Use these links to rapidly review the documentTABLE OF CONTENTS FISCHER IMAGING CORPORATION CONSOLIDATED FINANCIAL STATEMENTS INDEX



SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

|ý                                                                                            | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|-------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|For the fiscal year ended December 31, 2003                                                 
|o                                                                                            | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to           
                  .

Commission file number 0-19386

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FISCHER IMAGING CORPORATION(Exact name of registrant as specified in its charter)

|DELAWARE(State of incorporation)                                                  |  | 36-2756787(I.R.S. Employer Identification No.)
|--------------------------------------------------------------------------------- |  | ----------------------------------------------
|12300 North Grant Street
Denver, Colorado(Address of principal executive offices) |  | 80241(Zip Code)                               

Registrant's telephone number, including area code: (303) 452-6800

Securities Registered Pursuant to Section 12(b) of the Act: None

Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, Par Value $0.01 Per Share

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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 ý    No o

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Act). o

The aggregate market value of the Common stock held by non-affiliates of the registrant as of June 29, 2003 was approximately
$41.3 million.

The
number of shares of registrant's Common stock outstanding as of March 29, 2004 was 9,348,484.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant's definitive Proxy Statement for the 2004 Annual Meeting of Stockholders to be filed within 120 days after the end of the
Registrant's fiscal year ended December 31, 2003 are incorporated by reference into Part III of this report on Form 10-K to the extent stated therein.

Certain
exhibits filed with the Registrant's Registration Statement on Form S-1 (File No. 333-95439), Annual Report on Form 10-K
for fiscal year ended December 31, 2000, Annual Report on Form 10-K for fiscal year ended December 31, 2001, Annual Report on Form 10-K for the
fiscal year ended December 31, 2002, and Registration Statements on Forms S-8 (Nos. 333-38696, 333-60430 and 333-76804) are incorporated by
reference into Part IV of this report on Form 10-K.



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TABLE OF CONTENTS



|                              |                                                                                                |    | Page
|----------------------------- | ---------------------------------------------------------------------------------------------- | -- | ----
|PART I                        |                                                                                                | 2 
|ITEM 1.                       | BUSINESS                                                                                       |    | 2   
|ITEM 2.                       | PROPERTIES                                                                                     |    | 28  
|ITEM 3.                       | LEGAL PROCEEDINGS                                                                              |    | 29  
|ITEM 4.                       | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |    | 29  
|PART II                       |                                                                                                | 30
|ITEM 5.                       | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                          |    | 30  
|ITEM 6.                       | SELECTED CONSOLIDATED FINANCIAL DATA                                                           |    | 30  
|ITEM 7.                       | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          |    | 32  
|ITEM 7A.                      | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                     |    | 41  
|ITEM 8.                       | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    |    | 42  
|ITEM 9.                       | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           |    | 42  
|ITEM 9A.                      | CONTROLS AND PROCEDURES                                                                        |    | 42  
|PART III                      |                                                                                                | 43
|ITEM 10.                      | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |    | 43  
|ITEM 11.                      | EXECUTIVE COMPENSATION                                                                         |    | 43  
|ITEM 12.                      | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |    | 43  
|ITEM 13.                      | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 |    | 43  
|ITEM 14.                      | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                         |    | 43  
|PART IV                       |                                                                                                | 44
|ITEM 15.                      | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                                |    | 44  
|SIGNATURES AND CERTIFICATIONS |                                                                                                | 47

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PART I

Forward-looking Statements

This Form 10-K contains or incorporates by reference "forward-looking statements," as that term is used in federal securities laws, about our
financial condition, results of operations and business. These statements include, among others:



These
statements may be made expressly in this document or may be incorporated by reference to other documents we will file with the SEC. You can find many of these statements by looking
for words such as "believes," "expects," "anticipates," "estimates," or similar expressions used or incorporated by reference in this report.

These
forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results
expressed or implied by us in those statements. Some of these risks are described herein under "Risk Factors." These risk factors should be considered in connection with any subsequent written or oral
forward-looking statements that we or persons acting on our behalf may issue. We do not undertake any obligation to review or confirm analysts' expectations or estimates or to release publicly any
revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events. Further, the information contained in this document is a statement of our intention as of the date of this filing and is based upon, among other things, the
existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without
notice, based upon any changes in such factors, in our assumptions or otherwise.

The
reader is cautioned that we are filing our quarterly reports for the quarters ended on March 30, 2003, June 29, 2003, and September 28, 2003 and annual report
for the year ended December 31, 2002 on Form 10-K with the Securities and Exchange Commission, or SEC, as of the date of the filing of this Form 10-K. It
is recommended that the above referenced quarterly reports and annual report be read together with this document to better understand our business, results of operations and financial condition as
reported in this document.

Fischer®,
Fischer Imaging®, MammoTest®, SenoScan®, MammoPlus®, MammoVision®, MammoSound®,
TRAUMEX®, VersaRad®, SenoScan TrueView, MammoTest Plus "S", MammoTest All-Angles, MammoVision Plus, Target on
Scout, EPACE, and EP/Stim, EP/X, EP/X2 and SPX are trademarks of ours. This Annual Report on
Form 10-K may also include trademarks and trade names owned by other parties, and all other trademarks and trade names mentioned in this Annual Report on
Form 10-K are the property of their respective owners.

Unless
the context otherwise requires, references in this report to "Fischer Imaging," "Fischer," "we," "us," "our" and the "Company" refer to Fischer Imaging Corporation and its
consolidated subsidiaries.

ITEM 1. BUSINESS

Business Overview

We design, manufacture and sell innovative mammography and digital imaging products used to diagnose breast cancer and other diseases. Our primary focus is on
using our digital imaging technology

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in
screening and diagnostic mammograms and minimally invasive breast biopsy to aid in the early identification of breast cancer. We offer high-resolution digital mammography products,
enabling radiologists, surgeons and other healthcare treatment professionals to diagnose or rule out disease early and treat patients with less-invasive procedures. We have also refocused
our efforts to market and sell products that meet selected needs of the broader radiology and electrophysiology markets.

Our
SenoScan digital mammography system is used for both screening and diagnostic mammography. SenoScan's advantages over conventional x-ray film mammography systems stem
from the ability to acquire high-resolution images at a reduced radiation dose, to manipulate the resultant digital image, to transmit the images to remote locations to facilitate
diagnosis, and to store the images in a cost-effective digital archive.

Our
MammoTest stereotactic breast biopsy system is used for minimally invasive breast biopsy. The MammoTest system permits a procedure that is less-invasive and less
expensive than surgical biopsy, and can be performed under local anesthesia on an outpatient basis. We believe that our MammoTest product line represents the premier offering for stereotactic
minimally-invasive breast biopsy.

Our
RE&S (Radiology, Electrophysiology and Surgery) division produces a line of film and digital general radiology systems, an electrophysiology stimulation system, electrophysiology
x-ray imaging systems and a specialized surgical C-arm system.

We
also actively service our products, and are focused on developing new products to address the needs of our target markets as well as enhancing our existing product offerings.

The
Company was re-incorporated in Delaware in 1991.

Significant Events in 2003

During 2003 there were a number of key events that affected our business operations, financial performance, and business prospects that required significant
financial resources and time from our senior management.

Internal Review.During the first quarter of 2003, we conducted an internal review of our historical accounting policies,
practices and controls in preparation for our 2002 year-end closing and financial statement preparation. As a result of our internal review, we announced in April 2003 that
we had identified certain suspected accounting inaccuracies and errors that significantly affected our financial results including previously reported financial information for for 2002, 2001 and
prior years. We conducted a full internal investigation under the direction of our Board of Directors and with the advice and assistance of our outside counsel and independent auditors to determine
the scope and magnitude of these errors and to complete the restatement of our financial statements. As a result, we did not file our 2002 annual report on Form 10-K or our 2003
quarterly reports on a timely basis. We are filing these reports concurrently with our filing of this 2003 annual report on Form 10-K.

Restatements of Financials.In July 2002, we engaged Ernst and Young LLP as our new independent accounting firm to
audit our 2002 historical consolidated annual financial statements and to review our historical consolidated unaudited interim financial statements. Based on the results of our internal review, we
also engaged Ernst & Young to re-audit our consolidated financial statements for fiscal years ended December 31, 2001 and 2000 after we discovered several accounting issues
that required restatement of the consolidated financial statements for those years. As a result of this audit and our internal review, we have made various restatement adjustments to our historical
financial statements as disclosed in our 2002 annual report on Form 10-K.

SEC Proceedings.In April 2003 we voluntarily disclosed to the Securities and Exchange Commission (SEC) that we would
restate our financial results for the periods beginning January 1, 2000 and ending September 30, 2002. We made this disclosure following the formation of an

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independent
board committee, assisted by the law firm of Hogan & Hartson, to review the facts and circumstances underlying our decision to restate our financial results. In June 2003, we
received notice of a formal order of investigation and subpoena from the SEC. This investigation is ongoing.

Legal Proceedings.Following our announcement regarding our voluntary disclosure to the SEC, we, together with certain former
officers and former board members, became parties to various shareholder class-action lawsuits, to determine whether we have violated any federal securities laws. For a further
description of the nature and status of these legal proceedings see "Item 3Legal Proceedings."

Product Performance and ReliabilityFollowing the initial commercial launch of our newly developed SenoScan product line in
late 2001, we identified product reliability and performance issues for that product. These issues continued into 2003. We also received a formal notice from the FDA regarding deficiencies in the way
our quality system was meeting regulatory requirements. We implemented remedial steps to address the reliability, performance and compliance problems and to meet the needs of our customers, including
hiring additional service personnel to replace defective parts and components in our systems, extending our limited warranty and focusing our research and development efforts on resolving these
issues. We invested significant time and resources during 2003 in manufacturing and acquiring parts to re-work our existing SenoScan finished goods inventory, incorporating new product
enhancements. Similarly we've invested to improve the quality of our products and reduce manufacturing inefficiencies. We also significantly increased the size of our service organization to better
serve our customers and to ensure our existing installed SenoScan products were upgraded to incorporate our new product enhancements and exchange defective parts and components.

Board of Director ChangesWe also made significant changes to the composition of our board of directors, in which four of our
directors resigned during 2003, including our Chief Technology Officer and founder and former president and Chief Executive Officer. We added four new board members including a new Chair of the Board,
a new Chair of the Audit Committee and a new Chair of our Compensation Committee.

European OperationsIn 2002 we made the strategic decision to begin selling our SenoScan systems directly to customers and to
provide full service support for all of our products in Europe. We also decided to continue our strategic partnership with Ethicon Endo-Surgery (EES) Europe, a subsidiary of
Johnson & Johnson, Inc. for selling our MammoTest system. In 2003 we moved our European operations to Switzerland and began developing an operational infrastructure that includes
service, marketing, direct sales and administrative functions to support the development of a direct sales channel for our SenoScan products. As a result of this decision, we invested significant
resources in 2003 to establish our European operations and begin developing the market for our products.

As
a result of these events and other strategic decisions discussed below, during 2003 and early 2004 we implemented several key initiatives to improve our business operations, enhance
product performance and reliability and improve financial reporting capabilities.

Management ChangesDuring 2003 we made significant changes to our senior management team including hiring a new Chief
Executive Officer in May. The changes to our new management team involved hiring a Senior Vice President of Research and Development, Vice President of Operations, Vice President of Service, Vice
President of Quality and Regulatory Affairs, and created the new position of Senior Vice President of Global Strategy for our RE&S division. In early 2004 we hired a new Senior Vice President/Chief
Financial Officer and Vice President/Controller and promoted an employee to the Vice President of Marketing position. We also made several changes in our middle management team to assist senior
management in implementing its new strategic and operational plans.

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Quality Assurance ProgramWe received a warning letter from the Federal Drug Administration (FDA) in late 2002 regarding
certain compliance issues. In response to this letter and to enhance our product performance and reliability, our new management team has focused on implementing a more rigorous quality assurance
program to analyze our regulatory compliance process, assessing the need to re-design certain older products, and evaluating technologies on which our current products are built. We
undertook an assessment of our product supply chain and evaluated the performance of key vendors for our system components and parts, and, as a result, began establishing alternative sources for our
critical components. We have initiated a number of changes during 2003 to our product supply chain that we believe will result in more consistently higher quality and reliable parts and components for
our products. These changes are also intended to significantly improve product performance and reliability, reduce our reliance on sole suppliers of key components, and improve our gross margins on
all product lines over time while assuring compliance with regulatory requirements.

Enhanced Financial Disclosure ControlsThe investigation and review process resulted in our undertaking to begin modifying our
internal controls, accounting policies and procedures, disclosure controls and procedures and corporate governance policies and procedures in order to, among other things, improve the quality,
consistency and timeliness of our financial information and reporting. We've invested significant financial resources in upgrading our financial reporting process and capabilities including hiring
additional personnel, utilizing outside consultants and implementing a new Enterprise Resource Planning software system. We are planning to continue investing significant resources on this initiative
as we prepare for reporting on internal controls as required by Section 404 of the Sarbanes-Oxley Act.

We
believe these key initiatives are critical to building a strong foundation which to execute upon our business strategy.

Our Business Strategy

Our business strategy is to maintain our leadership position in designing, manufacturing and selling innovative mammography and digital imaging products used to
diagnose breast cancer and other diseases. Elements of our business strategy include:



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Our Market

We are focused on providing x-ray and digital imaging products associated with the diagnosis and treatment of disease, particularly breast cancer and
cardiac arrhythmia. We market and sell our products to public and private hospitals, as well as private care centers.

Breast
cancer is the leading cause of death from cancer among women between the ages of 15 and 54 and the second-leading cause of death from cancer among all women. According to the
American Cancer Society, over 1.3 million cases of invasive breast cancer were diagnosed in the US in 2003 and one in eight women in North America will develop breast cancer at some point in
her life. International health organizations estimate that, globally, more than one million women are diagnosed with breast cancer every year. In addition, another 55,700 cases of in-situ
breast cancer (called DCIS) were diagnosed.

Mammography
has been recommended as an effective tool for the early detection of breast cancer. We estimate that there were more than 50 million screening and diagnostic
mammograms performed in the United States in 2002. Age has proven to be the largest risk factor for breast cancer. Data from the National Cancer Institute show a woman's risk of breast cancer at age
40 is 145 per 10,000 women, rising to 431 per 10,000 women by age 65. This fact has resulted in women being recommended for a baseline mammogram at a younger age. In 2002, the U.S. Department of
Health & Human Services renewed its recommendation that women over 40 receive an annual mammogram, with a baseline mammogram recommended for women between the ages of 34 and 40.

The
mammography segment of the overall radiology market was estimated to be approximately $250 million in revenues worldwide, including approximately $200 million in North
America and $50 million in the rest of the world in 2002. It is further estimated that full-field digital mammography represented only 7% of total units sold into the market in
2002. The overall mammography market is predicted to grow to over $500 million worldwide by 2009, with the majority of the growth coming in the full-field digital mammography market
at nearly $400 million. Full-field digital mammography is expected to represent 70% of estimated revenues in the mammography market, as published by Frost and Sullivan. This market
segment has very specialized requirements and is serviced in large part by diagnostic physicians who specialize in breast cancer only. From a technical standpoint, the Mammography Quality Standards
Act (MQSA), passed in 1992, and recently amended in 2002, has established increasingly stringent quality requirements for equipment used in breast cancer screening. Screening mammography is
increasingly accepted as an effective method of detecting breast cancer at its earliest, most treatable stage.

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Screening Mammography

According to the Centers for Disease Control and Prevention, over 75% of women over age 50 received a mammogram in 2002. Based on FDA survey data, we estimate
that in 2002 there were about 40 million screening mammograms performed in the United States. The sensitivity of modern mammography is estimated to be around 75%; that is, if a cancer is
present there is a 75% chance that screening mammography will detect it. However, the specificity of screening mammography is not very high in that an average of 13% of screened women are called back
for further tests while only about 0.5% of the women screened will actually have breast cancer. These false positives create anxiety for women while adding significant expense to screening mammography
programs.

Diagnostic Mammography

If an abnormality is detected in a screening mammogram, or a woman or clinician discovers a palpable lump, diagnostic mammography is performed. Call back rates
range from 4% to 20% of women screened and average about 13% across the United States. While the total number of diagnostic mammograms performed per year is not known, we estimate that about 20% of
all mammograms are diagnostic exams.

Diagnostic Ultrasound

For lumps or masses discovered by palpation or mammography, diagnostic ultrasound is performed in addition to diagnostic mammography. Improvements in diagnostic
ultrasound image quality as well as increased training for radiologists and surgeons who perform ultrasound exams have resulted in a large increase in diagnostic ultrasound exams. In certain cases
radiologists are able to make a definitive diagnosis of benignity through the use of mammography and ultrasound for palpable and nonpalpable breast masses.

Breast Biopsy

Following diagnostic mammography and ultrasound, about 20% to 30% of patients called back from a screened mammogram require a tissue biopsy. A biopsy may either
be performed surgically or through a percutaneous (through the skin) procedure under ultrasound or stereotactic imaging guidance.

Needle Biopsy Contrasted with Surgical Tissue Biopsy

A traditional surgical tissue biopsy involves the removal of a golf-ball sized piece of tissue from the breast. This procedure has several
disadvantages:



A
less-invasive form of breast biopsy can be performed using a small needle and imaging guidance to direct the needle into the lesion detected by the mammogram. Approximately
40% of breast biopsies are performed with a needle under image guidance. We pioneered the clinical development of prone, stereotactic core needle biopsy together with several radiologists in the late
1980's. These clinical studies resulted in the development of the MammoTest system. Stereotactic core needle biopsies are less expensive than surgical biopsies because surgical biopsies are most often
performed in a hospital or surgery center. A significant portion of the cost savings for core needle biopsy results from the lower

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overhead
associated with physician offices and imaging centers, while maintaining the same efficacy as the surgical procedure.

In
September 2001, the American College of Surgeons published a consensus statement in theJournal of the American College of
Surgeonsthat endorsed needle biopsies as preferable to surgical biopsy in most patients. The statement also indicated that percutaneous biopsy would often allow breast cancer
to be treated with only one trip to the operating room, providing substantial cost savings for the healthcare system.

Our Products

Our products address two markets: mammography and conventional radiology. Our breast cancer diagnostic product line includes the SenoScan TrueView digital
mammography system and the MammoTest All-Angles prone stereotactic breast biopsy system. Our RE&S product line includes offerings for radiology, electrophysiology and surgery.

SenoScan TrueView Digital Mammography System

We are a leader in the development of full field-of-view digital mammography systems. Our SenoScan TrueView Digital Mammography System was
developed for screening and diagnostic mammography. SenoScan received FDA marketing clearance in September 2001 and European Community marking in November 2001. We installed our first
SenoScan at a customer in the fall of 2001. Sales of our SenoScan product constituted 24% and 12% of total revenue for 2003 and 2002, respectively. The FDA has cleared SenoScan under a premarket
approval (PMA) application. In addition to being approved by the FDA as equivalent to screening and
diagnostic film mammography, a specific claim of up to a 40% to 60% reduction in patient x-ray dosage was approved. Key product features of the SenoScan include:



A
SenoScan system is comprised of a gantry, an acquisition station, a local data storage repository and one or more review workstations. The acquisition station is installed in a
shielded room where the patient is positioned for the mammogram. The patient has the breast compressed, which is then exposed to x-ray with the image recorded in digital format. The image
is stored locally but is immediately available to one or more review stations for diagnosis. The image may also be transmitted to a local or remote data archive facility. The SenoScan system is
frequently sold with peripheral equipment and software provided to us by others.

SenoScan
is a patented, slot-scanning system that operates with a detector directly coupled to the x-ray tube. The x-ray detector is a charged-coupled
device, which is scanned underneath the breast, providing a very high-resolution digital image of the breast. Because the system does not require the use of a "scatter grid" to control
scatter radiation, the radiation required to form an image is lower, resulting in a lower radiation dose to the patient. The SenoScan system covers a 21cm by 29cm field of view and thus is compatible
with the great majority of breast sizes in screening mammography. The native resolution of the detector is 25 microns per pixel, which is used for diagnostic mammograms in an
11cm × 15cm field of view. In the screening mode the resolution is 50 microns per pixel with a field of view of 21cm by 29cm.

Diagnostic
radiologists have reported that digital mammography provides a number of advantages over conventional x-ray film mammography. Images acquired utilizing digital
mammography may be displayed on a computer monitor, which allows image brightness and contrast to be varied. Diagnostic radiologists have the opportunity to manipulate a digital mammogram in order to
improve their

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diagnosis,
in some cases eliminating the need for a second mammogram. Because younger women typically have more dense breast tissue, which may not be visualized adequately with x-ray film
mammography, this feature may be particularly useful in screening women under age 50. SenoScan is unique in its ability to provide mammographic images while exposing the patient to 40% to 60% less
radiation than traditional x-ray film mammography. Other benefits include: real time acquisition (film processing is not necessary); digital archival media storage of the mammogram; an
ability to implement computer-aided detection algorithms; and telemammography (digital transmission of mammograms for remote display and diagnosis).

We
participated in a $27 million study sponsored by the National Cancer Institute to measure the performance of digital mammography systems against conventional x-ray
film systems. This trial, known as the Digital Mammographic Imaging Screening Trial, or DMIST, began in 2001 and involved four manufacturers and 20 institutions. At the conclusion of the study in late
2003, a total of approximately 50,000 women had been screened with both digital mammography and conventional film systems. The digital mammography diagnosis is now being compared to the
x-ray film mammography diagnosis to evaluate the performance of the two imaging techniques. The results of the study are expected to be available in late-2004.

Because
digital mammography systems are substantially more expensive than x-ray film mammography systems, a major challenge affecting our sales will be the ability of health
care providers to obtain increased payments by private insurance carriers and the Medicare program to make it cost effective for health care providers to acquire and use digital mammography systems.
Medicare is estimated to provide coverage to about forty percent of the women who receive an annual mammogram. The Centers for Medicare and Medicare Services, or CMS, finalized Medicare reimbursement
for digital mammography effective January 1, 2004. Digital screening mammography is reimbursed at $134.41 per exam and digital diagnostic mammography at $141.88 per exam. Film screen
reimbursement rates also were increased to $84.76 for screening and $96.33 for diagnostic mammography. The average FDA-approved MQSA center performed 21 exams per day, according to an
FDA-sponsored survey in August 2001. While CMS provides for higher reimbursements for digital mammography compared to x-ray mammography, as indicated by these
reimbursement rates, the difference between digital mammography reimbursement rates and film screen reimbursement rates may not, in and of itself, make it economically compelling for healthcare
providers to change to digital mammography systems.

However,
while digital mammography systems are substantially more expensive than x-ray film mammography systems, we believe the potential benefits of digital mammography,
including significant operating cost reductions related to film and processing costs, cost of image storage, and improving workflow efficiencies, as well as improved imaging leading to earlier
detection, and increased volume of patient screenings will be compelling reasons for health care providers to purchase digital mammography systems.

MammoTest/MammoVision Systems

We have produced our MammoTest stereotactic breast biopsy system since 1988, and sales of this product constituted 35%, 47% and 61% of total revenues for 2003,
2002 and 2001, respectively. MammoTest enables core needle biopsy of the breast for the minimally-invasive removal of suspicious tissue. The MammoTest system consists of an elevating prone-position
table, a mammographic x-ray imaging system and a stereotactic needle guidance system used during the target localization process, biopsy procedures and placement of a breast applicator set
during interstitial therapy procedures. Stereotactic refers to the technique of locating a lesion in a three-dimensional field using x-ray imaging, and directing the tip of a core needle
to the site of the lesion for tissue removal. With the MammoTest system, the patient lies prone on the table with the breast hanging pendulant through an opening in the table. The digital
x-ray imaging camera is located beneath the table where the breast is compressed and

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two
digital x-ray images are acquired at separate angles. MammoTest is a mature product and competes with one other prone table biopsy systems. In 1992, we introduced MammoVision, the
first charge-coupled device imaging system cleared by the FDA that produces breast tissue images on a nearly real-time basis. With the aid of proprietary software, the coordinates of a
breast lesion are automatically calculated. These coordinates are then transmitted to the Autoguide, a motor-driven needle holder assembly that precisely positions the biopsy needle at the lesion.

We
have introduced additional enhanced versions of MammoTest. In 1995 we introduced MammoTest Plus and MammoVision Plus. The MammoTest Plus system permits 360-degree access
to the breast. It also incorporates the features of Target on Scout that provides additional imaging capability important to assuring accuracy of the biopsy and Lateral Arm, and provides
360-degree access to the breast allowing small breasts (less than 2.5cm when compressed) and breast lesions in difficult locations to be biopsied more easily. In 1998, we introduced the
MammoTest Plus "S" surgical system. The MammoTest Plus "S" is based on the MammoTest Plus prone biopsy system, with enhancements designed to support the more advanced techniques performed in the
surgical market segment. During 2001, the Elite Camera was introduced for more advanced, high resolution imaging capability. In 2002, we released the latest version of our Mammotest product, the
Mammotest Select. In 2003 we offered three product configurations, the MammoTest Basic, MammoTest Advantage and MammoTest Select, which each have different product functionality and performance
features to meet customer requirements. We continue to invest in product development efforts focused on further enhancements to MammoTest.

General Radiology Products

Prior to our introduction of the MammoTest system in 1988, our business was focused primarily on manufacture and sale of x-ray products directed to
the general radiology market. Beginning in the third quarter of 2002, we reinitiated efforts to more aggressively market and sell our Electrophysiology and VersaRad products by establishing our RE&S
division to focus on these product offerings. We are also investing product development efforts on redesigning and enhancing these products.

Electrophysiology Products.The treatment of cardiac arrhythmia patients typically involves a diagnostic study of the
electrical functioning of the heart with an electrophysiology, or EP, study. We estimate that approximately 200,000 EP studies are performed each year by electrophysiologists. When an EP study
indicates that the patient requires a surgical procedure, the electrophysiologist will map the electrical activity in the patient's heart in an effort to locate the precise area of the heart that is
causing the arrhythmia. We manufacture the EP x-ray imaging systems, tilt-tables and our Bloom Stimulator, which are used by electrophysiologists to evaluate the best course of
treatment. In 1995, we introduced the EP/X x-ray system, an economical, state-of-the-art single plane system designed to meet the unique
requirements of the electrophysiologist. In 1997, we introduced the EP/X2 bi-plane x-ray system. In addition, we manufacture the Bloom Stimulator
that is used by electrophysiologists in the treatment of patients with cardiac arrhythmia, as well as when patients receive pacemakers and implantable defibulators. We introduced a significant upgrade
to the EP/X System in 2003 that includes a new high-resolution digital imaging system along with a generator upgrade providing a 300% increase in power output, thus enabling the clinician
to better image larger patients.

VersaRad.The VersaRad system is an enhancement of our Traumex general x-ray system. VersaRad capitalizes on
unique positioning capabilities requiring minimal patient movement, making it well suited for emergency room applications. It is also a versatile general radiographic system, allowing
x-ray of every bone and joint in the body. The VersaRad is available for use with a traditional x-ray film cassette as well as a digital array.

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Backlog

As of December 31, 2003, we had backlog of approximately $19.8 million, including $8.4 million related to a large order from an international
customer which we shipped in December 2003 but revenue was not recorded at December 31, 2003 because our criteria for revenue recognition was not met. The customer has paid the entire
invoice amount in 2004. Our backlog generally includes only product orders which we believe to be firm orders where delivery is requested within the upcoming twelve months. However, as our customers
may delay or cancel orders at any time prior to delivery, backlog as of any particular date should not be relied upon as being indicative of our revenues for any future period. As of
December 31, 2002, we had backlog of approximately $2.5 million.

Research and Development

We employ 24 development engineers who are dedicated to the enhancement of our existing products and the development of next-generation products for
the diagnosis and treatment of breast cancer and the general radiology market. The product development efforts of our internal engineering staff are currently focused on engineering, system design and
software development to enhance our SenoScan digital imaging system and MammoTest products. One current product development focus is collaboration with two companies related to qualifying their cancer
detection software to operate in association with SenoScan. This has enabled us to offer our customers an option package that includes computer-aided detection (CAD) software for use with SenoScan. We
believe radiologists will prefer to use CAD programs that are integrated with the digital mammography system, since it is much less labor intensive to operate the software as part of a digital
mammography system. With regard to MammoTest we may create development partnerships with surgical instrument companies that desire to qualify their instruments on MammoTest to create a complete
solution for minimally-invasive surgery outside the mammography market.

We
are also actively engaged in a collaboration with Philips Electronics supported by $468,000 Phase I SBIR grant from the National Cancer Institute directed at integrating Philips
Electronics ultrasound imaging technology with our digital mammography capability. We entered into a separate collaboration with IBM supported by a four year, $1.2 million fast track SBIR grant
from the National Cancer Institute to evaluate the performance and clinical efficacy of the advanced IBM T221 flat panel display as part of the SenoScan mammography review workstation. We will begin
receiving proceeds from this grant in 2004.

Our
research and product development expenses were approximately $4.7 million, $4.6 million and $3.3 million in 2003, 2002 and 2001, respectively.

Sales and Marketing

Our SenoScan digital imaging system was introduced in the third quarter of 2001 and our marketing plan for the product is currently being deployed. This marketing
plan is primarily directed towards the physician/user and, to a lesser extent, healthcare administrators. Our marketing to the physician/user is focused on over 1,000 current MammoTest customers that
are mammography centers, whether engaged in screening and diagnostics, teaching or research. Our physician marketing for SenoScan focuses on demonstrating the technical, clinical and financial
benefits of digital imaging as compared to x-ray film diagnosis. In addition, we provide the consumer/patient with brochures outlining the digital mammography process and its potential
benefits compared to x-ray film.

The
market for our MammoTest product is mature, as the use of stereotactic breast biopsy is a well-established diagnostic procedure. Furthermore, customer requirements and
the competitive landscape are much better known in the physician community for breast biopsy than for digital imaging. Our marketing effort for MammoTest focuses on existing customers as well as the
emerging corporate healthcare buyers, such as Health Trust Purchasing, AmeriNet and Broadlane.

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We
market our RE&S products through several channels including direct sales personnel, partnering and other marketing efforts. We have two direct sales personnel who call on hospitals
with our EPX, SPX and VersaRad product lines. During 2003 we sold our VersaRad product to Analogic, who integrated a digital imaging system and then resold the product to Kodak. Beginning in 2004 we
began selling our VersaRad product directly to Kodak. We also sell our Bloom Stimulator directly to end user physicians as well as to General Electric (GE) for resale. We previously had an Original
Equipment Manufacturer (OEM) agreement with International Surgical Systems (ISS) to resell our SPX products. ISS filed for bankruptcy and is no longer in operation. We are focusing our marketing
efforts for our SPX products and SPX upgrades on customers who purchased our surgical imaging product from ISS while our OEM agreement was in place.

The
market for each of our product lines is characterized by an aggregation of buyers due to healthcare industry consolidations as well as emerging corporate healthcare buyers used by
hospitals to improve cost containment. Therefore, fewer decision-makers are making more substantial purchasing decisions. In this environment, ensuring high customer satisfaction is a key strategy for
maintaining marketing and sales momentum. Our marketing activities include trade shows, advertising in
professional journals, conferences and physician training programs. The marketing group develops sales leads and assesses customer satisfaction with our products, as well as with direct and dealer
service performance.

We
sell our products worldwide primarily through our direct sales force and dealers. As of December 31, 2003, we had 21 direct sales people whose territories cover primarily large
metropolitan areas. In addition, we have a limited number of dealers in the United States. All our international sales and service operations are now headquartered at Fischer Imaging International,
Geneva, Switzerland. In 1998, we entered into an agreement with Ethicon Endo-Surgery (EES) Europe, a subsidiary of Johnson & Johnson, Inc., for the distribution of the
MammoTest system in Europe. Under this agreement, we provide installation, applications and service support, while EES Europe is responsible for sales of the MammoTest system. EES Europe's sales force
provides sales coverage in the major European countries. During 2003, 2002 and 2001, the Company's total foreign revenues were $9.3 million, $6.0 million and $7.2 million,
respectively.

Service

Our service organization is responsible for installing our products and providing warranty and repair services. Products sold by our direct sales force typically
carry limited warranties covering parts and labor for twelve months. Products sold through dealers carry more limited warranties, with terms ranging from six to twelve months and typically covering
only parts or components. Service personnel offer maintenance service either under contracts or at hourly rates. In many foreign countries outside of Europe, we use dealers and third parties to
provide maintenance service for our products. As of December 31, 2003, we employed 57 field and technical support engineers, 10 applications training personnel, and 18 customer service,
administrative and management personnel in our service organization.

Manufacturing

Our products are manufactured in our production facility in Denver, Colorado. The manufacturing process is primarily assembly, integration, testing, and quality
control of out-sourced components and assemblies. This represents a significant change in our manufacturing strategy from the period prior to 2001, when we manufactured a substantial
number of these components ourselves. For the most part we now purchase all of our parts, peripheral components and sub-components for our systems.

Many
parts and components for our systems are generally readily available from several supply sources. However, for several critical components including detectors, transformers,
cameras, autoguides and x-ray tubes used in each of our product lines, we rely on one supplier for each of these

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key
components. The manufacture of these components is highly complex and requires a precise high quality manufacturing processes from our suppliers. Our sole supplier for our detectors has
experienced sub-component supply difficulties from their vendors and we have experienced product failures on these detectors during our pre-assembly quality testing process. We
have also experienced performance issues with several of these suppliers in meeting our supply chain needs and quality requirements. As a result, we have experienced unanticipated production problems
that have caused us to miss customer shipment request dates, delay production and incur additional costs related to manufacturing, shipping and installation. Changes in design for our products,
including our mammography detectors and our RE&S product line, could result in unanticipated production problems in the future. We are seeking to qualify a second supplier for each of our key
components and subsystems to ensure more consistently higher quality and reliable parts and components and to increase our manufacturing capacity, but cannot assure that we will be successful.
Obtaining alternative sources of supply of components or systems that are available from only one or a limited number of suppliers could involve significant delays and other costs, and these supplies
may not be available to us on reasonable terms, if at all.

Our
quality assurance program meets the requirements of both the U.S. FDA Quality System Regulation (QSR) and ISO 13485, the international quality system standard for medical devices. It
includes various quality assurance and quality control measures from inspection of incoming materials and assemblies through in-line inspection, final configuration testing, and monitoring
of complaints. Based on data gathered from these activities, we undertake actions to correct and prevent problems that may occur both during production and during product use. As of
December 31, 2003, we employed 53 employees in our manufacturing organization, including 48 in production and five in quality and regulatory affairs.

Intellectual Property

We seek to protect our proprietary rights through a combination of technical experience, patent, trade secret and trademark protection and nondisclosure
agreements. Our future success will depend in part on our ability to obtain and enforce patent protection for our products and processes, preserve our trade secrets and operate without infringing on
the patent or proprietary rights of others. Our issued patents cover, among other things, certain features of our MammoTest stereotactic breast biopsy system, our SenoScan digital mammography system
and related technologies and processes.

We
have a significant number of U.S. and foreign patents and pending patent applications covering various aspects of our products. A number of our patents issued between 1985 and 1990
will be
expiring during the next five years. We also rely on trade secrets and proprietary knowledge that we seek to protect, in part, through appropriate confidentiality and proprietary information
agreements. These agreements generally provide that all confidential information developed or made known to an individual during the course of his or her relationship with us is not to be disclosed to
third parties, except in specific circumstances. They also generally provide that all inventions conceived by the individual in the course of his or her services to us are our exclusive property.

From
time to time, we have entered into technology license agreements under which we pay nominal royalties in connection with the sale of products using a third party's technology. As
discussed in more detail below in "Management's Discussion and Analysis of Financial Condition and Results of Operations," we are receiving an annual royalty of $900,000 in connection with our license
of certain technology to ThermoElectron/Hologic.

Our
registered trademarks include Fischer®, Fischer Imaging®, MammoTest®, SenoScan®, MammoVision®, TRAUMEX®,
VersaRad-A® and VersaRad-D®. Our other trademarks include MammoTest Plus, MammoTest Plus "S", MammoVision Plus,
MammoSound®, Target on Scout, EPACE, and EP/Stim, EP/X, EP/X2 and SPX-Surgical Imaging System.

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Competition

The medical device industry is intensely competitive. Many companies are actively engaged in research and development of medical devices for mammography and
breast biopsy. There is significant interest in the development of digital imaging systems and other competing technological approaches for mammography (for example, ultrasound, CT scan, MRI) by many
current and prospective competitors. Most of these companies have substantially greater financial and other resources, larger research and development staffs, and more extensive marketing and
manufacturing organizations than we do. Additionally, some of them have considerably more experience in regulatory approval procedures.

We
face significant competition in digital imaging from large companies that are pursuing the same digital mammography market. In 2000 the FDA cleared the Senographe 2000D from General
Electric, and in 2002 the FDA cleared a digital mammography system from Hologic. Additional companies have announced plans to develop digital mammography systems, including Siemens, Fuji and Kodak. We
also have significant competition in our RE&S products from many companies that are pursuing the same market. EPMed manufacturers a product similar to our Bloom Stimulator product. GE, Siemens,
Phillips Electronics and Omega Medical Systems each manufacture and sell products similar to our EPX product. SwissRay is a primary competitor for our VersaRad product line.

We
believe that current customer interest in our SenoScan Digital Imaging System results from its high image resolution, which is currently unique in the market. However, developments by
others in digital imaging or in other screening technologies that may be able to identify breast abnormality earlier or more accurately may render our digital mammography system or other technologies
obsolete or noncompetitive. We will continue to face intense competition from other companies for collaborative arrangements and for securing licenses to additional technologies. These competitors,
either alone or with their collaborative partners, may succeed in developing technologies or products that are more effective than ours, or they may be more effective at marketing and selling their
products. In the smaller, breast biopsy market, similar dynamics apply but to a lesser degree.

Third-Party Reimbursement

In general we cannot predict what effect the policies of government agencies and other third party payers will have on future sales of our products, and such
policies may have a material, adverse impact on our business. Third-party reimbursement from Medicare or private payers has been a major inhibitor to the adoption rate of our digital imaging products
and sales of our stereotactic breast biopsy systems and RE&S products. We believe that focusing on cost reduction and increasing the number of procedures that can be performed in a given time period
may be the optimal means of addressing the challenges posed by limitations on reimbursement.

Medicare
reimbursement for hospitals represents about 40% of all hospital revenues. Since 1983, Medicare has limited reimbursement for Medicare inpatients to a fixed amount, based on
specified categories of diagnosis known as Diagnosis Related Groups or DRG's. Hospital profit margins have been reduced significantly since the introduction of fixed reimbursement amounts based on
DRG's. Therefore, hospitals have a financial incentive to use less-costly treatment methods. If a new technology is considered to be more cost effective, hospitals will often make capital
investments to provide cost savings. Frequently, but with a significant time lag, Medicare reimbursement rates are reduced to reflect the adoption of a new procedure or technique and, as a result,
hospitals are generally willing to implement new cost saving technologies before these downward adjustments in rates become effective.

Medicare
is estimated to provide coverage to about forty percent of the women who receive an annual mammogram. The Centers for Medicare and Medicaid Services, or CMS, finalized Medicare
reimbursement for digital mammography effective January 1, 2004. Digital screening mammography is reimbursed at $134.41 per exam and digital diagnostic mammography at $141.88 per exam. Film
screen

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reimbursement
rates also were increased to $84.76 for screening and $96.33 for diagnostic mammography. The average FDA-approved MQSA center performed 21 exams per day, according to an
FDA-sponsored survey in August 2001.

In
August 2000 Medicare implemented a prospective payment system for all outpatient procedures performed on behalf of Medicare beneficiaries. The new payment system uses
Ambulatory Payment and Classification, or APC's, to group similar procedures and make fixed payments to hospitals for the technical expenses associated with outpatient procedures. This prospective
payment system is similar to the DRG inpatient payment system and early experience indicates difficulty in properly determining the APC groups to which certain procedures belong. Technical payment
amounts for some procedures such as diagnostic mammography are well below the cost of performing the procedure and this low reimbursement may dissuade hospitals from expanding diagnostic mammography
services. In addition, while technical payments increased for open surgical biopsies beginning in January 2002, the technical fees related to core needle biopsy performed in a hospital
outpatient setting actually decreased. These payment changes may adversely impact our sales of mammography systems and stereotactic breast biopsy systems.

Reimbursement
for physician services provided to Medicare beneficiaries is made under a physician fee schedule administered by CMS and the American Medical Association, or AMA.
Procedures are assigned specific Common Procedural Codes. The valuation of these codes is accomplished by determining the relative value of work required to perform the procedure as well as the
practice expenses associated with the procedure. The total number of relative value units, or RVU's, are multiplied by an annual conversion factor for Medicare payments to physicians. This conversion
factor is determined annually by CMS. The conversion factor translates into dollars, and equals the total amount that physicians will receive for a particular procedure. For 2002, Medicare reduced the
conversion factor for Medicare Part B payments by 4.7%, essentially reducing physician remuneration by the same amount for all Medicare procedures. Percutaneous breast biopsy procedures however
were generally increased as the number of RVU's allocated to the procedure were increased. In addition, rates for both diagnostic and screening mammography were increased over the rates in 2001 by
about 17% and permanent reimbursement amounts were set for both screening and diagnostic digital mammography. The rates for digital mammography were set about $40 higher than the film screen
mammography rates.

Normally
private insurance carriers follow Medicare's lead in determining whether to provide coverage for medical procedures and frequently base payment from the Medicare physician fee
schedule. Historically private insurance carriers have paid up to 40% more than Medicare rates but there is no assurance that private carriers will continue this practice. For high volume procedures
such as mammography screening, private insurance carriers negotiate fee schedules with providers that may in
fact be lower than the Medicare fee schedule. While Medicare reimbursement rates for digital mammography procedures is sufficient to allow most MQSA centers to amortize the cost of systems such as our
SenoScan digital mammography system, failure of a majority of private carriers to adopt Medicare rates for digital mammography could adversely impact our sales of its SenoScan system. In at least one
instance, Blue Cross and Blue Shield of Illinois has indicated that full field digital mammography is considered "investigational" and therefore is not eligible for coverage.

Regulation

The medical devices manufactured and marketed by us are subject to regulation by the U.S. FDA and, in many instances, by foreign governments. Under the Federal
Food, Drug and Cosmetic Act, known as the FD&C Act, manufacturers of medical devices must comply with certain regulations governing the design, testing, manufacturing, packaging and marketing of
medical devices. The majority of our products are also subject to the Radiation Control for Health and Safety Act, administered by

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the
FDA, which imposes performance standards and record keeping, reporting, product testing and product labeling requirements for devices that emit radiation, such as x-rays.

The
FDA must approve all our medical devices for marketing before commercial distribution can take place. This approval is based on their evaluation of either 510(k) or PMA (Pre Market
Approval) filings. A 510(k) filing is pursuant to Section 510(k) of the FD&C Act that provides for FDA approval of certain devices that are substantially equivalent to devices that have been
continuously marketed since May 28, 1976. Most of our products are subject to this type of filing, including our MammoTest stereotactic breast biopsy system, our electrophysiology programmable
stimulator, and other general radiology equipment.

The
PMA filing and approval process is a more complex and lengthy testing and review process than the 510(k) process. A company must first obtain an investigational device exemption,
known as an IDE, for the manufacturer to conduct extensive clinical testing of the device to obtain the required clinical data for the filing. The FDA will thereafter only grant approval if it finds
that the safety and efficacy of the product has been sufficiently demonstrated through the clinical testing as well as the manufacturer's laboratory testing and third party product safety agency
testing. Then, after the FDA approves the product for distribution, annual reports must be submitted to update the FDA on the product's status. The manufacturer must obtain further approval if changes
to the product affect the safety and efficacy claims under which the original approval was given. One product that we manufacture is subject to this process, the SenoScan TrueView Digital Mammography
System. We received pre-market approval from the FDA on the SenoScan in September 2001. This pre-market approval permitted us to begin marketing efforts in the United
States and launch it commercially.

Our
systems are also subject to approval by certain foreign regulatory and safety agencies, including the European Union, where we market our products under the Medical Device Directive.
During an annual surveillance audit in December 2003, the European Notified Body, which is the authorizing agency of the CE Mark, cited us for failing to satisfactorily comply with some Medical
Device Directive documentation requirements, failing to meet some quality system requirements, and for failing to properly certify the MammoTest product line to international performance standards. As
a result, we may not ship the MammoTest product line to EU countries until the deficiencies are resolved. The CE mark is a symbol, which reflects that products meet relevant international performance
and safety standards, and is required for sales into the countries that are members of the European Union. We expect these to be resolved in the second quarter of 2004.

We
cannot assure that the FDA or foreign regulatory agencies will give the requisite clearances for any of our medical devices under development on a timely basis, if at all. Moreover,
after clearance is given, these agencies can later withdraw the clearance or require us to change the device or its manufacturing process or labeling, to supply additional proof of its safety and
effectiveness, or to recall, repair, replace or refund the cost of the medical device, if it is shown to be hazardous or defective. The process of obtaining clearance to market products is costly and
time-consuming and can delay the marketing and sale of our products.

As
a manufacturer of medical devices, we are subject to additional FDA regulations, including the Radiation Control for Health and Safety Act of 1968, which specifically regulates
radiation-emitting products. In addition, our manufacturing processes and facilities are subject to continuing review by the FDA. Most states and many other foreign countries monitor and require
licensing of X-ray devices. Federal, state and foreign regulations regarding the manufacture and sale of medical devices are subject to future change. We cannot predict what impact, if
any, such changes might have on our business.

FDA
regulations require manufacturers of medical devices to adhere to "The Quality System Regulation, (QSR) found in 21 CFR part 820", which includes testing, quality control,
quality assurance, corrective action, preventive action, and documentation procedures for design,

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manufacturing,
installation and servicing. Our manufacturing facilities are subject to periodic inspections by the FDA.

In
December 2002, following an earlier periodic inspection that resulted in the FDA issuing a Form 483 containing inspectional observations, the FDA issued a Warning
Letter, or formal notice, regarding deficiencies in the way our quality system satisfies the QSR requirements. We responded to the Warning Letter findings and observations and instituted corrective
actions. We expect the FDA to conduct an inspection to verify the effectiveness of our corrective actions during the next few months. While we believe the corrections we implemented will effectively
resolve the deficiencies cited, there is no assurance the next FDA inspection will identify no further deficiencies.

Failure
to satisfy FDA requirements can result in an inability to receive awards of federal government contracts, to receive new marketing or export clearance for products, or FDA
enforcement actions including, among other things, product seizure, injunction, and/or criminal or civil proceedings being initiated without further notice.

We
are also subject to other federal, state, local and international laws and regulations related to worker health and safety, environmental protection and export controls. Some of our
technology is governed by the International Traffic in Arms Regulations of the United States Department of State. As a result, the export of some of our systems to some countries may be limited or
prohibited. We believe Fischer is in compliance, in all material respects, with these other laws and regulations and that maintaining such compliance will not have a material financial impact on
future capital expenditures or results of operations.

Employees

As of December 31, 2003, we had 232 employees, including 207 in our U.S. operations and 25 in our international operations. We employ 85 people in service,
53 in manufacturing, 31 in engineering, 38 in sales and marketing and 25 in administration. None of our employees are parties to a collective bargaining agreement. We consider relations with our
employees to be satisfactory. On an as-needed basis we sub-contract for personnel to augment our needs.

Website Access

Our website address is www.fischerimaging.com. You may obtain free electronic copies of our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and all amendments to those reports at our website under the heading "Investor Relations" or at the SEC's website address,
which is www.sec.gov. The SEC website also contains proxy and information statements and other Company information. These reports are available on our website as soon as reasonably practicable after
we electronically file them with the SEC. However, we do not intend to amend our prior filings based on the restatement. The reference to our website does not constitute incorporation by reference of
the information contained on the website, and the information contained on the website is not part of this document.

Other Sources

The public may read and copy any materials the Company files with the SEC at the SEC's Public Reference Room, located at 450 Fifth Street NW, Washington, DC
20549, and may obtain information about the operation of the Public Reference Room by contacting the SEC at 1-800-SEC-0330.

Risk Factors

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 impair our operations and financial results. The occurrence of any of the following risks could harm our business.

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In
that case, the trading price of our common stock could decline, and you may lose all or part of your investment.



We have sustained operating losses during our last six quarters ending December 31, 2003 of $22.2 million in the aggregate, of which
$7.7 million occurred during the fourth quarter of 2003. During 2003 our operating losses were primarily the result of increased operating costs in our service department, additional inventory
write-off, increased operating losses related to the first full year of operations for our European operations, and costs associated with our financial restatement and compliance with
corporate governance and FDA requirements.

Our
future product and services revenue growth depends substantially on increased customer acceptance of our new SenoScan Digital Imaging System, our ability to develop valuable
enhancements to SenoScan and MammoTest and on our ability to increase sales of our RE&S products. If the SenoScan product is not accepted, or if product sales overall do not increase, or if margins on
the sales of all of our products do not improve, our cash reserves could be exhausted. If this occurs, we will be required to raise additional operating capital through equity or debt financings. We
can provide no assurance that we can raise additional funds if necessary, or that these funds can be raised in a timely fashion or on acceptable terms. Current stockholders could experience
substantial capital dilution or subordination of their investment to the rights of new investors. If we were unable to raise additional funds it would be necessary for us to further reduce personnel
or curtail operations, which would adversely affect our ability to market, sell and support our products.



Over the past six quarters we have incurred significant costs related to, among other things, legal, accounting and other professional fees associated with our
internal review of various accounting and other matters, the ongoing investigation of the Company by the SEC, the shareholder class-action lawsuit and other legal proceedings described below. In
addition we are making significant investments in product development and redesign, and in the development and implementation of sound internal controls, corporate governance policies and procedures
designed to enhance the accuracy, quality and consistency of our financial information and reporting and other significant corrective activities. We will continue to incur significant related expenses
in the future. If we are not able to significantly reduce our operating expenses, improve our operating margins, or we become subject to other significant judgments or settlements in connection with
the legal proceedings described in Item 3 of this Annual Report on Form 10-K, we may require additional financing. Additional equity or debt financing may not be available on
acceptable terms, or at all, in part because our common stock was delisted from The NASDAQ Stock Market. If we are unable to obtain additional capital, we may be required to reduce our sales and
marketing activities, reduce the scope of, or eliminate, our research and development programs, or relinquish rights to technologies or products that we might otherwise seek to develop or
commercialize.

For
a further description of the nature of the risks relating to our liquidity see, "Item 7Management's Discussion and Analysis of Financial Condition and Results of
OperationsLiquidity and Capital Resources."

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Our success largely depends upon the continued service of our sales and technical personnel, many of whom could be difficult to replace. Competition for qualified
technology and market-experienced employees is intense, and our business could be adversely affected by the loss of core competencies in engineering, manufacturing, marketing and sales. We cannot
assure you that we will continue to be successful in hiring and retaining qualified and properly trained personnel. The illiquidity of our common stock may also affect the attractiveness of equity
incentives that are part of our compensation program used to attract and retain key personnel. The failure to attract, retain, motivate and train qualified new personnel could have a material, adverse
effect on our business.



The market for our products is characterized by rapid and significant changes in competitive technologies, evolving medical industry standards, the frequent
introduction of new products and alternative surgical procedures. Products based on new technologies could replace or reduce the importance of current procedures that use our products and render these
products noncompetitive or obsolete. Therefore, our success will depend in part on our ability to respond quickly to new product introductions, marketing campaigns and medical and technological
changes through the development of new products. We may not be able to develop new products in a timely or cost-effective manner, if at all, and demand for our current products could be
significantly diminished. Because we compete in a high technology environment, competitive product instructions occur on a frequent basis. New, breakthrough technology in the areas of computer
tomography (CT) and position emission tomography (PET) scanning, magnetic resonance and ultrasound imaging may trigger a sharp drop in interest in our products. In addition, this convergence of
multiple imaging modalities may cause our products to be outdated.



Current research and development efforts are focused on the development of the next generation of SenoScan, our full field digital mammography system. In
addition, significant efforts are being expended on the integration of ultrasound with the MammoTest system. These products involve technological innovation and require significant planning, design,
development and testing at the technological, product and manufacturing process levels. Significant investments in research and
development, equipment, inventory, manufacturing and marketing are also required. Lengthy and expensive clinical trials could also be required prior to submission to the FDA for marketing approval.
All of these expenses occur well in advance of any potential product revenue from that generation of the product. We may not be able to successfully design, manufacture and market new generations of
products and the new products may not receive FDA clearance, or FDA clearance may be delayed. In addition, our newest products may be used with minimally invasive surgical procedures and we believe
that we must demonstrate to physicians and managed healthcare organizations the clinical benefits, safety, efficacy and cost-effectiveness of our products for such procedures. In
particular, we must demonstrate that our products are an attractive alternative to other products and methods that are widely known and accepted. Radiologists may not embrace such techniques as
replacements for conventional x-ray imaging in the case of SenoScan or surgeons may not embrace such techniques for open surgical procedures in the case of MammoTest, and hospitals may not
be willing to invest in, and use, our products. Lack of widespread acceptance of these products could have a material, adverse effect on our future revenues and earnings.

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Our market is intensely competitive. Our competitors include large, multinational corporations, including GE Medical Systems, Siemens, Philips, Toshiba, and
Hitachi, as well as a number of smaller, more focused companies such as Hologic Corporation. Many of these companies supply a broad range of medical products and equipment to their customers, and have
a substantial pre-existing presence resulting therefrom.

Most
of our product revenue during the past five years has been derived from our MammoTest system, which was introduced in 1988. The market for MammoTest is mature and our product
principally competes with the Hologic prone-positioning breast biopsy system, which is aggressively priced and marketed. Many larger companies, including GE Medical Systems, Philip and Siemens, also
offer a form of stereotactic add-on systems. Due to the maturity of this market, we expect prices and margins for MammoTest to decrease over time, which could adversely affect operating
revenues and margins. Our SenoScan digital mammography product received FDA clearance in September 2001 and currently competes with digital offerings from GE Medical Systems and Hologic. In
2000, the FDA cleared the Senographe 2000D from General Electric for marketing in the U.S. In 2002, the FDA cleared a digital mammography system from Hologic, which Hologic is able to market to its
existing analog system customers. Additional companies that have announced plans to develop digital mammography systems include Siemens, Fuji, Kodak, and Planmed. To date none of these companies has
made public any submission to the FDA for PMA approval.

We
also compete with companies that are using competitive technologies to address the challenge of early, more accurate screening for breast cancer. These technologies include CT
scanning, magnetic resonance imaging (MRI) and Ultrasound. One or more of those competing technologies may enable physicians to detect or rule out breast cancer more accurately, or earlier in its
development, which would adversely affect the market for SenoScan.

Many
of our competitors have larger installed bases and far greater financial, management, manufacturing, sales and marketing and other resources than we do. As a result, they are able
to more quickly adapt to new or emerging technologies and changes in customer requirements, and devote greater resources to the development, manufacture, promotion and sale of their products. We also
face competition from sellers of used x-ray imaging equipment, particularly general radiology systems, at prices substantially below the prices of our new products. If we are unsuccessful
relative to our competitors, our operating revenue may be adversely affected.



We introduced our SenoScan digital imaging product in the third quarter of 2001. We encountered a significant number of product and systems challenges in the
initial commercial deployments of the SenoScan product that forced us to expend scarce engineering resources on software bug fixes and retrofits, and which delayed our ability to attain customer
acceptance of these products. We believe that SenoScan will require additional engineering and software development resources to be directed to enhancements or improvements to the SenoScan design,
implementation or integration with customer work flow improvements such as PACS. We may not be able to do so on a timely basis, if at all, and may only be able to do so at considerable expense. We may
encounter problems with design, implementation and integration of our SenoScan product, including delays or malfunctions of the operating software. Any significant reliability problems we experience
with SenoScan could result in adverse customer reaction and negative publicity and could harm our business and sales prospects. In addition, the market for SenoScan is not yet clearly defined or
developed. The use of SenoScan in many cases would require these potential customers to either modify or replace their existing x-ray

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imaging
equipment. Moreover, we believe that a major factor in the market's acceptance of digital imaging technology is the transition by the healthcare industry from conventional film archiving
systems to storage of x-ray images electronically. Because the benefits of our direct-to-digital technology may not be fully realized by customers until they
install an electronic storage platform, a large potential market for these products may not develop until electronic storage is more widely used. Because of the early stage of the markets for these
products, it is likely that our evaluation of the potential markets for these products will vary with time. A significant market for SenoScan and digital imaging products for the diagnosis of breast
cancer may not develop.



In addition to the challenges of the SEC investigation, the shareholder class-action lawsuit and other legal proceedings described below, our new management
members have spent considerable time and effort dealing with internal and external investigations involving our previous internal controls, and in developing and implementing accounting policies and
procedures, disclosure controls and procedures and corporate governance policies and procedures. The significant time and effort spent may have adversely affected our operations and may continue to do
so in the future.



In April 2003, we reported to the Securities and Exchange Commission that we would restate our financial results for the reporting periods beginning
January 1, 2000 and ending September 30, 2002. On June 9, 2003, we received notice of a formal order of investigation and subpoena from the Securities and Exchange Commission. The
investigation relates to the preparation of our financial statements for the years 2000, 2001 and portions of 2002. This request follows the voluntary disclosures that we made to the SEC beginning in
April 2003. Those disclosures follow the previously announced formation of an independent board committee, assisted by the law firm of Hogan & Hartson, to review the facts and
circumstances underlying the decision to restate financial results. We have since provided documents and other information related to its investigation to the SEC. While we intend to continue our full
cooperation with the SEC investigation, we cannot predict the outcome of the investigation. If the SEC finds wrongdoing on our part, a financial or administrative penalty may be imposed which could
jeopardize our financial viability. In addition, such findings could provide grounds for additional stockholder lawsuits against us.

In
addition, we and certain former officers have been named defendants in a class-action lawsuit. The findings and outcome of the investigations described above may affect the
class-action lawsuit that is pending. We are generally obliged, to the extent permitted by law, to indemnify our directors and officers who are named defendants in some of these lawsuits. We are
unable to estimate what our liability in these matters may be, and we may be required to pay judgments or settlements and incur expenses in aggregate amounts that could have a material, adverse effect
on our business, financial condition, results of operations and cash flows.

We
currently have director and officer liability insurance that may pay a portion or all of the fees incurred in defending against claims and the damages of an award. However, if the
plaintiffs are successful, we may not have enough insurance to cover the judgment, or our insurers may seek to deny coverage. If we lose this lawsuit it may create uncertainty in the marketplace for
our products. If the judgment is severe, the financial burden may be so great as to jeopardize our financial viability.

For
a further description of the nature and status of these legal proceedings see, "Item 3Legal Proceedings."

21

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Our future success depends in large part on the support of our investors, customers, vendors, suppliers, employees and prospective employees. The restatement of
our historical financial statements and our inability to file on a timely basis all of our SEC filings has resulted in negative publicity about us, has resulted in the de-listing of our
common stock from The NASDAQ Stock Market, and has, and may continue to have, a negative impact on the market price of our common stock. The restatement of our historical financial statements and our
inability to file all of our SEC filings in a timely manner also could cause some of our customers or potential customers to refrain from purchasing or to defer or cancel purchases of our products.
Additionally, our current and potential vendors and suppliers may re-examine their willingness to do business with us, to develop critical interfaces for us or to supply products and
services if they lose confidence in our ability to fulfill our commitments. Finally, employees and prospective employees may factor in these considerations relating to our stability and the value of
any equity incentives in their decision-making regarding employment opportunities.



In the past 22 months, we replaced our chief executive officer twice and our chief financial officer twice, five directors resigned, we added four new
members to our board of directors and we replaced nearly all of our senior operating managers. It will take some time for our new management team and board of directors to develop strong working
relationships with our operating managers and to execute our strategic plan and annual operating plan. Moreover, new management's ability to complete this process has been and continues to be hindered
by its need to spend significant time and effort dealing with internal and external investigations, developing effective corporate governance procedures, strengthening reporting lines and reviewing
internal controls. We cannot assure you that this restructuring of our board of directors and senior management team, and the accompanying distractions, will not adversely affect our results of
operations.



In late 1999 and early 2000, we de-emphasized our operations in the general radiology area. In mid-2002, we created the RE&S Division to
re-focus resources and energy on our non-breast care products such as our
EPX-Electrophysiology Single Plane Imaging System, EPX-Electrophysiology Bi-Plane Imaging System, VersaRad-A & Dmulti-positioning
imaging systems and the Bloom Electrophysiology Stimulator. Because we had not been active in these markets from late 1999 through mid-year 2002, our re-entry with these
markets will require additional investment and it is unknown if we will be able to reestablish and grow a position in these markets.



The medical commercial markets, including bio-medical research and development and medical devices manufacturing, have been affected by the recent
slowdown in the world economy. If the economic slowdown continues and our customers continue to decrease capital spending for research and development and new products, our business, financial
condition and results of operations may be adversely affected. This risk is enhanced given the point of introduction of our SenoScan product at a period of low growth in the economy. Further, a
substantial portion of our revenue is derived from sales to public institutions, which face significant budgetary pressure.

22

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Development and protection of our intellectual property are critical to our business. If we do not adequately protect our intellectual property, both in the
United States and abroad, competitors may be able to practice our technologies. Our success depends in part on our ability to obtain patent protection for our products and processes both in the United
States and other countries. We must also protect trade secrets and prevent others from infringing on our proprietary rights.

We
face numerous risks and uncertainties with respect to our patents and other proprietary rights. Currently, most pending patent applications in the United States are maintained in
secrecy until issuance, and publication of discoveries in the scientific or patent literature tends to lag behind actual discovery by several months. Thus, we may not have been the first to file
patent applications on our inventions. Our patent applications may not result in any patents. Once granted, the claims of any issued patents may not afford meaningful protection for our technologies
or products. In addition, patents issued to us or our licensors may not provide competitive advantages for our products or may be challenged by our competitors and subsequently narrowed, invalidated
or circumvented. Competitors may also independently develop similar or alternative technologies or duplicate any of our technologies.

Litigation,
interference proceedings, oppositions or other proceedings in which we may become involved with respect to our proprietary technologies could result in substantial cost to
us. Patent litigation is widespread in our industry, and any patent litigation could harm our business. Costly litigation might be necessary to protect our proprietary rights, and we may not have the
necessary resources to pursue such litigation in order to protect our rights. An adverse outcome in litigation with respect to the validity of any of our patents could subject us to significant
liabilities to third parties, divert the attention of management and technical personnel from other business and development concerns, require disputed rights to be licensed to or from third parties
or require us to cease using a product or technology or lose our exclusivity rights with respect to such technology.

We
also rely upon trade secrets, proprietary know-how and continuing technological innovation to remain competitive. Additionally, our trade secrets and know-how
could otherwise become known or be independently developed by third parties. Confidentiality agreements with our employees, consultants and corporate partners with access to proprietary information
could be breached, and we might not have adequate remedies for any such breach.



Our business exposes us to potential product liability claims that are inherent in the manufacture and sale of medical devices and, as such, we may face
substantial liability to patients for damages resulting from the faulty design or manufacture of products. We have been a defendant from time to time in product liability actions. We maintain product
liability insurance. Product liability claims may exceed coverage limits and product liability insurance may not be available at commercially reasonable rates, if at all. Consequently, a product
liability claim or other claim in excess of insured liabilities or with respect to uninsured liabilities could have a material, adverse effect on us.

Complex
medical devices, such as we produce; can experience performance problems in the field that require review and possible corrective action by the manufacturer. We periodically
receive reports from users of our products relating to performance difficulties they have encountered. These or future product problems could result in market withdrawals or product recalls, which
could have a material, adverse affect on our business, financial condition and results of operations.

23

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Sales of medical products have historically been dependent upon the reimbursement of patients' medical expenses by government healthcare programs and private
health insurers. The costs of our products are substantial, and market acceptance of our products depends upon our customers' ability to obtain appropriate levels of reimbursement from third-party
payers for use of our products. Technical payment amounts for some procedures such as diagnostic mammography are well below the cost to perform the procedure and this low reimbursement may dissuade
hospitals from expanding diagnostic mammography services. In at least one instance, Blue Cross and Blue Shield of Illinois has indicated that full field digital mammography is considered
"investigational" and therefore is not eligible for coverage. In addition, while technical payments increased for open surgical biopsies beginning in January 2002, the technical fees related to
core needle biopsy performed in a hospital outpatient setting decreased. The use of our products outside the United States is similarly affected by reimbursement policies adopted by foreign regulatory
and insurance carriers. We cannot predict what effect the policies of government agencies and other third party-payers will have on future sales of our products, and such policies may have a material,
adverse effect on our business.



From time-to-time analyses are published that question the efficacy of mammography to reduce mortality from breast cancer. If mammography
is proven to be ineffective, our business could be seriously harmed. Most recently, researchers in Denmark published a study in theLancetquestioning
the justification for screening for breast cancer with mammography. The study performed a re-analysis of several prior studies on the efficacy of mammography, and concluded that there was
no benefit to mammography screening as a cancer prevention measure. Many academicians and health policy groups question these findings, but even if the findings are untrue, these claims could
influence mammography usage in the United States and undermine adoption of mammography in countries where screening is not widely adopted. In addition, the American Cancer Society and the U.S.
Department of Health and Human Services currently recommend annual mammograms for women over the age of 40, with an initial screening at age 34. If other articles or studies question the efficacy of
mammography, or if cancer organizations or governmental agencies cease recommending regular mammograms, our business could suffer. Also the results of the DMIST clinical trial to measure the
performance of digital mammography systems against conventional x-ray film systems are expected to be announced in mid-2004. If the results of this clinical trial do not
demonstrate sufficiently increased performance of digital systems compared to x-ray systems, this could negatively impact the market for our SenoScan product and our business could suffer.



Our business is subject to regulation by the FDA. Failure to comply with applicable regulatory requirements can result in, among other things, civil and criminal
fines, orders to repair or replace devices or to refund the device purchase price, suspensions and withdrawals of approvals, product recalls, detentions or seizures, injunctions and criminal
prosecutions. FDA regulations require manufacturers of medical devices to adhere to the FDA's Quality Systems Regulation, or QSR, which includes testing, quality control and documentation procedures
for design, manufacturing, installation and servicing. Our manufacturing facilities are subject to periodic inspection by the FDA.

In
December 2002, following an earlier periodic inspection that resulted in the FDA issuing a Form 483, the FDA issued a warning letter regarding deficiencies in the way
our quality system satisfies the FDA's Quality System Regulation (QSR). We responded to the warning letter findings and observations and instituted corrective actions. We expect the FDA to conduct an
inspection to verify

24

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the
effectiveness of our corrective actions during the next few months. While we believe the corrections we implemented will effectively resolve the deficiencies cited, there is no assurance the next
FDA meeting will identify no further deficiencies.

Failure
to satisfy FDA requirements can result in an inability to receive awards of federal government contracts, to receive new marketing or export clearance for products, or FDA
enforcement actions including, among other things, product seizure, injunction, and/or criminal or civil proceedings being initiated without further notice. The receipt of both a warning letter and a
Form 483 in 2002 increases the possibility that one or more of these sanctions could be imposed in the future.

The
FDA has post-marketing controls that include a requirement to file Medical Device Reports when a company becomes aware of information suggesting that one of its products
may have caused or contributed to a death, serious injury or serious illness or has malfunctioned in a way which could lead to that result. The FDA uses Medical Device Reports to determine whether it
should exercise enforcement powers, such as mandatory product recalls, temporary suspensions of approvals, or withdrawal of 510(k) marketing clearances or pre-market approvals. The filing
of Medical Device Reports indicating unexpected product hazards or the failure to comply with medical device reporting requirements could have a material, adverse effect on us.

Each
of our products is required to receive FDA clearance or approval prior to commercialization. To date, all of our products have been classified by the FDA as Class II medical
devices and have been eligible for FDA marketing clearance. In that digital mammography is new technology, the FDA required the SenoScan to be cleared through the pre market authorization (PMA)
process. Future
upgrades and enhancements to SenoScan must go through a more arduous review process than that applicable to other products and may result in extended delays or increased expense as compared to
products covered by a 510(k) clearance.

We
are also regulated by the FDA under the Radiation Control for Health and Safety Act of 1968. This act specifically addresses radiation-emitting products. Under this law, we must
submit initial reports on any new x-ray systems that require certification. In addition, we must submit installation reports to the FDA certifying compliance with installation instructions
of the manufacturer. Under certain circumstances, we also are required to submit product defect reports concerning our radiation emitting products to the FDA and, sometimes, to the first purchasers of
the products. Product defect reports describe any safety related product defects or the failure of a product to conform to an applicable standard of which we have become aware. Additionally, we are
required to submit accidental radiation occurrence reports regarding the injurious exposure to any person.

A
failure to comply with these regulations could have a material, adverse effect on us. Furthermore, discovery of unexpected product hazards or of failures to meet required standards
through the reporting system could also have a material, adverse effect on us.



Sales of medical devices outside of the United States are subject to FDA export and approval by certain foreign regulatory and safety agencies, including the
European Union, where we market our products under the Medical Device Directive. During an annual surveillance audit in December 2003, the European Notified Body, which is the authorizing
agency of the CE Mark, cited us for failing to satisfactorily comply with some Medical Device Directive documentation requirements and for failing to properly certify the MammoTest product line to
international performance standards. The CE mark is a symbol which reflects that products meet relevant international performance and safety standards and is required for sales into the countries
which are members of the European Union.

25

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As
a result, we may not ship the MammoTest product line to EU countries until the deficiencies are resolved. While we expect these to be resolved in the second quarter of 2004, we may
not be able to obtain the necessary regulatory approvals and we may incur significant costs in obtaining or maintaining our foreign regulatory approvals. Although we have approval to sell our other
products into the European Union, we may not be able to obtain other international regulatory approvals. In addition, significant costs and delays may be encountered in obtaining such approvals.
International regulatory
agencies may not approve, or may take longer to approve, digital imaging technologies. As a result, the market may develop slower than anticipated, or not at all, which would harm our business.



During 2003, 2002 and 2001, the Company's total foreign revenues were $9.3 million, $6.0 million and $7.2 million, respectively. Our
international business may be harmed by the expense and difficulty of establishing, expanding, and managing international operations as well as the difficulty of enforcing agreements, collecting
receivables, and protecting intellectual property in foreign countries. Until 2002, we sold and serviced our products abroad exclusively through our strategic relationship with the Ethicon
Endo-Surgery Division of Johnson & Johnson. Beginning in the fall of 2002, we assumed direct responsibility for product service in Europe. Providing this service directly exposes us
to additional organizational complexity and expense that could adversely affect our operating results. In addition, we could be harmed by the imposition by foreign countries of additional withholding
taxes, income taxes, tariffs, or other restrictions on trade and be impacted by difficulties in obtaining U.S. export licenses. Political and economic changes and disruptions and changes in various
regulatory requirements could also harm our business.



The scope of the product lines we offer and the need for product customization require a number of separate manufacturing processes and components and significant
management and engineering time and expertise. As we develop new products, we will be required to refine the prototypes of these products and develop new processes to manufacture these products in
commercial quantities. Additionally, there are several critical components including detectors, transformers, cameras, autoguides and x-ray tubes used in each of our product lines for
which we rely on one supplier for each of these key components. The manufacture of these components is highly complex and requires precise high quality manufacturing that is difficult to achieve by
our suppliers. Our sole supplier for our detectors has experienced sub-component supply difficulties from their vendors and we have experienced product failures on these detectors during
our pre-assembly quality testing process. We have also experienced performance issues with several of these suppliers in meeting our supply chain needs and quality requirements. As a
result, we have experienced unanticipated production problems that have caused us to not meet our customer shipment request dates, delay production and incur additional costs related to manufacturing,
shipping and installation inefficiencies. Changes in design for our products, including for our mammography detectors and our RE&S product line, could result in unanticipated production problems in
the future. We are seeking to qualify a second supplier for each of our key components and subsystems to ensure a more consistently higher quality and reliability of parts and components and to
increase our manufacturing capacity, but cannot assure that we will be successful. Obtaining alternative sources of supply of components or systems that are available from only one or a limited number
of suppliers
could involve significant delays and other costs, and these supplies may not be available to us on reasonable terms, if at all.

We
have encountered, and may continue to encounter, difficulties involving inventory supply, length of production cycles and shortages of manufacturing personnel. Due to the shifting
demand for

26

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our
products and the high fixed costs associated with manufacturing these products, we may encounter difficulty managing our operating costs. We may not be able to reliably or efficiently manufacture
our existing or new products at commercially reasonable costs on a timely basis, if at all. Failure to effectively manage the development and manufacture of our products could adversely affect us.



Our common stock was delisted from The NASDAQ Stock Market on July 7, 2003. One result of this action is a limited public market for our common stock.
Trading is now conducted in the over-the-counter market in the so-called "Pink Sheets." Consequently, selling our common stock is more difficult because smaller
quantities of shares can be bought and sold, transactions can be delayed and security analyst and news media coverage of us may be reduced. These factors could result in lower prices and larger
spreads in the bid and ask prices for shares of our common stock as well as lower trading volume. As a result of the delisting of our common stock from The NASDAQ Stock Market, our common stock has
become subject to the "penny stock" regulations, including Rule 15g-9 under the Securities Exchange Act of 1934. That rule imposes additional sales practice requirements on
broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer
must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the rule may affect the ability of
broker-dealers to sell our common stock and affect the ability of holders to sell their shares of our common stock in the secondary market. To the extent our common stock remains subject to the penny
stock regulations, the market liquidity for our shares will be adversely affected. Additionally, although we will seek to have our common stock re-listed on The NASDAQ Small Cap Market
once we are in full
compliance with our obligations as a reporting company, we can provide no assurance that we will be re-listed.



For most of 2003 and through 2004, our stock price was near or below $5.00. When the stock price is this low, a major negative fluctuation in price could drive
the stock price below the $4.00 per share level, which is a requirement for applying to be re-listed on The NASDAQ Small Cap Market. If we become re-listed on The NASDAQ Small
Cap Market and our stock price trades below $1.00 per share for a period of time, we risk being delisted from The NASDAQ Stock Market again. In addition, if we become re-listed, when our
stock price is below $5.00 per share, brokerage houses are often prohibited from allowing the stock to be used as collateral in a margin account. If any of our shareholders were then using their
Fischer Imaging shares in such a manner, a margin call could be placed by the broker who would sell the shares at whatever price they could be sold for, thus driving the share price even lower. This
could reduce the liquidity and the price of our common stock.



Our $8 million line of credit facility with Silicon Valley Bank contains financial and other covenants and is subject to borrowing base restrictions. Our
failure to meet any of our covenants under our loan agreement could significantly harm our liquidity and financial position.

27

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The market price of our common stock could be subject to significant fluctuations in response to variations in quarterly operating results and other factors. In
addition, the securities markets have experienced significant price and volume fluctuations from time to time in recent years that have often
been unrelated or disproportionate to the operating performance of particular companies. These broad fluctuations may adversely affect the market price of our common stock.



Although a substantial number of our outstanding stock options have exercise prices above current market prices, sales of a substantial number of shares of common
stock, or the perception that such sales could occur, could have a material, adverse effect on the market price of our common stock and could impair our ability to raise capital through the sale of
equity securities.



Four institutional investors and a single individual stockholder, combined, beneficially, own approximately 67.8% of our common stock as of December 31,
2003. As a result, a few shareholders are able to exercise significant influence on the election of our board of directors and could thereby direct our policies.



Our certificate of incorporation and bylaws include provisions that may be deemed to have anti-takeover effects and may delay, defer or prevent a
takeover attempt that stockholders might consider in their best interests. These provisions include the ability of the board of directors to issue shares of preferred stock in one or more series with
such rights, obligations, and preferences as the board of directors may provide, a "fair price" provision, a provision that requires stockholder action to be taken at meetings and not by written
consent, a provision under which only the board of directors may call meetings of stockholders, certain advance notice procedures for nominating candidates for election to the board of directors and
staggered terms for our board of directors.

In
November 1994, our board of directors adopted a stockholder rights plan and, pursuant thereto, issued preferred stock purchase rights, or Rights to the holders of our common
stock. The Rights have
certain anti-takeover effects. If triggered, the Rights would cause substantial dilution to a person or group of persons (other than certain exempt persons), who acquire more than 15%
(21.5% in the case of Morgan W. Nields, a former director) of our common stock on terms not approved by the board of directors.

ITEM 2. PROPERTIES

We maintain a leased office for our headquarters and manufacturing facility in Denver, Colorado. This facility includes approximately 120,000 square feet of
office and manufacturing space and is leased from JN Properties. A former employee, as of December 31, 2003, who was previously a director of the Company, Chairman of the Board, Chief Executive
Officer and Chief Technology Officer, and a 12.8% shareholder in the Company is a general partner in JN Properties. We also lease office space in Switzerland. We believe our present facilities are
adequate for the foreseeable future.

28

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ITEM 3. LEGAL PROCEEDINGS

A complaint was filed with the Equal Employment Opportunity Commission by a group of former employees alleging age discrimination as a result of two employee
layoffs during 2001. In November 2002, the EEOC granted a "No Cause" determination as to the merits of the complaint before them and issued "right to sue" letters to all plaintiffs in
December 2002. We were a defendant in a lawsuit filed by these same employees in March 2003. The lawsuit was settled in March 2004 and we have accrued estimated costs of $150,000
as of December 31, 2003.

On
June 9, 2003, we received notice of a formal order of investigation and subpoena from the Securities and Exchange Commission. This request followed the voluntary disclosures
that we made to the SEC beginning in April 2003 and the creation of an independent board committee to review the facts and circumstances underlying our decision to restate financial results. We
currently are cooperating with the SEC in its investigation by providing documents and other information. We intend to continue our full cooperation with the SEC investigation, but we cannot predict
the outcome of the investigation. If the SEC finds wrongdoing on our part, a financial penalty or other sanctions may be imposed on us that could jeopardize our financial viability.

On
April 10, 2003 and on June 3, 2003, The Sorkin, LLC and James K. Harbert filed punitive class action lawsuits against us and three of our former officers and directors,
Morgan Nields, Gerald Knudson and Louis Rivelli, in the United States District Court for the District of Colorado. The complaints are purportedly brought on behalf of purchasers of shares of our
common stock during the period February 14, 2001 to April 1, 2003 and allege that, among other things, during the punitive class period, the Company and the individual defendants made
materially false statements in violation of Section 10(b) of the Exchange Act, Rule 10b-5 promulgated under the Exchange Act, and Section 20(a) of the Exchange Act.
The complaints seek unspecified compensatory damages and other relief. On August 7, 2003, the company, and Messrs. Nields and Knudson moved to dismiss all claims asserted by The Sorkin,
LLC and Harbert. On August 18, 2003, Mr. Rivelli moved to dismiss all claims asserted in those lawsuits. On October 20, 2003, Mr. Harbert moved to dismiss his lawsuit,
which the court subsequently granted. On October 21, 2003, The Sorkin, LLC and Mr. Harbert filed an amended class action complaint. The amended complaint contains the same claims for
relief against the Company and Messrs. Nields and Rivelli, but does not assert any claims against Mr. Knudson. In addition, the amended complaint seeks to recover unspecified
compensatory damages and other relief on behalf of purchasers of shares of our common stock during the period February 14, 2001 to July 17, 2003. The Company, Mr. Nields and
Mr. Rivelli have filed motions to dismiss all claims asserted in the amended complaint.

We
are a defendant in various other lawsuits incident to the operations of our business. None of these lawsuits are believed to have a material impact on our results of operations.

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

The information required by this item regarding submission of matters to a vote of security holders is incorporated by reference to the information set forth in
the section of the proxy statement entitled "Equity Compensation Plan Information."

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock has historically traded on The NASDAQ Stock Market under the symbol "FIMG." From August 14, 2002 to November 14, 2002, our symbol
was "FIMGE" which signified that we were delinquent in our quarterly reporting requirements with the Securities and Exchange Commission. On April 1, 2003, we announced that we would be delaying
the filing of our 2002 Annual Report on Form 10-K to address accounting matters. On July 7, 2003, simultaneous with the delisting of our common stock from the NASDAQ stock
exchange, our symbol changed to "FIMG.PK" and our common stock was available for trading over-the-counter with trades reported by the Pink Sheets LLC. We plan to apply to
become re-listed on the NASDAQ Small Cap Market, using our symbol "FIMG" subsequent to the filing of this Annual Report on Form 10-K. The following table sets forth, for
each of the periods indicated, the high and low closing sale prices per share of our common stock as reported by The NASDAQ Stock Market or the Pink Sheets LLC, as applicable.

High

Low2002First Quarter

$
13.35

$
8.11Second Quarter


13.00


8.50Third Quarter


8.97


3.45Fourth Quarter


6.34


4.332003First Quarter

$
7.43

$
5.29Second Quarter


5.39


3.85Third Quarter


4.94


2.75Fourth Quarter


5.25


3.45


As
of December 31, 2003, there were approximately 250 holders of record of our common stock. We believe that we actually have in excess of 1,500 beneficial owners.

The
closing sale price of our common stock on December 31, 2003 as reported by Pink Sheets, LLC was $4.80 per share. We can give no assurance as to the nature of recent trading in
view of the limited public information available and the limited trading in common stock.

We
have not paid any cash dividends on our common stock and intend to retain future earnings to finance the growth of our business rather than to pay cash dividends.

Securities Authorized for Issuance Under Equity Compensation Plans

The information required by this Item 201(d) of Regulation S-K regarding securities authorized for issuance under equity compensation
plans is incorporated by reference from our definitive Proxy Statement to be filed in connection with the Annual Meeting of Stockholders.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

Our Selected Financial Data for the years ended December 31, 2001, 2000 and 1999 has been restated to incorporate the restatement adjustments. The 2003,
2002 and 2001 data is derived from our audited financial statements beginning on page F-1. The 2000 and 1999 data is derived from restated unaudited financial information. The
restatement adjustments for 2001 and 2000 are described in the 2002 annual report on Form 10-K.

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You
should read the following Selected Consolidated Financial Data with the consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Form 10-K.

|                                                  |                                  | 2003                     |              | 2002   |        | 2001    |        | 2000   |        | 1999   |       
|------------------------------------------------- | -------------------------------- | ------------------------ | ------------ | ------ | ------ | ------- | ------ | ------ | ------ | ------ | ------
|
|Consolidated Statement of Operations Data         |                                  |                          |              |        |        |         |        |        |        |        |       
|Revenues:                                         |                                  |                          |              |        |        |         |        |        |        |        |       
|                                                  | Products                         |                          | $            | 32,814 |        | $       | 30,630 |        | $      | 28,055 |       
|                                                  | Services                         |                          |              | 13,348 |        |         | 14,480 |        |        | 13,860 |       
|                                                  | Sale of manufacturing license(1) |                          |              |       |        |         |       |        |        |       |       
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|                                                  |                                  | Total revenues           |              |        | 46,162 |         |        | 45,110 |        |        | 41,915
|Cost of sales:                                    |                                  |                          |              |        |        |         |        |        |        |        |       
|                                                  | Products                         |                          |              | 25,109 |        |         | 28,180 |        |        | 17,984 |       
|                                                  | Services                         |                          |              | 13,629 |        |         | 11,887 |        |        | 7,307  |       
|                                                  | Sale of manufacturing license    |                          |              |       |        |         |       |        |        |       |       
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|                                                  |                                  | Total                    |              |        | 38,738 |         |        | 40,067 |        |        | 25,291
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|                                                  |                                  |                          | Gross profit |        |        | 7,424   |        |        | 5,043  |        |       
|Operating expenses:                               |                                  |                          |              |        |        |         |        |        |        |        |       
|                                                  | Research and development         |                          |              | 4,654  |        |         | 4,559  |        |        | 3,257  |       
|                                                  | Selling and marketing            |                          |              | 9,376  |        |         | 7,981  |        |        | 7,278  |       
|                                                  | General and administrative       |                          |              | 8,754  |        |         | 7,697  |        |        | 5,028  |       
|                                                  | Other(2)                         |                          |              |       |        |         |       |        |        |       |       
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|                                                  |                                  | Total operating expenses |              |        | 22,784 |         |        | 20,237 |        |        | 15,563
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|(Loss) income from operations                     |                                  |                          | (15,360      | )      |        | (15,194 | )      |        | 1,061  |        |       
|Interest expense                                  |                                  |                          | (49          | )      |        | (81     | )      |        | (138   | )      |       
|Interest income                                   |                                  |                          | 62           |        |        | 119     |        |        | 77     |        |       
|Patent settlement income(3)                       |                                  |                          | 900          |        |        | 24,950  |        |        |       |        |       
|Other (expense) income                            |                                  |                          | 34           |        |        | (74     | )      |        | (118   | )      |       
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|Income (loss) before income taxes                 |                                  |                          | (14,413      | )      |        | 9,720   |        |        | 882    |        |       
|Provision (benefit) for income taxes              |                                  |                          |             |        |        |        |        |        |       |        |       
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|Net income (loss)                                 |                                  | $                        | (14,413      | )      | $      | 9,720   |        | $      | 882    |        | $     
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|Net income (loss) per common share:               |                                  |                          |              |        |        |         |        |        |        |        |       
|                                                  | Basic                            |                          | $            | (1.55  | )      | $       | 1.06   |        | $      | 0.10   |       
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|                                                  | Diluted                          |                          | $            | (1.55  | )      | $       | 1.00   |        | $      | 0.09   |       
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|Shares used to calculate income (loss) per share: |                                  |                          |              |        |        |         |        |        |        |        |       
|                                                  | Basic                            |                          |              | 9,319  |        |         | 9,204  |        |        | 8,643  |       
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|                                                  | Diluted                          |                          |              | 9,319  |        |         | 9,692  |        |        | 9,352  |       
|                                                  |                                  |                          |              |        |        |         |        |        |        |        |       
|Balance Sheet Data (at end of period):            |                                  |                          |              |        |        |         |        |        |        |        |       
|Working capital                                   |                                  | $                        | 9,404        |        | $      | 23,199  |        | $      | 14,161 |        | $     
|Total assets                                      |                                  |                          | 32,348       |        |        | 41,079  |        |        | 31,552 |        |       
|Total long-term debt (life insurance loans)       |                                  |                          | 454          |        |        | 1,181   |        |        | 1,003  |        |       
|Total stockholders' equity                        |                                  |                          | 13,075       |        |        | 27,493  |        |        | 17,669 |        |       

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31

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following "Management's Discussion and Analysis" with the consolidated financial statements and related notes and "Selected Consolidated
Financial Data" appearing elsewhere in this Form 10-K.

Overview

We design, manufacture and sell innovative mammography and digital imaging products used in the diagnosis of breast cancer and other diseases. Our two primary
breast cancer products are our MammoTest stereotactic breast biopsy system, which we introduced in 1988, and our SenoScan digital mammography system, introduced in late 2001. MammoTest is a mature
product, and while we have introduced, and intend to continue to introduce, continued improvements to the system, it is not expected to provide significant growth in revenue going forward. We believe
SenoScan has significant potential for growth as digital mammography gains acceptance over traditional x-ray film mammography. Our ability to grow SenoScan sales and capture market share
in this emerging digital market is important to our success. SenoScan was approved by the FDA for sale in 2001 and since then we have invested, and will continue to invest, significant resources to
enhance performance and features, to make it a more mature product line. We also recently re-initiated our efforts to market and sell our Electrophysiology and VersaRad x-ray
products to the general radiology market through our RE&S division. In addition to our product sales we provide services for installation and application training at the time our products are
installed at the customer's location. We also sell parts and provide maintenance services under our limited warranties, under long-term contracts, or at hourly rates.

During
2003, in addition to continuing ongoing initiatives started in 2002, we implemented several significant new operational and strategic initiatives to improve our business
processes, enhance product performance and reliability for our SenoScan product and address our financial and disclosure controls. These initiatives included significant changes to our senior
management team and board of directors, an audit of our 2002 financial statements and re-audit of prior year financial statements resulting in a restatement of our financial statements for
2001 and prior years, and implementation of certain changes to enhance the quality and consistency of our financial information and reporting. We also invested significant time and resources in our
research and development organization as well as our manufacturing and service organizations to address product and system challenges related to the
initial commercial deployment of our SenoScan product. As a result of these initiatives, we reduced our focus on marketing our SenoScan product, which we believe resulted in a slower adoption rate for
our product. Our product margins were lower than anticipated due to increased competition resulting in lower average selling prices and to manufacturing inefficiencies resulting in increased costs. We
invested significant resources in our service department in anticipation of increased product sales growth in the future and to install, train and support customers purchasing our newly developed
products as a part of our customer satisfaction program for early adopters of our digital imaging technology. We also began developing our European operations to focus on selling our SenoScan product
directly to end user customers and to provide service support for our full line of products sold in Europe. As a result, our overall service costs and operating costs increased significantly in 2003.

Implementing
these strategic and operational initiatives during 2003 resulted in several charges for inventory write-offs as well as increased costs associated with building
our European operations, enhancing performance of our products and investments in operations intended to reduce inefficiencies. The primary costs associated with these initiatives included
$4.6 million for additional operating costs in our service department related to additional parts usage and increasing our service personnel; $2.6 million related to inventory
write-offs at year-end; a $2.3 million operating loss associated with our European operations; and, $0.9 million related to increased corporate governance costs
and FDA compliance requirements. We also incurred costs of $1.9 million related to our financial restatement;

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we
do not anticipate incurring substantial financial restatement costs in the future. In addition, we believe we incurred significant costs related to inefficiencies associated with replacing our
senior management team, diverting management's time and attention to the financial restatement and improving business and financial controls, and developing necessary product improvements to mature
our newly developed products. While we have not quantified these costs, we believe they have contributed substantially to our operating losses during 2003 as well as 2002. However, we believe our
investment in these areas is critical to meeting our customer expectations and to improving our financial performance and operational efficiencies. The changes we have implemented are key to our
long-term success and returning the company to profitability.

Results of Operations

The following table sets forth the percentage relationship to revenues represented by certain data included in our statements of operations for the years ended
December 31:

2003

2002

2001Revenues:Products

71.1
%
67.9
%
66.9
%Services

28.9

32.1

33.1Total revenues

100.0
%
100.0
%
100.0
%Cost of sales:Products

54.4

62.4

42.9Services

29.5

26.4

17.4Total cost of sales

83.9
%
88.8
%
60.3
%Gross profit

16.1

11.2

39.7Operating expenses:Research and development

10.1

10.1

7.8Selling and marketing

20.3

17.7

17.4General and administrative

19.0

17.1

12.0Total operating expenses

49.4

44.9

37.2Income (loss) from operations

(33.3
)
(33.7
)
(2.5
)Interest expense

(0.1
)
(0.2
)
(0.3
)Interest income

0.1

0.3

.2Patent settlement

2.0

55.3

Other income (expense), net

0.1

(0.2
)
(0.3
)Income (loss) before income taxes

(31.2
)
21.5

2.1Provision for income taxes





Net income (loss)

(31.2
)%
21.5
%
2.1
%


Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues.We generate revenues from sales of our SenoScan systems, MammoTest Systems, and Electrophysiology and VersaRad
x-ray products through our RE&S division, along with sales of third-party peripherals and software sold in conjunction with our system sales. Each of our products has several different
configurations based on product features, performance requirements, and customer requests. Our MammoTest system is a mature product in a mature market and we don't anticipate significant growth in
this product line. We expect an increasing percentage of our revenues will be

33

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derived
from our SenoScan systems and our x-ray products. We bundle installation services, limited warranty and applications training with our large system sales. We also generate service
revenues from long-term service contracts that range from one to five years, services charged at hourly rates and from parts sales not covered under our limited warranty program or long
term service contracts. We do not believe that inflation will have a material impact our revenues.

Revenues
increased 2.4% to $46.2 million in 2003 from $45.1 million in 2002. Our product revenues increased $2.2 million, or 7.1%, while our service revenues
decreased $1.1 million, or 7.8%, during 2003. The increase in our product revenues resulted from an increase in the number of SenoScan units sold in 2003 compared to 2002, but was partially
offset by a lower average selling price caused by increased competition and lowering pricing to increase market adoption rate. Revenue from our SenoScan products totaled $11.0 million in 2003
compared to $5.5 million in 2002. Revenue from our MammoTest products decreased to $16.5 million in 2003 from $21.2 million in 2002. Sales of products from our RE&S division
increased in 2003 due to increased unit sales of our Bloom Stimulator, while unit sales of our VersaRad remained level.

Our
service revenues decreased primarily from lower parts sales as we had more SenoScan and MammoTest units under warranty or long-term service contracts in 2003 compared to
2002. We had fewer service contracts on our x-ray products as we discontinued offering long-term service contracts on this older product line. We also extended our warranty to
certain customers who purchased our SenoScan products during our initial commercial release thereby delaying new long-term service contracts that generate revenue. Our SenoScan systems
primarily remained under warranty throughout 2003 as we extended our warranty to customers due to the product performance and reliabilities problems we experienced. We expect service revenues from
long-term contracts on our SenoScan systems to increase as we sell more units and as units come off warranty and our customers begin purchasing service contracts.

Cost of sales.Cost of sales for our products consists of fixed and variable costs incurred for purchased components for our
products, assembly, integration and testing of our products, expenses associated with quality and regulatory affairs, warranty provision, applications training and testing, excess and obsolete
inventory, shrinkage and other inventory carrying costs. Cost of sales for our services consists primarily of parts cost, salaries, commissions and travel costs for personnel in field service,
customer service, and service administration and management. Service costs are offset by warranty credits from our limited warranty program.

Cost
of sales for our products decreased 11.0% to $25.1 million in 2003 from $28.2 million in 2002. Our product costs of sales were 76.5% of product sales in 2003 compared
to 92.0% of product sales in 2002. The overall decrease in cost of sales for products is due primarily to significant inventory write-offs in 2002 that were not as large in 2003. Our
SenoScan systems had lower cost of sales resulting in increased margins in 2003 following the introduction of the product line in 2001. We also began implementing our operations initiatives to
increase manufacturing efficiencies and reduce product costs. We expect our product margins will improve, as the SenoScan becomes a more mature product. Cost of sales for our MammoTest systems
remained constant in 2003 compared to 2002.    Cost of sales for products from our RE&S division increased in 2003 resulting in slightly lower gross margin as a percent of sales.

Cost
of sales for our services increased 14.7% to $13.6 million in 2003 from $11.9 million in 2002. Our service costs were 102.1% of service revenues in 2003 compared to
82.1% in 2002. The increase is due to additional operating costs of $1.8 million offset by a decrease in parts usage expenses of $0.1 million. Our operating costs increased as we added
20% additional staffing in our field service and applications departments to meet the demands of ramping up our European operations and increased training requirements due to increased product
installations. Our parts usage expense and warranty amortization increased as a result of the product performance and reliability problems we encountered

34

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with
our SenoScan products during 2003. We expect our service margins will significantly improve as our revenues increase more in line with our service support capacity due to products coming off of
warranty and customers purchasing long-term service contracts and as a result of the product enhancements we have made to correct performance and reliability problems with our SenoScan
products.

Research and development expenses.We incur research and development expenses to design and develop new products as well as
develop significant enhancements to our existing products. These expenses consist primarily of compensation and overhead costs for staff engaged in research and development activities, software
development, consulting costs, and costs for materials and supplies consumed while performing research and development activities. We also offset our research and development costs with income from
research grants we receive.

Research
and development expenses increased 2.1% to $4.7 million in 2003 from $4.6 million in 2002. Our compensation costs increased $0.5 million related to
increased staffing levels during 2003 compared with 2002 and from severance costs resulting from management changes in 2003. As a part of our quality assurance program, we increased our staffing
levels in software development and engineering to focus on redesigning older products and enhancing the features and functionality of our newly developed products. These increased costs were partially
offset by a $0.3 million from a SBIR grant from the National Cancer Institute that we began receiving in 2003. We also had fewer product development initiatives in 2003 resulting in cost
reductions of $0.3 million from lower consulting and materials and supplies requirements as we focused primarily on enhancing our SenoScan product line. We plan to continue investing resources
in developing new enhancements for our products and
redesigning our older product line under our RE&S division to incorporate new technologies. We also intend to seek additional research grants and product development collaborations to fund our
research and development efforts and to continue advancing our technology.

Selling and marketing expenses.Our selling and marketing expenses primarily consist of salaries, commissions, travel and
other overhead costs for employees and activities in the areas of sales, marketing, sales support, and sales administration. Expenses associated with advertising, trade shows, conferences, promotional
and training costs related to marketing our products are also classified as selling and marketing expenses. We sell our products worldwide primarily through our direct sales force and dealers and we
market our products primarily to physicians.

Selling
and marketing expenses increased 17.5% to $9.4 million in 2003 from $8.0 million in 2002. Our compensation costs for our sales organization increased by
$1.4 million due to increased revenues and a significantly greater backlog at the end of 2003 resulting in paying partial commissions on sale orders for which there is no commensurate revenue
in 2003 as revenue will be recognized at a later date upon completion of the sale. We also had increased costs of ramping up our European sales operations in 2003 as we changed our strategy in Europe
by implementing a direct sales business model. Our marketing expenses for trade shows, advertising and promotional costs decreased by $0.3 million, due primarily to less marketing activity in
the fourth quarter of 2003, as we focused our internal resources on enhancing our products. We plan to increase our marketing and sales activities in the foreseeable future to increase revenues and
broaden our market share.

General and administrative expenses.Our general and administrative expenses consist primarily of compensation and overhead
costs for employees and activities in the areas of finance, information technology, human resources and administration. Fees for attorneys, independent auditors, other consultants and costs directly
related to our financial restatement are also included in general and administrative.

General
and administrative expenses increased 13.7% to $8.8 million in 2003 from $7.7 million in 2002. The increase is due primarily to approximately $1.9 million in
legal and accounting fees

35

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associated
with the audit committee's internal review of various accounting and other matters, auditing expenses and legal costs related to the restatement of our financial statements. We also had
increased expenses primarily from additional compensation and travel costs incurred by our European operations to develop administrative infrastructure in support of our new direct sales strategy in
Europe. We had significant non-recurring legal costs in connection with our patent lawsuit settlement in 2002 that did not recur in 2003. We expect our general and administrative expenses
to decrease as a percentage of revenue now that we have completed our financial restatement; however, we plan to continue making investments in building an organizational infrastructure to support
improvements in internal controls, financial reporting and disclosure controls and meeting corporate governance requirements. We also expect to incur significant legal and professional accounting
expenses associated with satisfying the listing requirements of The NASDAQ Small Cap Market should our common stock be re-listed and in connection with implementing the requirements of the
Sarbanes-Oxley Act of 2002, in particular, Section 404 thereof, which requires management to report on, and our independent auditors to attest to, the effectiveness of our internal controls.

Other income/expenses.Other income/expenses consist primarily of patent settlement income of $0.9 million that we
receive annually beginning in 2003 for seven years. We received $25.0 million from the patent settlement in 2002.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Revenues.Revenues increased 7.6% to $45.1 million in 2002 from $41.9 million in 2001. Our product revenues
increased 9.2% while our service revenues increased 4.5%. The increase in product revenues was primarily the result of the rollout of the new SenoScan Digital Imaging system during 2002. The increase
in service revenues was the result of a higher level of service contract renewals during 2002 compared to 2001.

Cost of sales.Cost of sales for our products increased 56.7% to $28.2 million in 2002 from $18.0 million in
2001. Our product costs were 92.0% of product revenue in 2002 compared to 64.1% in 2001. The increase was primarily due a $9.7 million charge for excess and obsolete inventory associated with
our RE&S product line and other inventory shrinkage. There was no similar write-off in 2001. Also, the initial sales of our SenoScan product yielded lower margins in 2002 because of
additional warranty provision of $2.4 million.

Cost
of sales for our services increased 63.0% to $11.9 million in 2002 from $7.3 million in 2001. Our service costs were 82.1% of service revenues in 2002 compared to
52.7% in 2001. During 2002 we incurred additional operating expenses of $2.5 million resulting from a 53% increase in staffing levels in our service organization to support the anticipated
growth in our mammography product lines in the United States and Europe. Our product and warranty costs increased $2.1 million due to additional costs related to the commercial launch of our
SenoScan digital imaging system during 2002.

Research and development expenses.Research and development expenses increased 39.4% to $4.6 million in 2002 from
$3.3 million in 2001. We increased our staffing levels and incurred additional consulting and outside labor costs in 2002 to support the growth and development of our MammoTest and SenoScan
product offerings.

Selling and marketing expenses.Selling and marketing expenses increased 9.6% to $8.0 million in 2002 from
$7.3 million in 2001. During 2002 we initiated a global marketing program in conjunction with the commercial launch of our SenoScan product and other mammography product lines that resulted in
additional marketing costs of $0.8 million. These additional costs were partially offset by lower head-count related costs in our sales organization as we consolidated our sales
management staff and restructured our domestic sales force during 2002.

36

---

General and administrative expenses.General and administrative expenses increased 53.1% to $7.7 million in 2002 from
$5.0 million in 2001.    We incurred non-recurring expenses of $1.0 million for legal and other costs directly related to our patent lawsuit settlement in 2002.
Our overall general and administrative operating expenses increased by an additional $1.7 million in 2002 to support our domestic operations and to expand our European operations which involved
building infrastructure to support a direct sales force business model.

Interest expense/interest income.Interest expense decreased in 2002 due to lower borrowings against our line of credit and
interest income increased in 2002 due to higher average cash balances resulting from the $25.0 million cash received from our patent lawsuit settlement during the second quarter of 2002.

Patent settlement income.During 2002 we settled a patent infringement lawsuit against Thermo-Electron Corporation and
Hologic, Inc. for $32.2 million. We received $25.0 million during the second quarter of 2002 and we are scheduled to receive the remaining $7.2 million from Thermo-Electron
in equal annual installments over the remaining life of the patents for continued sales of the breast-biopsy imaging system now being sold by Hologic, Inc. We recognized other income for the
$25.0 million payment, net of certain settlement costs. We will recognize the remaining $7.2 million as cash is received over the scheduled eight-year payment period, which
we expect will be $0.9 million each year during quarter two for the remaining patent life.

Income Taxes

As of December 31, 2003, we had approximately $28.4 million of domestic net operating loss carry-forwards for federal income tax reporting purposes
and $2.7 million of foreign net operating loss carry-forwards, that expire at various dates through 2023. We also had available research and development tax credits of approximately
$0.2 million expiring at various dates through 2020, and alternative minimum tax credits of $0.6 million. The utilization of these loss carryforwards and research and development credit
carryforwards to reduce future income taxes will depend on our ability to generate sufficient taxable income prior to the expiration of the net operating loss carryforwards and research and
development credit carryforwards.

No
income tax provisions have been recognized for foreign tax jurisdictions and no income tax benefits have been recognized for subsidiary losses outside the domestic return.

Liquidity and Capital Resources

We have incurred significant losses and have had negative cash flows from operations during 2003 as well as during 2002, before taking into account the patent
settlement income of $25.0 million received in 2002. We funded our loss from operations of $15.4 million in 2003 and $15.2 million in 2002 primarily from the proceeds received
from our patent settlement. During 2003 our operating losses were due largely to implementing several strategic and operational initiatives, which resulted in significant expenses including
$4.6 million for additional operating costs in our service department related to additional parts usage and increasing our service personnel; $2.6 million related to inventory
write-offs at year-end; a $2.3 million operating loss associated with our European operations; and, $0.9 million related to increased corporate governance costs
and FDA compliance requirements. We also incurred costs of $1.9 million related to our financial restatement, which we do not anticipate incurring as substantial of costs in the future. In
addition, we believe we incurred significant costs related to inefficiencies associated with replacing our senior management team, diverting management's time and attention to the financial
restatement and improving business and financial controls, and developing necessary product improvements to mature our newly developed products. While we have not quantified these costs, we believe
they have contributed substantially to our operating losses during 2003 as well as 2002. We believe our investment in these areas is critical to meeting our customer

37

---

expectations
and to improving our financial performance and operational efficiencies. The changes we have implemented are key to our long-term success and returning the company to
profitability.

We
expect to continue incurring operating losses during much of 2004 as it will take time for our strategic and operating initiatives to have a positive affect on our business
operations. We have developed an operating plan intended to return the company to positive cash flow from operations. Key components to this plan include increasing revenues and improving our
operating efficiencies to reduce cost of sales thereby improving gross margins, and lowering our overall operating costs as a percentage of revenues. Our future revenue growth and success depends
largely upon increasing sales of our SenoScan product and entering into corporate relationships to broaden our products' reach. We have taken a number of steps to improve the performance and
reliability of our SenoScan product and to advance our technology for digital imaging, which we believe will result in a significant increase in product revenues. We have begun implementing
manufacturing and process improvements and redesigning parts and components to our products that we believe will result in reducing cost of sales and increasing gross margins on our products. We
expect our service revenue to increase, as our installation base for our product continues to increase, such that our service revenues become more inline with our service cost infrastructure and we
will return to positive gross margins for our service organization. Our operating plan includes reducing our overall operating costs as a percentage of revenue as we expect not to continue incurring
costs associated with the restatement of our financial statements or continued initial start up costs to expand our European operations. However, we expect to continue investing resources to build an
organizational infrastructure to support our business objectives and continue meeting corporate governance requirements.

As
of December 31, 2003, we had $1.9 million in cash and $9.4 million in working capital compared to $8.4 million in cash and $23.3 million in working
capital at December 31, 2002. The decrease in our cash and working capital resulted primarily from cash used to fund our operating losses in 2003 offset by cash provided to operations due to
changes in our current assets and current liabilities.



We used $5.6 million of cash in our operating activities during 2003, which is the result of our net loss of $14.5 million offset by
non-cash charges for depreciation and amortization of $1.1 million and cash provided by changes in our current assets and current liabilities of $7.6 million. Our receivables
increased $0.7 million due to increased product sales in late 2003 compared to the same period in late 2002. Our inventory decreased $3.0 million due to inventory write-offs
and focused efforts to maintain lower inventory levels. Included in inventory is $3.4 million in inventory related to an order from an international customer. While we shipped the product in
December 2003 we retained title to the inventory and did not record revenue in 2003 because the transaction did not meet our criteria for revenue recognition. Our payables and current
liabilities increased due to significant payables associated with our financial restatement and vendor payables related to fulfilling the large order from an international customer that we received in
December 2003. As a result, our year-end inventory balances and payables balances are significantly higher than normal. We received payment in full for the international order in
February 2004. The increase in customer deposits reflects cash received from increased backlog at the end of 2003.



We used $1.3 million of cash for investing activities during 2003 primarily for ongoing capital expenditures including our new ERP system.

38

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We issued 41,908 shares of common stock through employees exercising stock options and sales of shares under our employee stock purchase plan resulting in cash
proceeds of $0.2 million. In September 2003 we entered into a sale/leaseback arrangement on our ERP system resulting in proceeds of $0.5 million. We used $0.1 million of
cash as we began repaying our capital lease obligation.



In June 2003, we entered into an $8.0 million credit facility, subject to restrictions based on eligible receivables. The amount available under the
credit facility at December 31, 2003 was approximately $8.0 million, which is further limited to $2.4 million until such time as the bank completes its review of our restated
financial statements. As amended, this credit agreement expires on December 9, 2004, and is secured by all of our assets. If we do not maintain compliance with the net worth covenant or other
covenants in the agreement, the amount available under the credit facility may be further reduced or we may not be permitted to make borrowings against the credit facility. Borrowings under the
agreement bear interest at the bank's prime rate, plus 2.75%, with a minimum total interest rate of 7%. As of December 31, 2003, there are no outstanding borrowings under the facility.

Our
future capital requirements will depend on a number of factors, including any judgments or settlements which may result from the ongoing investigation of us by the SEC, the
shareholder class-action lawsuit and other legal proceeding described above in "Item 3Legal Proceedings"; legal, accounting and other professional fees associated with such investigations
and legal proceedings, as well as our ongoing efforts to develop and implement internal controls and corporate governance policies and procedures designed to enhance the accuracy, quality and
consistency of our financial information and reporting; costs associated with satisfying the listing requirements of The
NASDAQ Stock Market should our common stock be re-listed; costs associated with implementing the requirements of the Sarbanes-Oxley Act of 2002, in particular, Section 404 thereof,
which requires management to report on, and our independent auditors to attest to the effectiveness of, our internal controls; market acceptance of SenoScan, the resources we devote to developing and
supporting our products; continued progress of our research and development of potential products; the need to acquire licenses to technology; and potential future merger and acquisition activity.

We
believe that our balances of cash, cash flows expected to be generated by future operating activities, and amounts available under our credit facility will be sufficient to meet our
cash requirements over the next twelve months. We may require additional financing sooner than expected depending on the factors listed in the preceding paragraph. Additionally, we may require
additional financing sooner than expected if we identify significant opportunities to invest in our core technology or to accelerate growth in market share and revenues. We expect that to meet our
long-term needs we may need to raise additional funds through the sale of equity securities, the incurrence of indebtedness or through funds derived through entering into collaborative
agreements with third parties.

Additional
equity or debt financing may not be available on acceptable terms, or at all. Our common stock was delisted from The NASDAQ Stock Market on July 7, 2003. One result of
this action is a limited public market for our common stock. Trading is now conducted in the over-the-counter market in the so-called "Pink Sheets." This reduced
liquidity will likely make it difficult to raise additional capital. If we are unable to obtain additional capital, we may be required to divest product lines, reduce our sales and marketing
activities, reduce the scope of or eliminate our research and development programs, or relinquish rights to technologies or products that we might otherwise seek to develop or commercialize. In the
event that we do raise additional equity financing, our stockholders will be further diluted. In the event that we incur additional indebtedness to fund our operations, we may have to grant the lender
a secondary security interest in our assets since our assets are currently pledged against our line of credit.

39

---



Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition,
changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that are material.

Contractual Obligations

At December 31, 2003 our commitments under contractual obligations were as follows (in thousands):

|Payments Due by Period:            |  | Total |       | Less
Than
1 Year |   | 1-3
Years |  | 4-5
Years |       | After 5
Years
|---------------------------------- |  | ----- | ----- | ---------------- | - | --------- |  | --------- | ----- | -------------
|Capital lease obligation           |  | $     | 454   |                  | $ | 231       |  | $         | 223   |              
|Operating leases                   |  |       | 8,673 |                  |   | 932       |  |           | 1,847 |              
|                                   |  |       |       |                  |   |           |  |           |       |              
|Total contractual cash obligations |  | $     | 9,350 |                  | $ | 1,163     |  | $         | 2,070 |              
|                                   |  |       |       |                  |   |           |  |           |       |              

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that are most important to the portrayal of our financial condition and operating results, and require management to make
its most difficult and subjective judgments, often as a result of the need to make estimates on matters that are inherently uncertain. These judgments are based on our historical experience, terms of
existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Actual results may differ from
these estimates under different assumptions or conditions.

As
of the date of this filing, our critical accounting policies include:

Revenue Recognition

We follow the provisions of Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB101) which provides for revenue recognition when
persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collectibility is probable. We recognize product revenue upon effective delivery for our
large, direct-sale medical equipment, although we defer recognition until all conditions are satisfied in cases where other arrangements exist or obligations remain to be performed.
Revenue related to dealers and other product sales are recognized upon shipment, provided that title and risk of loss has transferred. We recognize revenue from services when they are performed, and
from pre-paid service contracts and extended warranty contracts over the periods for which the contracts are in effect. We bill for service contracts and extended warranties monthly,
quarterly and annually in advance, and record deferred revenue, which is then recognized over the service period. We also sell replacement parts to customers, and record revenue at the time of
shipment when title transfers. Certain replaced parts may be returned for partial credit, and we make estimates to reduce current revenue to account for the future effect of those returns.

We
carry accounts receivable at original invoice amounts less an estimate for doubtful accounts and sales returns based on a periodic review of outstanding receivables. We provide
allowances for known and anticipated credit losses in the course of regularly evaluating individual customer receivables. This evaluation takes into consideration a customer's financial condition and
credit history as well as current economic conditions. Accounts receivable are written off when deemed uncollectible. Recovery of accounts receivable previously written off are recorded when received.

40

---

Inventories

We value inventory at the lower of cost or market using the first-in, first-out (FIFO) method. Management periodically assesses the
recoverability of inventory based on obsolescence or unmarketability equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and
changes in market conditions. These assessments require management judgments and estimates, and valuation adjustments for excess and obsolete inventory may be recorded based on these periodic
assessments.

Product Warranty

We accrue for the estimated cost of product warranties into product cost of sales at the time revenue is recognized. Although we engage in extensive product
quality programs and processes, our warranty obligation is affected by product failure rates and service delivery costs incurred in correcting a product failure. Should actual product failure rates or
service costs differ from our estimates, which are based on historical data, and engineering estimates, where applicable, revisions to the estimated warranty liability would be required. The typical
standard warranty term is for 12 months starting from the date of installation. We also sell extended warranties ranging from 12 to 60 months.

Income Taxes

As part of the process of preparing our financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This
process involves estimating actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences
result in deferred tax assets and liabilities, which are included within the balance sheet. We must then assess the likelihood that the deferred tax assets will
be recovered from future taxable income and, to the extent that recovery is not likely, a valuation allowance must be established. To the extent a valuation allowance is established, we must include
an expense within the tax provision in the statement of operations. In the event that actual results differ from these estimates, the provision for income taxes could be materially impacted. We have
fully reserved for our deferred tax asset.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows due to adverse changes in financial and
commodity market prices and rates. We are exposed to market risk in the areas of changes in United States interest rates and changes in foreign currency exchange rates as measured against the United
States dollar. These exposures are directly related to our normal operating and funding activities. Historically and as of December 31, 2003, we have not used derivative instruments or engaged
in hedging activities. There have been no significant changes in our market risk from December 31, 2002.

Foreign Currency Risk

Over the past several years, we have expanded our international sales and marketing efforts. Our exposure to foreign currency and other international business
risks may increase as our international business grows. We attempt to minimize these risks by: (1) generally requiring payments in U.S. dollars; (2) using letters of credit; and
(3) requiring advance deposits and through other means. Our international sales and marketing efforts may not be successful and we may not successfully minimize associated risks.

We
are exposed to foreign currency risks through our subsidiary operations in Switzerland and Germany. At December 31, 2003 we had cash, receivables and current liabilities
totaling $3.1 million

41

---

that
represent a net asset balance denominated in Euros. We do not employ any risk mitigation or hedging techniques with respect to amounts exposed to fluctuations in foreign currency exchange rates.

Interest Rate Risk

At December 31, 2003, we had an $8.0 million credit facility, subject to restrictions based on eligible receivables. Borrowings under the credit
facility would have reflected interest at the bank's prime rate plus 2.75% and therefore any borrowings under the credit facility would have subjected us to interest rate fluctuations. At
December 31, 2003, there are no outstanding borrowings under the facility. Increases in interest rates could, however, increase the interest expense associated with future borrowings, including
any under our credit facility. At December 31, 2003 we had a capital lease obligation, including current portion, in the aggregate amount of $0.5 million. The capital lease obligation
has a term of two years and will be repaid with monthly principal and interest payments at a fixed interest rate. A change in interest rates would not affect our obligation related to the capital
lease as of December 31, 2003, as the interest rate related to the obligation is fixed over the lease term.

We
have short-term investments in low risk and no risk financial instruments, which are readily convertible into cash, which earn interest at variable rates. At times, cash
balances with our financial institution exceed FDIC insurance limits.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our audited financial statements and notes thereto described in Item 15(a) of this report on Form 10-K and appearing on pages F-1
through F-22 of this report are incorporated by reference herein. See also "Quarterly Financial Data (unaudited)" appearing in Note 14 of our audited financial statements, which is
incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

In early 2003, we identified several accounting inaccuracies and errors that significantly affected our previously reported financial results. Under the direction
of our Board of Directors, and primarily our Audit Committee, we completed a comprehensive analysis of our accounting policies and practices and a restatement of our previously reported financial
results for 2000, 2001 and nine months ended September 29, 2002. Our new auditors, Ernst & Young LLP, completed a re-audit of our consolidated financial statements for 2000
and 2001 and has also performed an audit of our 2002 annual financial statements. See our Annual Report for 2002 on Form 10-K for a detailed description of our internal review and
restatement of our historical financial statements.

As
a result of our internal review, our Chief Executive Officer concluded that our disclosure controls and procedures (as defined in Rules 13a-14 and
15d-14 under the Securities Exchange Act of 1934) were not effective during 2003, and, as a result, we were not able to timely file all reports required to be filed by us pursuant to
Section 15(d) of the Securities Exchange Act of 1934. Our inability to timely file the required reports is due to, among other things, the fact that management's time and attention have been
consumed by the auditing and re-auditing of our financial statements for the years ended December 31, 2002, 2001 and 2000, and the resulting restatements described in our
consolidated financial statements.

However,
we implemented actions and modifications to our disclosure controls and procedures in an effort to correct the deficiencies and weaknesses. As a result, we carried out an
evaluation, under

42

---

the
supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of
December 31, 2003. Our disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are effective in alerting them to material information required to be included in our periodic SEC reports.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this Item concerning our directors is incorporated by reference to the information set forth in the sections of the Proxy Statement
entitled "Proposal 1Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance." The information required by this Item concerning our executive officers is
incorporated by reference to the information set forth in the section of the Proxy Statement entitled "Executive Officers and Key Employees."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item regarding executive compensation is incorporated by reference to the information set forth in the section of the Proxy
Statement entitled "Executive Compensation."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this Item regarding security ownership of certain beneficial owners and management is incorporated by reference to the information set
forth in the section of the Proxy Statement entitled "Security Ownership of Certain Beneficial Owners and Management." The information required by this Item regarding our equity compensations plans is
incorporated by reference to the information set forth in the section of the Proxy Statement entitled "Equity Compensation Plan Information."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this Item regarding certain relationships and related transactions is incorporated by reference to the information set forth in the
section of the Proxy Statement entitled "Certain Transactions."

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item regarding principal accountant fees and services is incorporated by reference to the information set forth in the section of
the Proxy Statement entitled "Independent Auditor's Fees."

43

---



PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

See
pages F-1 through F-22 of this Form 10-K.



Other
than as listed below, there were no other financial statement schedules required because the information is either provided in the financial statements or is not required under the
related instructions or is inapplicable.

Schedule IIValuation
accounts.

|Fiscal
Year |  | Description                     |  | Balance at
beginning
of year |       | Charged to
(deducted
from) expense |   | Write-offs
charged to
allowance |  | Balance at
the end of
year
|----------- |  | ------------------------------- |  | ---------------------------- | ----- | ---------------------------------- | - | ------------------------------- |  | --------------------------
|
|2003        |  | Allowance for doubtful accounts |  | $                            | 528   |                                    | $ | 486                             |  | $                         
|2002        |  | Allowance for doubtful accounts |  |                              | 878   |                                    |   | 252                             |  |                           
|2001        |  | Allowance for doubtful accounts |  |                              | 1,236 |                                    |   | 531                             |  |                           

|Fiscal
Year |  | Description                                 |  | Balance at
beginning
of year |       | Charged to
(deducted
from) expense |   | Write-offs
charged to
reserve |   | Balance at
the end of
year
|----------- |  | ------------------------------------------- |  | ---------------------------- | ----- | ---------------------------------- | - | ----------------------------- | - | --------------------------
|
|2003        |  | Reserve for excess and obsolete inventories |  | $                            | 3,637 |                                    | $ | (313                          | ) | $                         
|2002        |  | Reserve for excess and obsolete inventories |  |                              | 7,014 |                                    |   | 9,814                         |   |                           
|2001        |  | Reserve for excess and obsolete inventories |  |                              | 7,959 |                                    |   | 147                           |   |                           



The
following are filed as part of this report:

|Exhibit
Number |  | Description of Exhibit                                                                                                                                                                                                                                                                            
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Certificate of Incorporation of the Company(1)                                                                                                                                                                                                                                                    
|3.2            |  | Bylaws of the Company(1)                                                                                                                                                                                                                                                                          
|4.1            |  | Amended and Restated Rights Agreement, dated as of November 3, 1994, between the Company and American Securities Transfer, Inc. which includes the Certificate of Designation for the Series C Junior Participating Preferred stock as
Exhibit A and the form of Right Certificate as Exhibit B(7)
|4.2            |  | Certificate of Designation for the Series D Convertible Preferred Stock(4)                                                                                                                                                                                                                        
|10.1           |  | Agreement, dated October 5, 1990, between the Company and Dornier Medizintechnik GmbH(1)                                                                                                                                                                                                          
|10.2           |  | Non-employee Director Stock Option Plan, as amended(5)                                                                                                                                                                                                                                            
|10.3           |  | Stock Option Plan(1)                                                                                                                                                                                                                                                                              
|               |  |                                                                                                                                                                                                                                                                                                   

44

---

|10.4  |  | Retention Bonus Plan(3)                                                                                                                                                
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.5  |  | Lease Agreement, dated July 31, 1992, between the Company and JN Properties(2)                                                                                         
|10.6  |  | Agreement dated October 10, 1997, between the Company and Ethicon Endo-Surgery, Inc. with Addendum dated January 28, 1998(5)                                           
|10.7  |  | Addendum, dated February 2, 2002, to Agreement dated October 10, 1997 between the Company and Ethicon Endo-Surgery, Inc.(6)                                            
|10.8  |  | Distributor Agreement dated December 9, 1998, between the Company and Ethicon Endo-Surgery, Inc.(9)                                                                    
|10.9  |  | Addendum No. 1, dated December 9, 2000, to Distributor Agreement dated December 9, 1998 between the Company and Ethicon Endo-Surgery, Inc.(9)                          
|10.10 |  | Addendum No. 2, dated February 21, 2003, to Distributor Agreement dated December 9, 1998 between the Company and Ethicon Endo-Surgery, Inc.(9)                         
|10.11 |  | Non-Exclusive Distributorship Agreement dated October 10, 2002, between the Company and Ethicon Endo-Surgery, Inc.(9)                                                  
|10.12 |  | Form of Indemnification Agreement, dated September 1999, between the Company and Morgan W. Nields.(9)                                                                  
|10.13 |  | Form of Indemnification Agreement, dated January 2003 between the Company and each of Harris S. Ravine, J. Taylor Simonton, Todger Anderson, and Gail S. Schoettler.(9)
|10.14 |  | Accounts Receivable Financing Agreement, dated June 11, 2003, by and between Fischer Imaging Corporation and Silicon Valley Bank.(9)                                   
|10.15 |  | Amendment No. 1 to Accounts Receivable Financing Agreement, dated November 18, 2003, by and between Fischer Imaging Corporation and Silicon Valley Bank.(9)            
|10.16 |  | Employee Ethics and Business Conduct Policy(9)                                                                                                                         
|10.17 |  | Separation agreement with Morgan W. Nields dated December 19, 2003.(10)                                                                                                
|10.18 |  | Accounts Receivable Financing Modification Agreement, dated April 9, 2004, by and between Fischer Imaging Corporation and Silicon Valley Bank.(10)                     
|21    |  | List of Subsidiaries(10)                                                                                                                                               
|23    |  | Consent of Ernst and Young LLP(10)                                                                                                                                     
|24.1  |  | Power of Attorney by Todger Anderson.(10)                                                                                                                              
|24.2  |  | Power of Attorney by Gail S. Schoettler.(10)                                                                                                                           
|24.3  |  | Power of Attorney by Taylor Simonton.(10)                                                                                                                              
|31.1  |  | Certification of Harris Ravine, Chief Executive Officer and President, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.(10)                       
|31.2  |  | Certification of David Kirwan, Chief Financial Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.(10)                                      
|32.1  |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(10)                                            
|      |  |                                                                                                                                                                        

45

---

|32.2 |  | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.(10)
|---- |  | ---------------------------------------------------------------------------------------------------------------------------
|99.1 |  | Audit Committee Charter(10)                                                                                                

---

We
filed a report on Form 8-K dated April 1, 2003 announcing it would delay the filing of the 2002 annual report on Form 10-K.

We
filed a report on Form 8-K dated May 15, 2003 announcing it would delay the filing of the Form 10-Q for the quarter ended March 30,
2003.

We
filed a report on Form 8-K dated June 11, 2003 announcing it would be providing additional information at the request of the SEC.

We
filed a report on Form 8-K dated June 11, 2003 announcing it had entered into an $8.0 million accounts receivable line of credit with Silicon Bank.

We
filed a report on Form 8-K dated July 2, 2003 announcing its shares would to be delisted from the NASDAQ National Market effective July 7, 2003.

We
filed a report on Form 8-K dated July 17, 2003 announcing it had completed its preliminary analysis and restatement of unaudited financial results for 2000
and 2001; and results for fourth quarter and full year 2002 and first quarter 2003.

We
filed a report on Form 8-K dated October 7, 2003 announcing second quarter 2003 results.

See
Item 15(a)(3) of this Form 10-K.

46

---



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed
April 14, 2004 on its behalf by the undersigned, thereunto duly authorized.

| |  | FISCHER IMAGING CORPORATION
Registrant
| |  | --------------------------------------
| |  | By:                                   

Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant, in the capacities and on the dates
indicated.

|Signature                                 |  | Title                                                                                                          |  | Date          
|----------------------------------------- |  | -------------------------------------------------------------------------------------------------------------- |  | --------------
|                                          |  |                                                                                                                |  |               
|/s/GAIL S. SCHOETTLER *Gail S. Schoettler |  | Chair of the Board                                                                                             |  | April 14, 2004
|/s/HARRIS RAVINEHarris Ravine             |  | President, Chief Executive Officer and a Director
(Principal Executive Officer)                                |  | April 14, 2004
|/s/DAVID KIRWANDavid Kirwan               |  | Senior Vice President-Finance, Chief Financial Officer, Secretary
(Principal Financial and Accounting Officer) |  | April 14, 2004
|/s/TODGER ANDERSON *Todger Anderson       |  | Director                                                                                                       |  | April 14, 2004
|/s/J. TAYLOR SIMONTON *J. Taylor Simonton |  | Director                                                                                                       |  | April 14, 2004

|*By: |  | /s/HARRIS RAVINEHarris Ravine
(Attorney-in-Fact by Power of
Attorney filed herewith) |  |  |  | 
|---- |  | ------------------------------------------------------------------------------------ |  |  |  | 

47

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FISCHER IMAGING CORPORATION        CONSOLIDATED FINANCIAL STATEMENTS        INDEX



|                                                                                                     |  | Page
|---------------------------------------------------------------------------------------------------- |  | ----
|Report of Ernst & Young LLP, Independent Auditors                                                    |  | F-2 
|Consolidated Financial Statements:                                                                   |  |     
|Consolidated Balance SheetsDecember 31, 2003 and 2002                                               |  | F-3 
|Consolidated Statements of OperationsFor the Years Ended December 31, 2003, 2002 and 2001           |  | F-4 
|Consolidated Statements of Stockholders' EquityFor the Years Ended December 31, 2003, 2002 and 2001 |  | F-5 
|Consolidated Statements of Cash FlowsFor the Years Ended December 31, 2003, 2002 and 2001           |  | F-6 
|Notes to Consolidated Financial Statements                                                           |  | F-7 

F-1

---



REPORT OF INDEPENDENT AUDITORS

To
the Stockholders and Board of Directors of
Fischer Imaging Corporation:

We
have audited the accompanying consolidated balance sheets of Fischer Imaging Corporation and subsidiaries as of December 31, 2003 and 2002, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed
in the Index at Item 15. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and
schedule based on our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Fischer Imaging Corporation and
subsidiaries as of December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

|                                |  | /s/ Ernst & Young LLP
|------------------------------- |  | ---------------------
|Denver, Colorado
April 14, 2004 |  |                      

F-2

---



FISCHER IMAGING CORPORATION        CONSOLIDATED BALANCE SHEETS        (Amounts in thousands except share data)

|                                                |                                                                                                                                                                            | December 31,                                                                                                               |                                           
|----------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------
|
|ASSETS                                          |                                                                                                                                                                            |                                                                                                                            |                                           
|Current Assets:                                 |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                | Cash and cash equivalents                                                                                                                                                  |                                                                                                                            | $                                         
|                                                | Accounts receivable, net of allowance for doubtful accounts of $942 and $528 at December 31, 2003 and 2002, respectively                                                   |                                                                                                                            |                                           
|                                                | Inventories, net                                                                                                                                                           |                                                                                                                            |                                           
|                                                | Prepaid expenses and other current assets                                                                                                                                  |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            | Total current assets                                                                                                       |                                           
|Property and equipment:                         |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                | Manufacturing equipment                                                                                                                                                    |                                                                                                                            |                                           
|                                                | Office equipment and leasehold improvements                                                                                                                                |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            | Total property and equipment                                                                                               |                                           
|                                                | Less: accumulated depreciation                                                                                                                                             |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            | Property and equipment, net                                                                                                |                                           
|Intangible assets, net                          |                                                                                                                                                                            |                                                                                                                            | 1,077                                     
|Cash value of life insurance policies and other |                                                                                                                                                                            |                                                                                                                            | 25                                        
|                                                |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            |                                                                                                                            | Total assets                              
|                                                |                                                                                                                                                                            |                                                                                                                            |                                           
|LIABILITIES AND STOCKHOLDERS' EQUITY            |                                                                                                                                                                            |                                                                                                                            |                                           
|Current Liabilities:                            |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                | Accounts payable                                                                                                                                                           |                                                                                                                            | $                                         
|                                                | Current maturities under capital lease obligation                                                                                                                          |                                                                                                                            |                                           
|                                                | Accrued salaries and wages                                                                                                                                                 |                                                                                                                            |                                           
|                                                | Customer deposits                                                                                                                                                          |                                                                                                                            |                                           
|                                                | Accrued warranties                                                                                                                                                         |                                                                                                                            |                                           
|                                                | Deferred service revenue                                                                                                                                                   |                                                                                                                            |                                           
|                                                | Other current liabilities                                                                                                                                                  |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            | Total current liabilities                                                                                                  |                                           
|Long-term debt                                  |                                                                                                                                                                            |                                                                                                                            | 223                                       
|Non-current deferred revenue                    |                                                                                                                                                                            |                                                                                                                            | 619                                       
|                                                |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            |                                                                                                                            | Total liabilities                         
|Commitment and contingencies                    |                                                                                                                                                                            |                                                                                                                            |                                           
|Stockholders' Equity:                           |                                                                                                                                                                            |                                                                                                                            |                                           
|Preferred Stock, 5,000,000 shares authorized:   |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            | Series C Junior participating preferred stock, $.01 par value, 500,000 shares authorized, no shares issued and outstanding |                                           
|                                                |                                                                                                                                                                            | Series D Convertible preferred stock, $.01 par value, 506,667 shares authorized, no shares issued and outstanding          |                                           
|                                                | Common stock, $.01 par value, 25,000,000 shares authorized; 9,348,484 and 9,306,576 shares issued and outstanding at December 31, 2003 and December 31, 2002, respectively |                                                                                                                            |                                           
|                                                | Paid-in capital                                                                                                                                                            |                                                                                                                            |                                           
|                                                | Accumulated deficit                                                                                                                                                        |                                                                                                                            |                                           
|                                                | Accumulated other comprehensive loss                                                                                                                                       |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            |                                                                                                                            | Total stockholders' equity                
|                                                |                                                                                                                                                                            |                                                                                                                            |                                           
|                                                |                                                                                                                                                                            |                                                                                                                            | Total liabilities and stockholders' equity
|                                                |                                                                                                                                                                            |                                                                                                                            |                                           

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

F-3

---



FISCHER IMAGING CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS        (Amounts in thousands except per share data)

|                                                                       |                            | For the Years Ended December 31, |        
|---------------------------------------------------------------------- | -------------------------- | -------------------------------- | -------
|
|Revenues:                                                              |                            |                                  |        
|                                                                       | Products                   |                                  | $      
|                                                                       | Services                   |                                  |        
|                                                                       |                            |                                  |        
|                                                                       |                            | Total revenues                   |        
|Cost of sales:                                                         |                            |                                  |        
|                                                                       | Products                   |                                  |        
|                                                                       | Services                   |                                  |        
|                                                                       |                            |                                  |        
|                                                                       |                            | Total cost of sales              |        
|Gross profit                                                           |                            |                                  | 7,424  
|Operating expenses:                                                    |                            |                                  |        
|                                                                       | Research and development   |                                  |        
|                                                                       | Selling and marketing      |                                  |        
|                                                                       | General and administrative |                                  |        
|                                                                       |                            |                                  |        
|                                                                       |                            | Total operating expenses         |        
|                                                                       |                            |                                  |        
|(Loss) income from operations                                          |                            |                                  | (15,360
|Other income (expense):                                                |                            |                                  |        
|                                                                       | Interest expense           |                                  |        
|                                                                       | Interest income            |                                  |        
|                                                                       | Patent settlement income   |                                  |        
|                                                                       | Other                      |                                  |        
|                                                                       |                            |                                  |        
|                                                                       |                            | Total other income (expense)     |        
|                                                                       |                            |                                  |        
|(Loss) income before income taxes                                      |                            |                                  | (14,413
|                                                                       | Provision for income taxes |                                  |        
|                                                                       |                            |                                  |        
|Net (loss) income                                                      |                            | $                                | (14,413
|                                                                       |                            |                                  |        
|Net (loss) income per share:                                           |                            |                                  |        
|                                                                       | Basic                      |                                  | $      
|                                                                       |                            |                                  |        
|                                                                       | Diluted                    |                                  | $      
|                                                                       |                            |                                  |        
|Weighted average shares used to calculate net (loss) income per share: |                            |                                  |        
|                                                                       | Basic                      |                                  |        
|                                                                       |                            |                                  |        
|                                                                       | Diluted                    |                                  |        
|                                                                       |                            |                                  |        

The
accompanying notes are an integral part of these consolidated statements.

F-4

---

FISCHER IMAGING CORPORATION        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (Amounts in thousands except share data)

|                                                       |                                          | Common Stock               |   |   |    |   |   | Accumulated
Other
Comprehensive
Income (Loss) |   |   |        
|------------------------------------------------------ | ---------------------------------------- | -------------------------- | - | - | -- | - | - | --------------------------------------------- | - | - | -------
|
|
|Balances, December 31, 2000                            |                                          | 8,587,315                  |   | $ | 86 |   | $ | 47,377                                        |   | $ | (31,901
|Comprehensive income:                                  |                                          |                            |   |   |    |   |   |                                               |   |   |        
|                                                       | Net income                               |                            |  |   |    |  |   |                                               |  |   |        
|                                                       | Foreign currency translation adjustments |                            |  |   |    |  |   |                                               |  |   |        
|                                                       |                                          |                            |   |   |    |   |   |                                               |   |   |        
|                                                       |                                          | Total comprehensive income |   |  |    |   |  |                                               |   |  |        
|Shares purchased under Employee Stock Purchase Plan    |                                          | 120,844                    |   |   | 1  |   |   | 225                                           |   |   |       
|Exercise of stock options                              |                                          | 468,770                    |   |   | 4  |   |   | 1,196                                         |   |   |       
|                                                       |                                          |                            |   |   |    |   |   |                                               |   |   |        
|Balances, December 31, 2001                            |                                          | 9,176,929                  |   |   | 91 |   |   | 48,798                                        |   |   | (31,019
|Comprehensive income:                                  |                                          |                            |   |   |    |   |   |                                               |   |   |        
|                                                       | Net income                               |                            |  |   |    |  |   |                                               |  |   |        
|                                                       | Foreign currency translation adjustments |                            |  |   |    |  |   |                                               |  |   |        
|                                                       |                                          |                            |   |   |    |   |   |                                               |   |   |        
|                                                       |                                          | Total comprehensive income |   |  |    |   |  |                                               |   |  |        
|Exercise of stock options                              |                                          | 129,647                    |   |   | 2  |   |   | 333                                           |   |   |       
|                                                       |                                          |                            |   |   |    |   |   |                                               |   |   |        
|Balances, December 31, 2002                            |                                          | 9,306,576                  |   |   | 93 |   |   | 49,131                                        |   |   | (21,299
|Comprehensive loss:                                    |                                          |                            |   |   |    |   |   |                                               |   |   |        
|                                                       | Net loss                                 |                            |  |   |    |  |   |                                               |  |   |        
|                                                       | Foreign currency translation adjustments |                            |  |   |    |  |   |                                               |  |   |        
|                                                       |                                          |                            |   |   |    |   |   |                                               |   |   |        
|                                                       |                                          | Total comprehensive loss   |   |  |    |   |  |                                               |   |  |        
|Shares purchased under an Employee Stock Purchase Plan |                                          | 25,408                     |   |   |   |   |   | 129                                           |   |   |       
|Stock options issued below market value                |                                          |                           |   |   |   |   |   | 31                                            |   |   |       
|Exercise of stock options                              |                                          | 16,500                     |   |   | 1  |   |   | 52                                            |   |   |       
|                                                       |                                          |                            |   |   |    |   |   |                                               |   |   |        
|Balances, December 31, 2003                            |                                          | 9,348,484                  |   | $ | 94 |   | $ | 49,343                                        |   | $ | (35,712
|                                                       |                                          |                            |   |   |    |   |   |                                               |   |   |        

The
accompanying notes are an integral part of these consolidated statements.

F-5

---



FISCHER IMAGING CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS        (Amounts in thousands)

|                                                     |                                                                                          | For the Years Ended December 31,                        |                                          
|---------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------- | -----------------------------------------
|
|Cash flows from operating activities:                |                                                                                          |                                                         |                                          
|                                                     | Net (loss) income                                                                        |                                                         | $                                        
|                                                     | Adjustments to reconcile net income to net cash (used) provided by operating activities: |                                                         |                                          
|                                                     |                                                                                          | Depreciation                                            |                                          
|                                                     |                                                                                          | Amortization of intangible assets                       |                                          
|                                                     |                                                                                          | Loss on sales and retirements of assets                 |                                          
|                                                     |                                                                                          | Non-cash compensation expense                           |                                          
|                                                     |                                                                                          | Foreign exchange losses (gains)                         |                                          
|                                                     |                                                                                          | Change in current assets and liabilities                |                                          
|                                                     |                                                                                          |                                                         | Accounts receivable                      
|                                                     |                                                                                          |                                                         | Inventories                              
|                                                     |                                                                                          |                                                         | Prepaid expenses and other current assets
|                                                     |                                                                                          |                                                         | Accounts payable and accrued liabilities 
|                                                     |                                                                                          |                                                         | Customer deposits                        
|                                                     |                                                                                          |                                                         | Deferred service revenue                 
|                                                     |                                                                                          |                                                         | Other                                    
|                                                     |                                                                                          |                                                         |                                          
|                                                     |                                                                                          |                                                         |                                          
|Cash flows from investing activities:                |                                                                                          |                                                         |                                          
|                                                     |                                                                                          | Purchases of property and equipment                     |                                          
|                                                     |                                                                                          | Other                                                   |                                          
|                                                     |                                                                                          |                                                         |                                          
|                                                     |                                                                                          |                                                         |                                          
|Cash flows from financing activities:                |                                                                                          |                                                         |                                          
|                                                     |                                                                                          | Proceeds from sale of common stock                      |                                          
|                                                     |                                                                                          | Proceeds from sale/leaseback                            |                                          
|                                                     |                                                                                          | (Repayments) proceeds of long-term debt                 |                                          
|                                                     |                                                                                          |                                                         |                                          
|                                                     |                                                                                          |                                                         |                                          
|Effect of exchange rate changes on cash              |                                                                                          |                                                         | (218                                     
|                                                     |                                                                                          |                                                         |                                          
|Net (decrease) increase in cash and cash equivalents |                                                                                          |                                                         | (6,491                                   
|Cash and cash equivalents, beginning of year         |                                                                                          |                                                         | 8,401                                    
|                                                     |                                                                                          |                                                         |                                          
|Cash and cash equivalents, end of year               |                                                                                          | $                                                       | 1,910                                    
|                                                     |                                                                                          |                                                         |                                          
|Supplemental cash flow disclosures:                  |                                                                                          |                                                         |                                          
|                                                     |                                                                                          | Cash interest payments                                  |                                          
|                                                     |                                                                                          | Cash income tax payments                                |                                          
|                                                     |                                                                                          | Non-cash capital expenditures (capital lease financing) |                                          

The
accompanying notes are an integral part of these consolidated statements.

F-6

---



FISCHER IMAGING CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS        For the three years ended December 31, 2003, 2002 and 2001

(1) BUSINESS OPERATIONS

Organization

Fischer Imaging Corporation, together with its wholly owned subsidiaries, ("Fischer" or "the Company") designs, manufactures and sells innovative mammography and
digital imaging products used to diagnose breast cancer and other diseases. The Company's primary focus is on using our digital imaging technology in screening and diagnostic mammograms and minimally
invasive breast biopsy to aid in the early identification of breast cancer. The Company sells high-resolution digital mammography products, enabling radiologists, surgeons and other
healthcare treatment professionals to diagnose or rule out disease early and treat patients with less-invasive procedures. The Company has also refocused its efforts to market and sell
products that meet selected needs of the broader radiology and electrophysiology markets. The consolidated financial statements include the accounts of Fischer Imaging Corporation and all
subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Restatement of Financial Statements for 2001 and Prior Years

During the first quarter of 2003, the Company conducted a review of its historical accounting policies and practices in preparation for its
2002 year-end closing and financial statement preparation. As a result of the review, the Company announced in April 2003 that it had identified several accounting
inaccuracies and errors that significantly affected its financial results including previously reported financial information for 2001 and prior years. The Company then conducted a full internal
investigation under the direction of the Board of Directors to determine the scope and magnitude of these issues and as a result uncovered various accounting inaccuracies and errors that significantly
impacted its financial results and required a restatement of its previously reported financial information for 2001 and prior years. As a result of the internal review, the Company made various
restatement adjustments to its historical financial statements as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2002.

Management Plans

Management has developed an operating plan intended to return the Company to positive cash flow from operations. Key components to this plan include increasing
revenues and improving its operating efficiencies to reduce cost of sales thereby improving gross margins, and lowering its overall operating costs as a percentage of revenues. Management has taken a
number of steps to improve the performance and reliability of its SenoScan product and to advance the Company's technology for digital imaging, which they believe will result in a significant increase
in product revenues. Management has begun implementing manufacturing process improvements and redesigning components and sub-assemblies which they believe will result in reductions to cost
of sales and increased product gross margins. Management expects service revenue to increase, as the installation base for products continues to increase, such that service revenues become more inline
with service cost infrastructure and return to positive gross margins for the service organization. Management's operating plan also includes reducing overall operating costs as a percentage of
revenue as they expect not to continue incurring costs associated with the restatement of the Company's financial statements or start up costs to expand European operations. Management also believes
that, if necessary, it can access additional capital resources sufficient to allow the Company to maintain its operations at least through December 31, 2004.

F-7

---

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates in the Preparation of Financial Statements

The Company uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in the United States.
Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and contingent liabilities, and the reported revenue and expenses. Actual
results could vary from the estimates that were used.

Revenue Recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable, and collectibility
is probable. The Company recognizes product revenue upon effective delivery for its large, direct-sale medical equipment, although it defers recognition until all conditions are satisfied
in cases where other arrangements exist or obligations remain to be performed. Revenue related to dealers and other product sales are recognized upon shipment, provided that title and the risks and
rewards of ownership have transferred. The Company recognizes revenue from services when they are performed, and from pre-paid service contracts and extended warranty contracts over the
periods for which the contracts are in effect. The Company bills for service contracts and extended warranties monthly, quarterly and annually in advance, and records deferred revenue, which is then
recognized over the service period. The Company also sells replacement parts to customers, and records revenue at the time of shipment when title transfers. Certain used parts may be returned for
partial credit and the Company makes estimates to reduce current revenue to account for the future effect of those returns.

Accounts
receivable are carried at original invoice amounts less an estimate for doubtful accounts and sales returns based on a periodic review of outstanding receivables. Allowances are
provided for known and anticipated credit losses as determined by management in the course of regularly evaluating individual customer receivables. This evaluation takes into consideration a
customer's financial condition and credit history as well as current economic conditions. Accounts receivable are written off when deemed uncollectible. Recovery of accounts receivable previously
written off are recorded when received.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, demand deposits, and short-term investments with an original maturity of three months or less. Cash
and cash equivalents include financial instruments that potentially subject the Company to a concentration of credit risk. The
Company places its cash and temporary cash investments with high credit quality institutions. At times, cash held in the Company's primary bank may be in excess of the FDIC insurance limits.

Inventories

The Company values inventory at the lower of cost or market using the first-in, first-out (FIFO) method. The Company assesses the
recoverability of inventory based on obsolescence or overstocked inventory equal to the difference between the cost of inventory and the estimated market value based upon historical experience and
assumptions about future demand and changes in market conditions. These assessments require judgments and estimates, and valuation adjustments for excess and obsolete inventory may be recorded based
on these periodic assessments.

F-8

---

Inventories
consist of the following components (in thousands):

2003

2002Raw materials

$
8,925

$
7,065Work in process and finished goods


9,313


14,525Reserve for excess and obsolete inventories


(3,320
)

(3,637
)Inventories, net

$
14,918

$
17,953


Property and Equipment

Property and equipment is stated at the lower of depreciated cost or net realizable value. Significant additions and improvements are capitalized at cost, while
maintenance and repairs that do not improve or extend the life of the respective assets are charged to expense as incurred.

Manufacturing
and office equipment are depreciated or amortized on a straight-line basis, over the estimated useful lives (ranging from 3 to 8 years) of the respective
assets. Leasehold improvements are amortized, on a straight-line basis, over the lesser of the estimated useful life or the remaining term of the related lease.

Intangible Assets

Intangible assets consists of identifiable intangible assets and goodwill. Identifiable intangible assets consists of a non-compete agreement and a
patent license, which are stated at cost. Identifiable assets are amortized on straight line basis over their expected useful lives ranging from 8 to 10 years. Goodwill is the excess of the
purchase price over the fair value of net assets acquired related to acquisitions. Goodwill is recorded net of accumulated amortization through December 31, 2001. In accordance with SFAS
No. 142, "Goodwill and Other Intangible Assets", effective January 1, 2002, goodwill is no longer amortized, but is subject to an annual impairment analysis.

Long-Lived Assets including Identifiable Intangible Assets Subject to Amortization

In August 2001, the Financial Accounting Standards Board ("FASB"), issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 applies to all long-lived assets (including discontinued operations) and requires that long-lived assets be evaluated for
impairment if indicators of impairment are present and if necessary written down to estimated fair value. SFAS No. 144 also develops an accounting model for long-lived assets that
are to be disposed of by sale and requires the measurement to be the lower of book value or fair value, less the cost to sell the assets. Additionally, SFAS No. 144 expands the scope of
discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and will be eliminated from the ongoing operations of the entity in
a disposal transaction.

Long-lived
assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In performing
the
review for recoverability, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows
(undiscounted and without interest charges) is less than the carrying amount of the asset, the asset is written down to its estimated fair value. The Company has determined that no
long-lived assets were impaired at December 31, 2003.

Financial Instruments

The fair market value of accounts receivable, accounts payable, debt, and other financial instruments approximates their carrying values in the accompanying
consolidated balance sheets. The fair value of debt was determined based upon current interest rates available to Fischer.

F-9

---

Product Warranty

The Company provides for the estimated cost of product warranties at the time revenue is recognized. Although the Company engages in extensive product quality
programs and processes, its warranty obligation is affected by product failure rates and service delivery costs incurred in correcting a product failure. Should actual product failure rates or service
costs differ from the Company's estimates, which are based on historical data, and engineering estimates, where applicable, revisions to the estimated warranty liability would be required. The typical
standard warranty term is for 12 months starting from the date of installation. The Company also sells extended warranties ranging from 12 to 60 months.

Activity
in the product warranty accrual for the years ended December 31, 2003 and 2002 follows (in thousands):

2003

2002Beginning balance

$
1,676

$
691Add: Warranty provision


2,557


3,064Less: Warranty amortization


(2,246
)

(2,079
)Ending balance

$
1,987

$
1,676


Translation of Foreign Currencies

The assets and liabilities of the Company's consolidated foreign subsidiaries, whose cash flows are primarily in their local currency, have been translated into
U.S. dollars using the current exchange rates at each balance sheet date. The operating results of these foreign subsidiaries have been translated at average exchange rates that prevailed during each
reporting period. Adjustments resulting from translation of foreign currency financial statements are reflected as accumulated other comprehensive income in the consolidated balance sheet. Exchange
gains and losses resulting from foreign currency transactions (transactions denominated in a currency other than that of the entity's primary cash flow) are included in operations in the period in
which they occur.

Research and Development Costs

Research and product development costs are expensed as incurred and include primarily engineering salaries, overhead and materials used in connection with
research and development projects.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs of $320,000, $408,000 and $236,000 were expensed in 2003, 2002 and 2001, respectively.

Stock-Based Compensation Plans:

Non-employee Director Stock Option Plan

At December 31, 2003, the Company's Non-employee Director Stock Option Plan (the "Director Plan"), adopted in 1993 and amended in
June 1998, authorizes the granting of nonqualified options to acquire up to 300,000 shares of common stock. The Director Plan allows for automatic annual grants upon each year of director's
service, and for discretionary grants on such terms and conditions as are set by the Board at the time of grant. The stock options issued under the Director Plan may be exercised at any time from date
of grant, with a maximum option term of ten years.

F-10

---

Employee Stock Option Plan and Employee Stock Purchase Plan

At December 31, 2003, the Company had an employee stock option plan and an employee stock purchase plan, which are described more fully in Note 10.
The Company has elected to account for stock-based compensation arrangements using the intrinsic value method under the provisions of Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees". Under this method, stock compensation is recognized to the extent that the exercise price is less than the market price for the underlying stock on the date
of grant.

The
following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of Statement of Financial
Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation (in thousands except share data):

2003

2002

2001Net (loss) income:As reported

$
(14,413
)
$
9,720

$
882Less stock based compensation under the fair value method


(1,412
)

(1,560
)

(857
)Pro forma

$
(15,825
)
$
8,160

$
25Net (loss) income per common share, basic:As reported

$
(1.55
)
$
1.06

$
0.10Pro forma

$
(1.70
)
$
0.89

$
Net (loss) income per common share, diluted:As reported

$
(1.55
)
$
1.00

$
0.09Pro forma

$
(1.70
)
$
0.84

$



The
weighted average fair value of each option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model and the following average assumptions:

2003

2002

2001Dividend rate

0.0
%
0.0
%
0.0
%Expected volatility

94.9
%
104.3
%
83.0
%Risk-free interest rate

2.5
%
2.5
%
4.3
%Expected life (in years)

5.0

5.0

4.6


The
weighted average fair value of options granted during the 2003, 2002 and 2001 was $3.96, $5.51 and $5.85, respectively.

Net Earnings or Loss Per Share

Basic earnings or loss per share is computed by dividing the net earnings or loss by the weighted average number of shares of common stock outstanding at the
reporting date. Diluted earnings or loss per share is determined by dividing the net earnings or loss by the sum of the weighted average number of common shares outstanding, and if not
anti-dilutive, the effect of outstanding stock options

F-11

---

determined
utilizing the treasury stock method. Dilutive securities consist of the following (in thousands):

2003

2002

2001Weighted average common shares

9,319

9,204

8,643Dilutive effect of stock options



488

709Total

9,319

9,692

9,352


Common
stock equivalents excluded from diluted earnings per share because their effect is anti-dilutive are as follows (in thousands):

2003

2002

2001Anti-dilutive effect of stock options

1,340

1,068

815


Comprehensive Income (Loss)

Components of comprehensive income include net income (loss) and certain transactions that have generally been reported in the consolidated statements of
stockholders' equity. Other comprehensive income includes foreign currency translation adjustments.

Recently Issued Accounting Pronouncements

In November 2002, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 improves the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity and requires that those instruments be classified as
liabilities (or assets in certain circumstances) in statements of financial position. SFAS No. 150 also requires disclosures about alternative ways of settling the instruments and the capital
structure of entities, all of whose shares are mandatorily redeemable. SFAS No. 150 is generally effective for all financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on its financial position
or results of operations.

In
January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest Entities." FIN 46 requires an investor with a majority of the variable
interests in a variable interest entity to consolidate the entity and also requires majority and significant variable interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling interest or the equity investment at risk is insufficient to finance the entity's activities without receiving additional subordinated
financial support from the other parties. The Company is currently reviewing its investment portfolio to determine whether any of its investee companies are
variable interest entities. The Company does not expect to identify any variable interest entities that must be consolidated.

In
April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is generally effective for derivative instruments, including derivative instruments embedded in certain contracts, entered into or modified after
June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have a material impact on its financial position or results of
operations.

F-12

---

(3) PATENT LITIGATION SETTLEMENT

During the second quarter of 2002, the Company settled a patent infringement lawsuit that it had filed against Thermo-Electron Corporation and
Hologic, Inc. Under the $32.2 million settlement, the Company received and recognized as other income $25.0 million in 2002, net of certain settlement costs of $50,000 and the
balance of $7.2 million was scheduled for receipt in equal annual installments of $900,000 over the remaining eight-year life of the patents for continued sales of the breast-biopsy
imaging system now being sold by Hologic, Inc. During 2003, the Company received and recognized as other income $900,000. The remaining $6.3 million, due to contingencies, will be
recognized as cash is received over the remaining seven-year payment period.

(4) INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

Estimated
Lives

2003

2002Non-compete agreement

10 years

$
3,569

$
3,569License

8 years


350


3503,919


3,919Lessaccumulated amortization




(3,700
)

(3,656
)Identifiable intangibles, net




219


263Goodwill, net

N/A


858


858Total intangibles, net



$
1,077

$
1,121


Amortization
expense for identifiable intangible assets is projected to be approximately $44,000 per year for the next five years.

(5) OTHER CURRENT LIABILITIES

Other current liabilities consist of the following at December 31 (in thousands):

2003

2002Accrued sales, property, and other state and local taxes

$
288

$
852Accrued legal


284


398Other


1,087


911Total other current liabilities

$
1,659

$
2,161


F-13

---

(6) INCOME TAXES

The provision (benefit) for income taxes includes the following (in thousands):

2003

2002

2001CurrentFederal

$


$


$
State








Foreign








Total current provision








DeferredFederal


(4,509
)

4,256


323State


(429
)

358


31Foreign


(417
)

(295
)

42Total deferred provision


(5,355
)

4,319


396Valuation Allowance


5,355


(4,319
)

(396
)Total deferred provision








Total provision

$


$


$



During
2002, the Company utilized approximately $10.1 million of its net operating loss carry-forward to offset taxable income in that year. A valuation allowance was previously
provided against these loss carry-forwards.

The
statutory federal income tax rate was 35% for the years ended December 31, 2003, 2002 and 2001. Reasons for the difference between income tax expense reported in the
statements of operations and the amount computed by applying the statutory federal income tax rate to earnings before income taxes are as follows:

2003

2002

2001Domestic Operations:Statutory tax rate

35.0
%
35.0
%
35.0
%Increase (decrease) due to:State income taxes

3.0

3.7

3.3Non-deductible expenses

(0.3
)
0.7

20.8Expiring Tax Credits and Other

(0.3
)
5.0

(0.3
)Valuation allowance

(37.4
)
(44.4
)
(58.8
)Effective tax rate


%

%

%


The
domestic versus foreign component of the Company's income (loss) before income taxes is as follows (in thousands):

2003

2002

2001Domestic

$
(13,109
)
$
10,643

$
752Foreign


(1,304
)

(923
)

130Total

$
(14,413
)
$
9,720

$
882


F-14

---

Components
of net deferred tax assets (liabilities) as of December 31, 2003 and 2002 are as follows (in thousands):

2003

2002CurrentInventory reserves

$
1,241

$
1,382Bad debt reserves


356


201Accrued compensation


493


542Other accrued liabilities


169


190Warranty reserves


656


637LessValuation allowance


(2,915
)

(2,952
)Net current deferred tax asset

$


$
NoncurrentAmortization of investments

$
295

$
295Depreciation


324


277Net operating loss carryforward


11,722


5,004Tax credits


792


792Other


154


75LessValuation allowance


(13,287
)

(6,443
)Net noncurrent deferred tax asset

$


$



The
Company has approximately $30.1 million of domestic net operating loss carry-forwards, and $1.3 million of foreign net operating loss carry-forwards that expire at
various dates through 2021. The Company also has available research and development tax credits of approximately $221,000 expiring at various dates through 2020, and alternative minimum tax credits of
$571,000. Realization is dependent on generating sufficient taxable income prior to the expiration dates of the respective carry-forward periods and tax credits. The Company has provided a full
valuation against its deferred tax assets because the uncertainty of realizing such assets. A valuation allowance of approximately $1.7 million relates to operating losses totaling
$5.0 million attributable to deductions on stock option exercises that, if reversed, will be additions to additional paid in capital.

(7) LONG TERM DEBT

Long-term debt at December 31, 2003 consists solely of a two-year capital lease obligation for primarily computer equipment and
software. The capital lease is secured by computer equipment.

Long-term
debt at December 31, 2002 consisted solely of loans borrowed on cash values of life insurance policies by a former employee, as of December 31, 2003,
who was previously a director of the Company, Chairman of the Board, Chief Executive Officer and Chief Technology Officer. On May 12, 2003, the Company reached agreement with this individual,
to affect the transfers of, and responsibility for, the insurance policies. The Company subsequently released its assignments on the related policies in August 2003. This individual has assumed
all cash values and borrowings related to the split-dollar arrangements. The Company believes that all liabilities related to these arrangements were recorded as of December 31, 2002.

F-15

---

Long-term
debt and capital lease obligation as of December 31, 2003 and 2002 consist of the following: (in thousands)

2003

2002Long-term debt (life insurance loans)

$


$
1,181Long-term capital lease obligation


454


Total


454


1,181LessCurrent maturities on capital lease obligation


231


Long-term debt

$
223

$
1,181


In
June 2003, the Company entered into an $8.0 million credit facility, subject to restrictions based on eligible receivables. The amount available under the credit
facility is limited to $2.4 million until such time as the bank completes its review of the Company's restated financial statements. As amended, this
credit agreement expires on December 9, 2004, and is secured by all the assets of the Company. Borrowings under the agreement bear interest at the bank's prime rate, plus 2.75%, with a minimum
total interest rate of 7%. There are no outstanding borrowings under the facility.

(8) STOCKHOLDERS' EQUITY

Retention Bonus Plan

In December 1995, our Board of Directors adopted a Retention Bonus Plan. Under the Plan, all options to purchase shares of our common stock held by certain
of our executive officers and other key employees who participate in the Plan shall vest and we will make payments to such participants in the event of a change of control. A "change of control" under
the Plan includes an acquisition of 35% or more of our outstanding common stock, certain changes in the composition of our Board of Directors, a consolidation or merger in which we are not the
surviving corporation, the sale or other transfer of 50% or more of our assets or earnings power, our adoption of a plan of liquidation or dissolution, or certain other similar events. Payments made
to a participant under the Plan will not exceed an amount equal to his or her annual base salary in effect immediately prior to the change of control. There are no participants under the Plan as of
December 31, 2003.

Anti-Takeover Contingencies

In November 1994, the Board of Directors adopted a Stockholders Rights Plan, giving one right to purchase a share of Series C Junior Participating
Preferred Stock for each outstanding share of common stock. These rights generally become exercisable when anyone other than certain exempt persons acquires more than a 15% beneficial interest in the
Company. The existence of these rights might discourage an attempt to acquire the Company or make such an attempt more difficult. The Rights Plan was amended in 2001 to revise the definition of an
"exempt person," among other things.

(9) STOCK-BASED COMPENSATION PLANS

1991 Stock Option Plan

The Company's 1991 Stock Option Plan (the "1991 Plan") adopted June 1991 and subsequently amended, authorized the granting of incentive and nonqualified
stock options to acquire up to 1,750,000 shares of common stock by employees and consultants. Exercise terms for the options granted were determined by the Board of Directors at the time of grant.
Incentive stock options may be granted at an exercise price not less than fair market value on the date of grant with a maximum option term of ten years. The 1991 Plan also permitted the granting of
stock appreciation rights, although none were granted. The ability to grant options under the 1991 Plan expired in 2001.

F-16

---

Certain
of the options granted under the 1991 Plan vest upon attainment of performance objectives as well as over time. Outstanding as of December 31, 2003 are 80,000 options
granted in December 1995 that vest when the market price of the Company's stock has reached targeted price levels for a period of 45 consecutive trading days or nine years and eleven months
from the date of original grant, whichever is earlier. Other options granted under the 1991 Plan vest ratably over time, generally over a four year period.

Non-Plan Grants

During the period from the expiration of the ability to make grants under the 1991 Plan until September 6, 2003, the Company's Board of Directors
authorized grants to various officers and employees of options to purchase a total of 1,076,500 shares of common stock. Outstanding as of December 31, 2003 were 825,750 exercisable options so
granted.

1993 Director Plan

The Company's Non-employee Director Stock Option Plan (the "Director Plan"), adopted in 1993 and amended in June 1998, authorizes the granting
of nonqualified options to acquire up to 300,000 shares of common stock. The Director Plan allows for automatic annual grants upon each year of director's service, and for discretionary grants on such
terms and conditions as are set by the Board at the time of grant. The stock options issued under the Director Plan may be exercised at any time from date of grant, with a maximum option term of ten
years.

A
combined summary of the status of both plans and the non-plan grants follows:

|                                  |                            | 2003 |           | 2002 |  | 2001      |     
|--------------------------------- | -------------------------- | ---- | --------- | ---- |  | --------- | ----
|Outstanding at January 1          |                            |      | 1,556,560 |      |  | 1,524,590 |     
|Granted                           |                            |      | 298,500   |      |  | 509,000   |     
|Exercised                         |                            |      | (16,500   | )    |  | (129,647  | )   
|Canceled                          |                            |      | (355,060  | )    |  | (347,383  | )   
|                                  |                            |      |           |      |  |           |     
|Outstanding at December 31        |                            |      | 1,483,500 |      |  | 1,556,560 |     
|                                  |                            |      |           |      |  |           |     
|Exercisable at December 31        |                            |      | 835,125   |      |  | 743,135   |     
|                                  |                            |      |           |      |  |           |     
|Weighted average exercise prices: |                            |      |           |      |  |           |     
|                                  | At beginning of year       |      | $         | 6.90 |  | $         | 5.75
|                                  | At end of year             |      |           | 6.58 |  |           | 6.90
|                                  | Exercisable at end of year |      |           | 6.27 |  |           | 6.38
|                                  | Options granted            |      |           | 5.61 |  |           | 7.28
|                                  | Options exercised          |      |           | 3.18 |  |           | 2.59
|                                  | Options canceled           |      |           | 6.10 |  |           | 4.05

F-17

---

Following is information about options outstanding and exercisable under the 1991 and 1993 Plans, as well as the non-plan grants as of December 31, 2003:

|Range of exercise prices                                                        |                 | Shares    |         | Price
|------------------------------------------------------------------------------- | --------------- | --------- | ------- | -----
|Weighted average exercise price for options outstanding:                        |                 |           |         |      
|                                                                                | $1.00 - $3.05   |           | 169,958 |      
|                                                                                | $3.06 - $4.99   |           | 445,042 |      
|                                                                                | $5.00 - $5.99   |           | 238,500 |      
|                                                                                | $6.00 - $7.99   |           | 250,000 |      
|                                                                                | $8.00 - $11.00  |           | 136,250 |      
|                                                                                | $11.01 - $14.00 |           | 243,750 |      
|                                                                                |                 |           |         |      
|                                                                                |                 | 1,483,500 |         |      
|                                                                                |                 |           |         |      
|Weighted average exercise price for options exercisable:                        |                 |           |         |      
|                                                                                | $1.00 - $3.05   |           | 122,458 |      
|                                                                                | $3.06 - $4.99   |           | 256,167 |      
|                                                                                | $5.00 - $5.99   |           | 187,500 |      
|                                                                                | $6.00 - $7.99   |           | 74,500  |      
|                                                                                | $8.00 - $11.00  |           | 54,000  |      
|                                                                                | $11.01 - $14.00 |           | 140,500 |      
|                                                                                |                 |           |         |      
|                                                                                |                 | 835,125   |         |      
|                                                                                |                 |           |         |      
|
|Weighted average remaining contractual life for options outstanding (in years): |                 |           |         |      
|                                                                                | $1.00 - $3.05   |           | 169,958 |      
|                                                                                | $3.06 - $4.99   |           | 445,042 |      
|                                                                                | $5.00 - $5.99   |           | 238,500 |      
|                                                                                | $6.00 - $7.99   |           | 250,000 |      
|                                                                                | $8.00 - $11.00  |           | 136,250 |      
|                                                                                | $11.01 - $14.00 |           | 243,750 |      
|                                                                                |                 |           |         |      
|                                                                                |                 | 1,483,500 |         |      
|                                                                                |                 |           |         |      

Other

During 2003, $31,000 was recorded as non-cash compensation expense related to 25,000 options granted to certain directors for their service on the
Board of Directors at a $4.00 exercise price, which at the time of issuance was below the quoted market price.

Employee Stock Purchase Plan

Under the Employee Stock Purchase Plan, or Employee Plan, adopted in December 1991 and as amended in June 1998, the Company is authorized to issue
up to 400,000 shares of common stock to its full-time employees, nearly all of whom are eligible to participate. Under terms of the Employee Plan, employees can have from 2% to 5% of their
salary withheld to purchase common stock. The purchase price of the stock is 85% of the lower of its beginning-of-year or end-of-year market price.
Under the Employee Plan, Fischer issued 25,408 and 120,844 shares for the years ended December 31, 2003 and 2001, respectively, relating to employee withholdings. Shares issued in 2003 were for
the year ended December 31, 2002. As of the date of this filing, there are no shares available for purchase under the Employee Plan.

F-18

---

(10) BENEFIT PLANS

401(k) Plan

In 1985, Fischer established The Fischer Imaging Employee Capital Accumulation Plan, which is governed by Section 401(k) of the Internal Revenue Code.
Employees are eligible to participate in the plan upon completion of one month of service. Investments in the 401(k) plan are primarily made in independently managed mutual funds. The Company matches
25% of employees' contributions up to 6% of their respective annual compensation. In addition, the Plan allows the Company to make discretionary contributions. These match and discretionary
contributions ratably vest over a four-year period. The Company made $132,000, $64,000 and $135,000 of match contributions for the years ended December 31, 2003, 2002 and 2001,
respectively. The Company did not make a discretionary contribution in the years ended December 31, 2003, 2002 and 2001.

(11) RELATED PARTY TRANSACTIONS

Long-term debt at December 31, 2002 consisted of loans borrowed on cash values of life insurance policies by a former employee, as of
December 31, 2003, who was previously a director of the Company, Chairman of the Board, Chief Executive Officer and Chief Technology Officer. On May 12, 2003, the Company reached
agreement with this individual, to effect the transfers of and responsibility for, the insurance policies. The Company subsequently released its assignments on the related policies in
August 2003. This individual has assumed all cash values and borrowings related to the split-dollar arrangements. Effective December 31, 2003, this individual resigned as an employee and
director of the Company and received deferred compensation totaling $200,000 which is payable in 2004.

Our
Denver headquarters and manufacturing facility is leased from JN Properties under a lease effective August 1, 1992, which expires July 31, 2012. A former employee, as
of December 31, 2003, who was also previously a director of the Company, Chairman of the Board, Chief Executive Officer and Chief Technology Officer, and a 12.8% shareholder is a general
partner in JN Properties. The lease requires us to pay all taxes, insurance, operating and maintenance expenses for the facility, and provides for an annual base rent which is subject to
adjustment at the beginning of the 8th, 13th and 18th lease year based on the then current market rent for similar premises, provided that the base rent may
not be increased at any one time by more than 7%. We made total lease payments of $796,000 in 2003, 2002 and 2001.

On
December 1, 2001, we entered into a consulting agreement with a former Chief Executive Officer and director of the Company prior to his appointment to these positions. Under
the terms of the consulting agreement, which expired on April 18, 2002, this individual received compensation of $15,000 per month, or a total of $15,000 in 2001, and $60,000 in 2002 for his
consulting services. The individual resigned his position of Chief Executive Officer effective April 24, 2003 and resigned from the Board of Directors effective December 26, 2003.

During
2002, the Company entered into a consulting agreement with another director, which expired on December 31, 2002. For the year ended December 31, 2002, this director
received $59,000 in consulting fees. This director resigned from the Board of Directors effective October 29, 2003.

During
1999, the Company extended a loan in the amount of $252,000 to a former President and Chief Executive Officer and director pursuant to his employment agreement, in consideration
for his agreement to relocate to Colorado immediately. At December 31, 2003 and 2002, $100,000 of the loan was outstanding and is to be repaid in full by August 2004.

(12) SEGMENT AND CUSTOMER INFORMATION

The Company operates in a single industry segment: the design, manufacture and marketing of specialty digital imaging systems and other medical devices primarily
for the diagnosis and treatment of

F-19

---

breast
cancer. The Company manufactures its products in the United States and distributes them in the United States, Europe and elsewhere.

Revenues
and identifiable assets for foreign subsidiaries for years ended December 31, 2003, 2002 and 2001 were as follows (in thousands):

2003

2002

2001Revenues

$
8,196

$
2,194

$
1,741Identifiable assets


5,898


2,446


791


In
addition, during 2003, 2002 and 2001, and the Company's export revenues were $1.1 million, $3.8 million and $5.5 million, respectively. The Company's total
foreign revenues were $9.3 million, $6.0 million and $7.2 million in 2003, 2002 and 2001, respectively.

The
Company's revenues generally are concentrated among customers in the healthcare industry. The Company establishes an allowance for uncollectible accounts based upon factors
surrounding the credit
risk of specific customers, historical trends and other information. Accounts receivable are generally unsecured.

During
2003, 2002 and 2001, the following customers, both of which are dealers, represented greater than 5% of the Company's revenues:

2003

2002

2001Ethicon-Endo Surgery, Inc (a division of Johnson & Johnson, Inc.)

10.9
%
11.4
%
11.4
%Analogic Corporation

4.8
%
5.5
%
7.7
%


(13) COMMITMENTS AND CONTINGENCIES

Litigation

A complaint was filed with the Equal Employment Opportunity Commission by a group of former employees alleging age discrimination as a result of two employee
layoffs during 2001. In November 2002, the EEOC granted a "No Cause" determination as to the merits of the complaint before them and issued "right to sue" letters to all plaintiffs in
December 2002. The Company was a defendant in a lawsuit filed by these same employees in March 2003. The lawsuit was settled in March 2004 and we have accrued estimated costs of
$150,000 as of December 31, 2003 and December 31, 2002.

In
April 2003, Fischer Imaging Corporation reported to the Securities and Exchange Commission that it would restate its financial results for the reporting periods beginning
January 1, 2000 and ending September 30, 2002. On June 9, 2003, the Company received notice of a formal order of investigation and subpoena from the Securities and Exchange
Commission. This request followed the voluntary disclosures that the Company made to the SEC beginning in April 2003 and the creation of an independent board committee to review the facts and
circumstances underlying the Company's decision to restate financial results. The Company currently is cooperating with the SEC in its investigation by providing documents and other information. The
Company intends to continue its full cooperation with the SEC investigation, but the Company cannot predict the outcome of the investigation. If the SEC finds wrongdoing on the part of the Company, a
financial penalty or other sanctions may be imposed on the Company that could jeopardize the Company's financial viability.

On
April 10, 2003 and on June 3, 2003, The Sorkin, LLC and James K. Harbert filed punitive class action lawsuits against us and three of our former officers and directors,
Morgan Nields, Gerald Knudson and Louis Rivelli, in the United States District Court for the District of Colorado. The complaints are purportedly brought on behalf of purchasers of shares of the
Company's common stock during the period February 14, 2001 to April 1, 2003 and allege that, among other things, during the

F-20

---

punitive
class period, the Company and the individual defendants made materially false statements in violation of Section 10(b) of the Exchange Act, Rule 10b-5 promulgated
under the Exchange Act, and Section 20(a) of the Exchange Act. The complaints seek unspecified compensatory damages and other relief. On August 7, 2003, the Company, and
Messrs. Nields and Knudson moved to dismiss all claims asserted by The Sorkin, LLC and Harbert. On August 18, 2003, Mr. Rivelli moved to dismiss all claims asserted in those
lawsuits. On October 20, 2003, Mr. Harbert moved to dismiss his lawsuit, which the court subsequently granted. On October 21, 2003, the Sorkin, LLC and Mr. Harbert filed an
amended class action complaint. The amended complaint contains the same claims for relief against us and Messrs. Nields and Rivelli, but does not assert any claims against Mr. Knudson.
In addition, the amended complaint seeks to recover unspecified compensatory damages and other relief on behalf of purchasers of shares of our common stock during the period February 14, 2001
to July 17, 2003. The Company, Mr. Nields and Mr. Rivelli have filed motions to dismiss all claims asserted in the amended complaint. The Company is a defendant in various other
lawsuits incident to its operations.

In
addition, we have incurred and anticipate that we will continue to incur substantial legal expenses and some diversion of senior management's time in connection with the SEC
investigation and the securities lawsuit that could negatively affect our results of operations.

Operating Leases

Fischer leases buildings and equipment under various operating lease agreements that provide for the following minimum future lease payments: (in thousands)

2004

$
9252005


9222006


9352007


9362008


852Thereafter


3,172Total

$
7,742


Of
the above total lease commitments, $7,342,000 relates to the JN properties building lease (see Note 12Related Parties). Total rent expense was approximately
$936,000, $834,000 and $876,000 in 2003, 2002 and 2001, respectively. The total rent expense includes rent expense for JN properties of $796,000 for each of 2003, 2002 and 2001.

Regulatory Actions

Fischer is subject to periodic inspections by the Food and Drug Administration ("FDA") whose primary purpose is to audit the Company's compliance with Good
Manufacturing Practices. These practices include testing, quality control and documentation of procedures. In December 2002, following an earlier periodic inspection that resulted in the FDA
issuing a Form 483, the FDA issued a Warning Letter regarding deficiencies in the way the Company's quality system satisfies the FDA's Quality System Regulation (QSR). The Company responded to
the Warning Letter findings and observations and instituted corrective actions. The Company expects the FDA to conduct an inspection to verify the effectiveness of the Company's corrective actions
during the next few months.

The
Company's stock was delisted from NASDAQ on July 7, 2003 due to failure to meet the financial reporting filing requirements established by the NASDAQ for annual and quarterly
reports.

F-21

---

(14) QUARTERLY FINANCIAL DATAUNAUDITED

(in thousands, except per share data):

|                                |  | First Quarter
2003 |        | Second Quarter
2003 |   | Third Quarter
2003 |   | Fourth Quarter
2003 |        | Year Ended
2003 |  
|------------------------------- |  | ------------------ | ------ | ------------------- | - | ------------------ | - | ------------------- | ------ | --------------- | -
|Revenues                        |  | $                  | 9,492  |                     | $ | 12,057             |   | $                   | 11,649 |                 | $
|Gross profit                    |  |                    | 2,046  |                     |   | 2,671              |   |                     | 2,984  |                 |  
|Net (loss) income               |  |                    | (2,385 | )                   |   | (2,399             | ) |                     | (2,045 | )               |  
|Basic (loss) income per share   |  | $                  | (.26   | )                   | $ | (.26               | ) | $                   | (.22   | )               | $
|Diluted (loss) income per share |  | $                  | (.26   | )                   | $ | (.26               | ) | $                   | (.22   | )               | $

|                                |  | First Quarter
2002 |        | Second Quarter
2002 |   | Third Quarter
2002 |   | Fourth Quarter
2002 |        | Year Ended
2002
|------------------------------- |  | ------------------ | ------ | ------------------- | - | ------------------ | - | ------------------- | ------ | ---------------
|Revenues                        |  | $                  | 11,568 |                     | $ | 10,054             |   | $                   | 12,946 |                
|Gross profit                    |  |                    | 3,026  |                     |   | (912               | ) |                     | 2,450  |                
|Net (loss) income               |  |                    | (887   | )                   |   | 18,532             |   |                     | (2,145 | )              
|Basic (loss) income per share   |  | $                  | (0.10  | )                   | $ | 2.01               |   | $                   | (0.23  | )              
|Diluted (loss) income per share |  | $                  | (0.10  | )                   | $ | 1.89               |   | $                   | (0.23  | )              

|                                |  | First Quarter
2001 |        | Second Quarter
2001 |   | Third Quarter
2001 |  | Fourth Quarter
2001 |        | Year Ended
2001
|------------------------------- |  | ------------------ | ------ | ------------------- | - | ------------------ |  | ------------------- | ------ | ---------------
|Revenues                        |  | $                  | 10,828 |                     | $ | 10,930             |  | $                   | 10,095 |                
|Gross profit                    |  |                    | 3,896  |                     |   | 4,605              |  |                     | 4,237  |                
|Net (loss) income               |  |                    | (544   | )                   |   | 275                |  |                     | 634    |                
|Basic (loss) income per share   |  | $                  | (0.06  | )                   | $ | 0.03               |  | $                   | 0.07   |                
|Diluted (loss) income per share |  | $                  | (0.06  | )                   | $ | 0.03               |  | $                   | 0.06   |                

F-22

---