Urologix (ULGX)

COMPENSATION COMMITTEE REPORT

The Compensation Committee (the “Committee”) of the board of directors is responsible for administering the Company’s compensation program with respect to the Company’s executive officers. This report shall not be deemed incorporated by reference to any filing under the Securities Act of 1933 or to the Securities Exchange Act of 1934 and shall not otherwise be deemed to be filed under either Act.

Compensation Philosophy

The compensation philosophy of the Company is to provide competitive levels of compensation that are consistent with the Company’s annual and long-term performance goals, recognize individual initiative and achievements and assist the Company in attracting and retaining qualified executives.

In establishing compensation for executive officers, the Company examines a variety of factors, including salaries for executives holding comparable positions in similarly situated peer companies, including companies in the medical device industry. The Company also seeks to establish an executive compensation program that provides incentives that will reward officers for pursuing the actions necessary to improve the Company’s performance and increase long-term shareholder value.

There are three elements to the Company’s executive compensation program: base salary, cash bonuses and long-term stock-based incentives. The Company believes that there should be a strong relationship between executive compensation and achievement of corporate goals.

Base Salary

Executive base salaries have been based upon past performance, experience, responsibility, salary levels for persons holding similar positions in similarly situated companies and other appropriate factors. The base salaries of the Company’s executive officers, other than the Company’s Chief Executive Officer whose base salary is determined by a letter agreement, are determined by the Compensation Committee and are generally targeted at the median of a group of peer companies. In fiscal year 2006, the Compensation Committee did not make any adjustment in the base salaries of the Company’s executive officers.

Cash Bonuses

On July 15, 2005, the Compensation Committee established goals for fiscal year 2006 for the Company’s cash bonus program for executive officers. The Compensation Committee established performance goals for each of revenue and net earnings before taxes and determined the total cash bonus amount available under the 2006 bonus program if these performance goals are met at the 100% level. Under the fiscal 2006 cash bonus program, each financial performance goal is weighted at 50% of the total cash bonus amount available and the total cash bonus amount available would be adjusted if the Company’s 2006 financial performance varies from either of the established performance goals. Each component of the total cash bonus amount available relating to revenue and net earnings before taxes may be decreased or increased by 50%, depending upon the Company’s 2006 financial performance against the goals established by the Compensation Committee. However, unless the Company’s 2006 revenue meets at least the minimum revenue amount set by the Compensation Committee, no cash bonuses will be paid to the executive officers. Under the 2006 cash bonus program, the Company’s 2006 financial performance did not result in any cash bonus to any participant.

Stock Options

Stock options are generally granted to executive officers in connection with their initial employment and periodically upon review of compensation levels, past performance and future potential. The Committee believes that stock ownership by management and stock-based performance compensation arrangements are beneficial in aligning management and shareholder’s interest in enhancing shareholder value. Stock options have been awarded at an exercise price equal to the fair market on the date of grant and therefore have value only if the

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price of the Company’s stock appreciates from the price on the date on which the stock options are granted. In this way, the Company’s executive officers and shareholders benefit equally from such stock price appreciation. Stock options are awarded in a manner consistent with the Company’s objective to provide a long-term equity interest in the Company and to provide an opportunity for a greater financial reward if long-term performance is sustained. To encourage a long-term perspective, options generally vest over a four-year period. During 2006, the Compensation Committee granted stock options to purchase 387,500 shares of the Company’s common stock. Of these, options to purchase 50,000 shares were awarded to individuals who were executive officers on the grant date.

Chief Executive Officer Compensation

Mr. Parks began serving as the Chairman of the board as of May 21, 2003 and as Chief Executive Officer beginning May 27, 2003. On September 29, 2003, the Company and Mr. Parks entered into a letter agreement relating to his employment with the Company. This letter agreement was amended on July 19, 2004. See the section entitled “Employment and Change In Control Arrangements” for a description of the Company’s agreement with Mr. Parks, as amended, and a description of option grants to Mr. Parks.

Mr. Parks’ annual salary is determined by the terms of the letter agreement with Mr. Parks. For fiscal 2006, Mr. Parks’ yearly base salary was set at $318,000. Under the Company’s cash bonus program for executive officers, Mr. Parks was eligible for a cash bonus ranging from 25% to 75% of his base salary if the Company achieved the minimum performance goals established by the Compensation Committee relating to revenue and net earnings before taxes. In fiscal year 2006, neither Mr. Parks nor any other executive officer received any bonus under the Company’s cash bonus program for executive officers. Additionally, Mr. Parks received no options to purchase the Company’s common stock in fiscal year 2006.

In determining the compensation of the Company’s Chief Executive Officer for fiscal year 2006, the Compensation Committee used the criteria outlined above applicable to all executive officers.

COMPENSATION COMMITTEE REPORT

The Compensation Committee (the “Committee”) of the board of directors is responsible for administering the Company’s compensation program with respect to the Company’s executive officers. This report shall not be deemed incorporated by reference to any filing under the Securities Act of 1933 or to the Securities Exchange Act of 1934 and shall not otherwise be deemed to be filed under either Act.

Compensation Philosophy

The compensation philosophy of the Company is to provide competitive levels of compensation that are consistent with the Company’s annual and long-term performance goals, recognize individual initiative and achievements and assist the Company in attracting and retaining qualified executives.

In establishing compensation for executive officers, the Company examines a variety of factors, including salaries for executives holding comparable positions in similarly situated peer companies, including companies in the medical device industry. The Company also seeks to establish an executive compensation program that provides incentives that will reward officers for pursuing the actions necessary to improve the Company’s performance and increase long-term shareholder value.

There are three elements to the Company’s executive compensation program: base salary, cash bonuses and long-term stock-based incentives. The Company believes that there should be a strong relationship between executive compensation and achievement of corporate goals.

Base Salary

Executive base salaries have been based upon past performance, experience, responsibility, salary levels for persons holding similar positions in similarly situated companies and other appropriate factors.

At its meeting on July 19, 2004, the Compensation Committee approved increases effective for fiscal year 2005 to the base salaries of the Company’s executive officers, other than the Company’s Chief Executive Officer whose base salary is determined by a letter agreement. The increases were based on market-related and internal equity adjustments, as well as the individual’s performance. The base salary of an executive officer is generally targeted at the median of a group of peer companies.

Cash Bonuses

On July 19, 2004, the Compensation Committee established goals for fiscal year 2005 for the Company’s cash bonus program for executive officers. The Committee established performance goals for the Company’s 2005 net earnings before taxes and determined the total cash bonus amount available under the 2005 bonus program if this performance goal was met at the 100% level. Under the 2005 cash bonus program, the Company’s 2005 financial performance resulted in a cash bonus to Mr. Parks of $79,500, representing 25% of his annual base salary, and a cash bonus to Mr. Montecalvo of $25,500 and a cash bonus to Mr. Paulson of $22,500, representing 15% of each of their respective annual base salaries.

Stock Options

Stock options are generally granted to executive officers in connection with their initial employment and periodically upon review of compensation levels, past performance and future potential. The Committee believes that stock ownership by management and stock-based performance compensation arrangements are beneficial in aligning management and shareholder’s interest in enhancing shareholder value. Stock options have been awarded at an exercise price equal to the fair market on the date of grant and therefore have value only if the price of the Company’s stock appreciates from the price on the date on which the stock options are granted. In

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this way, the Company’s executive officers and shareholders benefit equally from such stock price appreciation. Stock options are awarded in a manner consistent with the Company’s objective to provide a long-term equity interest in the Company and to provide an opportunity for a greater financial reward if long-term performance is sustained. To encourage a long-term perspective, options generally vest over a four-year period. During 2005, the Compensation Committee granted stock options to purchase 313,500 shares of the Company’s common stock. Of these, options to purchase 75,000 shares were awarded to individuals who were executive officers on the grant date.

Chief Executive Officer Compensation

Mr. Parks began serving as the Chairman of the board as of May 21, 2003 and as Chief Executive Officer beginning May 27, 2003. On September 29, 2003, the Company and Mr. Parks entered into a letter agreement relating to his employment with the Company. This letter agreement was amended on July 19, 2004. See the section entitled “Employment and Change In Control Arrangements” for a description of the Company’s agreement with Mr. Parks, as amended, and a description of option grants to Mr. Parks.

Mr. Parks’ annual salary is determined by the terms of the letter agreement with Mr. Parks. For fiscal 2005, Mr. Parks’ yearly base salary was set at $318,000. Mr. Parks is also entitled to a target bonus of 50% of his base salary, upon achievement of corporate goals established by the Compensation Committee with respect to each fiscal year of the Company. In August 2005, Mr. Parks received a cash bonus under the 2005 cash bonus program of $79,500 representing 25% of this salary for fiscal year 2005. In fiscal year 2005, Mr. Parks received no options to purchase the Company’s common stock.

In determining the compensation of the Company’s Chief Executive Officer for fiscal year 2005, the Compensation Committee used the criteria outlined above applicable to all executive officers.