10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)

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

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004

or

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

For the transaction period from              to             

Commission File Number 0-28414

UROLOGIX, INC.

(Exact name of registrant as specified in its charter)

Minnesota	41-1697237
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

14405 21st Avenue North, Minneapolis, MN 55447

(Address of principal executive offices)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2) of the Exchange Act.    Yes  x    No  ¨

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    Yes  ¨    No  x

As of February 1, 2005, the Company had outstanding 14,304,102 shares of common stock, $.01 par value.

EXPLANATORY STATEMENT

This Amendment No. 1 on Form 10-Q/A amends and restates the Company’s Form 10-Q for the quarter ended December 31, 2004, initially filed with the Securities and Exchange Commission (the “SEC”) on February 9, 2005 (the “Original Filing”), and is being filed to reflect the restatement of the condensed financial statements and other financial information of the Company for the second fiscal 2005 quarter ended December 31, 2004. During the fiscal 2005 year end close process, the Company determined that, historically, the deferred income tax liability for the basis difference in goodwill and trademarks created since the adoption of SFAS 142 was incorrectly offset against deferred income tax assets. The deferred tax liability relating to this basis difference was assumed to reverse against the deferred tax asset relating to the net operating loss carryforwards, and thus the Company did not provide sufficient valuation allowance against deferred tax assets that were not more likely than not to be realized. Since the deferred tax liability relating to the goodwill and trademark basis difference relates to indefinite lived assets and the net operating loss carryforwards have a definite life of 20 years or less, it was not correct to net these deferred tax assets and liabilities. Therefore, the Company has recorded additional deferred tax expense of $68,000 and $136,000, respectively for the second quarter and year-to-date period ended December 31, 2004, and $72,000 and $144,000, respectively for the second quarter and year-to-date period ended December 31, 2003 to increase its deferred tax asset valuation allowance. See Note 2 to the condensed financial statements for further details.

For the convenience of the reader, this Form 10-Q/A sets forth the Original Filing in its entirety. However, this Form 10-Q/A only amends and restates certain information in Items 1, 2 and 4 of Part I of the Original Filing, in each case solely as a result of and to reflect the restatement, and no other information in the Original Filing is amended hereby. The foregoing items have not been updated to reflect other events occurring after the Original Filing or to modify or update those disclosures affected by subsequent events. In addition, pursuant to the rules of the SEC, Item 6 of Part II of the Original Filing has been amended to include certifications re-executed as of the date of this Form 10-Q/A from the Company’s Chief Executive Officer and Chief Financial Officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. The certifications of the Chief Executive Officer and Chief Financial Officer are attached to this Form 10-Q/A as exhibits 31.1, 31.2 and 32.

Except for the foregoing amended information, this Form 10-Q/A continues to describe conditions as of the date of the Original Filing, and the disclosures contained herein have not been updated to reflect events, results or developments that occurred after the Original Filing, or to modify or update those disclosures affected by subsequent events. Among other things, forward looking statements made in the Original Filing have not been revised to reflect events, results or developments that occurred or facts that became known to the Company after the date of the Original Filing (other than the restatement), and such forward looking statements should be read in their historical context.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Urologix, Inc.

Condensed Balance Sheets

(In thousands, except per share data)

	Restated December 31, 2004			Restated June 30, 2004
	(unaudited)			(*)
ASSETS
Current assets:
Cash and cash equivalents	$	8,367		$	5,142
Available-for-sale investments		1,005			2,462
Accounts receivable, net of allowances of $342 and $299		2,567			2,689
Inventories		2,421			2,144
Prepaids and other current assets		266			371
Total current assets		14,626			12,808
Property and equipment:
Machinery, equipment and furniture		9,533			9,256
Less accumulated depreciation		(7,102	)		(6,583	)
Property and equipment, net		2,431			2,673
Other assets		1,867			2,049
Goodwill, net		10,193			10,193
Other intangible assets, net		8,117			8,449
Total assets	$	37,234		$	36,172
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,211		$	949
Accrued compensation		588			1,425
Other accrued expenses		1,476			1,532
Note payable		—			165
Deferred income		1,234			1,383
Total current liabilities		4,509			5,454
Deferred tax liability		994			858
Total liabilities		5,503			6,312
COMMITMENTS AND CONTINGENCIES (Note 12)
Shareholders’ equity:
Common stock, $.01 par value, 25,000 shares authorized; 14,303 and 14,194 shares issued and outstanding		143			142
Additional paid-in capital		110,088			109,653
Accumulated deficit		(78,499	)		(79,944	)
Accumulated other comprehensive income (loss)		(1	)		9
Total shareholders’ equity		31,731			29,860
Total liabilities and shareholders’ equity	$	37,234		$	36,172

(*) The Balance Sheet at June 30, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

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

Urologix, Inc.

Condensed Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Restated Three Months Ended December 31,					Restated Six Months Ended December 31,
	2004		2003			2004		2003
Sales	$	6,350	$	5,619		$	12,401	$	10,680
Cost of goods sold		1,911		2,189			3,749		4,296
Gross profit		4,439		3,430			8,652		6,384
Costs and expenses:
Selling, general and administrative		2,801		3,147			5,528		5,972
Research and development		793		631			1,435		1,215
Amortization of intangible assets		41		41			82		82
Restructuring		—		(175	)		—		(175	)
Total costs and expenses		3,635		3,644			7,045		7,094
Operating earnings (loss)		804		(214	)		1,607		(710	)
Interest income, net		31		7			57		13
Net earnings (loss) before taxes		835		(207	)		1,664		(697	)
Provision for income taxes		110		72			219		144
Net earnings (loss)	$	725	$	(279	)	$	1,445	$	(841	)
Net earnings (loss) per common share - basic	$	0.05	$	(0.02	)	$	0.10	$	(0.06	)
Net earnings (loss) per common share - diluted	$	0.05	$	(0.02	)	$	0.10	$	(0.06	)
Weighted average number of shares used in basic per share calculations		14,294		13,985			14,253		13,975
Weighted average number of shares used in diluted per share calculations		14,692		13,985			14,909		13,975

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

Urologix, Inc.

Condensed Statements of Cash Flows

(In thousands)

(Unaudited)

	Restated Six Months Ended December 31,
	2004			2003
Operating Activities:
Net earnings (loss)	$	1,445		$	(841	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities:
Depreciation and amortization		948			1,044
Provision for bad debts		51			47
Deferred income taxes		136			144
Change in operating items:
Accounts receivable		71			(138	)
Inventories		(591	)		(2	)
Prepaids and other assets		287			455
Accounts payable		262			(295	)
Accrued expenses and deferred income		(1,103	)		(435	)
Net cash provided by (used for) operating activities		1,506			(21	)
Investing Activities:
Purchase of property and equipment		(60	)		(43	)
Proceeds from sale / maturity of available-for-sale investments, net		1,447			782
Net cash provided by investing activities		1,387			739
Financing Activities:
Payments made on capital lease obligations		—			(296	)
Payments made on note payable		(104	)		(410	)
Proceeds from exercise of stock options		436			146
Net cash provided by ( used for) financing activities		332			(560	)
Net increase in cash and cash equivalents		3,225			158
Cash and cash equivalents:
Beginning of period		5,142			727
End of period	$	8,367		$	885
Supplemental cash-flow information
Cash paid during the period for interest	$	16		$	156
Net value of inventory transferred to property and equipment	$	314		$	111

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

Urologix, Inc.

Notes to Condensed Financial Statements

December 31, 2004

(Unaudited)

1. Basis of presentation

The accompanying unaudited condensed financial statements of Urologix, Inc. (the “Company” or “Urologix”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. The balance sheet as of December 31, 2004, and the statements of operations for the three and six month periods ended December 31, 2004 and 2003 and statements of cash flows for the six months ended December 31, 2004 and 2003 are unaudited but include all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial position at such date and the operating results and cash flows for those periods. Certain information normally included in financial statements and related footnotes prepared in accordance with U.S. generally accepted accounting principles has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying financial statements should be read in conjunction with the financial statements and notes included in Urologix’ Annual Report on Form 10-K/A for the year ended June 30, 2004.

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

2. Restatement of Financial Statements

During the fiscal 2005 year end close process, the Company determined that, historically, the deferred income tax liability for the basis difference in goodwill and trademarks created since the adoption of SFAS 142 was incorrectly offset against deferred income tax assets. The deferred tax liability relating to this basis difference was assumed to reverse against the deferred tax asset relating to the net operating loss carryforwards, and thus the Company did not provide sufficient valuation allowance against deferred tax assets that were not more likely than not to be realized. Since the deferred tax liability relating to the goodwill and trademark basis difference relates to indefinite lived assets and the net operating loss carryforwards have a definite life of 20 years or less, it was not correct to net these deferred tax assets and liabilities. Therefore, the Company has recorded additional deferred tax expense of $68,000 and $136,000, respectively, for the second quarter and year-to-date period ended December 31, 2004, and $72,000 and $144,000, respectively, for the second quarter and year-to-date period ended December 31, 2003 to increase its deferred tax asset valuation allowance.

The Company has restated its balance sheets as of December 31, 2004 and June 30, 2004, and its statements of operations for the fiscal quarters and year-to-date periods ended December 31, 2004 and 2003 for the impact of this deferred tax liability as follows:

	December 31, 2004						June 30, 2004
	As previously reported			As restated			As previously reported			As restated
BALANCE SHEET DATA:
Non-current deferred tax liability	$	—		$	994		$	—		$	858
Total liabilities		4,509			5,503			5,454			6,312
Accumulated deficit		(77,505	)		(78,499	)		(79,086	)		(79,944	)
Total shareholders’ equity		32,725			31,731			30,718			29,860
	Three Months Ended December 31, 2004						Three Months Ended December 31, 2003
	As previously reported			As restated			As previously reported			As restated
STATEMENT OF OPERATIONS DATA:
Income tax expense	$	42		$	110		$	—		$	72
Net income (loss)		793			725			(207	)		(279	)
Net income (loss) per common share
Basic	$	0.06		$	0.05		$	(0.01	)	$	(0.02	)
Diluted	$	0.05		$	0.05		$	(0.01	)	$	0.02	)
	Six Months Ended December 31, 2004						Six Months Ended December 31, 2003
	As previously reported			As restated			As previously reported			As restated
STATEMENT OF OPERATIONS DATA:
Income tax expense	$	83		$	219		$	—		$	144
Net income (loss)		1,581			1,445			(697	)		(841	)
Net income (loss) per common share
Basic	$	0.11		$	0.10		$	(0.05	)	$	(0.06	)
Diluted	$	0.11		$	0.10		$	(0.05	)	$	(0.06	)

There was no impact in any period on net cash provided by operating, financing or investing activities on the statements of cash flows. The restatement also impacts note 6 and note 9 to the financial statements.

3. New Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 151 (“SFAS No. 151”) “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which clarifies the types of costs that should be expensed rather than capitalized as inventory. This statement also clarifies the circumstances under which fixed overhead costs associated with operating facilities involved in inventory processing should be capitalized. The provisions of SFAS No. 151 are effective for fiscal years beginning after June 15, 2005 and we will adopt this standard on July 1, 2005. No material impact on our financial statements is expected from the adoption of this standard.

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard (SFAS) No. 123 (Revised 2004), “Share-Based Payment.” SFAS No. 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award at the date of grant. The cost will be recognized over the period during which an employee is required to provide services in exchange for the award. SFAS No. 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. While we cannot precisely determine the impact on net earnings as a result of the adoption of SFAS No. 123R, estimated compensation expense related to prior periods can be found in Note 6 in the Notes to Condensed Financial Statements included in this Form 10-Q/A and in Note 3 in the Financial Statements included in our Form 10-K/A for the fiscal year ended June 30, 2004. The ultimate amount of increased compensation expense will be dependent on whether we adopt SFAS 123R using the modified prospective or retrospective method, the number of option shares granted during the year, their timing and vesting period, and the method used to calculate the fair value of the awards, among other factors.

4. Use of Estimates

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

Urologix, Inc.

Notes to Condensed Financial Statements

December 31, 2004

(Unaudited)

5. Basic and diluted earnings (loss) per share

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

	Three months ended December 31,		Six months ended December 31,
	2004	2003	2004	2003
Weighted average common shares outstanding - basic	14,294	13,985	14,253	13,975
Dilutive effect of stock options	398	—	656	—
Weighted average common shares outstanding - diluted	14,692	13,985	14,909	13,975

The dilutive effect of stock options in the above table excludes 602,000 and 449,000 of options, respectively, for which the exercise price was higher than the average closing price for the three and six month periods ended December 31, 2004.

As a result of the net loss for the three and six month periods ended December 31, 2003, dilutive potential common shares from stock options of 437,000 and 278,000, respectively, were excluded from the calculation of diluted earnings per share for those periods as the effect would be antidilutive.

Urologix, Inc.

Notes to Condensed Financial Statements

December 31, 2004

(Unaudited)

6. Stock-Based Compensation

We account for stock-based employee compensation arrangements in accordance with the provisions and related interpretations of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees” and have elected to follow the “disclosure only” alternative prescribed by SFAS 123, “Accounting for Stock-Based Compensation”.

Had compensation cost for stock-based compensation been determined consistent with SFAS 123, the net earnings (loss) and net earnings (loss) per share would have been adjusted to the following pro-forma amounts (in thousands, except for per share data):

	Three months ended December 31,						Six months ended December 31,
	2004			2003			2004			2003
Net earnings (loss), as reported (restated)	$	725		$	(279	)	$	1,445		$	(841	)
Total stock-based employee compensation expense determined under fair value based method		(688	)		(655	)		(1,306	)		(1,293	)
Pro forma net earnings (loss) (restated)	$	37		$	(934	)	$	139		$	(2,134	)
Net earnings (loss) per share (restated):
Basic - as reported	$	0.05		$	(0.02	)	$	0.10		$	(0.06	)
Basic - pro forma	$	—		$	(0.07	)	$	0.01		$	(0.15	)
Diluted - as reported	$	0.05		$	(0.02	)	$	0.10		$	(0.06	)
Diluted - pro forma	$	—		$	(0.07	)	$	0.01		$	(0.15	)

7. Inventories

Inventories consisted of the following as of (in thousands):

	December 31, 2004		June 30, 2004
Raw materials	$	1,349	$	1,304
Work in process		178		163
Finished goods		894		677
Total inventories	$	2,421	$	2,144

Urologix, Inc.

Notes to Condensed Financial Statements

December 31, 2004

(Unaudited)

8. Other intangible assets, net

Other intangible assets consist of developed technologies, customer base and trademarks. Developed technologies and customer base are amortized using the straight-line method over their estimated useful lives of 15 and 14 years, respectively. The trademark asset is considered to be an intangible with an indefinite useful life, and it will not be amortized until its useful life is determined to be no longer indefinite.

Effective July 1, 2004, we began including amortization expense relating to developed technologies within cost of goods sold. This expense was previously reported within amortization of intangible assets on the statements of operations. Consistent with this change, we have re-classified $125,000 and $250,000 of such expense to cost of goods sold for the three and six month periods ended December 31, 2003, respectively. Amortization expense related to other intangible assets was $166,000 and $332,000, respectively, for the three and six month periods ended December 31, 2004, of which, $125,000 and $250,000, respectively, was reported in cost of goods sold. Amortization expense for the next six months of fiscal 2005 and for each of the next four fiscal years is expected to be $332,000 and $664,000, respectively.

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

	As of December 31, 2004
	Carrying Amount		Accumulated Amortization		Net
Amortizing intangibles:
Developed technologies	$	7,500	$	2,125	$	5,375
Customer base		2,300		698		1,602
Subtotal		9,800		2,823		6,977
Non-amortizing intangibles:
Trademarks						1,140
Total other intangible assets						8,117

Urologix, Inc.

Notes to Condensed Financial Statements

December 31, 2004

(Unaudited)

9. Comprehensive income (loss)

Comprehensive income (loss) includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. Our comprehensive income (loss) is as follows (in thousands):

	Three months ended December 31,						Six months ended December 31,
	2004			2003			2004			2003
Net earnings (loss) (restated)	$	725		$	(279	)	$	1,445		$	(841	)
Change in net unrealized gains on available-for-sale investments		(3	)		(17	)		(10	)		(46	)
Comprehensive income (loss) (restated)	$	722		$	(296	)	$	1,435		$	(887	)

10. Warranty

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

Warranty provisions and claims for the six month periods ended December 31, 2004 and 2003 were as follows (in thousands):

Fiscal Year	Beginning Balance at July 1		Warranty Provisions		Warranty Claims			Ending Balance at December 31
2005	$	215	$	116	$	(186	)	$	145
2004	$	159	$	127	$	(72	)	$	214

Urologix, Inc.

Notes to Condensed Financial Statements

December 31, 2004

(Unaudited)

11. Restructuring Liability

In May 2003, we announced plans for an organizational restructuring which eliminated 28 positions within the Company and also resulted in our vacating a portion of our leased facility. All of the targeted headcount reductions were completed by June 2003, and we reached an agreement to sublet the vacated space beginning in the second quarter of fiscal 2004. All of the severance obligations were paid in fiscal 2004. The lease term on the vacated space currently runs through fiscal 2008.

Restructuring activity for the six month periods ended December 31, 2004 and 2003 were as follows (in thousands):

	Fiscal 2005								Fiscal 2004
	Severance		Lease			Total			Severance			Lease			Total
Beginning balance at July 1	$	—	$	169		$	169		$	636		$	264		$	900
Expense accurals (reversals)		—		—			—			(175	)		—			(175	)
Cash payments		—		(22	)		(22	)		(426	)		(72	)		(498	)
Ending balance at December 31	$	—	$	147		$	147		$	35		$	192		$	227

12. Legal Proceedings

Our business exposes us to product liability claims that are inherent in the testing, production, marketing and sale of medical devices. As a consequence, we are involved in various legal actions in the ordinary course of our business. Although the outcome of any such legal actions cannot be predicted, management believes any losses that may occur from these matters are adequately covered by insurance, subject to applicable deductibles, and that there is no pending legal proceeding against or involving the Company for which the outcome is likely to have a material adverse effect upon the Company’s financial position, liquidity or results of operations.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of Urologix’ financial condition and results of operations for the three and six month periods ended December 31, 2004 and 2003. This section should be read in conjunction with the condensed financial statements and related notes in Item 1 of this report and Urologix’ Annual Report on Form 10-K/A for the year ended June 30, 2004.

Cautionary Note Regarding Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical information, forward-looking statements that are based on our current expectations, beliefs, intentions or future strategies. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements, including the need to maintain profitability and increase revenues; the rate of adoption of Cooled ThermoTherapy^™ products, Urologix’ sole products, by the medical community; the impact of competitive treatments, products and pricing; the development and effectiveness of the Company’s sales organization and marketing efforts; developments in the reimbursement environment for the Company’s products including the determination of reimbursement rates for Cooled ThermoTherapy (transurethral microwave thermotherapy); the ability of third-party suppliers to produce and supply products; the risk of product liability claims and the adequacy of our product liability insurance coverage; the Company’s ability to successfully defend its intellectual property against infringement and the cost and expense associated with that effort. We caution readers not to place undue reliance on any of these forward-looking statements, which speak only as of the date made. A detailed discussion of risks and uncertainties may be found below in “Factors That May Affect Our Future Results and The Trading Price of Our Common Stock” and in our Annual Report on Form 10-K/A for the year ended June 30, 2004.

OVERVIEW

Urologix, Inc., based in Minneapolis, develops, manufactures and markets minimally invasive medical products for the treatment of urological disorders.

We have developed and offer non-surgical, catheter-based therapies that use a proprietary cooled microwave technology for the treatment of BPH, a disease that dramatically affects more than 23 million men worldwide by causing adverse changes in urinary voiding patterns. We market our products under the Targis^® and Prostatron^® names. Both systems utilize Cooled ThermoTherapy, a targeted microwave energy combined with a unique cooling mechanism that protects healthy tissue and enhances patient comfort while providing safe, effective, lasting relief from the symptoms of BPH. Cooled ThermoTherapy can be performed without anesthesia or intravenous sedation and, as a result, can be performed in a physician’s office or an outpatient clinic. We believe Cooled ThermoTherapy provides an efficacious, safe and cost-effective solution for BPH that is superior to medication without the complications and side effects inherent in more invasive surgical procedures.

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

The level of Medicare reimbursement for Cooled ThermoTherapy is dependent on the site of service. Beginning on August 1, 2000, the Centers for Medicare and Medicaid Services (CMS) replaced the reasonable cost basis of reimbursement for outpatient hospital-based procedures, including Cooled ThermoTherapy, with a new fixed rate or prospective payment system. Under this method of reimbursement, a hospital receives a fixed reimbursement for each Cooled ThermoTherapy treatment performed in its facility, approximately $2,100 in calendar year 2005, although the rate

varies depending on a wage index and other factors for each hospital. The urologist performing the Cooled ThermoTherapy treatment receives reimbursement of approximately $500 per procedure. The reimbursement rates for calendar 2005 are consistent with the 2004 rates.

In January 2001, CMS began to reimburse for Cooled ThermoTherapy treatments performed in the urologist’s office. The reimbursement rate (inclusive of the physician’s fee) in calendar year 2005 for Cooled ThermoTherapy procedures performed in the urologist’s office is approximately $3,900, compared to $4,000 in calendar 2004, which is subject to geographic adjustment.

In July 2003, CMS added the CPT Code covering Cooled ThermoTherapy to the ASC list of Medicare approved procedures providing a reimbursement rate for ambulatory surgical centers (ASC). Procedures in an ASC are reimbursed under a two part system similar to hospital reimbursement. The ASC receives a fixed reimbursement for each Cooled ThermoTherapy procedure performed. Cooled ThermoTherapy is in ASC payment group 9 which reimburses approximately $1,300, the highest amount allowed under this system. The urologist performing the procedure is reimbursed the same amount as if the treatment occurred in a hospital, approximately $500. This low facility reimbursement rate relative to the cost of the procedure potentially limits the number of Cooled ThermoTherapy treatments done in an ASC.

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

Our goal is to grow Cooled ThermoTherapy as a standard of care for the treatment of BPH. The key aspects of our business strategy to achieve this goal are to (i) increase the use of Cooled ThermoTherapy by physicians who already have access to a Cooled ThermoTherapy system, (ii) satisfy additional demand for Cooled ThermoTherapy systems through the efficient use of our installed base of Cooled ThermoTherapy system control units, and (iii) increase market awareness of Cooled ThermoTherapy.

Our revenues are primarily generated through the sale of our disposable treatment catheters, and to a lesser extent, sales of our Cooled ThermoTherapy system control units. We believe that continued growth in revenue from the sale of our disposable treatment catheters will be key to maintaining profitability and positive cash flow.

We will continue to invest and focus our resources on growing our revenues, developing new products that expand our product platform, and continuing clinical trials in support of regulatory and reimbursement approvals. Our ability to maintain profitability in the future will be dependent upon, among other factors, our success in achieving increased treatment volume and market acceptance of the Cooled ThermoTherapy procedures in the physician’s office, our success in obtaining and maintaining necessary regulatory clearances, our ability to manufacture at the volumes and quantities the market requires, the extent to which Medicare and other health care payers continue to reimburse costs of Cooled ThermoTherapy procedures performed in hospitals, ambulatory surgery centers and physicians’ offices and the amount of reimbursement provided.

We anticipate fiscal 2005 annual revenues in the range of $25 million to $28 million, up from $24.3 million in fiscal year 2004. Diluted net earnings per share are expected to be $0.16 to $0.22 per share compared to $0.04 per share last fiscal year. The fiscal 2005 guidance includes an increased investment in research and development over fiscal 2004 levels and assumes an income tax rate of 5 percent for fiscal 2005 compared to no tax expense in fiscal 2004.

Restatement of Financial Statements

During the fiscal 2005 year end close process, the Company determined that, historically, the deferred income tax liability for the basis difference in goodwill and trademarks created since the adoption of SFAS 142 was incorrectly offset against deferred income tax assets. The deferred tax liability relating to this basis difference was assumed to reverse against the deferred tax asset relating to the net operating loss carryforwards, and thus the Company did not provide sufficient valuation allowance against deferred tax assets that were not more likely than not to be realized. Since the deferred tax liability relating to the goodwill and trademark basis difference relates to indefinite lived assets and the net operating loss carryforwards have a definite life of 20 years or less, it was not correct to net these deferred tax assets and liabilities. Therefore, the Company has recorded additional deferred tax expense of $68,000 and $136,000, respectively, for the second quarter and year-to-date period ended December 31, 2004, and $72,000 and $144,000, respectively, for the second quarter and year-to-date period ended December 31, 2003 to increase its deferred tax asset valuation allowance.

The Company has restated its balance sheets as of December 31, 2004 and June 30, 2004, and its statements of operations for the fiscal quarters and year-to-date periods ended December 31, 2004 and 2003 for the impact of this deferred tax liability as follows:

	December 31, 2004						June 30, 2004
	As previously reported			As restated			As previously reported			As restated
BALANCE SHEET DATA:
Non-current deferred tax liability	$	—		$	994		$	—		$	858
Total liabilities		4,509			5,503			5,454			6,312
Accumulated deficit		(77,505	)		(78,499	)		(79,086	)		(79,944	)
Total shareholders’ equity		32,725			31,731			30,718			29,860
	Three Months Ended December 31, 2004						Three Months Ended December 31, 2003
	As previously reported			As restated			As previously reported			As restated
STATEMENT OF OPERATIONS DATA:
Income tax expense	$	42		$	110		$	—		$	72
Net income (loss)		793			725			(207	)		(279	)
Net income (loss) per common share
Basic	$	0.06		$	0.05		$	(0.01	)	$	(0.02	)
Diluted	$	0.05		$	0.05		$	(0.01	)	$	0.02	)
	Six Months Ended December 31, 2004						Six Months Ended December 31, 2003
	As previously reported			As restated			As previously reported			As restated
STATEMENT OF OPERATIONS DATA:
Income tax expense	$	83		$	219		$	—		$	144
Net income (loss)		1,581			1,445			(697	)		(841	)
Net income (loss) per common share
Basic	$	0.11		$	0.10		$	(0.05	)	$	(0.06	)
Diluted	$	0.11		$	0.10		$	(0.05	)	$	(0.06	)

There was no impact in any period on net cash provided by operating, financing, or investing activities on the statements of cash flows.

Critical Accounting Policies:

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

Revenue Recognition

We recognize revenue from the sale of Cooled ThermoTherapy system control units upon delivery to the customer. We recognize revenue from treatment catheter sales at the time of shipment. In addition to our sales of Cooled ThermoTherapy system control units, we place our Cooled ThermoTherapy system control units with customers under a variety of programs for both evaluation and long-term use. We retain title to these control units and do not recognize any revenue on these control units until title has transferred. These programs are designed to expand access to our technology, and thus expand the market for our single-use treatment catheters. Under these programs, we generally charge a higher price for each single-use treatment catheter to include the use of our Cooled ThermoTherapy system control unit by the customer. We recognize revenue on these single-use treatment catheters at the time of shipment. Revenue for warranty service contracts is deferred and recognized over the contract period. We record a provision for estimated sales returns on product sales in the same period as the related revenue is recorded. The provision for estimated sales returns is based on historical sales returns, analysis of credit memo data and other known factors. If the historical data used to calculate these estimates does not properly reflect future returns, our revenues could be overstated.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is a significant estimate and is regularly evaluated by us for adequacy by taking into consideration factors such as past experience, credit quality of the customer base, age of the receivable balances, both individually and in the aggregate, and current economic conditions that may affect a customer’s ability to pay. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Product Warranty

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

Inventories and Related Allowance for Excess and Obsolete Inventory

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

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

Valuation of Long-Lived and Intangible Assets and Goodwill

In accordance with Statement of Financial Accounting Standards (SFAS) 142, “Goodwill and Other Intangible Assets,” we have ceased to amortize approximately $10.2 million of goodwill and $1.1 million of trademarks. Goodwill and trademarks are tested for impairment annually or more frequently if changes in circumstance or the occurrence of events suggests an impairment exists. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows. Our estimates associated with the impairment tests are considered critical, due to the amount of goodwill and trademarks recorded on our balance sheet and the judgment required in determining fair value amounts, including projected future cash flows.

Other intangible assets consist of developed technologies, customer base and trademarks. Developed technologies and customer base are amortized using the straight-line method over their estimated useful lives of 15 and 14 years, respectively. The trademark asset is considered to be an intangible asset with an indefinite useful life, and it will not be amortized until its useful life is determined to be no longer indefinite. We review the definite lived intangible assets for impairment as changes in circumstance or the occurrence of events suggests the remaining value is not recoverable.

Income Taxes

We utilize the asset and liability method of accounting for income taxes. We recognize deferred tax liabilities or assets for the expected future tax consequences of temporary differences between the book and tax bases of assets and liabilities. We regularly assess the likelihood that our deferred tax assets will be recovered from future taxable income. We have recorded and continue to carry a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. We consider projected future taxable income and ongoing tax planning strategies in assessing the amount of the valuation allowance. If we determine it is more likely than not that we will not realize all or part of our deferred tax assets, we will adjust our earnings for the deferred tax in the period we make this determination. With our last four quarters of profit and in light of our historical losses, we continue to assess the need for a full valuation allowance against our gross deferred tax assets that will not reverse against deferred tax liabilities within the scheduled reversal period. The valuation allowance at June 30, 2004 was $32.5 million. We expect to provide a full valuation allowance on our future tax benefits until we can sustain a level of profitability that demonstrates our ability to realize these assets.

RESULTS OF OPERATIONS

Net Sales

Net sales increased to $6.4 million and $12.4 million, respectively, for the three and six month periods ended December 31, 2004 from $5.6 million and $10.7 million, respectively, during the same periods of the prior fiscal year. The sales growth in both periods was primarily attributable to increased revenue from sales of our single-use treatment catheters in the United States partially offset by lower revenues from the sale of single-use treatment catheters internationally. Average per unit selling prices of our single-use treatment catheters increased in both the three and six month periods ended December 31, 2004 compared to the same periods in the prior year, due primarily to our price standardization initiative that was implemented effective January 1, 2004, as well as a stronger mix of sales to our direct office accounts. Sales of our single-use treatment catheters accounted for approximately 94% of our revenue in the three month period ended December 31, 2004 compared to approximately 93% of revenue in the same period of the prior year. For the first half of fiscal 2005, sales of single-use treatment catheters accounted for approximately 95% of revenue compared to 93% of revenue in the first half of fiscal 2004.

At December 31, 2004 we had a domestic installed base of 453 Cooled ThermoTherapy systems, including the units that are being used by customers pursuant to our evaluation and long-term use programs, compared to an installed base of 437 units at September 30, 2004 and 427 units at June 30, 2004.

Cost of Goods Sold and Gross Profit

Cost of goods sold includes raw materials, labor, overhead, and royalties incurred in connection with the production of our Cooled ThermoTherapy system control units and single-use treatment catheters, and amortization expense relating to developed technologies. Effective July 1, 2004 we began including this amortization expense within cost of goods sold. This expense was previously reported within amortization of intangibles and consistent with this change, we have re-classified this expense to cost of goods sold for the periods prior to this change. For the three and six month periods ended December 31, 2003, the re-classification adjustment was $125,000 and $250,000, respectively.

Cost of goods sold for the three month period ended December 31, 2004 decreased to $1.9 million from $2.2 million during the same period of the prior fiscal year. The decrease in cost of goods sold resulted primarily from lower per unit manufacturing costs of both our single-use treatment catheters and control units. Cost of goods sold for the six month period ended December 31, 2004 decreased to $3.7 million from $4.3 million in the same period last fiscal year. The decrease resulted primarily from lower per unit manufacturing costs of both our single-use treatment catheters and control units as well as the $160,000 charge that occurred in the first quarter of fiscal 2004 for a commitment to purchase additional control unit inventory at prices which exceeded the expected future sales value.

Gross profit as a percentage of sales for both the three and six month periods ended December 31, 2004 increased to 70% from 61% and 60%, respectively in the three and six month periods ended December 31, 2003. The increase in gross profit rates in both periods resulted primarily from increased average per unit selling prices of both our single-use treatment catheters and Cooled ThermoTherapy system control units combined with reductions in the per unit manufacturing costs of both of these products.

Selling, General & Administrative

Selling, general and administrative expenses decreased to $2.8 and $5.5 million, respectively, for the three month and six month periods ended December 31, 2004 from $3.1 million and $6.0 million, respectively, in the same periods of fiscal year 2004. The decrease in expenses in both periods resulted primarily from a reduction in legal expenses related to the patent infringement suit we filed to protect our intellectual property which was settled in January 2004, and lower variable selling expenses.

Research and Development

Research and development expenses, which include expenditures for product development, regulatory compliance and clinical studies, increased to $793,000 and $1.4 million, respectively, for the three and six month periods ended December 31, 2004, from $631,000 and $1.2 million in the same periods of fiscal 2004. The increase in expenses in both periods resulted primarily from increased expenditures on product development activities partially offset by lower clinical trial expenses.

Amortization of Intangible Assets

As noted above, effective July 1, 2004, we began including amortization expense relating to developed technologies within cost of goods sold. This expense was previously reported within amortization of intangible assets. Consistent with this change, we have re-classified this expense from amortization of intangible assets to cost of goods sold for the periods prior to this change. For the three and six month periods ended December 31, 2003, the re-classification adjustment was $125,000 and $250,000, respectively.

Amortization of intangible assets was $41,000 and $82,000 for both of the three and six month periods ended December 31, 2004 and 2003, respectively. This amortization expense is related to the acquired customer base that resulted from the purchase of the Prostatron Cooled ThermoTherapy product line from EDAP in October 2000.

Restructuring

In May 2003, we announced plans for organizational restructuring which eliminated 28 positions within the Company and also resulted in our vacating a portion of our leased facility. During the fourth quarter of fiscal 2003 we recorded a $1.3 million restructuring charge to cover the expenses associated with these items. All of the targeted headcount reductions were completed by June 2003, and we began to sublet the vacated space in the second quarter of fiscal 2004.

The $175,000 restructuring benefit for the three and six month periods ended December 31, 2003, resulted from a reduction in our severance obligations related to the May 2003 workforce reduction. All severance related obligations have been paid and the lease term on the vacated space currently runs through fiscal 2008.

Net Interest Income

Net interest income for the three and six month periods ended December 31, 2004 increased to $31,000 and $57,000, respectively, from $7,000 and $13,000, respectively, in the same periods of fiscal 2004. The increase in both periods is due to higher cash and investment balances as well as a reduction in interest expense associated with the lease obligation assumed as part of the Prostatron acquisition in October 2000. The lease obligation was completed during the third fiscal quarter of 2004.

Provision for Income Taxes

Income tax expense increased to $110,000 and $219,000, respectively, for the three and six month periods ended December 31, 2004 from $72,000 and $144,000, respectively, in the prior year periods. The increase in income tax expense is primarily due to federal alternative minimum taxes and state taxes.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations since inception through sales of equity securities and, to a lesser extent, sales of our Cooled ThermoTherapy system control units and single-use treatment catheters. As of December 31, 2004, we had total cash, cash equivalents and available-for-sale investments of $9.4 million compared to $7.6 million as of June 30, 2004. Working capital increased to $10.1 million at December 31, 2004 from $7.4 million at June 30, 2004.

During the six months ended December 31, 2004, we generated $1.5 million of cash from operating activities. Our net earnings of $1.4 million combined with depreciation and amortization of $948,000 were partially offset by a decrease in accrued expenses and deferred income of $1.1 million. The significant decrease in accrued expenses and deferred income resulted primarily from the payment of employee bonuses and fiscal 2004 year-end sales commissions during the first quarter of fiscal 2005. These expenses were accrued in fiscal 2004. An increase in inventory of $591,000 was more than offset by an increase in accounts payable of $262,000 and decreases in accounts receivable and prepaid and

other assets of $122,000 and $287,000, respectively. The increased investment in inventory resulted primarily from an increase in the number of control units produced during the first six months of fiscal 2005. A portion of this inventory was transferred into property and equipment in support of our customer evaluation and long-term use programs, and a portion remained in inventory at December 31, 2004.

During the first six months of fiscal 2005, we generated $1.4 million from investing activities, resulting from the net sale and maturity of $1.4 million of available-for-sale investments partially offset by the purchase of $60,000 of property and equipment.

During the six months ended December 31, 2004, we generated $332,000 from financing activities as a result of $436,000 of proceeds from the exercise of stock options partially offset by a $104,000 principal payment to EDAP for the retirement of the promissory note associated with the Prostatron acquisition. The final payment on the promissory note was made to EDAP on December 31, 2004. The payment totalled $120,000 and consisted of a $104,000 principal payment and $16,000 of accrued interest.

We plan to continue offering customers a variety of programs for both evaluation and long-term use of our Cooled ThermoTherapy system control units in addition to purchase options. As of December 31, 2004, our property and equipment, net, included approximately $1.9 million of control units used in evaluation or long-term use programs. Depending on the growth of these programs, we may use additional capital to finance the units used by these customers.

Based upon our financial performance in fiscal 2004 and the first six months of fiscal 2005, we believe our $9.4 million in cash, cash equivalents, and available-for-sale investments at December 31, 2004, together with the funds generated from operations, will be sufficient to fund our working capital and capital resources needs for the next 12 months. There can be no assurance, however, that we will not require additional financing in the future or that any additional financing will be available to us on satisfactory terms, if at all.

FACTORS THAT MAY AFFECT OUR FUTURE RESULTS AND THE TRADING PRICE OF OUR COMMON STOCK

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

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

The medical device industry is characterized by rapid technological change, changing customer needs and frequent new product introductions. Our products may be rendered obsolete as a result of future innovations. We face intense competition from other device manufacturers and surgical manufacturers, as well as from pharmaceutical companies. Nearly all of our competitors are significantly larger than we are and have greater financial, technical, research, marketing, sales, distribution and other resources than we do. We believe that price competition will continue among products developed in our markets. Our competitors may develop or market technologies and products, including drug-based treatments that are more effective or commercially attractive than any we are developing or marketing. Our competitors may succeed in obtaining regulatory approval and introducing or commercializing products before we do. Such developments could have a significant negative effect on our financial condition and operating results. Even if we are able to compete successfully, we may not be able to do so in a profitable manner.

We have only attained profitability recently.

Although we produced net earnings of $1.4 million for the six months ended December 31, 2004 and $356,000 for the year ended June 30, 2004, we have incurred losses of over $78 million since our inception. If physicians do not continue to purchase and use our Cooled ThermoTherapy systems to treat patients with BPH, we may not be able to maintain profitability. Because we will continue to incur additional expenses relating to sales and marketing activities and research and development activities, we will need to increase the revenues we receive from sales of our products in order to continue to operate in a profitable manner. We cannot assure you that we will be able to increase our revenues, maintain profitable operations, or successfully implement our business plan or future business opportunities.

Our products may not achieve market acceptance, which could limit our future revenue.

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

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

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

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

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

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

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

Costly litigation may be necessary to enforce patents issued to us, to protect trade secrets or “know-how” we own, to defend us against claimed infringement of the rights of others or to determine the ownership, scope, or validity of our proprietary rights and the rights of others. In connection with a patent infringement suit we filed in March 2002, we granted ProstaLund AB, ProstaLund Operations AB, and Circon Corporation (a/k/a ACMI Corporation) a non-exclusive, royalty free license under certain of our patents to sell the ProstaLund transurethral microwave thermotherapy system marketed in the United States by ACMI Corporation as the CoreTherm device.

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

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

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

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

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

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

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

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

In December 2003, we determined that a component of one of our Cooled ThermoTherapy system control units may not perform properly under certain conditions. We advised our customers who are using the affected units of an appropriate product protocol to follow pending our implementation of a software solution that will resolve the performance issue. We submitted the software update addressing the problem to the FDA and have received its approval. We are currently in the process of installing the updated software on all affected units in the field. We completed the majority of these installations during the second quarter of fiscal 2005 and expect to complete the remainder of these installations during the third quarter of fiscal 2005.

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

We produce the single-use treatment catheters for the Targis system and in January 2004 we began manufacturing the Targis system control unit. Our success will depend upon our ability to cost-effectively manufacture a reliable product and deliver that product in a timely manner. Because we lack extensive manufacturing experience, we may encounter difficulties in maintaining production efficiencies, quality control and assurance, component supply and qualified personnel. We cannot assure you that we will be able to manufacture a reliable product and deliver that product to customers in a timely fashion. Our failure to maintain a reputation among our customers as a timely, responsive manufacturer or higher than expected manufacturing costs would adversely affect our business.

Other than the Targis system control unit and procedures kits, we outsource all other manufacturing for our products. We assemble Targis control units and procedure kits using materials and components supplied by various subcontractors and suppliers, as well as components we fabricate. We rely on single sources for several components, one of which is obtained from a source that has a patent for the technology. Our reliance on outside suppliers for our components involves risks including limited control over the price and uncertainty regarding timely delivery and quality of parts. Additionally, we currently have a supply agreement with VTI Corporation (formerly Venusa) for the production of the Prostatron single-use treatment catheter that extends though April 2006 with an automatic renewal term.

The termination or interruption of any of these relationships, or the failure of these manufacturers or suppliers to supply products or components to us on a timely basis or in sufficient quantities, likely would cause us to be unable to meet customer orders for our products and harm our reputation with customers and our business. Identifying and qualifying alternative suppliers of components or manufacturers of products takes time and involves significant additional costs and may delay the production of our products. Further, if we obtain a new supplier for a component, manufacture our product with an alternative component or if our products are manufactured by an alternative manufacturer, we may need to obtain FDA approval of a PMA supplement to reflect changes in product manufacturing and the FDA may require additional testing of any component from new suppliers prior to our use of these components. Further, if FDA approval of a PMA supplement is required, any delays in delivery of our product to customers would be extended and our costs associated with the change in product manufacturing would increase.

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

We have limited inventory of Prostatron control units and if customer demand exceeds our expectations, we will experience delays and expense in meeting customer demand that could be significant.

We have previously contracted with third parties for the production of the Prostatron product line pursuant to written supply agreements. Our supply agreement for the production of the Prostatron control unit with EDAP ended on October 1, 2003. At this time, we do not have plans to enter into another supply agreement for the manufacture of Prostatron control units, as we believe our current inventory of Prostatron control units combined with company owned control units located at customer sites will adequately support future customer requirements. If, for any reason, customer demand exceeds our current projections, we could experience significant delays and expend significant resources in obtaining a new supply agreement with EDAP or another manufacturer to meet this customer demand. Therefore, we are likely to experience significant delays in fulfilling unexpected, significant customer demand for our Prostatron control units.

We are dependent on key personnel.

Failure to attract and retain skilled personnel could hinder our research and development as well as our sales and marketing efforts. Our future success depends to a significant degree upon the continued services of key technical and senior management personnel, including Fred B. Parks, our Chairman of the Board and Chief Executive Officer. We have an employment agreement with Mr. Parks that provides that Mr. Parks will serve as our Chairman and Chief Executive Officer and that either party may terminate Mr. Parks’ employment at any time with or without cause. If we terminate Mr. Parks’ employment without cause, however, we would be required to make specified payments to him as described in his employment agreement. We do not have key person life insurance on Mr. Parks. Our future success also depends on our continuing ability to attract, retain and motivate highly qualified managerial, technical and sales personnel. Our inability to retain or attract qualified personnel could have a significant negative effect and thereby materially harm our business and financial condition.

Government regulation can have a significant impact on our business.

Government regulation in the United States and other countries is a significant factor affecting the research and development, manufacture and marketing of our products. In the United States, the FDA has broad authority under the federal Food, Drug and Cosmetic Act and the Public Health Service Act to regulate the distribution, manufacture and sale of medical devices. Sales of medical devices outside the United States are subject to government regulation and restrictions that vary from country to country. The process of obtaining FDA and other required regulatory approvals is lengthy and expensive.

We may not be able to obtain necessary approvals for clinical testing or for the manufacturing or marketing of our products in the United States or in other countries. Failure to comply with applicable regulatory approvals can, among other things, result in fines, suspension of regulatory approvals, product recalls, operating restrictions and criminal prosecution. In addition, government regulations may be established that could prevent, delay, modify or rescind regulatory approval of our products. Any such position or change of position by the FDA may adversely impact our business and financial condition. Regulatory approvals, if granted, may include significant limitations on the indicated uses for which our products may be marketed in the United States or in other countries. In addition to obtaining such approvals, the FDA and foreign regulatory authorities may impose numerous other requirements on us. The FDA prohibits the marketing of approved medical devices for unapproved uses. In addition, product approvals can be withdrawn for failure to comply with regulatory standards or the occurrence of unforeseen problems following initial marketing. We may not be able to obtain regulatory approvals for our products on a timely basis, or at all, and delays in receipt of or failure to receive such approvals, the loss of previously obtained approvals, or failure to comply with existing or future regulatory requirements would have a significant negative effect on our financial condition. In addition, the health care industry in the United States is generally subject to fundamental change due to regulatory, as well as political, influences. We anticipate that Congress and state legislatures will continue to review and assess alternative health care delivery and payment systems. Potential approaches that have been considered include controls on health care spending through limitations on the growth of private purchasing groups and price controls. We cannot predict what impact the adoption of any federal or state health care reform measures may have on our business.

We, along with our distributors and health care providers who purchase our products and services, are subject to state and federal laws prohibiting kickbacks or other forms of bribery in the health care industry. We may be subject to civil and criminal prosecution for violations of any of these laws by our agents or us.

We have limited cash resources and may not have additional financing available to us.

We generated approximately $1.5 million of cash and cash equivalents from operating activities in the six month period ended December 31, 2004 and ended that period with approximately $9.4 million of cash, cash equivalents, and available-for-sale investments. We believe our $9.4 million in cash, cash equivalents, and available-for-sale investments, together with the funds generated from product sales, will be sufficient to fund our working capital and capital resources needs for the next 12 months. Our business plan and financing needs are subject to change depending on, among other things, success of our efforts to continue to effectively manage expenses, market conditions, business opportunities and cash flow from operations, if any. We may require additional financing to continue our business, the receipt of which cannot be assured. Such additional financing could be sought from a number of sources, including possible sales of equity or debt securities or loans from banks or other financial institutions. We may not be able to obtain additional financing from any source on reasonable terms, if at all. Any future capital that is available may be raised on terms that are dilutive to our shareholders.

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

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

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

• the impact to the marketplace of competitive products and pricing,

• costs and expenses related to our effort to protect our intellectual property,

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

• product availability.

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

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

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

• actual or anticipated variations in our operating results,

• developments regarding government and third-party reimbursement,

• changes in government regulation,

• government investigation of us or our products,

• changes in reimbursement rates or methods affecting our products,

• developments concerning proprietary rights,

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

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

• investor perception of us and our industry,

• general economic and market conditions including market uncertainty,

• national or global political events,

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

• changes in senior management.

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

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

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

Anti-takeover provisions in our articles of incorporation may have a possible negative effect on our stock price.

Certain provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of us. We have in place several anti-takeover measures that could discourage or prevent a takeover, even if an acquisition would be beneficial to our shareholders. Our stock option plans contain provisions that allow for the acceleration of vesting or payments of awards granted under the plans in the event of specified events that result in a “change in control.” In addition, we have adopted a shareholder rights plan that would cause substantial dilution to any person or group attempting to acquire our company on terms not approved in advance by our board of directors.

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

Our financial instruments include cash, cash equivalents, and available-for-sale investments. Our available-for-sale investments at December 31, 2004 are carried at market value. Increases and decreases in prevailing interest rates generally translate into decreases and increases in the fair value of these instruments. Also, fair values of interest rate sensitive instruments may be affected by the credit worthiness of the issuer, prepayment options, relative values of alternative instruments, the liquidity of the instrument and other general market conditions.

Market risk was estimated as the potential decrease in fair value resulting from a hypothetical 1% change in interest rates for the issues contained in the available-for-sale investment portfolio and was not materially different from the carrying value at December 31, 2004. Due to the nature of our short-term investments, we have concluded that we do not have a material market risk exposure.

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

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Company’s Chief Executive Officer, Fred B. Parks, and Chief Financial Officer, Todd E. Paulson, have evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report and due to the identification of a material weakness in internal control over financial reporting related to the Company’s accounting for income taxes, as described below, concluded that the Company’s disclosure controls and procedures were not effective, at the reasonable assurance level, in ensuring that information required to be disclosed by the Company in reports filed with the Securities and Exchange Commission is recorded, processed, summarized and reported on a timely basis. Due to this material weakness in internal control over financial reporting, the Company performed other procedures related to the calculation of deferred income taxes in preparing its restated financial statements as of and for the quarter ended December 31, 2004 to ensure that such financial statements were presented fairly, in all material respects, in accordance with U.S. generally accepted accounting principles.

In connection with management’s evaluation of the effectiveness of the Company’s internal control over financial reporting for its fiscal year ended June 30, 2005, management identified a material weakness in internal control over financial reporting related to the Company’s accounting for income taxes that led management to conclude that as of December 31, 2004, there was more than a remote likelihood that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected on a timely basis by Company employees in the normal course of performing their assigned functions. This material weakness occurred as of December 31, 2004 because the Company’s management did not have adequate technical expertise with respect to income tax accounting to effectively oversee and review the Company’s accounting over this area. This lack of adequate technical expertise resulted in a material error in the Company’s accounting for income taxes, which was identified during the course of the Company’s 2005 audit. This error related to the Company not providing a sufficient valuation allowance against deferred tax assets that are not more likely than not to be realized. The Company had incorrectly netted deferred tax liabilities related to intangibles with indefinite lives against deferred tax assets related to net operating loss carryforwards with finite lives in determining the amount of allowance necessary. As a result, the Company has restated its financial statements for all periods presented in this report and its previously issued annual financial statements as of June 30, 2004 and 2003 and for each of the years in the three-year period ended June 30, 2004 and interim financial statements as of September 30, 2004 and for the quarter ended September 30, 2004 and for all the quarters for the year ended June 30, 2004.

(b) Changes in Internal Controls over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Regarding the material weakness described above, the Company is taking steps to ensure that the material weakness is remediated by implementing enhanced control procedures over accounting for income taxes which include education and training of Company management and staff to improve technical expertise with respect to income tax accounting. The Company is also evaluating whether to engage additional independent tax consulting resources to assist with the Company’s evaluation of complex issues concerning tax accounting and tax reserves and to assist management in developing its judgments with respect to such issues. The Company expects to have the remediation completed no later than December 31, 2005.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure controls and procedures and its internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Our business exposes us to product liability claims that are inherent in the testing, production, marketing and sale of medical devices. As a consequence, we are involved in various legal actions in the ordinary course of our business. Although the outcome of any such legal actions cannot be predicted, management believes any losses that may occur from these matters are adequately covered by insurance, subject to applicable deductibles, and that there is no pending legal proceeding against or involving the Company for which the outcome is likely to have a material adverse effect upon the Company’s financial position, liquidity or results of operations. See “Factors that May Affect our Future Results and the Trading Price of our Common Stock – Our business of the manufacturing, marketing and sale of medical devices involves risk of liability claims and such claims could seriously harm our business, particularly if our insurance coverage is inadequate.”

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

The Company’s Annual Meeting of Shareholders was held on November 9, 2004. Of the 14,228,615 shares of common stock outstanding and entitled to vote at the meeting, 13,424,004 shares were present, either in person or by proxy. The following describes the matters considered by the Company’s shareholders at the Annual Meeting, as well as the results of the votes cast at the Annual Meeting:

1. To elect two directors to hold office for a term of three years or until their respective successors have been elected and shall qualify.

Nominee	Votes
Guy C. Jackson	For:	12,266,455
	Withheld:	1,157,549
Bobby I. Griffin	For:	12,143,730
	Withheld:	1,280,274

Susan Bartlett Foote, Mitchell Dann, Fred B. Parks and Daniel J. Starks continued their respective terms as directors after the Annual Meeting.

2. To amend the Company’s Amended and Restated 1991 Stock Option Plan to increase the number of shares of common stock reserved and authorized for issuance thereunder by 1,000,000 shares.

For:	4,979,194
Against:	2,243,559
Abstained:	33,541
Broker Non-Vote:	6,167,710

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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

SIGNATURES

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

Date September 28, 2005

Urologix, Inc.

(Registrant)

/s/ Fred B. Parks.

Fred B. Parks

Chairman and Chief Executive Officer

(Principal Executive Officer)

/s/ Todd E. Paulson

Todd E. Paulson

Vice President and Chief Financial Officer

(Principal Financial Officer)

EX-31.1

Exhibit 31.1

CERTIFICATIONS

I, Fred B. Parks, certify that:

1. I have reviewed this Form 10-Q/A of Urologix, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 28, 2005
	/s/ Fred B. Parks
	Fred B. Parks,
	Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS

I, Todd E. Paulson, certify that:

1. I have reviewed this Form 10-Q/A of Urologix, Inc.

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 28, 2005
	/s/ Todd E. Paulson
	Todd E. Paulson,
	Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION

The undersigned certify pursuant to 18 U.S.C. § 1350, that:

(1) The accompanying quarterly report on Form 10-Q/A for the period ended December 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the accompanying Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: September 28, 2005

/s/ Fred B. Parks

Fred B. Parks

Chairman and Chief Executive Officer

/s/ Todd E. Paulson

Todd E. Paulson

Vice President and Chief Financial Officer