 milliliters required for the study. These data
demonstrated that the Targis procedure increased peak flow rates for patients
with a mean increase of over 4 ml/sec at three months (p(Less than)0.001) and
that the flow rate increase was maintained from the three month to the three
year time point.

[GRAPH]

ML/SEC 7.7 10.8 11.9 12.1 11.7 11.3 12.5

N=491 N=491 N=460 N=405 N=306 N=117 N=41
INITIAL 6 WEEK 3 MONTH 6 MONTH 12 MONTH 24 MONTH 36 MONTH

TIMEPOINT/# OF PATIENTS

29
<PAGE>

QUALITY OF LIFE. The Company has patient quality of life data from the 385
patients from whom the Company has received one-year follow-up data. These
patients were asked a statistically validated quality of life assessment
question to evaluate how they would feel living the rest of their life with
their current BPH symptoms. At 12 months following their Targis procedures,
75% of these patients indicated they would be satisfied, an increase from only
4% giving the same response prior to treatment.

MINIMAL COMPLICATIONS. Of the 573 patients from whom the Company has
received follow-up data, no patient needed an anesthetist or anesthesia
services during the treatment, and 88% of the patients spent one day or less
in bed following the Targis treatment. Of these 573 patients, there were no
cases of long-term incontinence, impotence or significant bleeding resulting
from the Targis procedure. Thirteen percent of patients experienced urinary
retention which required catheterization for more than one week. All of these
cases were resolved within 30 days. Additionally, 8% of the patients
experienced an episode of urinary tract infection which was treated and
resolved with routine antibiotic therapy, and less than 1% experienced
urethral stricture requiring intervention. Other minor complications included
epididymitis (4%), loss of ejaculate (4%), and transient urinary incontinence
(3%).

SALES AND MARKETING

The Company's marketing strategy includes (i) conducting and reporting the
results of controlled clinical studies of the Targis System with leading
clinical investigators around the world, (ii) demonstrating the cost
effectiveness of the Targis System to governmental and commercial payors, and
(iii) educating urologists and BPH patients on the safety, efficacy and other
benefits of the Targis System.

United States

The Company will sell its Targis System in the United States through a
direct sales force. Urologix is planning to initiate a full product launch by
the end of calendar 1997 and sold an initial Targis System in the United
States in October 1997. Beginning with the hiring of its Executive Vice
President of Sales and Marketing in February 1997, the Company has developed a
sales and marketing team, consisting of a director of marketing and a director
of North American sales, geographic marketing managers, product managers,
communication specialists and direct domestic sales representatives, who are
all dedicated to marketing the Targis System. The Company is currently hiring
and training its sales force in preparation of the product launch. To date,
the Company has hired and trained three sales people and is actively
recruiting additional sales representatives. As of September 30, 1997, the
Company employed a total of 20 individuals in its sales and marketing
department.

The Company is also finalizing its marketing and promotional materials,
establishing three training sites at leading United States hospitals to
instruct urologists on the use of the Targis System and developing a clinical
data registry.

Of the over 7,500 urologists in the United States, the Company intends to
target urologists who practice in high-volume prostate treatment groups and
urologists who are opinion leaders in BPH treatment methods. The Company
believes that the demographics of urologists and their practices in the United
States will allow for an effective direct selling strategy.

In the United States, the Company intends to offer urologists the option to
purchase or lease the Targis System Control Unit. The list prices for the
purchase of a Control Unit and Procedure Kit are $150,000 and $1,200,
respectively.

International

The Company has developed broad-based relationships with Nihon Kohden and
Boston Scientific for market development and sales of the Targis System in
Japan and all other foreign countries outside Japan, respectively. Both
companies have dedicated marketing and sales specialists for the Targis
System.

The Company entered into an international distribution agreement with Boston
Scientific in 1996. Under the agreement, Boston Scientific was granted
exclusive distribution rights for the Company's Targis System in all countries
outside the United States and Japan for a period of five years ending in 2001.
Under

30
<PAGE>

the agreement, Boston Scientific agreed to purchase certain minimum numbers of
the Company's Control Units and Procedure Kits. Prior to entering into this
distribution agreement, Boston Scientific made equity investments in the
Company.

In 1994, the Company entered into a distribution agreement with Nihon Kohden
which granted Nihon Kohden exclusive distribution rights for the Company's
Targis System in Japan for a term ending in the year 2000. Nihon Kohden has
agreed to purchase certain minimum numbers of the Company's Control Units and
Procedure Kits under the agreement. Nihon Kohden made an equity investment in
the Company concurrently with entering into this distribution agreement.

MANUFACTURING

The Company's Targis System consists of the Targis Control Unit and the
Targis Procedure Kit, which includes the Targis Catheter, Cooling Bag and
Rectal Thermosensing Unit. The Targis Control Unit is currently manufactured
by SeaMED Corporation ("SeaMED") of Seattle, Washington to the Company's
specifications under a supply agreement that expires in February 1999. SeaMED,
a contract manufacturer for various medical device companies, has a
manufacturing facility in which it produces Class III medical devices.
Currently, the Company manufactures a key component of the Targis Control
Unit, the microwave generator, and provides it to SeaMED for incorporation
into the final Targis Control Unit. Although the Company expects that SeaMED
will be able to adequately meet demand for the Targis Control Unit on a timely
basis for the foreseeable future, there can be no assurance that this will be
the case.

The Targis Procedure Kits are assembled by the Company, using materials and
components supplied to the Company by various subcontractors and suppliers, as
well as components fabricated by the Company. Several of the components are
currently available to the Company through only one vendor. Wherever possible
and practical, the Company intends to develop alternative sources for every
critical component. Where alternative sourcing is not possible, the Company
intends to enter into supply agreements with each component provider.
Nevertheless, failure to obtain components from such providers or delays
associated with any future component shortages, particularly as the Company
increases its manufacturing activities in preparation for commercial
distribution of the Targis System in the United States, could have a material
adverse effect on the Company's business, financial condition and results of
operations.

In an effort to ensure that adequate space is available for expanding
commercial production, since June 1996, the Company has expanded its
facilities from 12,000 square feet to over 20,000 square feet and increased
its controlled environment production space by over fifty percent. In
addition, the Company intends to expand its facility in the next 18 months.
Also, the Company has implemented multi-shift production capabilities and
systems to establish back-up manufacturing capacity. As of September 30, 1997,
the Company employed 38 individuals in its manufacturing department.

If sales of the Targis System increase, the Company expects cost of goods
sold, as a percent of sales, to decrease due to efficiencies obtained from
higher production volumes. To further improve performance, the Company has
expanded its manufacturing engineering group and started initiatives to
improve production yields through the use of several methods, including total
quality management and statistical process control. The Company is also
working closely with its suppliers to continuously improve quality and reduce
costs.

The Company's manufacturing operations must comply with the FDA's quality
system regulation, which includes, but is not limited to, the FDA's GMP
requirements, and with certain requirements of state, local and foreign
governments, which establish requirements for assuring quality by controlling
components, processes and document traceability and retention, among other
things. In June 1997, the FDA conducted its initial inspection of the
Company's manufacturing facility, in which the Company's

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<PAGE>

facility, documentation and quality control systems were determined to be
satisfactory and no deficiencies of GMP were raised with the Company. The
Company's facilities will also be subject to unscheduled inspections by the
FDA and scheduled inspections by other auditors. The Company believes that its
manufacturing and quality control procedures meet the requirements of these
regulations, and has established training and self-audit systems designed to
ensure compliance. See "--Government Regulation--United States."

The Company has received ISO 9001 certification indicating compliance of the
Company's manufacturing facilities with European standards for quality
assurance and manufacturing process control. The Company has also received CE
mark certification, which allows it to affix the CE Mark to its product and
market it in the European Union. In addition, the Targis System has been
approved for marketing by the Japanese Ministry of Health and Welfare. See "--
Government Regulation--International."

RESEARCH AND DEVELOPMENT

The Company intends to build upon its clinical knowledge and relationships
to develop innovative future generations of BPH and other urology products.
The Company's research and development efforts are currently focused on
improving the function and features of the Targis System, reducing the
production cost of the components in the Targis System and investigating other
applications for its technologies. This effort includes development of
enhanced components of the Targis Procedure Kit. The Company also believes
that its core technologies may have other medical applications for prostatic
diseases, including malignancies.

During the fiscal years ended June 30, 1995, 1996 and 1997 and the three
months ended September 30, 1997, the Company spent $4.1 million, $4.8 million,
$5.0 million, and $1.4 million, respectively, in its research and development
efforts. As of September 30, 1997, the Company employed 12 individuals in its
research and development department.

THIRD-PARTY REIMBURSEMENT

The Company believes that third-party reimbursement will be essential to
commercial acceptance of the Targis procedure, and that overall cost
effectiveness and physician advocacy will be keys to obtaining such
reimbursement. The Company believes that the Targis procedure can be performed
for a substantially lower total cost than surgical treatments for BPH or
continuous drug therapy. Consequently, the Company believes that third-party
payors seeking procedures that provide quality clinical outcomes at a lower
cost will reimburse the Targis procedure.

The Company's strategy for obtaining reimbursement in the United States is
to obtain appropriate reimbursement codes and perform outcome studies in
conjunction with clinical studies to establish the cost effectiveness of the
Targis procedure as compared to surgical and drug treatments for BPH. The
Company plans to use this information when approaching health care payors to
obtain reimbursement authorizations.

In the United States, the Company estimates that 60% to 80% of patients who
receive a Targis treatment 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
private-paying patients.

The United States Health Care Financing Administration ("HCFA"), which
establishes coverage policies for Medicare carriers, can either make national
coverage reimbursement determinations or allow local Medicare carriers to
adopt, modify or ignore model reimbursement policies. The Company believes
that HCFA will not make a national coverage decision for transurethral
microwave therapy for BPH in the foreseeable future and therefore, local
Medicare carriers will each make their own coverage decisions regarding
coverage of microwave therapy for BPH. Based on communications with various
local Medicare

32
<PAGE>

carriers, the Company believes that coverage for transurethral microwave
therapy for BPH is currently available in over 30 states. In addition, a group
of medical directors from local Medicare carriers, known as the Medicare
Carrier Urology Workgroup, has outlined a model policy for coverage of
transurethral microwave therapy for BPH and has recommended that Medicare
carriers adopt the model policy. The Company believes that as more clinical
data are published, HCFA may make a national coverage decision for
transurethral microwave therapy for BPH. Despite these indications and
recommendations, there can be no assurance that reimbursement will be
available to providers.

For those states where coverage is available from the Medicare carrier,
physicians' professional fees will be reimbursed for performing a Targis
procedure based on a Current Procedural Terminology ("CPT") code. CPT codes
are established by the American Medical Association's CPT Editorial Panel.
This Panel approved the addition of a CPT code for physicians to use when
submitting claims for performing transurethral microwave therapy in November
1996, and recommended a work value, which will be used to determine the amount
reimbursed for the CPT code in February 1997. This code has been published in
the 1998 CPT book, which became available in November 1997. The Company
believes that the existence of this code will make it easier for physicians to
adopt the Targis procedure. Reimbursement for hospitals by Medicare
intermediaries (Medicare administrators for hospitals) for the cost of the
Targis System and other costs related to a Targis procedure (other than the
physician's professional fee) will be cost-reimbursed when submitted by
hospitals to the Medicare intermediary. HCFA is currently revising its
reimbursement methodology to allow for reimbursement of supplies and other
costs related to certain procedures performed by physicians in their offices.
Should these revisions be implemented, the Company believes that physicians
will be reimbursed by Medicare for costs related to performing a Targis
procedure in their office.

Private insurance companies and HMOs make their own determinations regarding
coverage and reimbursement based upon "usual and customary" fees established
for CPT codes.

There can be no assurance that the Company will receive favorable coding,
coverage and reimbursement determinations for its Targis System from Medicare
and other payors or that amounts reimbursed to physicians for performing a
Targis procedure will be sufficient to encourage physicians to use the
Company's Targis System. See "Risk Factors."

Internationally, reimbursement approvals for the Targis procedure will be
sought on an individual country basis. Some countries currently have
established reimbursement authorizations for transurethral microwave therapy.
Reimbursement approvals have been obtained through Nihon Kohden Corporation
for the Targis System in Japan. Recently, the largest private health insurer
in the United Kingdom, British United Provident Association ("BUPA"),
announced its intention to begin reimbursing providers that use thermotherapy,
such as the Targis System, for the treatment of BPH. BUPA provides health
insurance for approximately 50% of United Kingdom patients who maintain
private coverage. The Company and its marketing partner, Boston Scientific,
are actively pursuing reimbursement approvals on a country-by-country basis
throughout Western Europe. Clinical studies and physician advocacy will be
used to support reimbursement requests in countries where there is currently
no reimbursement for such procedures.

PATENTS AND PROPRIETARY RIGHTS

The Company has aggressively pursued protection of its intellectual
property. The Company has been issued 12 United States patents and has 20
patent applications pending in the United States. The Company also has applied
for patent coverage in a number of foreign jurisdictions. The Company either
filed or is preparing to file international applications under the Patent
Cooperation Treaty ("PCT") for qualifying United States applications and is
now pursuing the national phase in designated PCT countries for the Company's
first four applications.

The United States patents issued to the Company claim methods and devices
which the Company believes are critical to providing a safe and efficacious
treatment for BPH. Several of the claims under these

33
<PAGE>

patents relate to devices and methods for preferentially limiting the amount
of microwave energy directed toward the rectum. Because cell death is a
function of time and temperature and because the rectum is in close proximity
to the prostate, the Company believes preferential heating is critical to
enable continuous delivery of energy to achieve an adequate zone of necrosis
to durably treat BPH while not endangering the rectum.

The Company also has several issued patents and pending applications
relating to its gamma-matched, helical-dipole microwave antenna. For a
microwave antenna to radiate energy efficiently, it must be impedance matched
to its environment. Further, the antenna design controls the evenness of the
heating and the area to be heated. The Company has two issued patents covering
various designs and methods of its helical microwave antenna with impedance
matching.

There can be no assurance that these 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 the Company's patents or
applications will not be challenged, invalidated or circumvented in the
future. In addition, there can be no assurance that 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 the Company's ability to manufacture or market its
Targis System in the United States or in international markets. Further, there
can be no assurance the Company's Targis System does not infringe upon the
patent rights or other intellectual property rights of other companies, that
the Company will not be required to seek licenses from other companies or that
other companies will not pursue claims of infringement against the Company.

Other companies have developed or are in the process of developing medical
methods and devices to transurethrally treat BPH with microwave energy.
Several companies have applied for, and in some cases received, patents
related to such medical methods and devices. One company, BSD Medical
Corporation ("BSD"), initiated a patent infringement lawsuit against the
Company in 1992. The Company chose to settle that lawsuit in March 1994 by
entering into a settlement agreement with BSD, under which BSD granted the
Company a license for the patent at issue, as well as several other patents.
The Company and BSD are currently in litigation concerning the settlement
agreement. The Company believes that the BSD allegations are without merit.
See "Risk Factors" and "--Legal Proceedings."

In August 1996, the Company entered into a non-exclusive, worldwide patent
license agreement with EDAP TMS S.A., a French corporation, and its
subsidiary, EDAP Technomed, Inc. (collectively referred to as "EDAP") for
certain EDAP patents relating to the microwave treatment of BPH.

The Company also relies on trade secrets and proprietary know-how, which it
seeks to protect, in part, through proprietary information agreements with
employees, consultants and other parties. The Company's proprietary
information agreements with its employees and most of its consultants contain
industry standard provisions requiring such individuals to assign to the
Company, without additional consideration, any inventions conceived or reduced
to practice while retained by the Company, subject to customary exceptions.
The Company's officers and other key employees also agree not to compete with
the Company 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 the Company would have adequate remedies
for any breach, or that third parties will not nonetheless gain access to the
Company's technology.

COMPETITION

Competition in the market for BPH treatments is intense and is expected to
increase. The Company believes that its principal competition will come from
both surgical and non-surgical therapies. Surgical therapies include TURP,
TUIP or alternative surgical procedures for vaporization of the prostate
tissue using laser or RF energy. Non-surgical alternatives include drug
therapy and emerging less invasive technologies.

34
<PAGE>

The primary manufacturer of equipment used in the TURP procedure is
ValleyLab, a subsidiary of Pfizer, Inc. In addition, Trimedyne, Inc., C.R.
Bard, Inc., Coherent, Inc., Surgical Laser Technologies, Inc., Circon
Corporation, Richard Wolf GmbH, Karl Storz GmbH & Company and ProSurg Corp.
all manufacture equipment used in alternative surgical procedures. Drugs for
the treatment of BPH are marketed by Abbott Laboratories (Hytrin(R)), Merck &
Co., Inc. (Proscar(R)), Pfizer, Inc. (Cardura(R)) and Boehringer Ingelheim
Pharmaceuticals, Inc. (FLOMAX(R)). Companies that have developed or are
developing less invasive interstitial therapies include Johnson & Johnson,
Dornier Medical Systems, Inc., Diomed Ltd., VidaMed, Inc. and U.S. Surgical
Corporation. Other companies have developed or are developing less invasive
microwave thermotherapy systems for the treatment of BPH include EDAP, BSD and
Dornier Medical Systems, Inc. The Company is aware of additional companies
that have developed or are developing technologies for the treatment of BPH,
including Boston Scientific Corporation, InStent Inc., a subsidiary of
Medtronic, Inc., Argomed, Inc., Cheung Laboratories, Inc., Thermal
Therapeutics, Inc. and FOCUS Surgery, Inc. These technologies include stents,
dilatation balloons, transurethral and transrectal hyperthermia, and high
intensity focused ultrasound.

The Company expects that competition in the BPH field will be based, among
other things, on the ability of the therapy to provide safe, effective and
lasting treatment, cost effectiveness of the therapy, acceptance of the
procedure by physicians, health care payors and patients, patent position,
marketing and sales capabilities, and third-party reimbursement policies.
Another factor in competition may be the timing of market introduction of
competitive products.

GOVERNMENT REGULATION

United States

Government regulation in the United States and other countries is a
significant factor in the development and marketing of the Company's Targis
System and in the Company's ongoing manufacturing and research and development
activities. The Company and the Targis System are regulated in the United
States by the FDA under a number of statutes including the Federal Food, Drug,
and Cosmetic Act ("FDC Act"). Pursuant to the FDC Act, the FDA regulates the
pre-clinical and clinical testing, manufacturing, labeling, distribution,
sale, marketing, advertising and promotion of medical devices in the United
States. Failure to comply with applicable requirements can result in fines,
recall or seizure of products, total or partial suspension of production,
distribution, sales and marketing, suspension or withdrawal of existing
product approvals or clearances, refusals to approve or clear new applications
or notices and criminal prosecution of a company and its officers and
employees.

Prior to commercial sale in the United States, most medical devices,
including the Company's products, must be cleared or approved by the FDA. In
general, the regulatory process can be lengthy, expensive and uncertain, and
securing FDA clearances or approvals may require the submission of extensive
clinical data together with other supporting information to the FDA. Medical
devices such as the Targis System are classified into one of three classes,
Class I, II or III, on the basis of the controls necessary to reasonably
ensure their safety and effectiveness. Generally, Class III devices are those
that must receive approval of a PMA by the FDA to ensure their safety and
effectiveness. The PMA process ordinarily requires the performance of at least
two independent, statistically significant clinical studies that must
demonstrate the safety and effectiveness of the device in order to obtain FDA
approval of the PMA. The PMA process is expensive and often lengthy, typically
requiring several years, and may never result in approval.

In 1993, the FDA issued a policy statement indicating that medical devices
seeking to be labeled for use in treatment of BPH would be classified as Class
III devices requiring FDA approval of a PMA before marketing may begin. The
Company's Targis System is a Class III device for which a PMA had to be filed
with and approved by the FDA before the product could be marketed. The FDA
approved the PMA for the Targis System by a letter (order) dated August 22,
1997. As approved, the Targis System is indicated

35
<PAGE>

to relieve symptoms associated with BPH in men with prostatic lengths of 30 to
50 millimeters. The FDA made the Targis System a restricted device which means
that its labeling specifies requirements for the training of physicians who
may use the device and that the FDA has greater control over advertising for
the Targis System. The FDA imposed a number of post-approval requirements,
including a study to collect 5-year follow-up data to evaluate the long-term
effects of the Targis System treatment in at least 100 patients. This post-
approval study must assess the rates of adverse events that occurred during
the 5-year follow-up period, as well as the rate of repeat and alternative
treatments that were administered. Failure of the Company to comply with these
and other post-approval requirements could result in the FDA withdrawing its
approval of the PMA for the Targis System. The Company intends to comply with
all post-approval requirements. Once it is marketed, the Targis System will be
subject to continual FDA and other regulatory agency review and regulation.
Subsequent discovery of previously unknown problems or failure to comply with
applicable requirements can result in severe administrative, civil, and
criminal sanctions.

The FDA's regulations require agency approval of a PMA supplement prior to
marketing for certain changes if they 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. When
clinical data are required to obtain FDA approval of a PMA supplement, such as
in the event of a change in the indication for use of the Targis System, the
Company will be required to obtain an investigational device exemption ("IDE")
to gather the data. Approval of such an IDE could not be assured on a timely
basis, or at all. There can be no assurance that the required approvals of PMA
supplements for any changes to the Targis System 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 the Targis System, would
have a material adverse effect on the business, financial condition and
results of operations of the Company.

In 1995, the FDA issued a policy statement indicating that general medical
use lasers used specifically for the treatment of BPH are eligible for
marketing through 510(k)s, a significantly less burdensome regulatory pathway
than PMAs. Products under development by several of the Company's competitors
are covered by this 1995 policy statement.

Advertising and promotional activities are subject to regulation by the FDA
and, in certain instances, by the Federal Trade Commission. Other applicable
requirements include the FDA's medical device reporting regulations, which
require that the Company provide information to the FDA on deaths or serious
injuries alleged to have been associated with the use of its marketed devices,
as well as product malfunctions that would likely cause or contribute to a
death or serious injury if the malfunction were to recur.

The FDC Act regulates the Company's quality control and manufacturing
procedures by requiring the Company to demonstrate and maintain compliance
with the FDA's quality system regulations which include GMP requirements, as
specified in the FDA device quality system ("QS") regulation. This regulation
requires, among other things, that (i) the manufacturing process be regulated,
controlled, and documented by the use of written procedures and (ii) the
ability to produce devices which meet the manufacturer's specifications be
validated by extensive and detailed testing of every aspect of the process.
The regulation also requires investigation of any deficiencies in the
manufacturing process or in the products produced and detailed record keeping.
In addition, the QS regulation requires preproduction design controls,
purchasing controls and maintenance of service records, except that FDA has
stated that as long as manufacturers are taking reasonable steps to come into
compliance with the design control requirements, the FDA will not initiate
action (including enforcement cases) based on a failure to comply with these
requirements before June 1, 1998. The QS regulation is expected to increase
the cost of complying with the FDA GMP and related requirements. The FDA
monitors compliance with QS including GMP requirements by conducting periodic
unannounced inspections of manufacturing facilities. If violations of the
applicable regulations are noted during FDA inspections of manufacturing
facilities, the FDA or the government through court enforcement action can
prohibit further manufacturing,

36
<PAGE>

distribution, sale and marketing of the device until the violations are cured,
if ever, and in that circumstance the continued marketing of the Company's
products would be adversely affected. Such regulations are subject to change
and depend heavily on administrative interpretations. There can be no
assurance that future changes in regulations or interpretations made by the
FDA or other regulatory bodies, with possible retroactive effect, will not
adversely affect the Company.

International

Sales of medical devices outside of the United States are subject to United
States export requirements and foreign regulatory requirements. Exportation of
a device that complies with FDA requirements for commercial distribution in
the United States is not subject to any FDA export permit requirement so long
as the device is exported for the indication(s) for which commercial
distribution in the United States is lawful under the FDC Act.

Although the Company has met the necessary registration requirements in
Japan, the European Union and Canada to commercialize the Targis System in
these countries, the Company's Targis System has not been approved for
commercial sale in most other jurisdictions outside the United States. Legal
restrictions on the sale of imported medical devices vary from country to
country. The time required to obtain approval by a foreign country may be
longer or shorter than that required for FDA approval, and the requirements
may differ. The Company has implemented ISO 9001, a certification showing that
the Company's procedures and manufacturing facilities comply with standards
for quality assurance and manufacturing process control. The ISO 9001
certification, along with the European Medical Device Directive ("MDD")
certification, received in early fiscal 1997, evidences compliance with the
requirements and enables the Company to affix the CE Mark to its current
products. The CE Mark denotes conformity with European standards for safety
and allows certified devices to be placed on the market in all European Union
countries. After June 1998, medical devices may not be sold in European Union
countries unless they display the CE Mark. There can be no assurance that the
Company will be able to obtain regulatory approvals or clearances for its
products in other foreign countries.

The Company's distributor in Japan, Nihon Kohden, is responsible for
obtaining regulatory and reimbursement approvals for the Targis System in
Japan. In February 1997, the Company's Targis System received regulatory
approval from the Japanese Ministry of Health and Welfare.

PRODUCT LIABILITY AND INSURANCE

The business of the Company entails the risk of product liability claims.
Although the Company has not experienced any product liability claims to date,
any such claims could have an adverse impact on the Company. The Company
maintains product liability insurance with coverage of $1.0 million per
occurrence and an annual aggregate maximum of $2.0 million. The Company also
carries a $10.0 million umbrella insurance policy. The Company evaluates its
insurance requirements on an ongoing basis. There can be no assurance that
product liability claims will be covered by such insurance, will not exceed
such insurance coverage limits or that such insurance will be available on
commercially reasonable terms, or at all.

EMPLOYEES

As of September 30, 1997, the Company employed 88 individuals on a full-time
basis. The Company believes that it has been successful in attracting
experienced and capable personnel, although there can be no assurance that the
Company will continue to attract and retain qualified personnel. None of the
Company's employees is covered under a collective bargaining agreement. The
Company considers relations with its employees to be good.

BACKLOG

Although the Company has received orders for future delivery of its
products, at September 30, 1997, the Company did not have a significant
backlog.

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<PAGE>

PROPERTIES

The Company leases approximately 24,000 square feet of office, manufacturing
and warehouse space in a suburb of Minneapolis, Minnesota. The lease
expiration date is January 31, 2003. The Company believes its facilities will
be sufficient to meet the Company's current requirements and that additional
space at or near the current location will be available at a reasonable cost
if such space is required in the future.

LEGAL PROCEEDINGS

On July 30, 1996, the Company filed a lawsuit under seal in United States
District Court for the District of Minnesota against BSD to enforce the terms
of the BSD Settlement Agreement, which includes a patent license. In June
1996, BSD accused the Company of breaching a confidentiality provision of the
BSD Settlement Agreement, and notified the Company that BSD was terminating
the BSD Settlement Agreement. The Company initiated the lawsuit against BSD
seeking a declaratory judgment that the Company had not breached the
confidentiality provision of the BSD Settlement Agreement, and that the BSD
Settlement Agreement remained in full force and effect. BSD answered the
Company's complaint and counterclaimed for a declaratory judgment of breach
and termination of the BSD Settlement Agreement. The formal discovery period
in the lawsuit has closed and the case is currently set for trial no later
than April 1998. The Company believes that it has fully complied with the BSD
Settlement Agreement and intends to continue complying with the BSD Settlement
Agreement. The Company believes that BSD's allegations and purported
termination of the BSD Settlement Agreement are without merit. See "Risk
Factors."

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<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and directors of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Mitchell Dann.................. 37 Chairman of the Board
Jack E. Meyer(1)............... 54 Director, President and Chief Executive Officer
John P. Costello............... 41 Executive Vice President, Sales and Marketing
Wesley E. Johnson, Jr.......... 39 Vice President, Finance, Chief Financial Officer, Secretary
and Treasurer
Jonathan R. McGrath............ 43 Vice President, Research and Development
David W. Powell................ 40 Vice President, Operations
W. Allen Putnam................ 50 Vice President, Regulatory and Quality
Buzz Benson(1)................. 43 Director
Janet G. Effland(1)(2)......... 49 Director
Michael R. Henson(2)........... 51 Director
Paul A. LaViolette(1)(2)....... 40 Director
Robert R. Momsen(2)............ 50 Director
David C. Utz, M.D.............. 73 Director
</TABLE>
- --------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.

Mr. Dann was a co-founder of the Company, has served as a director since its
inception in 1991 and served as acting President from June 1993 to January
1994. He became Chairman of the Board in March 1993. Mr. Dann is currently
President of M. Dann & Co., Inc., a venture capital advisory firm. Prior to
M. Dann & Co., Inc., Mr. Dann co-founded and held the position of Managing
Partner at IAI Venture Capital Group, the venture capital division of
Investment Advisers, Inc. Mr. Dann has served as a director of several private
companies and is currently a director of Cardiovascular Dynamics, Inc.

Mr. Meyer has served as the President, Chief Executive Officer and a
director of Urologix since January 1994. Prior to joining Urologix, Mr. Meyer
served as President and Chief Executive Officer of FiberOptic Sensor
Technologies, Inc., a medical device company, from March 1993 to January 1994.
From January 1992 to March 1993, Mr. Meyer was President and Chief Executive
Officer of Carelink, Inc., a medical device company. From December 1982 to
August 1991, Mr. Meyer held the positions of Chief Operating Officer and
Executive Vice President at Quest Medical, Inc., a medical device company. Mr.
Meyer currently is a director of BestWay, Inc.

Mr. Costello has served as the Executive Vice President, Sales and Marketing
for the Company since February 1997. Prior to joining Urologix, Mr. Costello
served as Vice President of Sales and Marketing for FemRx, Inc. and
Cardiovascular Imaging Systems, Inc. over the past four years. In addition,
Mr. Costello served as Vice President of Sales for the Critical
Care/Angioplasty division of Baxter Healthcare.

Mr. Johnson has served as the Vice President of Finance and Chief Financial
Officer of Urologix since September 1995. He was also elected Secretary in
March 1996 and was elected Treasurer in December 1996. Prior to joining
Urologix, Mr. Johnson served as Vice President, Finance and Chief Financial
Officer of Orthofix Inc., formerly American Medical Electronics, Inc., from
December 1986 to September 1995.

Mr. McGrath has served as the Vice President of Research and Development for
Urologix since October 1994. Prior to joining Urologix, Mr. McGrath served as
Vice President of Research and Development of Schneider USA from March 1990 to
September 1994. Prior to 1990, Mr. McGrath co-founded Harbor Medical Devices,
where he served as Vice President from February 1987 to February

39
<PAGE>

1990. In addition, Mr. McGrath has held various positions at Medi-Tech, Inc.,
Ladd Medical, Inc., and Ladd Research Industries, Inc.

Mr. Powell has served as the Vice President, Operations for the Company
since September 1996. From 1991 through May 1996, Mr. Powell served in a
variety of positions of increasing responsibility with Gymania Corporation and
certain related companies including Playpal Inc. and Playpal Sales
Corporation. Each of the latter two companies was engaged in the business of
international sales, design and technical service of large commercial creative
play structures. During this time, Mr. Powell was asked to serve as President
of Playpal Inc., a financially troubled Florida corporation. Mr. Powell became
President of Playpal in approximately March 1995 and continued as its
President until Playpal filed a petition for Chapter 11 protection in
approximately May 1996. Subsequent to Mr. Powell's resignation, Playpal filed
a petition for bankruptcy under Chapter 7 in late 1996. From 1988 to 1991, Mr.
Powell was Vice President, Operations for Vitaphore Corporation, a medical
device company. From 1980 to 1988 Mr. Powell held various positions with
Baxter Healthcare and American Hospital Supply Corporation.

Mr. Putnam has served as the Vice President, Regulatory and Quality for
Urologix since October 1994 and was Vice President of Operations from December
1993 to October 1994. Before joining Urologix, Mr. Putnam served as President
and Chief Operating Officer of Uroplasty, Inc. from June 1992 to November
1993. Uroplasty was a wholly-owned subsidiary of Bioplasty, Inc., a breast
implant company, and both companies filed for Chapter 11 bankruptcy protection
in April 1993. Mr. Putnam also held the position of Vice President of Quality
Assurance and Regulatory Affairs at St. Jude Medical, Inc. from December 1989
to June 1992. In addition, Mr. Putnam has held various positions at Bio-
Vascular, Inc., Minnetonka, Inc., Hollister Corporation, and Baxter Travenol
Laboratories, Inc.

Mr. Benson has served as a director of the Company since August 1992. Mr.
Benson has been the Managing Director of Piper Jaffray Ventures since November
1992 and is a Partner in the Piper Jaffray Healthcare Funds, a series of
venture capital funds focused on investments in emerging companies in the
health care industry. From November 1988 to November 1992, Mr. Benson was a
Managing Director in the corporate finance department of Piper Jaffray Inc.
Mr. Benson is also a director of Exogen, Inc., a medical device company, and
several privately held medical companies.

Ms. Effland has served as a director of the Company since July 1994. Since
1988, Ms. Effland has been a General Partner and Vice President of Patricof &
Co. Ventures, Inc. Prior to joining Patricof & Co., Ms. Effland was the
managing director of a portfolio of United States investments for CIN
Investment Company. From 1974 to 1984, Ms. Effland served as Vice President of
Qume Corporation and Courier Terminal Systems, Inc., both subsidiaries of ITT
Corporation. Ms. Effland is also a director of CYTYC Corporation, a medical
diagnostics equipment company, and several privately held medical companies.

Mr. Henson has served as a director of the Company since September 1991. Mr.
Henson has served as President, Chief Executive Officer and Chairman of the
Board of Cardiovascular Dynamics, Inc. since February 1995. From February 1988
to May 1995, Mr. Henson served as Chief Executive Officer of Endosonics
Corporation, a medical device company. Mr. Henson has also served as Chairman
of the Board of Endosonics since February 1993. From April 1983 to February
1988, Mr. Henson served as President and Chief Executive Officer of Trimedyne,
Inc., a manufacturer of medical lasers and catheters. Prior to joining
Trimedyne in 1983, Mr. Henson held positions as Vice President for G. D.
Searle & Company, Director of Marketing for the Hospital Products Division of
Abbott Laboratories and Marketing Manager for Bristol-Myers Squibb Company.
Mr. Henson is presently a director of Endosonics Corporation.

Mr. LaViolette has served as a director of the Company since April 1996. Mr.
LaViolette is a Senior Vice President and Group President of Boston Scientific
Corporation. He joined Boston Scientific Corporation in 1994 as President of
Boston Scientific International and in 1995 became Group President for the
Nonvascular Businesses, which includes Microvasive Endoscopy and Microvasive
Urology. Previously, Mr. LaViolette was with C. R. Bard, Inc. for ten years,
where he served as President of Bard's

40
<PAGE>

USCI Division from 1993 to 1994 and its USCI Angioplasty Division from 1991 to
1993. Before that time, he held several other marketing positions at Bard.
Previously, he was with the Kendall Company, Hospital Products Division.

Mr. Momsen has served as a director of the Company since December 1992.
Since 1981, Mr. Momsen has been a general partner of InterWest Partners, a
venture capital firm. Mr. Momsen is also a director of COR Therapeutics, Inc.,
Coulter Pharmaceutical, Inc., and Progenitor, Inc., each of which is a
biopharmaceutical company, and Innovasive Devices, Inc., a tissue repair
system company, Integ Incorporated, a medical diagnostic company, ArthroCare
Corporation, a manufacturer of arthroscopic surgical equipment, and several
privately held medical companies.

Dr. Utz has served as a director of the Company since September 1994. He is
an emeritus consultant, Mayo Clinic. Dr. Utz was Professor of Urology at Mayo
Clinic and the Mayo Medical School from 1957 to 1988. He holds an M.D. degree
from St. Louis University School of Medicine and a M.S. degree in Urology from
the University of Minnesota. Dr. Utz has served in many medical and
professional urological associations and received numerous prestigious awards
in the field of urology. He is the author of over 145 publications and 28
abstracts and editorials.

41
<PAGE>

SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT

The following table includes information as of October 3, 1997 concerning
the beneficial ownership of Common Stock by (i) the only shareholders known to
the Company to hold more than five percent of the Common Stock, (ii) each of
the directors of the Company, (iii) each executive officer of the Company, and
(iv) all directors and executive officers of the Company as a group. Unless
otherwise indicated, all beneficial owners have sole voting and investment
power over the shares held.

<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF OUTSTANDING SHARES
SHARES ----------------------
NAME AND ADDRESS OF BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
------------------- ------------ --------- ---------
<S> <C> <C> <C>
John Reid.............................. 563,837 6.0% 5.2%
195 Bunker Hill Avenue
Stratham, NH 03885
Boston Scientific Corporation.......... 587,500 6.3% 5.4%
One Boston Scientific Place
Natick, MA 01670
Mitchell Dann.......................... 494,357(2) 5.3% 4.5%
14405 21st Avenue North
Minneapolis, MN 55447
Jack E. Meyer.......................... 171,711 1.8% 1.6%
Buzz Benson............................ 25,334(3) * *
Janet Effland.......................... 29,049(4) * *
Michael R. Henson...................... 9,903(5) * *
Paul A. LaViolette..................... 590,000(6) 6.3% 5.4%
Robert R. Momsen....................... 18,727(7) * *
David C. Utz, M.D...................... 19,250 * *
John P. Costello....................... 14,062 * *
Wesley E. Johnson, Jr.................. 33,124 * *
Jonathan R. McGrath.................... 88,489 * *
David W. Powell........................ 9,375 * *
W. Allen Putnam........................ 73,457 * *
All directors and executive officers as
a group (13 persons).................. 1,576,830 16.4% 14.2%
</TABLE>
- --------
* Indicates ownership of less than one percent.
(1) Includes options to purchase the following number of shares, which are or
will become exercisable within 60 days of October 3, 1997: Mr. Dann,
20,000 shares; Mr. Meyer, 60,064 shares; Mr. Benson, 2,500 shares; Ms.
Effland, 2,500 shares; Mr. Henson, 2,500 shares; Mr. LaViolette, 2,500
shares; Mr. Momsen, 2,500 shares; Dr. Utz, 14,750 shares; Mr. Costello,
14,062 shares; Mr. Johnson 21,874 shares, Mr. McGrath 82,233 shares, Mr.
Powell, 9,375 shares; Mr. Putnam 25,358 shares; and all officers and
directors as a group, 260,216 shares.
(2) Includes 5,358 shares owned by M. Dann & Co. Profit Sharing Trust.
(3) Includes 1,561 shares owned individually by Mr. Benson and 21,273 shares
owned by the Piper Venture Management III Fund Limited Partnership, the
general partner of Piper Jaffray Healthcare Fund Limited Partnership. Mr.
Benson, a director of the Company, is a partner in such partnership and,
as such, may be deemed to share voting and investment power with respect
to such shares. Mr. Benson disclaims beneficial ownership of such shares
except to the extent of his respective interest in such shares arising
from his interest in the partnership.

42
<PAGE>

(4) Includes 12,721 shares owned individually by Ms. Effland and 13,828 shares
owned by CIN Ventures Nominees, Ltd., which is managed by Patricof & Co.
Ventures, Inc. Ms. Effland, a director of the Company, is a General
Partner and Vice-President of Patricof & Co. Ventures, Inc. and, as such,
may be deemed to share voting and investment power with respect to such
shares. Ms. Effland disclaims beneficial ownership of such shares except
to the extent of her respective interest in such shares arising from her
interest in the partnership.
(5) Includes 499 shares owned by the Henson Family Trust, of which Mr. Henson
is a trustee.
(6) Includes 587,500 shares owned by Boston Scientific Corporation. Mr.
LaViolette is a Senior Vice President and Group President of Boston
Scientific Corporation. Mr. LaViolette disclaims beneficial ownership of
shares held by Boston Scientific Corporation.
(7) Includes 16,227 shares owned by the Momsen Living Trust, of which Mr.
Momsen is a trustee.

43
<PAGE>

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 25,000,000 shares
which are designated as Common Stock, $.01 par value per share, 250,000 shares
which are designated as Series A Junior Participating Preferred Stock and
4,750,000 shares that are not designated as to terms and preferences.

COMMON STOCK

All shares of Common Stock have equal voting rights and have one vote per
share in all matters to be voted upon by shareholders. Cumulative voting in
the election of directors is not allowed. No share of Common Stock is entitled
to preference over any other share of Common Stock, and each share of Common
Stock is equal to every other share of Common Stock in all respects. All of
the outstanding shares of Common Stock are, and the shares to be sold pursuant
to this offering will be, fully paid and nonassessable. The shares of Common
Stock have no preemptive or conversion rights, no redemption or sinking fund
provisions, and are not liable for further call or assessment. Subject to the
rights of holders of any Preferred Stock that may be outstanding, each share
of Common Stock is entitled to share in any distribution of capital assets
remaining after payment of liabilities. Subject to the rights of holders of
any Preferred Stock that may be outstanding, shareholders of Common Stock are
entitled to receive dividends when and as declared by the Company's Board of
Directors out of funds legally available thereof. Any such dividends may be
paid in cash, property or shares of Common Stock.

As of October 3, 1997, there were 9,341,196 shares of Common Stock
outstanding, which were held by 236 shareholders of record.

UNDESIGNATED STOCK

The Board of Directors of the Company is empowered to establish, and to
designate the name of, each class or series of the undesignated shares and to
set the terms of such shares (including terms with respect to redemption,
sinking fund, dividend, liquidation, preemptive, conversion and voting rights
and preferences). Accordingly, the Board of Directors, without shareholder
approval, may issue undesignated stock with terms (including terms with
respect to redemption, sinking fund, dividend, liquidation, preemptive,
conversion and voting rights and preferences) that could adversely affect the
voting power and other rights of holders of the Common Stock.

The existence of undesignated stock may have the effect of discouraging an
attempt, through acquisition of a substantial number of shares of Common
Stock, to acquire control of the Company with a view to effecting a merger,
sale or exchange of assets or a similar transaction. The anti-takeover effects
of the undesignated shares may deny shareholders the receipt of a premium on
their Common Stock and may also have a depressive effect on the market price
of the Common Stock.

SHAREHOLDER RIGHTS AGREEMENT

On January 14, 1997, the Board of Directors of the Company adopted a Rights
Agreement (the "Rights Agreement"), commonly called a poison pill. Pursuant to
the terms of the Rights Agreement, one right (a "Right") was issued in respect
of each share of the Company's Common Stock outstanding. Such Rights also
attach to each share of Common Stock issued subsequent to the adoption of the
Rights Agreement, including the shares of Common Stock offered hereby. Each
Right entitles the holder to purchase a fraction of a share of the Company's
Series A Junior Participating Preferred Stock or, in certain instances, Common
Stock of the Company or stock of an Acquiring Person (as defined below) in the
event that (i) a third party or a group (an "Acquiring Person") acquires
beneficial ownership of 15% or more of the Common Stock or (ii) a tender offer
or exchange offer that would result in a person or group becoming an Acquiring
Person is commenced. The Rights Agreement will be in effect through January
14, 2007 and could have the effect of discouraging tender offers or other
transactions which could result in shareholders receiving a premium over the
market price of Common Stock. No shares of Series A Junior Participating
Preferred Stock are outstanding.

44
<PAGE>

REGISTRATION RIGHTS

Under the Urologix, Inc. Amended and Restated Investors' Rights Agreement,
dated December 1995, purchasers of the Company's formerly outstanding Series
A, Series B, Series C, and Series D Preferred Stock acquired certain demand
and piggyback registration rights for the shares of Common Stock into which
their shares of Preferred Stock converted at the time of the initial public
offering. Each holder's registration rights expire on the earlier of (i) five
years after the Company's May 1996 initial public offering, or (ii) the date
that all shares entitled to registration held by such holder may be sold under
Rule 144 during any 90-day period.

All shares of Common Stock issued upon conversion of the Series A, Series B
and Series C Stock may be sold under Rule 144(k) and all shares issued upon
conversion of the Series D Preferred Stock may be sold under Rule 144, subject
in each case to limitations applicable to affiliates. Because the warrant
holder and certain affiliates of the Company may not be able to sell all of
their shares under Rule 144 in any 90-day period, the Company obtained waivers
from those holders in connection with this offering. All other registration
rights have expired.

ANTI-TAKEOVER PROVISIONS OF MINNESOTA BUSINESS CORPORATION ACT

Certain provisions of Minnesota law described below could have an anti-
takeover effect. These provisions are intended to provide management
flexibility to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and in the policies formulated
by the Board and to discourage an unsolicited takeover of the Company, if the
Board determines that such a takeover is not in the best interests of the
Company and its shareholders. However, these provisions could have the effect
of discouraging certain attempts to acquire the Company which could deprive
the Company's shareholders of opportunities to sell their shares of Common
Stock at prices higher than prevailing market prices.

Section 302A.671 of the Minnesota Business Corporation Act ("MBCA") provides
that, unless the acquisition of certain new percentages of voting control of
the Company (in excess of 20%, 33 1/3% or 50%) by an existing shareholder or
other person is approved by a majority of the disinterested shareholders of
the Company, the shares acquired above such new percentage level of voting
control will not be entitled to voting rights. The Company is required to hold
a special shareholders' meeting to vote on any such acquisition within 55 days
after the delivery to the Company by the acquirer of an information statement
describing, among other things, the acquirer and any plans of the acquirer to
liquidate or dissolve the Company and copies of definitive financing
agreements for any financing of the acquisition not to be provided by funds of
the acquirer. If any acquirer does not submit an information statement to the
Company within ten days after acquiring shares representing a new threshold
percentage of voting control of the Company, or if the disinterested
shareholders vote not to approve such an acquisition, the Company may redeem
the shares so acquired by the acquirer at their market value. Section 302A.671
generally does not apply to a cash offer to purchase all shares of voting
stock of the issuing corporation if such offer has been approved by a majority
vote of disinterested board members of the issuing corporation.

Section 302A.673 of the MBCA restricts certain transactions between the
Company and a shareholder who becomes the beneficial holder of 10% or more of
the Company's outstanding voting stock (an "interested shareholder") unless a
majority of the disinterested directors of the Company have approved, prior to
the date on which the shareholder acquired a 10% interest, either the business
combination transaction suggested by such a shareholder or the acquisition of
shares that made such a shareholder a statutory interested shareholder. If
such prior approval is not obtained, the statute imposes a four-year
prohibition from the statutory interested shareholder's share acquisition date
on mergers, sales of substantial assets, loans, substantial issuances of stock
and various other transactions involving the Company and the statutory
interested shareholder or its affiliates.

45
<PAGE>

INDEMNIFICATION OF OFFICERS AND DIRECTORS

The Company's Bylaws and the statutes of the State of Minnesota require the
Company to indemnify any director, officer, employee or agent who was or is a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, against certain
liabilities and expenses incurred in connection with the action, suit or
proceeding, except where such persons have not acted in good faith or did not
reasonably believe that the conduct was in the best interests of the Company.

In addition, the Company has entered into indemnification agreements with
each of its directors and officers. These agreements provide for
indemnification to the full extent permitted by Minnesota Law.

Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or other persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the
Securities and Exchange Commission (the "Commission"), such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.

TRANSFER AGENT AND REGISTRAR

The Transfer Agent and Registrar with respect to the Common Stock is Norwest
Bank Minnesota, N.A.

46
<PAGE>

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
BT Alex. Brown Incorporated, Dain Bosworth Incorporated and PaineWebber
Incorporated, have severally agreed to purchase from the Company the following
respective numbers of shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BT Alex. Brown Incorporated.......................................... 520,000
Dain Bosworth Incorporated........................................... 390,000
PaineWebber Incorporated............................................. 390,000
Robert W. Baird & Co. Incorporated................................... 50,000
John G. Kinnard & Company, Incorporated.............................. 50,000
Vector Securities International, Inc................................. 50,000
Wessels, Arnold & Henderson, L.L.C................................... 50,000
---------
Total................................................................ 1,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the Common Stock offered hereby if any of such shares
are purchased.

The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the public offering price set forth on the cover page of this Prospectus and
to certain dealers at such price less a concession not in excess of $0.68 per
share. The Underwriters may allow, and such dealers may reallow, a concession
not in excess of $0.10 per share to certain other dealers. After the public
offering, the offering price and other selling terms may be changed by the
Representatives of the Underwriters.

The Company has granted to the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 225,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the above table bears to 1,500,000, and the Company
will be obligated, pursuant to the option, to sell such shares to the
Underwriters. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of Common Stock offered hereby. If
purchased, the Underwriters will offer such additional shares on the same
terms as those on which the 1,500,000 shares are being offered.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.

The Company and holders of approximately 1,772,043 shares of Common Stock
have agreed not to offer, sell or otherwise dispose of any of such Common
Stock for a period of 90 days after the date of this Prospectus without the
prior consent of BT Alex. Brown Incorporated on behalf of the Representatives
of the Underwriters.

The Underwriters have advised the Company that, pursuant to Regulation M
under the Securities Exchange Act of 1934, as amended, certain persons
participating in this offering may engage in transactions, including
stabilizing bids, syndicate covering transactions or the imposition of penalty
bids, which may have the effect of stabilizing or maintaining the market price
of the Common Stock at a level above that which might otherwise prevail in the
open market. A "stabilizing bid" is a bid for or the purchase of the Common
Stock on behalf of the Underwriters for the purpose of fixing or maintaining
the price of the Common Stock. A "syndicate covering transaction" is the bid
for or the purchase of the Common Stock on behalf of the Underwriters to
reduce a short position incurred by the Underwriters in

47
<PAGE>

connection with this offering. A "penalty bid" is an arrangement permitting
the Underwriters to reclaim the selling concession otherwise accruing to an
Underwriter or dealer in connection with this offering if the Common Stock
originally sold by such Underwriter or dealer is purchased by the Underwriters
in a syndicate covering transaction and has therefore not been effectively
placed by such Underwriter or dealer. The Underwriters have advised the
Company that such transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at any time.

As permitted by Rule 103 under the Securities Exchange Act of 1934, as
amended, Underwriters or prospective Underwriters that are market markers
("passive market makers") in the Common Stock may make bids for or purchases
of Common Stock on the Nasdaq National Market until such time, if any, when a
stabilizing bid for such securities has been made. Rule 103 generally provides
that: (i) a passive market maker's net daily purchases of the Common Stock may
not exceed 30% of its average daily trading volume in such securities for the
two full consecutive calendar months (or any 60 consecutive days ending within
the 10 days) immediately preceding the filing date of the Registration
Statement of which this Prospectus forms a part; (ii) a passive market maker
may not effect transactions or display bids for the Common Stock at a price
that exceeds the highest independent bid for the Common Stock by persons who
are not passive market makers; and (iii) bids made by passive market makers
must be identified as such.

LEGAL MATTERS

The validity of the Shares offered hereby will be passed upon for the
Company by Lindquist & Vennum P.L.L.P., Minneapolis, Minnesota. Certain legal
matters relating to the offering will be passed upon for the Underwriters by
Dorsey & Whitney LLP, Minneapolis, Minnesota.

EXPERTS

The audited financial statements included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report.

48
<PAGE>

AVAILABLE INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the offering of the
securities offered hereby. This Prospectus does not contain all of the
information set forth in such Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
Statements contained in this Prospectus as to the contents of any contract or
other document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement or as previously filed with the
Commission and incorporated herein by reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made
to such Registration Statement, exhibits and schedules.

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by the
Company can be inspected and copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, and at
the following Regional Offices of the Commission: Chicago Regional Office,
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661;
and New York Regional Office, 7 World Trade Center, Suite 1300, New York, New
York 10048. The Commission also maintains a Web site (http://www.sec.gov) at
which reports, proxy and information statements and other information
regarding the Company may be accessed. In addition, such reports, proxy
statements and other information can also be inspected at the offices of the
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents have been filed by the Company with the Commission
and are incorporated herein by reference (i) the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1997, (ii) the Company's
Quarterly Report on Form 10-Q for the three months ended September 30, 1997,
and (iii) the description of the Company's capital stock contained in the
Registration Statement on Form 8-A, as filed on January 16, 1997 (file no. 0-
28414).

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of this offering shall be deemed to be incorporated by reference
into this Prospectus and to be a part hereof from the date of filing of such
documents. Any statement contained herein or in a document incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed to
constitute a part of this Prospectus, except as so modified or superseded.

The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the oral or written request of any such
person, a copy of all documents which are incorporated by reference in this
Prospectus, other than exhibits to such documents (unless such exhibits are
specifically incorporated by reference in such documents). Requests for such
copies should be directed to Wesley E. Johnson, Jr., Urologix, Inc. 14405 21st
Avenue North, Minneapolis, Minnesota 55447, (612) 475-1400.

49
<PAGE>

UROLOGIX, INC.

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Balance Sheets as of June 30, 1996 and 1997.............................. F-3
Statements of Operations for years ended June 30, 1995, 1996 and 1997.... F-4
Statements of Shareholders' Equity for years ended June 30, 1995, 1996
and 1997................................................................ F-5
Statements of Cash Flows for years ended June 30, 1995, 1996 and 1997.... F-6
Notes to Financial Statements............................................ F-7
Balance Sheets as of June 30, 1997 and September 30, 1997 (Unaudited).... F-12
Statements of Operations for the three months ended September 30, 1996
and 1997 (Unaudited).................................................... F-13
Statements of Cash Flows for the three months ended September 30, 1996
and 1997 (Unaudited).................................................... F-14
Notes to Condensed Financial Statements (Unaudited)...................... F-15
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Urologix, Inc.:

We have audited the accompanying balance sheets of Urologix, Inc. (a
Minnesota corporation) as of June 30, 1996 and 1997 and the related statements
of operations, shareholders' equity, and cash flows for each of the three
fiscal years in the period ended June 30, 1997. 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 generally accepted auditing
standards. 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, 1996 and 1997, and the results of its operations and its cash flows for
each of the three fiscal years in the period ended June 30, 1997, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Minneapolis, Minnesota,
August 8, 1997

F-2
<PAGE>

UROLOGIX, INC.

BALANCE SHEETS

AS OF JUNE 30

<TABLE>
<CAPTION>
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 65,042 $ 275,571
Available-for-sale securities..................... 40,779,176 25,825,238
Accounts receivable............................... 35,066 1,272,994
Inventories....................................... 415,920 2,119,373
Prepaids and other current assets................. 365,976 667,593
----------- ------------
Total current assets.......................... 41,661,180 30,160,769
----------- ------------
PROPERTY AND EQUIPMENT:
Leasehold improvements............................ 79,721 539,039
Machinery, equipment and furniture................ 699,694 2,141,622
Less-Accumulated depreciation and amortization.... (401,381) (832,604)
----------- ------------
Property and equipment, net................... 378,034 1,848,057
OTHER ASSETS, net................................... 328,641 3,573,261
----------- ------------
$42,367,855 $ 35,582,087
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capital lease obligations... $ 17,926 $ 19,531
Accounts payable.................................. 845,566 2,087,443
Accrued liabilities............................... 858,158 1,040,345
----------- ------------
Total current liabilities..................... 1,721,650 3,147,319
CAPITAL LEASE OBLIGATIONS, less current maturities.. 57,868 37,725
----------- ------------
Total liabilities............................. 1,779,518 3,185,044
----------- ------------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDERS' EQUITY (Note 4):
Undesignated stock, 4,750,000 shares authorized;
none issued or outstanding....................... -- --
Series A Junior Participating Preferred Stock,
250,000 shares authorized, none issued or
outstanding...................................... -- --
Common stock, $.01 par value, 25,000,000 shares
authorized;
9,128,433 and 9,256,594 shares issued and
outstanding...................................... 91,284 92,566
Additional paid-in capital........................ 59,030,559 59,131,097
Accumulated deficit............................... (18,533,506) (26,767,362)
Net unrealized losses on investments.............. -- (59,258)
----------- ------------
Total shareholders' equity.................... 40,588,337 32,397,043
----------- ------------
$42,367,855 $ 35,582,087
=========== ============
</TABLE>

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

F-3
<PAGE>

UROLOGIX, INC.

STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30
-------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
SALES.................................. $ 489,350 $ 362,118 $ 5,503,800
COST OF GOODS SOLD..................... 785,298 1,177,455 4,866,082
----------- ----------- -----------
Gross profit (loss)................ (295,948) (815,337) 637,718
----------- ----------- -----------
COSTS AND EXPENSES:
Research and development............. 4,099,070 4,811,165 5,048,917
Sales and marketing.................. 477,380 1,006,544 3,429,443
General and administrative........... 883,409 1,191,518 2,226,012
----------- ----------- -----------
Total costs and expenses........... 5,459,859 7,009,227 10,704,372
----------- ----------- -----------
OPERATING LOSS......................... (5,755,807) (7,824,564) (10,066,654)
INTEREST INCOME, net................... 329,060 231,252 1,832,798
----------- ----------- -----------
NET LOSS............................... $(5,426,747) $(7,593,312) $(8,233,856)
=========== =========== ===========
NET LOSS PER COMMON SHARE.............. $ (0.91) $ (1.22) $ (0.90)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (Note 2)........... 5,996,162 6,235,291 9,173,419
=========== =========== ===========
</TABLE>

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

F-4
<PAGE>

UROLOGIX, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
NONCUMULATIVE
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL NET TOTAL
------------------------ ----------------- PAID-IN ACCUMULATED UNREALIZED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT LOSSES EQUITY
------------ ---------- --------- ------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1994.. 3,603,993 $ 36,040 1,170,510 $11,705 $14,858,782 $ (5,513,447) -- $ 9,393,080
Stock options
exercised............. -- -- 27,394 274 10,082 -- -- 10,356
Net loss............... -- -- -- -- -- (5,426,747) -- (5,426,747)
------------ --------- --------- ------- ----------- ------------ -------- -----------
BALANCE, June 30, 1995.. 3,603,993 36,040 1,197,904 11,979 14,868,864 (10,940,194) -- 3,976,689
Issuance of preferred
stock, net............ 638,806 6,388 -- -- 4,580,676 -- -- 4,587,064
Stock options
exercised............. -- -- 160,375 1,603 63,312 -- -- 64,915
Preferred stock
conversion............ (4,242,799) (42,428) 4,665,154 46,652 (4,224) -- -- --
Shares issued through
initial public
offering, net......... -- -- 3,105,000 31,050 39,521,931 -- -- 39,552,981
Net loss............... -- -- -- -- -- (7,593,312) -- (7,593,312)
------------ --------- --------- ------- ----------- ------------ -------- -----------
BALANCE, June 30, 1996.. -- -- 9,128,433 91,284 59,030,559 (18,533,506) -- 40,588,337
Stock options
exercised............. -- -- 128,161 1,282 100,538 -- -- 101,820
Net unrealized losses
on investments........ -- -- -- -- -- -- (59,258) (59,258)
Net loss............... -- -- -- -- -- (8,233,856) -- (8,233,856)
------------ --------- --------- ------- ----------- ------------ -------- -----------
BALANCE, June 30, 1997.. -- $ -- 9,256,594 $92,566 $59,131,097 $(26,767,362) $(59,258) $32,397,043
============ ========= ========= ======= =========== ============ ======== ===========
</TABLE>

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

F-5
<PAGE>

UROLOGIX, INC.

STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
FOR THE YEARS ENDED JUNE 30
---------------------------------------
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................. $(5,426,747) $ (7,593,312) $ (8,233,856)
Adjustments to reconcile net loss to
net cash used for operating
activities--
Depreciation and amortization....... 104,433 128,770 431,223
Change in operating items:
Inventories........................ (273,850) 69,713 (1,703,453)
Accounts receivable................ -- (35,065) (1,237,928)
Prepaids and other current assets.. (191,687) (174,289) (301,617)
Accounts payable and accrued
liabilities....................... 531,670 832,458 1,424,064
Other assets....................... 51,924 (19,524) --
----------- ------------ ------------
Net cash used for operating
activities....................... (5,204,257) (6,791,249) (9,621,567)
----------- ------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment.. (259,255) (134,336) (1,901,246)
Purchase of securities............... (3,229,459) (40,529,176) (83,807,022)
Proceeds from sale of securities..... 1,520,000 1,972,452 98,701,702
Purchase of intangible assets, net... -- -- (3,244,620)
----------- ------------ ------------
Net cash provided by (used for)
investing activities............. (1,968,714) (38,691,060) 9,748,814
----------- ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of common
stock, net.......................... -- 39,552,981 --
Proceeds from issuance of preferred
stock, net.......................... -- 4,587,064 --
Proceeds from exercise of stock
options............................. 10,356 64,915 101,820
Payments made on capital lease
obligations......................... (68,121) (6,650) (18,538)
----------- ------------ ------------
Net cash provided by (used for)
financing activities............. (57,765) 44,198,310 83,282
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS..................... (7,230,736) (1,283,999) 210,529
CASH AND CASH EQUIVALENTS:
Beginning of period.................. 8,579,777 1,349,041 65,042
----------- ------------ ------------
End of period........................ $ 1,349,041 $ 65,042 $ 275,571
=========== ============ ============
Supplemental cash flow disclosures:
Cash paid for Interest................ $ 4,262 $ 3,976 $ 8,706
=========== ============ ============
Noncash investing and financing
activities:
Common stock issued upon conversion
of Preferred Stock.................. $ -- $ 42,428 $ --
=========== ============ ============
</TABLE>

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

F-6
<PAGE>

UROLOGIX, INC.

NOTES TO FINANCIAL STATEMENTS

1. NATURE OF BUSINESS:

Description of Operating Activities

Urologix, Inc. (Urologix or the Company) was organized to research, develop,
manufacture and market innovative devices for the treatment of benign
prostatic hyperplasia (BPH) and other urologic diseases. Since inception (May
29, 1991) through June 30, 1996, the Company was a development stage
enterprise, having devoted substantially all of its efforts to proprietary
product development and selling the Targis System to international
distributors. Such efforts also included raising capital, performing clinical
trials, and developing commercial markets. As of June 30, 1997, regulatory
approvals necessary to market the Targis System in the European Union
Countries, Japan and Canada had been obtained. On August 26, 1997, the Company
received United States Food and Drug Administration (FDA) approval to market
the Targis System in the United States. The Company is required to comply with
the regulations of the FDA in the United States.

Although the Company began actively selling its products during fiscal 1997
and no longer considers itself to be in the development stage, it has not
operated profitably to date and there are no assurances that it will operate
profitably in the future. The Company's success will be dependent upon, among
other things, the extent to which satisfactory reimbursement for the Targis
System can be obtained from health care payors and its ability to protect its
Targis System and technology under United States and international patent
laws. The Company faces and expects increasing competition from numerous other
companies developing other procedures for the treatment of BPH.

2. SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents

The Company classifies highly liquid investments with original maturities of
90 days or less to be cash equivalents. Cash equivalents are stated at cost,
which approximates market value.

Available-for-Sale Securities

The Company invests in money market funds and U.S. government and
investment-grade corporate securities with original maturities ranging from 90
days to two years. These investments are considered to be available-for-sale,
and are stated at market value, which approximates cost.

Inventories

Inventories are stated at the lower of first-in, first-out cost or market
and consisted of:

<TABLE>
<CAPTION>
JUNE 30
-------------------
1996 1997
-------- ----------
<S> <C> <C>
Raw materials............................................ $ 48,459 $ 915,609
Work-in-process.......................................... 54,969 352,174
Finished goods........................................... 312,492 851,590
-------- ----------
$415,920 $2,119,373
======== ==========
</TABLE>

Property and Equipment

Property and equipment are stated at cost. Improvements that extend the
useful lives of property and equipment are capitalized at cost and
depreciated. 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
leasehold improvements.

Other Assets

Other assets consist primarily of license fees and prepaid royalties
resulting from patent licensing agreements. The agreements require the Company
to pay a royalty on sales of certain catheters and related

F-7
<PAGE>

UROLOGIX, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

systems. The license fees and amounts prepaid by the Company will be charged
to expense as sales are recognized.

Research and Development Costs

Research and development costs are charged to expense as incurred.

Net Loss Per Common Share

Net loss per common share was computed by dividing net loss by the weighted
average number of shares of common stock outstanding during each period. The
impact of common stock equivalents has been excluded from the computation of
weighted average common shares outstanding, except as follows, as the effect
would be antidilutive. Pursuant to Securities and Exchange Commission rules,
stock options granted within one year prior to the date of the initial public
offering have been included in the calculation of common share equivalents as
if they were outstanding for the years ended June 30, 1995 and 1996.

Use of Estimates

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

Financial Instruments

For most financial instruments, including cash, available-for-sale
securities, accounts payable and accruals, management believes that the
carrying amount approximates fair value, as the majority of these instruments
are short-term in nature.

New Accounting Pronouncements

The Company will adopt in the fiscal year ending June 30, 1998, Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS No. 128),
which was issued in February 1997. SFAS No. 128 requires disclosure of basic
earnings per share (EPS) and diluted EPS, which replaces the existing primary
EPS and fully diluted EPS, as defined by APB No. 15. Basic EPS is computed by
dividing net income by the weighted average number of shares of common stock
outstanding during the year. Diluted EPS is computed similar to primary EPS as
previously reported, provided that, when applying the treasury stock method to
common equivalent shares, the Company must use its average share price for the
period rather than the more dilutive greater of the average share price or end
of period share price required by APB No. 15. The Company believes this will
not have a material affect on EPS.

3. INCOME TAXES:

A reconciliation of the Company's statutory tax rate to the effective rate
for the years ended June 30 is as follows:

<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate..................................... 34% 34% 34%
State taxes, net of federal tax benefit.................... 6 6 6
Valuation allowance........................................ (40) (40) (40)
---- ---- ----
-- % -- % -- %
==== ==== ====
</TABLE>

F-8
<PAGE>

UROLOGIX, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

As of June 30, 1997, the Company had net operating loss carryforwards of
approximately $25,000,000 for federal income tax purposes that are available
to offset future taxable income through the year 2011. Certain restrictions
caused by the change in ownership resulting from sales of stock will limit
annual utilization of the net operating loss carry forwards.

The components of the Company's deferred tax asset for the years ended June
30, is as follows:

<TABLE>
<CAPTION>
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Net operating loss carry forwards................ $ 3,996 $ 6,802 $ 10,151
Temporary deductible differences................. -- 870 160
Valuation allowance.............................. (3,996) (7,672) (10,311)
------- ------- --------
$ -- $ -- $ --
======= ======= ========
</TABLE>

4. SHAREHOLDERS' EQUITY:

Initial Public Offering

In May 1996, the Company completed an initial public offering of 3,105,000
shares of common stock which generated net proceeds of $39,552,981, to be used
to fund research and development, clinical trials, sales and marketing
activities, and fixed asset and working capital requirements.

Reverse Stock Split

The Company's shareholders approved a 1-for-2 reverse common and convertible
preferred stock split effective April 30, 1996. The effect of the reverse
stock split has been reflected for all periods presented in the accompanying
financial statements.

Convertible Preferred Stock

From February through June 1994, the Company issued 1,250 Series B and
2,264,292 Series C convertible preferred shares at $4.00 and $4.40 per share,
respectively, for total net proceeds of $9,848,050. In December 1996 and March
1997, the Company completed the sales of 312,500 and 326,306 Series D
convertible preferred shares at $8.00 per share, for total net proceeds of
$4,587,064.

In conjunction with the Company's initial public offering, all shares of
convertible preferred stock were converted to 4,665,154 shares of common
stock, in accordance with each series' respective conversion ratio.

Stock Options

The Company has a stock option plan (the 1991 Stock Option Plan) which
provides for the granting of incentive stock options to employees and
nonqualified stock options to employees, directors and consultants. As of June
30, 1997, the Company has reserved 1,550,910 shares of common stock under this
plan. As of June 30, 1997, 266,969 options were available for future grants
under this plan. Options expire seven to ten years from the date of grant and
are subject to varying vesting schedules. In April 1996, the Company amended
the 1991 Stock Option Plan to provide for the automatic grant of 10,000 stock
options to each nonemployee director upon the later of initial election or the
effective date of an initial public offering. Options are granted at fair
market value, vest over four years, and expire ten years from date of grant,
or one year after the person ceases to be a director of the Company, whichever
occurs earlier.

F-9
<PAGE>

UROLOGIX, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

Shares subject to option are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
STOCK EXERCISE
OPTIONS PRICE
-------- --------
<S> <C> <C>
Balance at June 30, 1994.................................. 507,472 $ .39
Options granted......................................... 212,953 .60
Options canceled........................................ (1,206) .40
Options exercised....................................... (27,394) .36
-------- ------
Balance at June 30, 1995.................................. 691,825 .46
Options granted......................................... 376,936 8.83
Options canceled........................................ (454) .60
Options exercised....................................... (160,389) .48
-------- ------
Balance at June 30, 1996.................................. 907,918 3.93
Options granted......................................... 196,000 16.35
Options canceled........................................ (2,020) .60
Options exercised....................................... (128,161) .81
-------- ------
Balance at June 30, 1997.................................. 973,737 $ 5.47
======== ======
Options exercisable at June 30, 1997...................... 581,721 $ 2.00
======== ======
</TABLE>

The Company accounts for stock options under Accounting Principles Board
Opinion No. 25, under which no compensation cost has been recognized. Had
compensation cost for these options been determined consistent with SFAS No.
123, "Accounting for Stock-Based Compensation," the net loss and loss per
share would have been increased to the following pro forma amounts:

<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C> <C>
Net loss............................... As reported $(7,593,312) $(8,233,856)
Pro forma (7,913,515) (9,872,331)
Net loss per share..................... As reported $ (1.22) $ (0.90)
Pro forma (1.27) (1.08)
</TABLE>

For purposes of calculating the above required disclosure, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions used for
grants in 1996 and 1997, respectively: risk-free interest rates of 5.0% and
6.87%, no expected dividend yield, expected lives of seven years and expected
volatility of 54.25%.

The weighted average fair value of options granted during 1996 and 1997 was
$8.83 and $16.35, respectively. Options issued during 1996 and 1997, which
remain outstanding at June 30, 1997, have an exercise price between $.60 and
$18.50, a weighted average exercise price of $11.56 and a weighted average
remaining contractual life of 9.0 years.

1996 Employee Stock Purchase Plan

In 1996, the Company adopted the 1996 Employee Stock Purchase Plan (the
Plan), and reserved 100,000 common shares for issuance under the Plan,
commencing upon the effective date of an initial public offering. Under the
terms of the Plan, employees may purchase common shares at prices to be
determined by the Company's board of directors, ranging from 85% to 100% of
the shares' estimated fair market value. Eligible employees elect to
participate through payroll deductions up to the maximum level established by
the board of directors, but not to exceed 10% of the participant's base pay,
as defined. As of June 30, 1996, 10,540 shares had been purchased under the
Plan for gross proceeds of $125,426.

F-10
<PAGE>

UROLOGIX, INC.

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

5. COMMITMENTS AND CONTINGENCIES:

Purchase Commitments

At June 30, 1997, the Company has orders outstanding to purchase a certain
number of Targis Control Systems, the primary system necessary for all
treatments, from a third-party vendor for a total purchase commitment of
approximately $4,050,000.

Product Manufacture

The Targis Control Unit for the Targis System is assembled by a contract
manufacturer pursuant to a supply agreement with the Company. In the event the
Company had to obtain a substitute manufacturer, the Company could experience
significant delays in obtaining a substitute supplier.

Sales Commitments

In 1996, the Company signed agreements granting Boston Scientific
Corporation and Nihon Kohden Corporation exclusive distribution rights of the
Targis System in all geographic areas other than the United States. Nihon
Kohden Corporation has exclusive distribution rights for Japan. Boston
Scientific Corporation has exclusive distribution rights for the rest of the
world.

Litigation

In 1996, the Company received notice from a licensor to a patent license,
which was contained in a settlement agreement, of its intent to terminate the
license based on allegations of the Company's breach of certain terms of the
settlement agreement. The Company's management strongly believes the
licensor's allegations are without merit and has filed a suit against the
licensor to enforce the terms of the agreement. The formal discovery period in
the lawsuit has closed, and the case is currently set for trial no later than
April 1998.

401(k) Plan

The Company provides a 401(k) savings plan to which eligible employees may
make pretax payroll contributions up to 15% of compensation. Company matching
contributions are discretionary, and none have been made to date.

Leases

The Company leases its facility and certain equipment under noncancelable
operating or capital leases, which expire at various dates through fiscal
2002. Rent expense related to operating leases was approximately $102,500,
$139,700 and $250,800 for the years ended June 30, 1995, 1996 and 1997,
respectively. Future minimum lease commitments under noncancelable operating
and capital leases with initial remaining terms of one year or more are as
follows as of June 30, 1997:

<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- --------
<S> <C> <C>
Fiscal year:
1998.................................................. $ 207,600 $ 25,896
1999.................................................. 207,600 32,005
2000.................................................. 207,600 9,517
2001.................................................. 207,600 --
2002.................................................. 207,600 --
---------- --------
$1,038,000 67,418
==========
Less--Imputed interest.................................. (10,162)
Current maturities.................................. (19,531)
--------
Long-term capital lease obligations..................... $ 37,725
========
</TABLE>

F-11
<PAGE>

UROLOGIX, INC.

BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................ $ 275,571 $ 1,814,708
Available-for-sale securities.................... 25,825,238 20,719,903
Accounts receivable.............................. 1,272,994 2,278,966
Inventories...................................... 2,119,373 2,340,709
Prepaids and other current assets................ 667,593 632,044
------------ ------------
Total current assets......................... 30,160,769 27,786,330
------------ ------------
PROPERTY AND EQUIPMENT:
Machinery, equipment and furniture............... 2,547,799 2,954,137
Less-accumulated depreciation.................... (699,742) (1,025,992)
------------ ------------
Property and equipment, net.................. 1,848,057 1,928,145
OTHER ASSETS, net.................................. 3,573,261 3,407,173
------------ ------------
$ 35,582,087 $ 33,121,648
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of capitalized lease
obligations..................................... $ 19,531 $ 19,531
Accounts payable................................. 2,087,443 1,327,110
Accrued compensation and other................... 1,040,345 1,189,329
------------ ------------
Total current liabilities.................... 3,147,319 2,535,970
CAPITAL LEASE OBLIGATIONS, less current
maturities........................................ 37,725 31,737
------------ ------------
Total liabilities............................ 3,185,044 2,567,707
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 25,000,000 shares
authorized;
9,256,594 and 9,340,846 shares issued and
outstanding..................................... 92,566 93,408
Additional paid-in capital....................... 59,131,097 59,286,675
Accumulated deficit.............................. (26,767,362) (28,783,024)
Net unrealized losses on investments............. (59,258) (43,118)
------------ ------------
Total shareholders' equity................... 32,397,043 30,553,941
------------ ------------
$ 35,582,087 $ 33,121,648
============ ============
</TABLE>

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

F-12
<PAGE>

UROLOGIX, INC.

STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
------------------------
1996 1997
----------- -----------
<S> <C> <C>
SALES............................................... $ 586,125 $ 2,599,135
COST OF GOODS SOLD.................................. 721,553 1,738,301
----------- -----------
Gross profit (loss)............................. (135,428) 860,834
----------- -----------
COSTS AND EXPENSES:
Research and development.......................... 1,239,224 1,374,165
Sales and marketing............................... 485,044 1,332,966
General and administrative........................ 450,743 500,805
----------- -----------
Total costs and expenses........................ 2,175,011 3,207,936
----------- -----------
OPERATING LOSS...................................... (2,310,439) (2,347,102)
INTEREST INCOME, net................................ 520,754 331,442
----------- -----------
NET LOSS............................................ $(1,789,685) $(2,015,660)
=========== ===========
NET LOSS PER COMMON SHARE........................... $ (0.20) $ (0.22)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING........................................ 9,128,765 9,309,896
=========== ===========
</TABLE>

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

F-13
<PAGE>

UROLOGIX, INC.

STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................ $ (1,789,685) $ (2,015,660)
Adjustments to reconcile net loss to net cash
used for operating activities--
Depreciation and amortization.................. 46,706 492,336
Change in operating items:
Accounts receivable........................... (717,217) (1,005,972)
Inventories................................... (237,934) (221,336)
Prepaids and other current assets............. 11,475 35,549
Accounts payable and accrued liabilities...... 426,028 (611,349)
------------- -------------
Net cash used for operating activities....... (2,260,627) (3,326,432)
------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment............. (134,656) (406,338)
Purchase of intangible assets, net.............. (2,962,301) --
Purchase of securities.......................... 5,492,802 5,121,475
------------- -------------
Net cash provided by investing activities.... 2,395,845 4,715,137
------------- -------------
FINANCING ACTIVITIES:
Proceeds from exercise of stock options......... 2,540 156,420
Payments made on capital lease obligations...... (4,278) (5,988)
------------- -------------
Net cash provided by (used for) financing
activities.................................. (1,738) 150,432
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS........ 133,480 1,539,137
CASH AND CASH EQUIVALENTS:
Beginning of period............................. 65,042 275,571
------------- -------------
End of period................................... $ 198,522 $ 1,814,708
============= =============
Supplemental cash flow disclosures:
Cash paid for Interest........................... $ 1,485 $ 1,125
============= =============
</TABLE>

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

F-14
<PAGE>

UROLOGIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements of Urologix, Inc.
(the "Company") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions for Form 10-Q and Article 10 of Regulation S-X. The balance sheet
as of September 30, 1997 and the statements of operations for the three-month
periods ended September 30, 1996 and 1997, and the statements of cash flows
for the three-month period ended September 30, 1996 and 1997, are unaudited
but include all adjustments (consisting of normal recurring adjustments) which
the Company considers necessary for a fair presentation of the financial
position at such dates and the operating results and cash flows for those
periods. Although the Company believes that the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information normally included in financial statements and related
footnotes prepared in accordance with generally-accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements
should be read in conjunction with the financial statements for the year ended
June 30, 1997 and notes thereto included in this Prospectus.

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

2. NET LOSS PER SHARE

3. INVENTORIES

Inventories consisted of the following as of:

<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
---------- -------------
<S> <C> <C>
Raw materials.......................................... $ 915,609 $1,287,056
Work in process........................................ 352,174 93,874
Finished goods......................................... 851,590 959,779
---------- ----------
$2,119,373 $2,340,709
========== ==========
</TABLE>

F-15
<PAGE>

Catheter-based and truly
anesthesia-free. Targis
System treatment mini-
mizes complication risk
and patient discomfort.

[Photo of Targis
System Catheter]

THE PROCEDURE
Clinically Proven Results
[Photo of microwave energy
during procedure]

The proprietary antenna
sends microwave energy di-
rectly to the targeted area
of the prostate, allowing
higher temperatures and
longer duration for more ef-
fective treatment.

[Photo of catheter cooling]
Advanced catheter cool-
ing protects the ure-
thra, diminishing
patient discomfort and
preventing damage to im-
portant tissues.

Significant areas of ne-
crosed tissue following
Targis treatment
indicate effective, du-
rable results.
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.

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TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
The Company.............................................................. 11
Use of Proceeds.......................................................... 12
Price Range of Common Stock.............................................. 13
Dividend Policy.......................................................... 13
Capitalization........................................................... 14
Dilution................................................................. 15
Selected Financial Data.................................................. 16
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 17
Business................................................................. 20
Management............................................................... 39
Security Ownership of Principal Shareholders and Management.............. 42
Description of Capital Stock............................................. 44
Underwriting............................................................. 47
Legal Matters............................................................ 48
Experts.................................................................. 48
Available Information.................................................... 49
Incorporation of Certain Documents by Reference.......................... 49
Index to Financial Statements............................................ F-1
</TABLE>

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1,500,000 Shares

LOGO

Common Stock

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PROSPECTUS

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BT ALEX.BROWN

DAIN BOSWORTH
Incorporated

PAINEWEBBER INCORPORATED

November 12, 1997

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