SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-K

[XX]              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

[  ]           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

                           FISCHER IMAGING CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

              DELAWARE                                 36-2756787
      (STATE OF INCORPORATION)            (I.R.S. EMPLOYER IDENTIFICATION NO.)

      12300 NORTH GRANT STREET
          DENVER, COLORADO                               80241
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)               (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


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

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


      The aggregate market value of the common equity held by non-affiliates of
the Registrant as of March 2, 1998 was approximately $25,349,000.

      The number of shares of Registrant's Common Stock outstanding on March 2,
1998 was 6,980,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

      PORTIONS OF THE REGISTRANT'S PROXY STATEMENT FOR ITS 1998 ANNUAL MEETING
OF STOCKHOLDERS TO BE FILED ON OR PRIOR TO APRIL 30, 1998, ARE INCORPORATED BY
REFERENCE INTO PART III OF THIS FORM 10-K.


<PAGE>


                           FISCHER IMAGING CORPORATION
                                TABLE OF CONTENTS

PART I                                                                    PAGE

            Item 1.     Business                                           1

            Item 2.     Properties                                        24
            Item 3.     Legal Proceedings                                 24
            Item 4.     Submission of Matters to a Vote of
                        Security Holders                                  24

PART II

            Item 5.     Market for Registrant's Common Equity
                        and Related Stockholder Matters                   25
            Item 6.     Selected Consolidated Financial Data              27
            Item 7.     Management's Discussion and Analysis of
                        Financial Condition and Results of
                        Operations                                        28
            Item 8.     Financial Statements and Supplementary
                        Data                                              F-0
            Item 9.     Changes in and Disagreements with
                        Accountants on Accounting and Financial
                        Disclosure                                        35

PART III

            Item 10.    Directors and Executive Officers of the
                        Registrant                                        35
            Item 11.    Executive Compensation                            35
            Item 12.    Security Ownership of Certain Beneficial
                        Owners and Management                             35
            Item 13.    Certain Relationships and Related
                        Transactions                                      35

PART IV

            Item 14.    Exhibits, Financial Statement Schedules,
                        and Reports on Form 8-K                           36

                        Signatures


<PAGE>


                                     PART I

ITEM 1.                            BUSINESS

     Fischer Imaging Corporation, incorporated in the State of Delaware in 1991,
(the "Company") designs, manufactures and markets specialty and general purpose
medical imaging systems for the diagnosis and treatment of disease. The
Company's newest products are directed towards medical specialties (such as the
diagnosis and treatment of breast cancer, heart disease and vascular disease) in
which image-guided, minimally invasive therapies are replacing open surgical
procedures. The Company also designs and manufactures specialty x-ray imaging
components and subsystems for several leading medical products companies as an
Original Equipment Manufacturer ("OEM") and sells general radiology systems for
use in hospitals, clinics and physicians' offices.


PRODUCTS AND MARKETS

        The Company's current proprietary products include specialty imaging
systems that serve image-guided, minimally-invasive markets, and general
radiology products. Major markets served include: Breast Cancer Screening and
Biopsy, Electrophysiology, Endovascular and Interventional, and General
Radiology. The Company also designs and manufactures specialty x-ray imaging
components and subsystems as an OEM for several leading medical equipment
manufacturers, including GE Medical Systems, a division of General Electric
Company, Varian Associates, Inc. ("Varian"), Storz Medical AG ("Storz"), Picker
International, Inc. ("Picker") and Dornier Medizintechnik (Medtech) GmbH
("Dornier").

        BREAST CANCER IMAGING AND BIOPSY MARKETS

        MARKET OVERVIEW

        Breast cancer is the leading cause of cancer death among the 27 million
women in the United States between the ages of 40 and 55 and the second leading
cause of cancer death among all women in the United States. According to the
American Cancer Society, approximately 185,000 new cases of breast cancer are
diagnosed and 45,000 women die annually from the disease. The incidence of
breast cancer increases with age, rising from about 100 cases per 100,000 women
starting at age 40 to about 400 cases per 100,000 women at the age of 65. Thus,
the Company believes that the large number of aging baby boomers coupled with
increased breast cancer screening rates and education will lead to an increase
in the number of breast cancer screening and diagnostic procedures.

        Successful treatment of breast cancer depends in large part on the early
detection of malignant lesions. According to the National Cancer Institute
("NCI"), the five-year survival rate decreases from more than 90% to 72% after
the cancer has spread to the lymph nodes, and to 18% after it has spread to
other organs such as the lungs, liver or brain. Current methods of detecting
breast cancer typically include clinical and self examination and screening
mammography. While these methods can indicate the presence of lesions, they
cannot indicate whether the lesions are benign or malignant. If a clinical or
self examination or screening mammogram detects a lesion of a suspicious nature,
or if other symptoms of breast cancer are present, additional diagnostic
mammography is typically ordered.

        If the results of a diagnostic mammogram are indeterminate, a breast
biopsy is typically performed. The Company believes that approximately 1.0
million biopsies are performed annually, 70% to 90% of which result in a benign
diagnosis. The most


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common forms of biopsy  procedures are open surgical,  stereotactic  core needle
and ultrasound-guided core needle biopsies.

        Open Surgical Biopsy. Open surgical biopsy has been the most commonly
used method of diagnosing breast cancer for many years. Although open surgical
biopsy typically provides the tissue sample necessary for a definitive
diagnosis, the procedure has several disadvantages: (1) it must generally be
performed in an operating room with general anesthesia, (2) it takes
approximately one hour and requires one to two days of recuperation at home, (3)
the skin incision and large amount of tissue removed may be disfiguring, (4)
internal tissue scars can impair the ability of subsequent mammograms to detect
potentially cancerous lesions, and (5) the aggregate cost, including surgical
fees and operating room charges, is believed to currently range from
approximately $2,500 to $5,000.

        Stereotactic Core Needle Biopsy. Stereotactic core needle biopsy was
pioneered by the Company and a group of radiologists with the development of the
Company's Mammotest(R) system in the late 1980s. As an alternative to open
surgical biopsy, stereotactic core needle biopsy offers a less-invasive
procedure, lower cost and minimal scarring of the breast, while maintaining
accuracy in cancer detection. Stereotactic core needle biopsies using systems
such as the Company's Mammotest system can be performed in a physician's office,
breast imaging center or hospital. Initially performed by radiologists, the
procedure is now being more widely adopted by surgeons as they become aware of
the accuracy and less-invasive nature of the procedure. The typical billing for
the procedure is believed to currently range from $750 to $1,200.

        During the stereotactic core needle biopsy procedure, the patient lies
prone in a face down position on top of a stereotactic x-ray imaging table with
her breast protruding through an opening in the table, creating a work space
below the table for the physician. An x-ray imaging system is located on the
underside of the table that enables the physician to localize a lesion in a
three-dimensional field and accurately position the core needle within one
millimeter of the targeted lesion for sampling. During the less than one-hour
procedure, the patient is given a local anesthetic and a small nick is made in
the patient's skin. As with open surgical biopsy, the samples are sent to the
pathology laboratory for analysis. At the conclusion of the procedure, the skin
nick is covered by a band-aid.

       The Company believes that the number of stereotactic core needle biopsy
procedures performed in 1990 was approximately 500, but has grown, in recent
years, to approximately 200,000 procedures annually. The increased acceptance
and use of core needle biopsy techniques has been driven by the clinical and
cost advantages of core needle biopsies, as well as improvements in tissue
removal systems such as the Mammotome(TM) device from Biopsys Medical, Inc. (a
Johnson & Johnson company), which can be used in conjunction with the Company's
Mammotest system. Several television programs aired since 1993 on the benefits
of stereotactic core needle biopsy have increased awareness of women and managed
care organizations as to the cost savings and less-invasive nature of the
procedure. Finally, failure to diagnose breast cancer on a timely basis is
currently the leading cause of malpractice lawsuits against physicians, which
the Company believes is causing more biopsies to be requested.

        Ultrasound-Guided Core Needle Biopsy. Ultrasound imaging can play an
important adjunctive role to mammography based on its ability to characterize
masses in breast tissue. For example, benign cysts can be diagnosed reliably
with ultrasound and, with state of the art ultrasound equipment, some masses in
addition to cysts can be diagnosed as benign. Additionally, ultrasound does not
expose a patient to x-ray radiation. The quality of ultrasound equipment has
only recently improved to the level


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needed  for  breast  imaging  and,  as  yet,  mammographers  are  typically  not
sufficiently trained in breast ultrasound imaging techniques.  Nonetheless,  the
Company  believes that the large number of breast lesions that could be biopsied
under ultrasound guidance and the ability of ultrasound to characterize  certain
breast masses  without the use of x-ray  radiation  will result in the increased
use of  ultrasound  for both the  diagnosis  of breast  masses  and core  needle
biopsies in the future.

        There are a number of new and developing technologies, such as digital
mammography and magnetic resonance imaging, that may be used to detect,
diagnose, and enhance post-diagnostic treatment of breast cancer. The Company
has products under development using both technologies:

        Digital Mammography. Digital mammography provides a number of advantages
over conventional mammography. Because a digital mammography system separates
the display of a mammogram from the detection and creation of the image (a film
screen mammogram acts both as a detector and display) the contrast may be varied
on the display monitor. In this way, dense breast tissue can be interpreted
appropriately without subjecting the patient to a second mammogram. Digital
mammography may be especially useful in screening women under age 50 due to the
limited ability of film screen mammography to image the denser breast tissue of
younger women. In addition, a properly designed digital mammography detector
system can reduce the radiation required for a diagnostic mammogram by at least
a factor of two. Other benefits from a digital mammography system include real
time acquisition (film processing is not necessary), storage of the mammogram in
digital memory or on digital archival media, computer aided diagnosis and
telemammography.

        Magnetic Resonance Imaging. Magnetic resonance imaging is an evolving
modality for imaging breast cancer. Breast magnetic resonance imaging ("Breast
MR"), performed with the intravenous injection of a contrast agent, has been
demonstrated in clinical research to be more effective than film screen
mammography or ultrasound at detecting lesions and determining the extent of
known breast cancer. However, since the lesions cannot currently be diagnosed as
benign or malignant with Breast MR, there is a need for a capability to perform
core needle biopsy under MR guidance.

        The Company believes that the primary use of Breast MR, combined with
biopsy capabilities, will be to provide physicians and patients with additional
information concerning the appropriateness of lumpectomy as opposed to
mastectomy and as a diagnostic alternative to partial mastectomies or
lumpectomies for patients with a high risk of breast cancer recurrence. In
addition, Breast MR may also be used to diagnose special cases where breast
cancer may be suspected but where film screen mammography and ultrasound produce
negative findings.


        PRODUCTS

        The Company serves the mammography market with stereotactic core needle
biopsy products and screening and diagnostic mammography systems.

        MAMMOTEST(R)/MAMMOVISION(R). The Company's Mammotest stereotactic core
needle biopsy system, first introduced in 1989, is designed expressly for core
needle biopsy of the breast and represents substantial improvements over open
surgical biopsy for most patients requiring diagnosis for breast cancer. The
Mammotest system consists primarily of an elevating, prone position table, a
mammographic x-ray imaging system and a stereotactic needle guidance system. The
Company is one of only two manufacturers worldwide of prone position tables. In
1992, the Company introduced Mammovision, the first charge coupled device
("CCD") imaging system cleared by the U.S. Food and Drug Administration ("FDA")
that permits near real time imaging of breast tissue. With the aid of
proprietary software for the Mammovision computer, coordinates


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of the lesion  can be  quickly  calculated  using a  computer  trackball.  These
coordinates  are then sent via a computer  interface to the  Autoguide,  a motor
driven needle holder  assembly that precisely aims the biopsy needle directly at
the lesion.  Mammovision  has become a standard  for  providing  computer  based
imaging for the Mammotest system.

        Since 1990, approximately 600 Mammotest systems have been installed
worldwide, with the vast majority in the United States. The list price of the
Mammotest system with Mammovision is $225,000. A Mammovision sold separately has
a list price of $95,000.

        MAMMOTEST PLUS(TM)/MAMMOVISION PLUS(TM). The Company introduced
Mammotest Plus and Mammovision Plus in November 1995. The Mammotest Plus system
permits its operator 360 degree access to the breast and incorporates the
software and hardware features of Target on Scout(TM) and Lateral Arm that allow
small breasts (compressed to less than 2.5cm) and breasts with lesions located
near the axilla or very posterior to the chest wall to be biopsied more easily.
Mammovision Plus is a new CCD imaging system that provides an optional expanded
field of view (10 x 5cm versus 5 x 5cm) as well as the ability to remove the
camera from the Mammotest table. This feature permits the operator to install
the Mammovision Plus camera on the Company's HFX diagnostic mammography system.
Thus, near real time digital imaging can be performed in conjunction with
standard diagnostic mammography. As a result, the cost of the system can be
amortized across a larger number of procedures thus potentially expanding the
Company's market for Mammotest Plus and Mammovision Plus systems. The list price
of a Mammotest Plus system with Mammovision Plus is approximately $225,000.

        MAMMOTEST PLUS "S"(TM) SURGICAL SYSTEM. The Mammotest Plus "S" Surgical
System was introduced in February 1998 in support of the Company's surgical
alliance with Ethicon Endo-Surgery, Inc., a Johnson & Johnson company ("Ethicon
Endo-Surgery").  This enhancement of the Company's Mammotest Plus prone
biopsy system is designed to support the more advanced techniques performed in
the surgical market segment. The list price of the Mammotest Plus "S" system is
approximately $280,000.

        PERFORMA(TM) 7.5 MHZ ULTRASOUND SYSTEM. Under an agreement with Acoustic
Imaging, an indirect subsidiary of Dornier, the Company distributes the Performa
dedicated ultrasound breast imaging system in conjunction with the sale of the
Company's Mammotest and HFX diagnostic mammography systems. Performa allows core
needle biopsies to be performed with ultrasound guidance if the lesion can be
visualized under ultrasound. The list price for the Performa breast ultrasound
system is $45,000.

        HFX(TM) MAMMOGRAPHY SYSTEM. HFX is a diagnostic mammography system
designed to perform high quality, low dose breast examinations quickly, easily
and efficiently. Through a proprietary x-ray tube, the HFX generates excellent
spatial resolution, especially at the front edge of the image receptor where
magnification mammography examinations are performed. The HFX can be provided in
a two-tube configuration and integrated with the Mammotest to provide a
cost-efficient system capable of performing both mammography and stereotactic
core needle breast biopsies. The HFX mammography system ranges in price from
$50,000 to $70,000.

        HFX PLUS(TM) MAMMOGRAPHY SYSTEM. The HFX Plus has all the benefits and
capabilities of the HFX with the addition of digital spot imaging. The HFX Plus
can accept the removable CCD camera from the Mammotest Plus stereotactic table,
which allows communication with a Mammovision Plus digital workstation.
Problematic dense tissue or thin, low absorption tissue areas can be evaluated
on the digital camera. Digital technology gives a wider range of contrast
controls, providing enhanced visualization of


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faint lesions over that of conventional  film screen imaging.  The list price of
the HFX Plus Mammography System is $62,000.

        SENOSCAN(TM) DIGITAL MAMMOGRAPHY SYSTEM. The Company is a leader in the
development of full-field digital mammography systems. Digital mammography
provides a number of advantages over film screen mammography, including an
improved ability to image dense breast tissue, reduced radiation dosage to the
patient, real time imaging and the ability to store images in a digital format
which may be transmitted over high-speed telecommunication networks, thus
allowing remote diagnosis. The Company believes that its SENOSCAN full-field
digital mammography system, which was introduced as a prototype in late 1995,
will offer all of these advantages.

        The Company believes there is a large potential market for digital
mammography. The Company's SENOSCAN digital mammography system currently under
development may represent a significant technological advance in the imaging of
breast tissue, especially in younger women. Current film screen mammography
technology is limited in its ability to image the dense breast tissue of younger
women. As reported by the American Cancer Society, women under age 50 experience
significant incidence of breast cancer, with more than 20% of breast cancer
cases detected in women under that age.

        The Company has installed SENOSCAN systems in five locations, three of
which are performing clinical testing on approximately 500 patients. This
clinical testing will image patients for a study comparing results of film
screen and digital mammography (an "agreement study"). The Company plans to
submit a 510(k) application, together with the results of these clinical trials,
to the FDA during 1998, which is later than originally anticipated due to
start-up equipment issues and patient acquisition delays. See
"Business-Government Regulation."

        While the Company expects that its SENOSCAN system may cost more than
conventional film screen mammography systems, it believes that the increased
benefits from improved imaging will more than offset the increased capital
costs.

       PROTOTYPE MR BIOPSY SYSTEM. The Company has designed and manufactured a
prototype MR biopsy system that is compatible with the GE Medical Systems' Signa
1.5T magnetic resonance imaging system, which constitutes a significant portion
of the 4,000 installed magnetic resonance imaging systems believed to be in
operation in the United States. Although clinical trials of the prototype
system, designed to further test the system's ability to reliably biopsy breast
lesions using magnetic resonance imaging as its guidance modality, have not yet
begun, the Company believes these trials will commence in the near future. The
Company believes that the primary use of Breast MR, combined with biopsy
capabilities, will be to stage known cancers, providing the physician and
patient with additional information concerning the appropriateness of lumpectomy
as opposed to mastectomy.

       The Company experienced decreases in its sales of its Mammotest systems
in the second half of 1996 and in 1997. See "Competition." In October 1997, the
Company entered into a marketing partnership with Ethicon Endo-Surgery and a
distribution agreement with Imagyn Medical Technologies, Inc. ("Imagyn") that it
believes will help it more adequately address this market. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview".


        ELECTROPHYSIOLOGY MARKETS

        MARKET OVERVIEW

        The Company estimates that of the 550,000 annual heart attack deaths in
the United States, more than 350,000 are related to ventricular tachycardia
(very rapid

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heartbeat) or other cardiac  arrhythmias  that may induce sudden death.  Cardiac
arrhythmias  are  irregular  heartbeats  that arise  when the normal  pattern of
conduction of electrical impulses in the heart is disrupted. Cardiac arrhythmias
can range from isolated  premature  contractions to tachycardia that may lead to
life-threatening episodes of ventricular fibrillation.

        Atrial fibrillation is a common, normally non-life threatening form of
atrial tachycardia. Currently, approximately 2.2 million people in the United
States are believed to have this condition. Atrial fibrillation is normally
treated by cardioversion, a procedure in which an external electrical shock is
applied to the chest to restore a normal pattern of conduction of electrical
impulses in the heart. Episodes of atrial fibrillation are a frequent cause of
strokes due to emboli (clots) formed in the heart dislodging and blocking
cerebral arteries. An industry source estimates that atrial fibrillation causes
75,000 strokes each year.

        The treatment of arrhythmia patients typically involves a diagnostic EP
study and the prescription of an anti-arrhythmic drug, corrective open heart
surgery, the implantation of an implantable cardiovertor defibrillator ("ICD")
or interventional therapy such as radio frequency ("RF") ablation. The Company
estimates that approximately 200,000 EP studies are performed annually.

        EP studies, which are performed by inducing arrhythmias in patients, are
increasingly being undertaken in a dedicated electrophysiology laboratory ("EP
Lab"). The arrhythmia is generally induced by electrostimulation of the heart
through the percutaneous introduction of catheters into veins leading into the
heart. Tilt table testing is also performed to observe presence or absence of
transient fainting when the patient is moved to a natural, upright position. If
it is determined that the patient might benefit from a surgical or other
interventional procedure, the electrical activity in the patient's heart is
generally mapped in an effort to locate the precise area of the heart that is
causing the arrhythmia or tachycardia. EP x-ray imaging positioners,
tilt-tables, stimulators and recording devices are used during these procedures,
all of which the Company manufactures.

        The Company expects the EP market to continue to expand over the next
several years based on the increased use of ICD implantation and the development
of RF ablation and new catheter-based technologies for the treatment of
ventricular tachycardia and atrial fibrillation. ICDs are typically implanted in
patients who have experienced ventricular tachycardia and are diagnosed to be at
risk of ventricular fibrillation and sudden cardiac death. The Company expects
continued growth in the use of ICDs as a result of studies indicating that ICDs
may provide a more effective therapy for ventricular fibrillation than existing
drug therapies. The development of transvenous leads for ICDs and smaller device
sizes that allow pectoral implantation will allow ICDs to be implanted in
outpatient dedicated device implantation suites which can be operated less
expensively than standard operating rooms. The Company believes growing use of
pectoral implantation of ICDs will provide an expanding market opportunity for
dedicated device implantation suites which will require x-ray imaging equipment.

        During the last five years, RF ablation has been increasingly used to
treat atrial arrhythmias such as Wolf-Parkinson-White syndrome. RF ablation
involves locating an electrical abnormality in a chamber of the heart and using
specialized EP catheters to deliver energy from an external source to ablate the
abnormal tissue. RF ablation has also been used successfully to treat certain
ventricular tachycardia. Research by electrophysiologists has focused on the use
of catheter-based technology used in an EP interventional procedure to
permanently cure certain patients with recurrent atrial fibrillation.


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        PRODUCTS

        The Company's strategy is to develop and market an integrated, dedicated
EP Lab which contains stimulation, recording and x-ray imaging capabilities for
use in diagnostic and therapeutic EP procedures. An integrated EP system offers
the potential of consolidating controls and monitors in order to speed EP
procedures and reduce requirements for ancillary personnel. The Company's EP
products offer specialized features specifically designed for the
electrophysiologist. The Company offers a choice of ceiling and floor mounted
c-arm positioners which incorporate motorized isocentric c-arm movement
(allowing multiple fluoroscopic views of the patient's heart without moving the
patient), floor mounted tilt tables, a ceiling suspended table capable of
vertical patient positioning, and pulse progressive fluoroscopy capable of
reducing x-ray dosage by up to 80%.

        Until recently, most EP procedures were performed in cardiac
catheterization laboratories or performed with mobile fluoroscopic systems. The
Company, with the cooperation of the University of Colorado Health Sciences
Center, developed the first dedicated EP system in 1985, and since that time has
sold over 100 dedicated EP systems, primarily to teaching hospitals in the
United States.

        EP/X(TM). In 1995, the Company introduced the EP/X system, an
economical, state of the art single plane x-ray imaging system. The EP/X system
meets most general purpose EP requirements for both community and teaching
hospitals. The EP/X is offered optionally with the Company's patented automatic
pulse progressive fluoroscopy system. The list price of the system ranges from
$300,000 to $380,000. As a result of healthcare industry cost containment
pressures, the majority of the Company's EP system orders have recently included
the EP/X system.

        EP/X2(TM). The EP/X2 is a cost-effective, ceiling suspended, bi-plane
fluoroscopy system. The Company believes that bi-plane imaging will be
increasingly required for new, developing EP procedures such as catheter
treatment for ventricular tachycardia or atrial fibrillation. The Company
believes the flexibility of the ceiling suspended system will allow versatile
use of the bi-plane x-ray system whether in a dedicated EP laboratory or in a
surgical suite. EP/X2 complements the Company's existing, more expensive,
bi-plane Cardiac CX/Pegasus imaging system. The EP/X2 carries a list price
significantly below the lowest priced competitive systems currently available.
The Company both received 510(k) clearance for the EP/X2 from the FDA and began
shipments during 1997. EP/X2 is now installed in several leading EP laboratories
throughout the United States. The list price of the EP/X2 is $800,000.

        CARDIAC  CX/PEGASUS(TM).  The  Cardiac  CX/Pegasus  is a
fully-integrated bi-plane system for cardiac special procedures laboratories.
The Cardiac CX/Pegasus has a list price of $1,200,000.

        EPIC(R). EPIC is a computerized image management system used to
integrate and display x-ray images and electrocardiogram ("ECG") signals during
an EP procedure. The EPIC can handle both bi-plane and single plane images and
provides the ability to display three ECG signals from the EPACE recording
system on the x-ray imaging system in both the control room and the procedure
room.

        EPACE(TM). The EPACE product is a computer-based 32 channel recording
system. It is also the foundation for the Company's integrated EP Lab, in which
EPACE is linked by a computer interface to the EPIC imaging computer and the
EP/Stim(TM) computer controlled stimulator under development.


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        EP STIMULATORS. The Company currently markets the DTU-215 EP Stimulator,
a four-channel stimulator for use in EP labs and has under development the
EP/Stim, a computer controlled stimulator that would allow direct communication
with the Company's EPACE product. The DTU-215 EP Stimulator lists for $22,000.
During 1997, the Company continued work towards a 510(k) notification for the
EP/Stim to the FDA, and now believes this submission will occur during 1998.

        Competitors in the EP market such as GE Medical Systems, Philips
Electronics ("Philips"), Siemens A.G. ("Siemens"), and Toshiba America Medical
Systems, Inc. ("Toshiba") provide single-plane systems for the EP Lab at prices
ranging from $500,000 to $600,000. The Company's dedicated EP systems are
designed specifically for the requirements of the electrophysiologist and are
offered at prices under the competition for the EP/X single-plane system.

        ENDOVASCULAR AND INTERVENTIONAL MARKETS

        MARKET OVERVIEW

        The most common form of cardiovascular disease is atherosclerosis, a
disease characterized by the thickening of the arteries caused by deposits of
"plaque," a fatty substance. Atherosclerosis affects both coronary and
peripheral arteries. Open surgical procedures have traditionally been performed
in the operating room by vascular surgeons to repair the partially-blocked
arteries that have been impairing the normal flow of blood. In addition,
vascular surgeons repair aneurysms (balloon like enlargements of an artery)
which, if left untreated, may rupture and frequently cause death.

        Percutaneous catheter techniques have been used for over a decade to
treat a significant number of vascular disorders. These procedures, which are
guided by high performance x-ray imaging, are significantly less-invasive and
less costly than open surgical procedures. The procedures were initially
developed by cardiologists and radiologists and performed in cardiac
catheterization or angiographic laboratories in hospital cardiology or radiology
departments.

        Angioplasty, one of the most frequently performed procedures, involves
x-ray imaging guidance of a catheter introduced into a blood vessel. The
catheter is guided to the vascular narrowing and a balloon is inflated to reopen
the artery to normal flow. While peripheral angioplasty has been quite
successful, a significant portion of treated vessels reocclude over time. More
recent developments include the implantation of a stent delivered to the
narrowing on a catheter. Studies have shown that stents keep the artery open for
a longer duration. In addition, catheter-based techniques to remove plaque have
demonstrated success and are frequently performed in conjunction with stent
deployment.

        More recently, vascular surgeons are purchasing x-ray imaging systems
for installation in the operating room, and vascular surgeons are becoming
trained in the performance of these newer, less-invasive vascular (non-coronary)
procedures. Historically, mobile c-arm intensifiers have provided x-ray imaging
capability for vascular surgeons. However, more complex procedures, such as
carotid stenting and abdominal aortic aneurysm ("AAA") repair using stent
grafts, require more sophisticated x-ray imaging capability in the operating
room.

        AAAs are vascular enlargements which are difficult to treat and, if left
untreated, increasingly susceptible to rupture, usually resulting in death.
Several companies have developed stent grafts which are deployed across the
aneurysm following percutaneous catheter introduction. The x-ray imaging
requirements for percutaneous AAA repair are demanding and typically cannot be
met by the capabilities of mobile c-arm intensifier


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<PAGE>


systems.  The  Company  believes  that stent  grafts will  eventually  provide a
less-invasive  method of treating the estimated 190,000 AAAs diagnosed yearly in
the United States.  Currently,  only an estimated  45,000 patients  undergo open
surgery  annually  in  large  part  due  to the  high  mortality  and  morbidity
associated with the procedure.

        In addition, the use of laparoscopic cholecystectomy (minimally-invasive
gall bladder removal) procedures has grown dramatically over the last several
years. These procedures normally require the use of x-ray systems in the
operating room to perform intraoperative cholangiograms (x-ray studies of the
gallbladder). The Company believes that continued growth in the use of
laparoscopic and other minimally-invasive procedures will increase the demand
for dedicated x-ray systems in the operating room.

        The Company believes that vascular surgeons would prefer to perform
catheter directed techniques such as peripheral angioplasty and stent placements
in the operating room using angiographic x-ray imaging systems with similar
angiographic capabilities as found in dedicated x-ray laboratories. The Company
also believes that vascular surgeons would prefer to perform new evolving and
high risk procedures such as AAA repairs and carotid and iliac stenting in the
operating room where open surgery would be immediately available if necessary.

        PRODUCTS

        2000 AND 2001 SERIES. The 2000 and new 2001 Series products include
dedicated specialized x-ray imaging systems designed for installation in an
operating room. These systems include a ceiling suspended isocentric c-arm x-ray
imaging system with state of the art angiographic and digital image management
capabilities, and a surgical table with motorized control for rotation, tilting
and elevation. An unobstructed 80 inch cantilevered carbon fiber table top
supports the patient and permits full body x-ray imaging of patients. The
surgical table provides full capability for the performance of open surgical
procedures, including open heart operations. The 2001 provides increased x-ray
tube heat capacity and the capability to add a 12 inch image intensifier.

        The 2000/2001 Series systems include high line variable frame rate
progressive fluoroscopy for x-ray dose reduction of up to 80% with no loss in
image quality. The Company believes this feature is very important because the
2000/2001 Series systems are frequently used by many non-radiology trained
specialists to perform procedures such as catheter placements, pacemaker
implantation and general orthopedics.

        The Company is not aware of any other company making dedicated x-ray
imaging systems for surgery with similar features to the 2000/2001 Series
systems. A number of manufacturers provide less expensive mobile c-arm
intensifier systems to meet x-ray imaging requirements in surgery. However, the
2000/2001 Series systems incorporate improved image quality, ease and speed of
positioning, x-ray dose reduction and on-line angiographic image processing,
thus providing unique advantages over a mobile c-arm. The Company believes these
product features are important to surgeons who perform endovascular procedures
in the operating room. Since 1991, the Company's 2000/2001 Series systems have
been distributed by International Surgical Systems ("ISS") under an OEM
agreement. ISS's list price for the 2000/2001 Series products is approximately
$499,000.

        IMAGER III/DPS-100. The Company's Imager III system is a universal x-ray
imaging system designed for a wide variety of interventional radiology
procedures, primarily endovascular procedures. These systems incorporate digital
image processing computers, which allow a reduction in x-ray dose and
improvement in image quality, and sophisticated positioning control of the
patient and x-ray source, which allow the physician to efficiently achieve all
angulations necessary to perform a procedure. The DPS-100


                                       9

<PAGE>


provides a  cost-effective  solution for the  incorporation  of digital  imaging
capabilities  with the Imager III and in general purpose  fluoroscopy.  The list
prices of the Imager III systems  range from  $500,000 to $800,000  depending on
the components included.

        GENERAL RADIOLOGY PRODUCTS

        In addition to breast cancer, electrophysiology and OEM products, the
Company sells other diagnostic x-ray imaging systems and other products used for
general x-ray procedures. These systems are sold domestically and
internationally through direct and dealer distribution channels for use in
hospitals, clinics and physician's offices for general radiographic and
fluoroscopic screening.

        Traumex(R). The Company's Traumex x-ray imaging system provides unique
positioning capabilities which require minimal patient movement, making it well
suited for emergency room applications. It also serves as a versatile general
radiographic system for hospitals. The list price of the Company's Traumex
system ranges from $140,000 to $200,000.

        RAD DX. The Company also manufactures and sells Rad DX and other general
radiographic systems to hospitals and clinics. The Rad DX product line includes
x-ray imaging products for use in clinics and physicians' offices, which
generally sell for approximately $35,000, and systems for hospitals which
generally sell in the range of $80,000 to $120,000.

        RF-X SERIES. The Company's RF-X Series systems are composed of
fluoroscopic tables used in conjunction with generators and imaging chains and
are sold through direct, dealer and OEM channels. These are radiographic and
fluoroscopic systems designed for real time x-ray imaging which are sold to both
clinics and hospitals with list prices ranging from $175,000 to $250,000.

        OEM AGREEMENTS

        The Company also designs and manufactures specialty x-ray imaging
components and subsystems for several leading medical products companies as an
OEM. Sales under OEM contracts constituted approximately 31% of the Company's
1997 total revenues. These OEM relationships provide the Company with
opportunities to share the cost of development and use of new technologies, and
to achieve manufacturing cost savings through higher volumes for components and
subsystems used in other products while, in most cases, maintaining an ownership
interest in product designs. These OEM contracts expire on various dates between
1998 and 2001 but, under some circumstances, provide that orders under these
contracts may be reduced or terminated earlier than the applicable contract's
expiration date. The Company's sales under its OEM agreements have fluctuated
significantly in the past and may continue to do so in the future.

        GE Medical Systems. GE Medical Systems, currently the holder of a 16%
interest in the Company, is a major customer, accounting for approximately 7.5%
of the Company's 1997 total revenues. Under its OEM contract, GE Medical Systems
is required to purchase certain minimum annual quantities of Tilt C positioners
from the Company. The Tilt C positioner is a multi-purpose 90 degree tilting
table with a cantilevered table top and sophisticated positioner controls. These
multi-purpose systems are used in biopsies and other interventional procedures,
as well as in general imaging studies. The OEM contract expires in December
1999. The Company may also independently sell systems incorporating its Imager
III version of the Tilt C system.


                                       10

<PAGE>


        Varian. The Company provides a line of x-ray generators and imaging
systems to Varian for incorporation into Varian's Ximatron radiotherapy
simulator system. The Company has provided Varian with imaging systems since
1983 and is currently working under a multi-year contract which expires in
October 1998.

        Storz. Under a ten-year agreement with Storz which expires in 1998, the
Company has designed and manufactures the c-arm x-ray imaging system used with
Storz Medical's Modulith SLX lithotripter (a non-invasive system for breaking
kidney stones). The Modulith SLX is sold worldwide, including the United States
since its clearance by the FDA in 1995.

        Picker. The Company supplies Picker with a complete line of radiographic
and fluoroscopic systems which includes the Company's x-ray generator, imaging
chain, table and tube stand. The Company's agreement with Picker expired in
February 1997, although deliveries will continue through the first quarter of
1998. In March 1997, the Company and Picker entered into a master agreement
whereby Picker may purchase certain cardiac catheterization systems from the
Company over the next several years. Negotiations for additional products that
will be included under the master agreement are on-going.

        Dornier. The Company supplies Dornier with x-ray imaging systems for
sale with Dornier's lithotripter systems. Dornier systems are sold worldwide,
and have been sold in the United States since 1995 when FDA clearance was
received. The agreement expires in December 2001.

        ISS. The Company sells its 2000 and 2001 Series specialty x-ray imaging
system to ISS under an OEM agreement. Under this agreement, ISS is responsible
for sales and marketing of these systems, while the Company is responsible for
installation, applications training and service for 2000/2001 Series systems
sold by ISS. ISS currently has five direct sales people selling the 2000/2001
Series in the United States. Both companies are permitted to market the product
outside of North America. This agreement expires in December 1998.

        RISKS ASSOCIATED WITH OEM AGREEMENTS

        Many of the Company's OEM customers are also competitors and have larger
installed customer bases and far greater financial, management, manufacturing,
sales and marketing and other resources than the Company. The business
strategies and manufacturing practices of the Company's OEM customers are
subject to change and such changes may result in decisions by these customers to
seek other sources for products currently manufactured by the Company or to
manufacture these products internally. Additionally, these OEM customers have
increasingly sought to obtain price concessions from the Company or the pass
through of cost savings achieved by the Company in the form of lower prices. The
Company's OEM contracts are usually non-exclusive. OEM customers generally may
modify, limit or terminate the contract or purchase orders under the contract on
short notice with modest or no penalties. OEM customer orders may be influenced
by factors relating to the OEM customer's business such as sales of the product,
changes in product or marketing strategy, changes in components of the end
product manufactured by others and development of new products. Additionally,
the timing of product orders under these OEM contracts has fluctuated and is
likely to continue to fluctuate on a quarterly or annual basis. Under these OEM
contracts, the Company is required to design, develop and manufacture its
products to meet the specifications of the OEM customers and from time to time
the Company may be required to correct deficiencies identified in these
products. The Company's OEM agreements involve complex products, and changing
product specifications and requirements that may lead to the renegotiation of
these agreements


                                       11

<PAGE>


from time to time. These negotiations may result in disagreements which could
adversely affect relationships with OEM customers. For example, in late 1997 and
early 1998, the Company was involved in litigation over pricing under an OEM
contract. Although a favorable outcome was obtained in this instance, there can
be no assurance that this or other OEM relationships and revenues will not be
adversely affected in any future negotiations or disagreements. Moreover, order
rates under the Company's OEM contracts can decline over the term of the
agreement and may not be renewed upon expiration, causing revenues to decline
significantly. The Company may not be able to replace revenues lost in such
situations. There can be no assurance that the Company will be able to maintain
its existing, or establish new, OEM relationships and the loss of any of its OEM
relationships could have a material adverse effect on the Company's business and
profitability.

SALES AND MARKETING

       In the United States, the Company currently markets its products through
its direct sales force and certain dealers. Direct sales offer the Company
higher margins, more central control over the sales process and customer
contacts, and ongoing service revenues. The Company believes that more
sophisticated products such as certain breast cancer, EP and endovascular
systems require a focused and dedicated sales force. As a result, the majority
of the Company's sales of Mammotest and EP systems are made through its direct
sales force. The Company believes that general radiology systems are more
appropriately sold by dealers because such products require broader distribution
and more competitive pricing. Accordingly, the Company markets its general
radiology systems through its dealer organization. Certain of the Company's
dealers market the Company's entire product line, while others focus exclusively
on the general radiology market. As of December 31, 1997, the Company had 24
direct sales people whose territories primarily cover large metropolitan areas
and approximately 30 independent dealers which cover the remainder of the United
States. The Company also expects to benefit from recently announced marketing
alliances with Ethicon Endo-Surgery and Sterling Diagnostic Imaging, Inc.
("Sterling"). Both organizations have direct sales organizations and marketing
resources substantially larger than those of the Company. See "Strategic
Alliances."

        Historically, the Company has focused its marketing efforts in the
United States. In recent years, however, the Company has expanded its
international marketing efforts to support the Company's expansion into the
European, Asian and Latin American markets. The Company formed subsidiaries in
Australia (1984), Europe (1993), and China (1996) to manage its sales and its
dealer networks in Asia and Europe, respectively. International sales are also
made through a network of dealers in Latin America and the Middle East. As of
December 31, 1997, the Company had 10 direct sales people and approximately 45
dealers conducting the Company's international sales efforts.

        The Company's key marketing activities include trade shows, professional
journal advertising, telemarketing and the organization and administration of
seminars, conferences and physician training programs. The marketing group
develops sales leads and assesses both customer satisfaction with the Company's
products and direct and dealer service performance.

        The Company's service organization is responsible for installing the
Company's products and providing warranty service. Company products sold by the
direct sales force carry limited warranties covering parts and labor for periods
ranging from six to twelve months. Company products sold through dealers and to
OEM customers carry limited warranties with terms ranging from six to twelve
months which cover only parts or components supplied by the Company. Service
personnel provide maintenance service under contracts or at hourly rates from
several locations in the United States.


                                       12

<PAGE>


The Company's direct service organization  services its products in some foreign
countries. In other foreign countries, the Company services its products through
dealers and third  parties.  As of December  31, 1997,  the Company  employed 41
field and technical  support  engineers  and 14  administrative  and  management
personnel in its U.S. service organization.

INTERNATIONAL OPERATIONS

        Revenues from customers based outside the United States accounted for
18.7% and 21.2% of the Company's total revenues in 1997 and 1996, respectively.
These revenues included sales to foreign OEM customers of 11.5% and 11.7% of the
Company's 1997 and 1996 total revenues, respectively. In addition, the Company
has OEM contracts with several foreign and multinational companies that
distribute the Company's products internationally and within the United States.
Risks of doing business outside the U.S. include: the expense and difficulty of
establishing, expanding, and managing international operations; the uncertainty
of market acceptance of the Company's products; the difficulty of enforcing
agreements, collecting receivables, and protecting intellectual property in
foreign countries; the potential imposition by foreign countries of additional
withholding taxes, income taxes, tariffs, or other restrictions on foreign
trade; and potential difficulties in obtaining U. S. export licenses. The
Company, in 1997, did experience reductions in its international business. There
can be no assurance that this market will improve in 1998, that the Company's
international business will grow in the future, or that any of the foregoing
risks will not result in a material adverse effect on the Company. See Note 10
"Foreign Operations", of Notes to Consolidated Financial Statements for
additional information.

STRATEGIC ALLIANCES

        During 1997, the Company announced several strategic marketing and
distribution alliances which it believes will allow it to compete more
effectively in the markets where its products are used.

        Ethicon Endo-Surgery, Inc., a Johnson & Johnson company. In October
1997, the Company entered into a marketing partnership with Ethicon Endo-Surgery
for the marketing and sale of Mammotest Plus "S", a version of the Company's
Mammotest Plus prone biopsy system designed for the requirements of the surgical
market. This system has a list price of $280,000. In order to realize any
significant increase in revenues under this arrangement, the Company will be
required to attain and sustain the manufacturing capacity necessary to meet any
additional demand generated by this marketing partnership. Under the terms of
this relationship, in the event the Company is unable to meet its product
delivery obligations, Ethicon Endo-Surgery may acquire the right to obtain a
license to manufacture and sell certain Company products. Any such license would
give the Company specified royalty rights on each sale.

        Imagyn Medical Technologies, Inc. Also announced in October 1997, was
the Company's distribution agreement with Imagyn for the sale of the Company's
Mammotest Plus prone biopsy systems with Imagyn's Percutaneous Breast Biopsy
device.

        Sterling Diagnostic Imaging, Inc. In November 1997, the Company entered
into an alliance with Sterling Diagnostic Imaging, Inc. ("Sterling") under which
the Company will develop specific digital radiographic systems utilizing
Sterling's FDA-cleared DirectRay(TM) digital image detector technology with the
Company's positioning and x-ray components. Potential clinical benefits of
digital image acquisition over film-based


                                       13

<PAGE>


imaging include fewer retakes,  faster diagnosis,  remote image  interpretation,
image  integration  with other  patient  records,  reduced film and other supply
costs, and higher equipment  utilization.  The Company will manufacture complete
systems,  which will be marketed  and sold by both  companies.  The Company will
perform installation,  service, and support functions. The first system expected
to be  developed  is a  dedicated  digital  chest  system,  with a list price of
approximately $350,000. Shipment of the first prototype chest system is expected
in the second quarter of 1998, with production  units expected to begin delivery
in the second half of 1998.

BACKLOG

        The Company's backlog generally includes only product orders for which
delivery is requested within the succeeding twelve month period. Although the
Company has multi-year agreements with several OEM customers and occasionally
has other orders with longer than twelve month lead times, such orders are
included in backlog only at the time when the requested delivery date falls
within the twelve month period.

        As of December 31, 1997 and 1996, the Company's backlog was
approximately $24.2 million and $19.4 million, respectively. Backlog as of any
particular date should not be relied upon as being indicative of the Company's
net revenues for any future period.

RESEARCH AND DEVELOPMENT

        The Company has a number of potential new products in various stages of
development. Currently, the Company's research and development efforts are
focused on the development of SENOSCAN, its full field digital mammography
system employing CCD imaging technology. In addition, the Company is expending
significant research efforts on EP systems, advanced image processing and high
frequency generator design. Research and development expenditures totaled $6.0
million, $6.7 million and $6.7 million in 1997, 1996 and 1995, respectively, a
portion of which expenditures was shared by the Company's OEM customers.

        The National Cancer Institute, through payments made to certain members
of the National Digital Mammography Development Group (a consortium of GE
Medical Systems and four universities), has provided funding for the clinical
testing of SENOSCAN. The Company is also a party to a Cooperative Research and
Development Agreement with the Lawrence Livermore National Laboratory to jointly
develop design parameters for a digital mammography system, and has a research
arrangement with the University of Toronto's Department of Medical Physics to
jointly evaluate the Company's digital mammography detector system.

        The Company believes that its ability to develop technical innovations
and apply them to new products designed for targeted clinical applications has
been and continues to be important to its success. The Company's key areas of
engineering expertise include digital image processing, structural mechanical
design, microprocessor control of servo systems, high voltage x-ray generator
design and high resolution video systems. As of December 31, 1997, the Company
employed 57 engineers and technicians in research and development.

        RISKS OF TECHNOLOGICAL CHANGE AND NEW PRODUCTS

        The market for the Company's products is characterized by rapid and
significant changes in competitive technologies, evolving medical industry
standards and the frequent introduction of new products. Competing core needle
biopsy systems and other


                                       14

<PAGE>


products competitive with the Company's products have recently been introduced
which could adversely affect the Company's sales, profitability and market
share. For example, a major surgical supply company continues to aggressively
market a large diameter core needle biopsy device with a competitor's breast
biopsy table. Alternative surgical procedures or technologies or new medications
may also be developed and marketed. For example, products based on new
technologies could replace or reduce the importance of current procedures that
utilize the Company's products and render these products noncompetitive.
Accordingly, the Company's success will depend in part on its ability to respond
quickly to new product introductions, marketing campaigns and medical and
technological changes through the development of new products. There can be no
assurance that the Company will be able to develop new products in the future on
a timely or cost-effective basis, if at all, or that the Company's current
products will not be rendered obsolete or noncompetitive.

        RISKS OF NEW PRODUCT DEVELOPMENT AND MARKET ACCEPTANCE

        The Company has a number of potential new products in various stages of
development. Currently, the Company's research and development efforts are
focused on the development of a full-field digital mammography system known as
SENOSCAN which is in clinical trials but has not yet received clearance or
approval from the FDA. In addition, significant efforts are being expended on EP
systems, advanced image processing and high frequency generator design. These
products involve technological innovation and require significant planning,
design, development and testing at the technological, product and manufacturing
process levels. These activities require significant investments in research and
development, equipment, inventory, manufacturing and marketing by the Company.
Lengthy and expensive clinical trials could also be required prior to submission
to the FDA and to obtaining FDA clearance or approval. There can be no assurance
that the Company will be able to successfully design, manufacture and market
these new products or that the new products will receive FDA clearance or
approval. In addition, the Company's newest products may be used with
minimally-invasive surgical procedures and the Company believes that it must
demonstrate to physicians and managed healthcare organizations the clinical
benefits, safety, efficacy and cost-effectiveness of its products for such
procedures. In particular, the Company must demonstrate that its products are an
attractive alternative to other products and methods that may be widely
accepted. There can be no assurance that surgeons will embrace such techniques
as replacements for open surgical procedures or that hospitals will be willing
to invest in and utilize the Company's products. Lack of widespread acceptance
of these products could have a material adverse effect on the Company's future
revenues and earnings. See "- Research and Development."

COMPETITION

        The Company encounters and expects to continue to encounter intense
competition in the sale of its products. The Company believes that it maintains,
with respect to each of its products, distinct competitive advantage in one or
more of these areas: the clinical aspects of the products, product features,
speed of introduction of new products utilizing changes in technologies,
performance and quality, upgrade flexibility, price and customer service. The
Company's competitors include large multinational corporations and their
operating units, including GE Medical Systems, Siemens, Philips, Toshiba,
Shimadzu Precision Systems, Inc. Medical Systems Division ("Shimadzu") and
Picker, as well as a number of other companies such as Trex Medical Corporation
("Trex Medical"). These companies typically have a larger installed base and far
greater financial, management, manufacturing, sales and marketing, and other
resources than the Company. As a result, they may be able to adapt more quickly
to new or emerging technologies and changes in customer requirements, or to
devote greater resources to the development, manufacture, promotion and sale of
their products than the Company.


                                       15

<PAGE>


Moreover, a significant portion of the Company's sales are to medical equipment
companies who integrate the Company's products into their own systems or resell
these products under their own label. There can be no assurance that such
companies will not choose to purchase from alternative sources or internally
manufacture competing products. The Company also faces competition from sellers
of used x-ray imaging equipment, particularly general radiology systems, at
prices substantially below the prices of the Company's new products. In
addition, the Company competes for acquisition opportunities, OEM and service
contracts and experienced personnel.

        The Company's Mammotest system principally competes with the
prone-positioning breast biopsy system manufactured by Lorad ("Lorad"), a
division of Trex Medical, which Lorad has aggressively priced and marketed. Many
larger companies, including GE Medical Systems, Philips and Siemens, also offer
stereotactic add-on systems. During 1996, U.S. Surgical Corporation ("U.S.
Surgical") introduced a 20 millimeter (0.78 inch) diameter tissue removal system
which is sold with a stereotactic table manufactured for U.S. Surgical by Lorad
on a private label basis. U.S. Surgical is competing aggressively and
successfully within the surgical stereotactic core needle biopsy market,
adversely affecting the Company's sales of its Mammotest systems. See Item 3
"Legal Proceedings" for a discussion of the Company's patent infringement
litigation against Lorad.

GOVERNMENT REGULATION

        The Company's business is subject to substantial regulation by the FDA
and equivalent agencies in foreign countries. 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
"Good Manufacturing Practices" ("GMPs"), which include testing, quality control
and documentation procedures. The Company's manufacturing facilities are subject
to periodic inspection by the FDA. In March 1995, the Company was issued a
Warning Letter by the FDA concerning documentation and other deficiencies at its
Denver facility. The Company rectified these deficiencies and resolved this
matter with the FDA in June 1995. In September 1995, the Company received a
Warning Letter from the FDA with respect to documentation and other deficiencies
at its Chicago facility. The Company corrected these deficiencies, obtained
third-party certification of its corrections, and was notified by the FDA that
these actions resolved the matter. In December 1996, following an inspection,
the FDA issued Inspectional Observations Form 483 ("Form 483") regarding
manufacturing practices at its Denver facility. Subsequently, the FDA issued a
Warning Letter concerning deficiencies noted during the December 1996
inspection. The FDA requested a written response to the Warning Letter regarding
the Company's planned corrective actions and a favorable third-party
certification of the Company's manufacturing and quality systems. The Company
has completed these actions, including the receipt and submission to the FDA of
a favorable third-party certification, and believes it has resolved the FDA's
GMP concerns. Failure to satisfy FDA requirements can result in the Company's
inability to receive awards of federal government contracts, to receive new
marketing or export clearances for products manufactured at its Denver facility,
or FDA enforcement actions including, among other things, product seizure,
injunction, and/or criminal or civil proceedings being initiated by the FDA
without further notice. The Company also received separate correspondence from
the Center for Device Evaluation and Research ("CDRH") regarding violations of
the Electronic Product Radiation Control Performance Standard. The Company
believes that it has been able to correct the deficiencies noted in the Form
483, the FDA Warning Letter, and the communication from the CDRH, although no
assurance can be given to


                                       16

<PAGE>


that the corrections will be sufficient. Although the Company strives to operate
within the requirements imposed by the FDA, there can be no assurances that
these deficiencies can be corrected or that the Company will be able to satisfy
FDA compliance concerns in the future. These ongoing FDA compliance reviews
and/or related delays in future product clearances could have a material adverse
effect on the Company.

        The FDA has post-marketing controls that include the requirement to file
medical device reports ("MDRs") when the Company becomes aware of information
suggesting that one of its marketed 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 Company must utilize field performance
information, which includes any MDR reportable events, in its quality control
system to make any changes necessary to reduce or eliminate similar events in
the future. The FDA utilizes MDRs to determine whether it should exercise its
enforcement powers, such as mandatory product recalls, temporary suspensions of
approvals, or withdrawal of 510(k) marketing clearances or premarket approvals
("PMA"s). The filing of MDR reports that indicate unexpected product hazards or
the failure to comply with MDR requirements could have a material adverse effect
on the Company.

        Each of the Company's products is required to receive FDA clearance or
approval prior to commercialization. To date, all of the Company's products have
been classified by the FDA as Class II medical devices and have been eligible
for FDA marketing clearance pursuant to the FDA's 510(k) premarket notification
process, which is generally less time consuming than the more involved PMA
approval process for Class III medical devices. The Company believes that most
of its currently anticipated future products and substantial modifications to
existing products will be eligible for the 510(k) premarket notification
process. However, the FDA has not yet classified full-field digital imaging
mammography systems like the SENOSCAN system being developed by the Company.
During 1996, the FDA released a memorandum suggesting that clearance for
full-field digital imaging mammography systems may be obtained through a 510(k)
notification with clinical trials involving approximately 500 subjects. The
Company is now acquiring patients for its clinical trials and plans to submit a
510(k) notification for SENOSCAN and the results of the clinical trials to the
FDA during 1998. This is later than originally anticipated due to start-up
equipment issues and patient acquisition delays encountered in late 1996 and in
1997. If the FDA indicates that a PMA is required for any of the Company's new
products, the application will require extensive clinical studies, manufacturing
information and most likely a review by a panel of experts outside the FDA.
Clinical studies would need to be conducted in accordance with FDA requirements.
Failure to comply with FDA requirements could result in the FDA's refusal to
accept the data or the imposition of regulatory sanctions. FDA review of a PMA
application can take significantly longer than that for a 510(k) premarket
notification and could take several years to complete. There can be no assurance
that the necessary applications clearances or approvals for any of the Company's
new products, including SENOSCAN, will be made or obtained on a timely basis, if
at all. Failure to obtain necessary regulatory approvals, the restriction,
suspension or revocation of existing approvals, or any failure to comply with
regulatory requirements could have a material adverse effect on the Company's
business, financial condition and results of operations.

        Sales of medical devices outside of the United States are subject to FDA
export and international regulatory requirements that vary from country to
country. The time required to obtain approval for sale internationally may be
longer or shorter than that required for FDA clearance or approval, and the
requirements may differ. There can be no assurance that the Company will obtain
regulatory approvals in such countries or that it will not be required to incur
significant costs in obtaining or maintaining its foreign regulatory approvals.
The Company has recently obtained the certifications necessary to permit the
"CE" mark to be affixed to those products currently being sold in Europe. The


                                       17

<PAGE>


CE mark is an international symbol of quality which will become required for
sales into the member countries of the European Union beginning in mid-1998.
While the Company has obtained approval to sell into the European Union, there
can be no assurance that the Company will be able to obtain other international
regulatory approvals. In addition, significant costs and delays may be
encountered in obtaining such regulatory approvals.

        The Company is also regulated by the FDA under the Radiation Control for
Health and Safety Act of 1968 which specifically addresses radiation emitting
products. Under this law, the Company must submit initial reports on any new
x-ray systems that require certification. In addition, the Company must submit
installation reports to the FDA certifying compliance with installation
instructions of the manufacturer. Under certain circumstances, the Company also
is required to submit product defect reports ("PDRs") concerning its radiation
emitting products to the FDA and, sometimes, to the first purchasers of the
products. PDRs describe any safety related product defects or the failure of a
product to conform to an applicable standard of which the Company has become
aware. Additionally, the Company is required to submit accidental radiation
occurrence ("ARO") reports to the FDA whenever one of its products accidentally
releases radiation that results in an injurious or potentially injurious
exposure to any person. However, the Company need not file both an MDR and an
ARO report on the same incident. A failure to comply with these regulations
could have a material adverse effect on the Company. Furthermore, discovery of
unexpected product hazards or failures to meet required standards through the
reporting system could also have a material adverse effect on the Company.

        The Company is also subject to other Federal, state, local and
international laws and regulations related to worker health and safety,
environmental protection and export controls. The Company believes it 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
the Company's capital expenditures, earnings or competitive position.

GOVERNMENT REIMBURSEMENT

        Medicare reimbursement for hospitals represents about 30% of all
hospital revenues. Since 1983, Medicare reimbursement has been based on a fixed
amount for admitting a patient with a specific diagnosis. Hospital profit
margins have been reduced significantly since the introduction of fixed
reimbursement amounts based on specific diagnoses (Diagnosis Related Groups, or
"DRGs"). Therefore, hospitals have incentive to use less costly treatment
methods. If a new technology is considered to be more cost effective, hospitals
will frequently make capital expenditures to provide cost savings. Frequently,
DRG reimbursement is 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 DRG rates become
effective. The Company believes that since minimally invasive surgical
techniques are generally less expensive than open or conventional surgery, its
stereotactic breast biopsy, electrophysiology and endovascular systems provide
hospitals the opportunity to reduce costs and, therefore, in the context of a
fixed reimbursement structure, the Company may benefit from cost containment
programs.

        In 1991, the Health Care Financing Administration ("HCFA") published
rules to change the method of capital reimbursement for hospitals. The rules
changed capital reimbursement from a system based on costs to one based on
prospective payment. The rules provide for a ten year transition and permit
hospitals with unusually low or high capital reimbursement methods to be
reimbursed fairly. The Company believes that these capital reimbursement rules
impact facilities expansion more heavily than medical equipment purchases.


                                       18

<PAGE>


        In early 1992, Medicare also began to phase in over a five year period a
system whereby reimbursements to physicians are based on the lower of their
actual charges or a fee schedule amount based on a "resource-based relative
value scale." This replaced a "charge-based" fee schedule, and generally lowers
the reimbursements received by radiologists and cardiologists from the previous
method.


        The Federal government also regulates the reimbursement of fees related
to certain diagnostic procedures or medical conditions and capital equipment
acquisition costs connected with services to Medicare beneficiaries. Recent
legislation has limited Medicare reimbursement of these fees, which may have the
effect of limiting the availability of reimbursement for procedures or
conditions, and as a result may inhibit or reduce demand by healthcare providers
for the Company's products. Additionally, hospitals may continue to face other
capital constraints which prevent them from investing in such equipment. In
addition, widespread use of procedures utilizing the Company's SENOSCAN digital
or breast magnetic resonance imaging mammography systems, which are currently
under development, would likely require reimbursement in excess of those
currently permitted under Medicare guidelines. As a result, the demand for these
systems may be limited.

        While the Company cannot predict what effect the polices of government
entities and other third party payers will have on future sales of the Company's
products, there can be no assurance that such policies would not have a material
adverse impact on the business of the Company.

MANUFACTURING

        The Company's products are manufactured at its manufacturing facilities
in Denver, Colorado and Addison, Illinois. Production processes at the
facilities include machining, fabrication, printed circuit board assembly and
testing, subassembly, system assembly and final testing. The Company has
invested in various automated and semi-automated equipment for the fabrication
and machining of parts and assemblies incorporated in its products. The Company
may from time to time further invest in such equipment when cost-justified. The
Company's quality assurance program includes various quality control measures
from inspection of raw materials, purchased parts and assemblies through on-line
inspection.

        The Company's manufacturing processes are, for the most part, vertically
integrated, although selective outsourcing is employed to take advantage of
economies of scale at outside manufacturing facilities and to alleviate
manufacturing bottlenecks. The Company purchases materials and components from
various suppliers that are either standard products or built to Company
specifications. Certain components used in existing products of the Company, as
well as products under development, are frequently purchased from single
sources. The Company believes that alternative sources for such components may
generally be obtained when necessary, although the need to change suppliers or
to alternate between suppliers might cause material delays in delivery or
significantly increase the Company's costs and, moreover, there can be no
assurance, however, that the Company will be able to timely obtain components
from alternate sources and on commercially reasonable terms, if at all, and that
the Company would not suffer a material adverse effect as a result.

        During the third quarter of 1997, the Company decided to close its
Addison manufacturing facility. The Company presently expects that the closure
of this facility will be completed in early 1998. See "-Other Developments" for
additional discussion of the Company's closure of the Addison facility.


                                       19

<PAGE>


        MANUFACTURING AND OPERATING RISKS

        The scope of the product lines offered by the Company and the need for
product customization require a number of separate manufacturing processes and
components and significant management and engineering time and expertise.
Additionally, as the Company develops new products it will be required to refine
the prototypes of these products and develop new processes to manufacture these
products in commercial quantities. The Company has 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
the Company's products and the high fixed costs associated with manufacturing
these products, the Company may encounter difficulty managing its operating
costs. There can be no assurance that the Company will be able to reliably or
efficiently manufacture its existing or new products at commercially reasonable
costs on a timely basis, if at all. Failure to effectively manage the
development and manufacture of its products could adversely affect the Company.

PRODUCT LIABILITY, MARKET WITHDRAWAL, AND PRODUCT RECALLS

        The Company's business exposes it to potential product liability claims
which are inherent in the manufacture and sale of medical devices, and as such
the Company may face substantial liability to patients for damages resulting
from the faulty design or manufacture of products. The Company has been a
defendant from time to time in product liability actions. The Company maintains
product liability insurance with coverage limits of $5 million per occurrence
and per year in the aggregate. There can be no assurance that product liability
claims will not exceed coverage limits or that such insurance will continue to
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 the
Company.

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

PATENTS AND INTELLECTUAL PROPERTY

        The Company seeks to protect its proprietary rights through a
combination of technical experience, patent, trade secret and trademark
protection and nondisclosure agreements. The Company's future success will
depend in part on its ability to obtain and enforce patent protection for its
products and processes, preserve its trade secrets and operate without
infringing on the patent or proprietary rights of others. The Company's issued
patents cover, among other things, certain features of its Mammotest
stereotactic breast biopsy system, its SENOSCAN digital mammography system, and
its MR biopsy system.

        While the Company has numerous U.S. and foreign issued patents and
pending patent applications covering various aspects of its products, there can
be no assurance that the Company's patents, and any patents that may be issued
in the future, will not be challenged, invalidated or circumvented, or that the
rights thereunder will provide the Company with significant competitive
advantages. In addition, the laws of some foreign countries do not protect the
Company's proprietary rights in its products to the same extent as do the laws
of the United States. The Company anticipates that any attempt to enforce its
patents would be time consuming and costly. In addition, the Company could


                                       20

<PAGE>


be found to have infringed on patents of others and could be required to alter
its products or processes or acquire licensing rights, which may not be
available to the Company on commercially reasonable terms, if at all, or cease
making and selling any infringing products and pay damages for past
infringement.

        The Company also relies on trade secrets and proprietary know-how which
it seeks to protect, in part, through appropriate confidentiality and
proprietary information agreements. These agreements generally provide that all
confidential information developed or made known to the individual by the
Company during the course of the individual's relationship with the Company is
not to be disclosed to third parties, except in specific circumstances, and that
all inventions conceived by the individual in the course of rendering services
to the Company shall be the Company's exclusive property. There can be no
assurance that confidentiality or proprietary information agreements will not be
breached, that remedies for any breach would be adequate, or that the Company's
trade secrets will not otherwise become known to, or independently developed by,
competitors.

        The Company from time to time has technology license agreements under
which it pays nominal royalties in connection with the sale of products using a
third party's technology. Under one such agreement, which expires in April 1998,
the Company pays royalties relating to the Traumex system.

        In connection with the June 1995 sale of Series D Convertible Preferred
Stock to GE Medical Systems, the Company granted contingent access to the
technology of, and rights to manufacture, an OEM product. These rights are
contingent upon GE Medical Systems' continued ownership of all of the Series D
Convertible Preferred Stock and upon a change in control of the Company.  See
also "-Strategic Alliances" for a discussion of potential license rights granted
to Ethicon Endo-Surgery.

        As described more fully under Item 3 "Legal Proceedings," the Company
continues to vigorously pursue its claims of patent infringement against Lorad
covering certain features of the Company's stereotactic breast biopsy system.

        Fischer(R), Fischer Imaging(R), Mammotest(R), EPIC(R), Mammovision(R),
and TRAUMEX(R) are registered trademarks of, and Mammotest Plus(TM), Mammotest
Plus "S"(TM), MAMMOVISION PLUS(TM), HFX(TM), HFX PLUS(TM), SENOSCAN(TM), CARDIAC
CX/PEGASUS(TM), Target on Scout(TM), EPACE(TM), EP/Stim(TM), EP/X(TM) and
EP/X2(TM) are trademarks of the Company.

EMPLOYEES

        As of December 31, 1997, the Company had 416 employees, including 221 in
manufacturing, 57 in engineering, 107 in sales, marketing and service and 31 in
administration. None of the Company's employees are parties to a collective
bargaining agreement. The Company considers relations with its employees to be
good.
        RISK OF DEPENDENCE ON KEY PERSONNEL

        The Company's future performance is partially dependent on the services
of Morgan W. Nields, the Company's Chairman, Chief Executive Officer and largest
common stockholder. The Company has no employment agreement with Mr. Nields. The
Company carries $5 million of key man life insurance on Mr. Nields. In addition,
the continued success of the Company will depend heavily on its ability to
attract and retain highly qualified engineering, management, manufacturing,
marketing and sales personnel. There can be no assurance that the Company will
be able to continue to attract and retain such people. Failure to hire and
retain such personnel could have a material adverse effect on the Company.


                                       21

<PAGE>


OTHER DEVELOPMENTS

During the third quarter of 1997, the Company decided to close its Addison,
Illinois manufacturing facility and, accordingly, recorded a $2.9 million
restructuring provision for the anticipated shortfall between required lease
payments and estimated sublease payments during the facility's remaining lease
term (which runs through June 2002), estimated facility closing costs, severance
and certain other non-recurring costs associated with this decision. The Company
expects that the closure of the facility will be completed in the near future.


                                       22

<PAGE>


MEDICAL ADVISORY BOARD

        The Company maintains a Medical Advisory Board to provide advice to the
Company with respect to new developments in the medical field. The Company seeks
the advice of its Medical Advisory Board members for opinions on the relative
importance of new techniques in medicine, as well as the impact of new and
developing procedures on the Company, particularly in the fields of radiology
and cardiology. From time to time, members of this board or their institutions
may purchase products from the Company. Members receive no compensation from the
Company other than reimbursement of expenses and nominal honoraria. One of the
Medical Advisory Board members, David G. Bragg, M.D., is also a director of the
Company.


   Member                                  Affiliation

David G. Bragg, M. D.        Benning Presidential Endowed Professor and
                             Former Chairman of Radiology
                             University of Utah School of Medicine
                             Salt Lake City, Utah

                             Special Assistant to the Director,
                             Diagnostic Imaging Program
                             National Cancer Institute
                             Bethesda, Maryland

Joseph P. Galichia, M. D.    Galichia Cardiovascular Cardiology Group P. A.
                             Wichita, Kansas

William R. Hendee, Ph. D.    Senior Associate Dean for Research
                             Medical College of Wisconsin
                             Milwaukee, Wisconsin

Philip Z. Israel, M. D.      Member of the staff,
                             Breast Center,
                             Marietta, Georgia

Spencer B. King, M. D.       Director of Interventional Cardiology
                             Emory Hospital
                             Atlanta, Georgia

David S. Robinson, M. D.     Associate Professor
                             St. Luke's Hospital of Kansas City
                             Kansas City, Missouri

Wende Logan-Young, M. D.     Breast Clinic of Rochester
                             Rochester, New York

William M. Thompson, M. D.   Professor and Chairman of Radiology
                             University of Minnesota
                             Minneapolis, Minnesota


                                       23

<PAGE>


ITEM 2.                            PROPERTIES

        The Company maintains leased office and manufacturing facilities in
Denver, Colorado and Addison, Illinois. The Denver facilities include
approximately 125,000 square feet of office and manufacturing space and are
leased from a partnership whose general partners are Morgan W. Nields, the
Company's Chairman of the Board and Chief Executive Officer, and Kinney L.
Johnson, a member of the Company's Board of Directors. The Denver facilities
include the Company's headquarters. The Illinois facilities consist of
approximately 150,000 square feet of office and manufacturing space. The
Company's general radiology systems are manufactured at the Illinois facility.
All other products are manufactured in Denver. The Company also leases office
space in Denmark, Germany, Australia and China. The Company believes its
facilities, with planned capital improvements, will provide the capacity to
accommodate several years of growth.

        During the third quarter of 1997, the Company decided to close its
Addison manufacturing facility. It presently expects that the closure of this
facility will be completed in the near future.  See also Item 1, "Current
Developments".

ITEM 3.                       LEGAL PROCEEDINGS

       The Company is a defendant in various lawsuits incident to the operation
of its business. Management believes that there are no pending legal proceedings
against the Company that would have a material adverse effect on the
consolidated financial position of the Company.

       In April 1992, the Company filed a patent infringement lawsuit against
Lorad in the United States District Court for the District of Colorado. The
Company owns patent No. 5,078,142, covering certain features of its Mammotest
stereotactic breast biopsy system and believes that Lorad has infringed certain
claims of its patent with the introduction of its mammographic biopsy system.
The action seeks to enjoin Lorad and its agents from the manufacture, use and
sale of the allegedly infringing stereotactic breast biopsy system. The Company
is also seeking treble damages and attorney's fees. The District Court had
previously delayed the litigation pending a decision in a case before the U.S.
Supreme Court, Werner-Jenkinson Company, Inc. v Hilton Davis Chemical Co. The
Supreme Court rendered a decision in the Werner-Jenkinson case on March 3, 1997.
The Company expects a trial for its litigation against Lorad to begin in 1998,
with a starting date to be set in the near future.

       The Company has received notice from the holder of a U.S. patent alleging
infringement by certain of the Company's products and offering the Company a
license to use the patent on terms that are not acceptable to the Company. The
Company believes that only one former product and one current product could
potentially be implicated by the patent. Based on the foregoing, the Company
believes that, if required to take a license to the patent, any license fees
payable would not have a material adverse effect on the Company's financial
position.

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

               Not Applicable.


                                       24

<PAGE>


                                     PART II

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

        The Company's Common Stock trades on the Nasdaq Stock Market under the
symbol "FIMG". The following table sets forth, for each of the periods
indicated, the high and low closing sale prices per share of the Common Stock as
reported by the Nasdaq Stock Market.

           1996                                          High     Low
             First Quarter...........................  $14.75  $10.25
             Second Quarter..........................   15.00   12.25
             Third Quarter...........................   13.88    5.63
             Fourth Quarter..........................    8.88    5.63


           1997
             First Quarter...........................   $7.75   $5.00
             Second Quarter..........................    7.88    3.25
             Third Quarter...........................    8.00    5.63
             Fourth Quarter..........................    6.25    4.81


        As of March 1, 1998, there were 264 recordholders of the Company's
Common Stock. The Company believes that it has in excess of 1,500 beneficial
owners.

        The Company has not paid any cash dividends on its Common Stock and
intends to retain future earnings to finance the growth of the Company's
business rather than to pay cash dividends. The Company is subject to
restrictions on the paying of dividends under terms of its revolving credit
agreement and under state law.

        RISK OF PRICE VOLATILITY OF COMMON STOCK

        The market price of the 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 the
Common Stock.

        RISKS ASSOCIATED WITH SHARES ELIGIBLE FOR FUTURE SALE

        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 the Company's Common Stock and could
impair its ability to raise capital through the sale of equity securities. As of
March 2, 1998 the Company had approximately 6,980,000 shares of Common Stock
outstanding, and there were 842,000 shares reserved for issuance upon exercise
of outstanding stock options, 267,000 of which were then exercisable.
Additionally, 1,333,333 shares of the Company's Convertible Preferred Stock,
which are convertible at any time into an equivalent number of shares of Common
Stock, are outstanding. GE Medical Systems, the holder of the Convertible
Preferred Stock, has certain demand registration rights with respect to this
stock, as well as certain piggyback registration rights.


                                       25

<PAGE>


        Future sales of shares of Common Stock under Rule 144 of the Securities
Act by existing stockholders of Common Stock (through the exercise of
registration rights or otherwise) or through the issuance of shares of Common
Stock upon the exercise of options or otherwise could have an adverse effect on
the price of the Common Stock.

        RISKS ASSOCIATED WITH CONTROL BY MANAGEMENT AND CERTAIN STOCKHOLDERS

        The Company's officers and directors beneficially own, in the aggregate,
approximately 1,347,000 shares, or 23%, of the Company's Common Stock. As a
result, the officers and directors will be able to exercise significant
influence on the election of the Company's Board of Directors and thereby direct
the policies of the Company.

        Additionally, GE Medical Systems owns 1,333,333 shares of the Company's
Series D Convertible Preferred Stock (the "Convertible Preferred Stock") that is
convertible at any time, at the option of the holder, into an equivalent number
of shares of Common Stock. Although the Convertible Preferred Stock is
non-voting, except as required by law, if GE Medical Systems were to convert the
Convertible Preferred Stock into Common Stock, it would own approximately 16% of
the Company's outstanding stock. GE Medical Systems would therefore be able to
significantly influence the policies of the Company.

        CERTAIN ANTI-TAKEOVER EFFECTS

        The Company's 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 its
Board of Directors.

        In November 1994, the Company's Board of Directors adopted a stockholder
rights plan and, pursuant thereto, issued preferred stock purchase rights
("Rights") to the holders of its 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, including
Morgan W. Nields, one of the Company's founders and its Chairman of the Board
and Chief Executive Officer, Kinney L. Johnson, one of the Company's founders
and a director, and GE Medical Systems) who acquires more than 15% of the Common
Stock on terms not approved by the Board of Directors. Additionally, in
connection with the Company's sale of Convertible Preferred Stock to GE Medical
Systems in June 1995, GE Medical Systems has the right to convert the
Convertible Preferred Stock for 1,333,333 shares of Common Stock, or
approximately 16% of the Company's outstanding Common Stock. In connection with
this transaction, GE Medical Systems also received certain contingent rights,
including rights to use a manufacturing license for the Company's Tilt-C
technology, in return for cancellation of the Convertible Preferred Stock in the
event of a change of control of the Company or certain other events. The Rights
and the Company's agreements with GE Medical Systems could discourage or make
more difficult a tender offer, acquisition, merger or other similar transaction,
even if favorable to the Company's stockholders.  See Note 12, "Commitments and
Contingencies", of Notes to Consolidated Financial Statements for information
regarding the Company's Retention Bonus Plan.


                                       26

<PAGE>


        ITEM 6.          SELECTED CONSOLIDATED FINANCIAL DATA

        The following table contains certain selected consolidated financial
data and is qualified by the detailed Consolidated Financial Statements and
Notes thereto included elsewhere in this Form 10-K. The consolidated balance
sheet data as of December 31, 1997 and 1996 and the consolidated statement of
operations data for each of the three years in the period ended December 31,
1997 have been derived from the Company's Consolidated Financial Statements,
which have been audited by Arthur Andersen LLP, independent public accountants,
as indicated in their report included elsewhere herein. The consolidated balance
sheet data as of December 31, 1995, 1994 and 1993 and the consolidated statement
of operations data for both of the two years in the period ended December 31,
1994 are derived from the Company's Consolidated Financial Statements which have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports, which statements are not included herein.

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                              1997      1996      1995      1994      1993
                                                (In thousands, except per share data)
<S>                                         <C>       <C>       <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                    $56,908   $77,508   $76,750   $68,473   $73,332
Cost of sales                                39,252    47,073    46,905    44,526    43,741
                                             ------    ------    ------    ------    ------
  Gross profit                               17,656    30,435    29,845    23,947    29,591
                                             ------    ------    ------    ------    ------
Operating expenses:
  Research and development                    6,043     6,746     6,690     5,595     6,176
  Selling, marketing and service             16,323    18,776    15,461    15,573    16,641
  General and administrative                  4,988     4,863     4,800     4,697     5,321
  Restructuring provisions                    2,900        --        --     2,419       796
                                             ------    ------    ------    ------    ------
       Total operating expenses              30,254    30,385    26,951    28,284    28,934
                                             ------    ------    ------    ------    ------
(Loss) earnings from operations             (12,598)       50     2,894    (4,337)      657
Interest expense                               (181)     (595)     (678)   (1,247)     (933)
Interest income                                 271       138        62        15         9
Other income (expense), net                    (760)     (163)       (1)      (71)       68
                                             ------    ------    ------    ------    ------
(Loss) earnings before income taxes         (13,268)     (570)    2,277    (5,640)     (199)
Benefit for income taxes                         --       209        --        --       199
                                             ------    ------    ------    ------    ------
Net earnings (loss)                        $(13,268)  $  (361)    2,277    (5,640)       --
                                             ======    ======    ======    ======    ======
Net (loss) earnings per common share
    Basic                                   $  (191)     (.06)     $.41   $ (1.02) $     --
                                             ======    ======    ======    ======    ======
    Diluted                                 $ (1.91)     (.06)      .36     (1.02)       --
                                             ======    ======    ======    ======    ======
Shares used to calculate  (loss) earnings
  per share
    Basic                                     6,949     6,299     5,561     5,526     5,495
                                             ======    ======    ======    ======    ======
    Diluted                                   6,949     6,299     6,331     5,526     5,495
                                             ======    ======    ======    ======    ======
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital                             $25,179  $ 36,187   $23,635   $12,057   $19,408
Total assets                                 49,144    60,432    55,650    46,889    56,551
Total debt                                      533       432     4,722     9,441    11,582
Total stockholders' investment               35,185    47,805    33,584    21,643    27,033
</TABLE>


                                       27

<PAGE>


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

     The following discussion of the results of operations and financial
condition should be read in conjunction with the Company's Consolidated
Financial Statements and Notes thereto appearing elsewhere in this Form 10-K.
This Form 10-K, including the information incorporated by reference herein,
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. For this purpose, statements contained herein that are
not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes", "expects",
"anticipates", "plans", "estimates", and similar words and expressions are
intended to identify such statements. These forward-looking statements include
statements concerning the size and growth of the Company's markets, future
operating results including revenues and expenses, the success of its
cost-cutting measures including the closure of the Company's Addison, Illinois
manufacturing facility, sales under the Company's strategic alliances, OEM
agreements and otherwise, marketing arrangements for its Mammotest products and
other products, development of SenoScan and other new products, availability of
raw materials and components, manufacturing capabilities, submissions to the FDA
and receipt of FDA approvals and clearances, resolutions of deficiencies noted
by the FDA, the Company's assessment of costs of modifications required to
become Year 2000 compliant, and other matters. These forward-looking statements
involve risks and uncertainties. The actual results that the Company achieves
may differ materially from those discussed in such forward-looking statements
due to the risks and uncertainties described in the Business section of this
Form 10-K under the headings "Risks Associated with OEM Agreements",
"International Operations," "Strategic Alliances", "Risks of Technological
Change and New Products," "Risks of New Product Development and Market
Acceptance," "Manufacturing and Operating Risks," "Competition," "Government
Regulation," "Government Reimbursement," "Patents and Intellectual Property,"
"Risk of Dependence on Key Personnel," and "Product Liability, Market
Withdrawal, and Product Recalls", in the Market for Registrant's Common
Equity and Related Stockholder Matters section under the headings "Risk of Price
Volatility of Common Stock," "Risks Associated with Shares Eligible for Future
Sale," "Risks Associated with Control by Management and Certain Stockholders,"
and "Certain Anti-Takeover Effects," in the Management's Discussion and Analysis
of Financial Condition and Results of Operations ("MD&A") section under the
"Overview" heading, elsewhere in the Business and MD&A sections and other
sections of this Form 10-K, as well as in the Company's Quarterly Reports on
Form 10-Q.

OVERVIEW

        The Company designs, manufactures and markets specialty and general
purpose medical imaging systems for the diagnosis and treatment of disease. The
Company's newest products are directed towards medical specialties in which
image-guided, minimally invasive therapies are replacing open surgical
procedures. These products are used primarily in the diagnosis and treatment of
breast cancer, heart disease and vascular disease. The Company also designs and
manufactures specialty x-ray imaging components and subsystems for several
leading medical product companies as an OEM and sells general radiology systems
for use in hospitals, clinics and physicians' offices.

       The Company experienced significant losses during the second half of 1996
and during 1997. The Company cannot predict when it will return to
profitability, although it has taken significant steps to reduce costs and
improve sales during 1997 including the distribution partnership, announced in
October 1997, with Ethicon Endo-Surgery for the marketing and sale of Mammotest
breast biopsy systems. Improvement in the Company's results of operations will


                                       28

<PAGE>


depend on many factors, including demand for the Company's products and the
ability of the Company to maintain or increase gross margins, control
manufacturing and other costs, effectively transfer production from the
Company's Addison, Illinois manufacturing facility, enter into and effectively
implement distribution arrangements for its Mammotest and other products,
implement its marketing and sales strategies in the United States and
internationally, maintain orders under OEM agreements, renew OEM agreements on
favorable terms and develop and introduce new products that compete
successfully.

        The Company believes that improving factory utilization will be a key
factor in returning to acceptable levels of profitability. As a means of
reducing its overall manufacturing costs, the Company announced, in the third
quarter of 1997, its intention to close its Addison, Illinois manufacturing
facility and outsource or transfer Addison production. Accordingly, the Company
recorded a $2.9 million restructuring provision in the third quarter, for the
anticipated shortfall between required lease payments and estimated sublease
payments during the facility's remaining lease term (which runs through June
2002), estimated facility closing costs, severance, and certain other
non-recurring costs associated with this decision. The Company expects that the
Addison closure will be completed in the near future, although no assurance can
be given to that effect.

        The Company has experienced and is likely to continue to experience
significant quarterly and annual fluctuations in revenues, operating results and
net income, depending on such factors as the timing of large system shipments,
the timing of orders under OEM contracts and related manufacturing and shipment
scheduling, new product introductions and new marketing programs by the Company
and its competitors, delays in development projects, the effect of economic
conditions on the Company's markets, the effects of managed healthcare on
capital expenditures and reimbursement, increases in marketing, research, and
other costs in relation to sales, regulatory clearance of new products, seasonal
purchasing patterns of hospitals and the timing of purchasing decisions by
customers. Additionally, because the timing of the occurrence of such factors is
difficult to anticipate and many of the Company's costs are fixed, the Company
may not be able to sufficiently reduce its costs in periods when its revenues
are less than anticipated and may suffer unexpected losses or lower income in
these periods.

        The Company continues to attempt to expand its international sales and
marketing efforts, which can be expected to result in losses from its
international operations until its international revenues reach sufficient
levels. Additionally, the Company's exposure to foreign currency and other risks
of international business may increase as its international business grows. The
Company attempts to minimize these risks through measures including, but not
limited to, generally requiring payments in U.S. dollars and using letters of
credit. There can be no assurance, however, that the Company will be successful
in its international sales efforts or in minimizing any associated risks. The
Company experienced a 35% decline in revenues from customers outside the United
States in 1997.

        The Company's sales of its Mammotest breast biopsy systems were lower in
1997 as compared to 1996, although Mammotest sales during the second half of
1997 were higher than the comparable six month period of 1996. The Company
continues to face aggressive and successful competition within the surgical
stereotactic core needle breast biopsy market from U.S. Surgical Corporation. In
October 1997, the Company entered into a marketing partnership with Ethicon
Endo-Surgery that it believes will help it more adequately address this market.

        In November 1997, the Company entered into an alliance with Sterling
Diagnostic Imaging, Inc., under which the Company will develop specific digital
radiographic systems, utilizing Sterling's DirectRay(TM) digital image detector
technology.


                                       29

<PAGE>


         If the Ethicon EndoSurgery and Sterling strategic alliances produce a
significant increase in demand for the Company's products and the Company is
able to meet the resultant product demand, the Company's revenue could increase
appreciably, although no assurance can be given to that effect. See "Business -
Strategic Alliances."


YEAR 2000

        The Company utilizes software and related technologies within its
products and in their development and manufacture that may be impacted by the
year 2000. The Year 2000 issue exists because many computer systems and
applications currently use two-digit date fields to designate a year.
Date-sensitive systems may recognize the year 2000 as 1900, or not at all. This
inability to properly treat the Year 2000 could cause systems to process
critical financial and operational information incorrectly. The Company is
expected to incur expenditures over the next two years to address this issue.

        The Company has completed its initial assessment of all currently
supported products, and has concluded that only a limited number of its products
will be affected. Necessary modifications are not expected to have a material
financial impact on the Company.

        The Company continues to assess the impact of the Year 2000 on its
internal operating software and systems, and the related costs of modifications.
This assessment is on-going; therefore, a detailed plan of action for addressing
any issues which will arise from this review has not yet been developed.
Accordingly, although the Company does not expect the costs of any required
modifications will be material to the consolidated financial statements, no
assurance to that effect can be given.


RESULTS OF OPERATIONS

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

                                                   1997      1996      1995

       Revenues................................   100.0%    100.0%    100.0%
       Cost of sales...........................    69.0      60.7      61.1

         Gross profit..........................    31.0      39.3      38.9

       Operating expenses:
         Research and development..............    10.6       8.7       8.7
         Selling, marketing and service........    28.7      24.2      20.1
         General and administrative............     8.8       6.3       6.3
         Restructuring provision...............     5.1         -        --

            Total operating expenses...........    53.2      39.2      35.1

       (Loss) earnings from operations.........   (22.2)      0.1       3.8
       Interest expense........................    (0.3)     (0.8)     (0.9)
       Interest income.........................     0.5       0.2       0.1
       Other income, net.......................    (1.3)     (0.2)       --

       (Loss) earnings before income taxes.....   (23.3)     (0.7)      3.0
       Benefit for income taxes................     0.0       0.2       0.0

       Net (loss) earnings.....................   (23.3)%    (0.5)%     3.0%


                                       30

<PAGE>


1997 COMPARED TO 1996

        Revenues. Revenues decreased from $77.5 million in 1996 to $56.9 million
in 1997. The revenue decrease was principally due to a decline in shipments of
OEM products, as well as declines in sales of general radiology, mammography,
and electrophysiology products. The decline in mammography product sales was in
part due to aggressive and successful competition within the surgical
stereotactic core needle biopsy market from U.S. Surgical Corporation. In an
effort to more adequately address this market, the Company has entered into a
marketing partnership with Ethicon Endo-Surgery.  See "-Overview."

        Gross Profit. Gross profit as a percentage of total revenues decreased
from 39.3% in 1996 to 31.0% in 1997. This decrease was primarily due to the
unfavorable effects of reduced factory utilization and to significant one-time
manufacturing costs associated with the Company's decision to close its Addison,
Illinois manufacturing facility. The Company believes that such one-time
manufacturing costs were as much as $2.0 million in the fourth quarter of 1997,
including about $1.2 million of non-cash inventory adjustments and $0.8 million
of plant rearrangement, labor inefficiencies, and other out-of-pocket cash
expenses.

        Research and Development Expenses. Research and development expenses
were $6.0 million, or 10.6% of total revenues, in 1997, as compared to $6.7
million, or 8.7% of total revenues, in 1996. The reduction in research and
development expenses is primarily attributable to efforts to narrow the focus of
engineering efforts and eliminate marginal engineering efforts, as well as
efficiencies caused by the transfer of engineering activities from the Company's
Addison, Illinois manufacturing facility. The increase in research and
development expenses as a percentage of total revenues is due to lower revenues
in 1997. The Company is maintaining its commitment to research and development
as the key to its long-term success, with the development of digital imaging
products for mammography continuing to be a key focus of the Company's research
and development activities.

        Selling, Marketing and Service Expenses. Selling, marketing and service
expenses decreased to $16.3 million in 1997 as compared to $18.8 million in
1996. As a percentage of total revenues, selling, marketing and service
increased to 28.7% in 1997 from 24.2% in 1996. The decrease in selling,
marketing, and service expenses is primarily a result of decreased warranty,
installation, and commissions expenses caused by lower revenues in 1997, planned
reductions in the scope of marketing activities, and efficiencies in
service-related activities caused by the transfer of such activities from the
Company's Addison, Illinois facility. As a percentage of revenues, selling,
marketing, and service expenses have increased due to the impact of fixed costs
compared against lower total revenue.

        General and Administrative Expenses. General and administrative expenses
increased to $5.0 million in 1997 from $4.9 million in 1996. General and
administrative expenses equaled 8.8% and 6.3% of total revenues in 1997 and
1996, respectively. The modest increase in general and administrative expenses
was primarily due to higher legal expenses in 1997 as compared to 1996, partly
offset by cost savings associated with the closing of the Company's Addison
facility. The increase in legal expenses is primarily due to preparations for
the Company's patent infringement lawsuit against Lorad, which is expected to
commence during 1998. (See Item 3, Legal Proceedings.)

        Interest  Expense.  Interest expense decreased to $0.2 million in 1997
from $0.6 million in 1996.  The decrease in interest  expense is primarily due
to the elimination of borrowings  under the Company's line of credit beginning
in  mid-1996  and  extending  throughout  1997.  See  "Liquidity  and  Capital
Resources."


                                       31

<PAGE>


1996 COMPARED TO 1995

        Revenues. Revenues increased to $77.5 million in 1996 from $76.8 million
in 1995. The revenue increase was primarily due to increased sales of general
radiology products and higher service revenue, offset by a decline in sales of
mammography products, largely due to revenues from non-recurring
Mammotest(R)/Mammovision(R) product upgrades which occurred in late 1995.

        Gross Profit. Gross profit as a percentage of total revenues increased
from 38.9% in 1995 to 39.3% in 1996. This increase was primarily due to
increases in high margin service revenue largely offset by declines in margins
for OEM products.

        Research and Development Expenses. Research and development expenses
were $6.7 million, or 8.7% of total revenues, in both 1996 and 1995. The Company
has maintained its commitment to research and development as the key to its
long-term success. The development of digital imaging products for mammography
continues to be a key focus of the Company's research and development
activities.

        Selling, Marketing and Service Expenses. Selling, marketing and service
expenses increased to $18.8 million in 1996 from $15.5 million in 1995. As a
percentage of total revenues, selling, marketing and service increased to 24.2%
from 20.1%, primarily as a result of increases in domestic and international
service expenses, increased advertising and commissions expense associated with
direct sales, and a lower level of installation credits, which are recognized
upon completion of installation, as compared to installation provisions, which
are recognized at time of sale.

        General and Administrative Expenses. General and administrative expenses
increased to $4.9 million in 1996 from $4.8 million in 1995. General and
administrative expenses equaled 6.3% of total revenues in both 1996 and 1995.
The modest increase in general and administrative expenses was primarily due to
higher legal expenses in 1996 as compared to 1995.

        Interest  Expense.  Interest expense decreased to $0.6 million in 1996
from $0.7  million  in 1995.  Interest  expense  in both  years was  primarily
related to borrowings  under the Company's line of credit.  See "Liquidity and
Capital Resources."


INCOME TAXES

        The Company's effective tax rate was 0% and 37% in 1997 and 1996,
respectively. The 1997 rate reflects a $4.4 million increase in the valuation
allowance against net deferred tax assets, which is due mainly to uncertainty
relating to the realizability of the 1997 net operating loss carryforwards and
available income tax credits. The 37% rate in 1996 includes the effects of a
$0.5 million reduction in the valuation allowance against net deferred tax
assets, which was based upon the 1996 results of operations of companies in the
domestic consolidated tax return. At December 31, 1997, the Company had
approximately $2.0 million of net deferred tax assets, after valuation
allowances, which represent the amount of tax benefits on existing net
deductible temporary differences and tax credits that are more likely than not
to be realized against taxable income of future years. The amount of net
deferred tax assets considered realizable, however, could be reduced in the near
term if estimates of future taxable income do not materialize.

        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 consolidated return because they are not expected to
reverse in the foreseeable future.

                                       32

<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

        During 1997, the Company generated $2.4 million of cash flow from
operations, while utilizing $1.7 million in investing and $0.3 million in
financing activities and $0.2 million in other changes in cash, resulting in a
$0.2 million increase in cash. The cash flow from operations was primarily due
to a decrease in working capital, offset by the Company's 1997 net loss before
non-cash expenses. The decrease in working capital primarily consisted of a $3.3
million reduction in inventories and $4.2 million in net collections of trade
accounts receivable. These decreases, along with other working capital and other
changes in net assets of $0.6 million, positively impacted cash flow from
operations. This impact was partially offset by the net loss from operations
before depreciation, amortization, non-cash inventory adjustments, and the
non-cash restructuring charge of $5.6 million and by $0.8 million of severance
and other facility closing costs charged against the restructuring reserve. (See
Note 6 to the Consolidated Financial Statements). Cash utilized in investing
activities decreased from $2.3 million in 1996 to $1.7 million in 1997, due to
an increase in capital expenditures financed through capital lease arrangements
and a reduced level, in 1997, of capital investments related to the development
of full field digital mammography. Cash utilized in financing activities during
1997 reflected $0.5 million in repayments of long-term debt, offset by the
proceeds from sales of common stock of $0.2 million.


        During 1996, the Company utilized $4.7 million of cash flow in
operations and $2.4 million in investing activities, while generating $9.4
million from financing activities, resulting in a $2.3 million increase in cash.
The utilization of cash flow in operations was primarily due to an increase in
working capital. The increase in working capital consisted of a $3.3 million
investment in inventories and a $4.3 million reduction in accounts payable.
These working capital increases, which reduced cash flow, were partially offset
by $1.0 million of net collections of trade accounts receivable and by net
earnings before depreciation, amortization, and non-cash inventory adjustments
of $2.5 million. Cash utilized in investing activities during 1995 was increased
from $1.8 million in 1995 to $2.3 million in 1996, due to a reduction in capital
expenditures financed through capital lease arrangements and capital investments
related to the development of full field digital mammography. Cash generated
from financing activities during 1996 reflected the Company's June 1996 sale of
1,200,000 shares of common stock for $13.1 million, net of related expenses, and
the proceeds of other stock sales, offset by debt reductions, including
repayments under the Company's line of credit, totaling $4.3 million.

        During 1995, the Company utilized $2.3 million of cash flow in
operations, $1.8 million in investing activities, and $0.2 million in other
changes in cash, while generating $4.8 million from financing activities,
resulting in a $0.5 million increase in cash. The utilization of cash flow in
operations was primarily due to an increase in working capital caused by a
higher level of revenues and production activity. Compared to December 31, 1994,
accounts receivable at December 31, 1995 increased by $5.0 million, inventories
increased by $2.6 million, and other current liabilities decreased by $1.3
million due primarily to reduced customer deposits. These reductions in cash
flow were partially offset by a $2.3 million increase in accounts payable and by
net earnings before depreciation, amortization, and non-cash inventory
adjustments of $5.0 million. Cash utilized in investing activities during 1995
was reduced from $2.3 million in 1994 to $1.8 million in 1995, due to efforts to
contain capital expenditures not financed through capital lease arrangements.
Cash generated from financing activities during 1995 reflected the Company's
June 1995 sale of convertible preferred stock to GE Medical Systems for $9.5
million, net of related expenses, offset by debt reductions, including
repayments under the Company's line of credit, totaling $4.9 million.


                                       33

<PAGE>


         On December 31, 1997, the Company had $3.4 million in cash and cash
equivalents and working capital of $25.2 million. Subsequent to year end, the
Company renewed, on a short-term basis, its bank revolving credit arrangement,
which expired in February 1997. Under terms of this renewal, the Company has
available up to $15.0 million of credit, subject to further restrictions based
on eligible receivables, inventory, and Company liquidation value. The
agreement, which extends through June 30, 1998 and is renewable on a monthly
basis thereafter, is secured by the Company's accounts receivable, inventory,
and fixed assets. Renewals are subject to a renewal fee of $5,000 per month, and
borrowings under the agreement will bear interest at one percent over the bank's
prime rate of interest, or 9.5% at December 31, 1997. See Note 5 to the
Consolidated Financial Statements.

        The Company has no present plans for capital expenditures in 1998
materially different from recent years.

        The Company expects its long-term liquidity needs to be satisfied
principally from cash flows generated by operations. The Company believes that
its short-term liquidity needs can be satisfied through cash provided from
operations and current cash and cash equivalent balances, through borrowings
under its revolving line of credit arrangement, or through another credit
arrangement collateralized by the Company's working capital.


                                       34


<PAGE>


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                           FISCHER IMAGING CORPORATION


                        CONSOLIDATED FINANCIAL STATEMENTS



                                      INDEX

                                                                    PAGE

Report of Independent Public Accountants                             F-1

Financial Statements:
  Consolidated Balance Sheets--December 31, 1997 and 1996            F-2

  Consolidated Statements of Operations--For the Years
    Ended December 31, 1997, 1996 and 1995                           F-3

  Consolidated Statements of Stockholders' Investment--
    For the Years Ended December 31, 1997, 1996 and 1995             F-4

  Consolidated Statements of Cash Flows--For the Years
    Ended December 31, 1997, 1996 and 1995                           F-5

  Notes to Consolidated Financial Statements                         F-6


                                      F-0

<PAGE>


                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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


We have audited the accompanying consolidated balance sheets of FISCHER IMAGING
CORPORATION (a Delaware corporation) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of operations, stockholders'
investment and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Fischer Imaging Corporation and
subsidiaries as of December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles.



/S/ARTHUR ANDERSEN LLP

Denver, Colorado,
January 23, 1998.

                                      F-1

<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                         December 31,
                                                                                                      1997           1996
                                   ASSETS
<S>                                                                                              <C>             <C>
CURRENT ASSETS
    Cash and cash equivalents                                                                    $    3,439      $   3,289
    Trade accounts receivable, net of allowance for doubtful accounts of approximately $778
       and $641 at December 31, 1997 and 1996, respectively                                          14,132         18,600
    Inventories, net                                                                                 17,373         22,732
    Deferred income taxes                                                                             1,334          2,267
    Prepaid expenses and other current assets                                                         1,169          1,289
                                                                                                  ---------       --------
          Total current assets                                                                       37,447         48,177
                                                                                                  ---------       --------
PROPERTY AND EQUIPMENT (at cost)
    Manufacturing equipment                                                                           9,521          9,158
    Office equipment and leasehold improvements                                                       5,563          4,666
                                                                                                  ---------       --------

                                                                                                     15,084         13,824
    Less- Accumulated depreciation                                                                    9,417          8,294
                                                                                                  ---------       --------
          Property and equipment, net                                                                 5,667          5,530
                                                                                                  ---------       --------

INTANGIBLE ASSETS, net (Note 3)                                                                       3,615          4,327
DEFERRED INCOME TAXES                                                                                   668            346
DEFERRED COSTS AND OTHER ASSETS                                                                       1,747          2,052
                                                                                                  ---------       --------
              Total assets                                                                       $   49,144      $  60,432
                                                                                                  =========       ========
                    LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES
    Notes payable and current maturities of long-term debt (Note 5)                              $      224      $     283
    Trade accounts payable                                                                            4,876          5,155
    Accrued salaries and wages                                                                        2,027          2,160
    Accrued restructuring costs (Note 6)                                                              1,180              -
    Deferred service revenue                                                                            771            805
    Other current liabilities                                                                         3,190          3,587
                                                                                                  ---------       --------
              Total current liabilities                                                              12,268         11,990

LONG-TERM DEBT (Note 5)                                                                                 309            149

ACCRUED RESTRUCTURING COSTS, LONG-TERM (Note 6)                                                         900              -

OTHER NONCURRENT LIABILITIES                                                                            482            488
                                                                                                  ---------       --------
              Total liabilities                                                                      13,959         12,627
                                                                                                  ---------       --------
COMMITMENTS  AND  CONTINGENCIES (Note 12)

STOCKHOLDERS' INVESTMENT
    Common Stock, $.01 par value, 25,000,000 shares authorized, 6,948,648 and 6,920,335
       shares issued and outstanding at December 31, 1997 and 1996, respectively                         69             69
    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, 1,333,333 shares
          authorized, issued and outstanding at December 31, 1997 and 1996;
       liquidation preference of $10,000,000 (Note 7)                                                    13             13
    Additional paid-in capital                                                                       49,235         49,093
    Accumulated deficit                                                                             (14,656)        (1,388)
    Cumulative translation adjustment                                                                   524             18
                                                                                                  ---------       --------
              Total stockholders' investment                                                         35,185         47,805
                                                                                                  ---------       --------
              Total liabilities and stockholders' investment                                     $   49,144      $  60,432
                                                                                                  =========       ========
</TABLE>
      The accompanying notes are an integral part of these balance sheets.
                                      F-2

<PAGE>


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


<TABLE>
<CAPTION>
                                                          FOR THE YEARS ENDED DECEMBER 31,
                                                        1997            1996           1995

<S>                                                 <C>              <C>            <C>
REVENUES                                            $  56,908        $ 77,508       $ 76,750

COST OF SALES                                          39,252          47,073         46,905
                                                     --------         -------        -------
              Gross profit                             17,656          30,435         29,845
                                                     --------         -------        -------

OPERATING EXPENSES
    Research and development                            6,043           6,746          6,690
    Selling, marketing and service                     16,323          18,776         15,461
    General and administrative                          4,988           4,863          4,800
    Restructuring provision (Note 6)                    2,900               -              -
                                                     --------         -------        -------
              Total operating expenses                 30,254          30,385         26,951
                                                     --------         -------        -------
(LOSS) EARNINGS FROM OPERATIONS                       (12,598)             50          2,894

    Interest expense                                     (181)           (595)          (678)
    Interest income                                       271             138             62
    Other expense, net                                   (760)           (163)            (1)
                                                     --------         -------        -------
(LOSS) EARNINGS BEFORE INCOME TAXES                   (13,268)           (570)         2,277

    Benefit for income taxes                                -             209              -
                                                     --------         -------        -------
NET (LOSS) EARNINGS                                 $ (13,268)       $   (361)      $  2,277
                                                     ========         =======        =======


(LOSS) EARNINGS PER SHARE (Note 2)
    Basic                                           $   (1.91)       $   (.06)      $    .41
                                                     ========         =======        =======
    Diluted                                         $   (1.91)       $   (.06)      $    .36
                                                     ========         =======        =======

SHARES USED TO CALCULATE (LOSS) EARNINGS
  PER SHARE (Note 2)
    Basic                                               6,949           6,299          5,561
                                                     ========         =======        =======
    Diluted                                             6,949           6,299          6,331
                                                     ========         =======        =======
</TABLE>


        The accompanying notes are an integral part of these statements.

                                      F-3

<PAGE>



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

<TABLE>
<CAPTION>
                                                                Series C
                                                                 Junior      Series D
                                                              Participating Convertible Additional            Cumulative
                                                 COMMON STOCK   Preferred    Preferred  Paid-In  Accumulated Translation
                                                SHARES   AMOUNT   STOCK        STOCK    CAPITAL   DEFICIT     ADJUSTMENT    TOTAL


<S>                                             <C>         <C>    <C>          <C>     <C>      <C>            <C>      <C>
BALANCE, December 31, 1994                      5,515,664   $55    $ -          $ -     $25,008  $ (3,304)      $ (116)  $ 21,643

Shares purchased under employee stock
 purchase plan                                     22,027     1      -            -         102         -            -        103
Exercise of stock options                          13,000     -      -            -          61         -            -         61
Cumulative translation adjustment                       -     -      -            -           -         -          (21)       (21)
Sale of 1,333,333 shares of Series D
 Preferred Stock, net of related costs                  -     -      -           13       9,508         -            -      9,521
Net earnings                                            -     -      -            -           -     2,277            -      2,277
                                                ---------    --     --           --      ------   -------        -----     ------

BALANCE, December 31, 1995                      5,550,691    56      -           13      34,679    (1,027)        (137)    33,584

Shares purchased under employee stock
 purchase plan                                     24,522     -      -            -         114         -            -        114
Exercise of stock options                          81,960     1      -            -         475         -            -        476
Tax benefit from exercise of options                    -     -      -                      163         -            -        163
Acquisition of minority interest in subsidiary     63,162     -      -            -         553         -            -        553
Cumulative translation adjustment                       -     -      -            -           -         -          155        155
Sale of 1,200,000 shares of Common
 Stock, net of related costs                    1,200,000    12      -            -      13,109         -            -     13,121
Net loss                                                -     -      -            -           -      (361)           -       (361)
                                                ---------    --     --           --      ------   -------        -----     ------

BALANCE, December 31, 1996                      6,920,335    69      -           13      49,093    (1,388)          18     47,805

Shares purchased under employee stock
 purchase plan                                     21,463     -      -            -         112         -            -        112
Exercise of stock options                           6,850     -      -            -          30         -            -         30
Cumulative translation adjustment                       -     -      -            -           -         -          506        506
Net loss                                                -     -      -            -           -   (13,268)           -    (13,268)
                                                ---------    --     --           --      ------   -------        -----     ------
BALANCE, December 31, 1997                      6,948,648  $ 69    $ -          $13     $49,235  $(14,656)      $  524   $ 35,185
                                                =========    ==     ==           ==      ======   =======        =====    =======
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-4

<PAGE>


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

<TABLE>
<CAPTION>
                                                                                    FOR THE YEARS ENDED DECEMBER 31,
                                                                                  1997            1996           1995
<S>                                                                           <C>              <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES
    Net (loss) earnings                                                       $ (13,268)       $   (361)      $  2,277
                                                                               --------         -------        -------
    Adjustments to reconcile net (loss) earnings to net cash
       provided by (used in) operating activities-
          Restructuring provision                                                 2,900               -              -
          Depreciation                                                            1,981           1,629          1,631
          Amortization of intangible assets                                         712             741            812
          Provision for doubtful accounts                                           256             358           (494)
          Provision for excess and obsolete inventories                           2,028             532            264
          Deferred income tax (benefit) provision                                   611            (369)        (1,225)
          Sales and retirements of assets                                           170              62            165
          Restructuring costs                                                      (820)              -              -
          Foreign exchange losses                                                   720             130            200
          Other  changes in current assets and liabilities-
              Decrease (increase) in trade accounts receivable                    4,212             999         (4,997)
              Decrease (increase) in inventories                                  3,331          (3,263)        (2,558)
              Decrease (increase) in prepaid expenses
                    and other current assets                                        120            (168)            28
              (Decrease) increase in trade accounts payable                        (279)         (4,285)         2,291
              (Decrease) increase in accrued salaries and wages                    (133)            (32)           188
              (Decrease) increase in deferred service revenue                       (34)           (242)           352
              Decrease in other current liabilities                                (397)           (339)        (1,275)
          Other                                                                     299            (129)            66
                                                                               --------         -------        -------
              Total adjustments                                                  15,677          (4,376)        (4,552)
                                                                               --------         -------        -------
              Net cash provided by (used in) operating activities                 2,409          (4,737)        (2,275)
                                                                               --------         -------        -------
CASH FLOWS FROM INVESTING ACTIVITIES
    Capital expenditures                                                         (1,728)         (2,300)        (1,810)
     Other                                                                            -             (48)             -
                                                                               --------         -------        -------
              Net cash used in investing activities                              (1,728)         (2,348)        (1,810)
                                                                               --------         -------        -------
CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from sale of common stock, net                                         142          13,711            164
    Proceeds from sale of preferred stock, net                                        -               -          9,521
    Net repayments under line of credit agreements                                    -          (2,643)        (3,141)
    Repayments of long-term debt                                                   (459)         (1,687)        (1,778)
                                                                               --------         -------        -------
              Net cash (used in) provided by financing activities                  (317)          9,381          4,766
                                                                               --------         -------        -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH                                            (214)             25           (221)
                                                                               --------         -------        -------
NET INCREASE IN CASH AND CASH EQUIVALENTS                                           150           2,321            460
CASH AND CASH EQUIVALENTS, beginning of period                                    3,289             968            508
                                                                               --------         -------        -------
CASH AND CASH EQUIVALENTS, end of period                                      $   3,439        $  3,289       $    968
                                                                               ========         =======        =======

SUPPLEMENTAL CASH FLOW DISCLOSURES
       Cash interest payments                                                 $     119        $    599       $    785
       Cash income tax (refunds) payments, net                                     (308)          1,016            242
       Non-cash capital expenditures (capital lease financing)                      560              40            200
       Non-cash acquisition of minority interest                                      -             553              -
       Non-cash tax benefit from exercise of stock options                            -             163              -
</TABLE>

        The accompanying notes are an integral part of these statements.


                                      F-5

<PAGE>

                           FISCHER IMAGING CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                            FOR THE THREE YEARS ENDED
                        DECEMBER 31, 1997, 1996 AND 1995

(1)    BUSINESS ORGANIZATION

Fischer Imaging Corporation (the "Company"), a Delaware Corporation, and its
foreign marketing subsidiaries, 100%-owned Fischer Imaging Australia Pty.
Limited ("FIA") and 90% owned Fischer Imaging Europe A/S ("FIE"); designs,
manufactures, and markets specialty and general purpose x-ray imaging systems
for the diagnosis and treatment of disease. The Company's principal product
lines are directed toward medical specialties in which minimally invasive
techniques are replacing open surgical procedures. The Company's existing
products are principally marketed to the healthcare industry.

(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include those of the Company and all of
its majority-owned subsidiaries. Investments in less than 20%-owned companies
are accounted for at the lower of cost or estimated long-term realizable value.
All significant intercompany transactions have been eliminated in consolidation.

       USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

       CASH AND CASH EQUIVALENTS

Cash and cash equivalents include investments in highly liquid instruments with
an original maturity of three months or less.

       FINANCIAL INSTRUMENTS

The fair market value of accounts receivable, accounts payable, debt, and other
financial instruments approximates their carrying values in the accompanying
balance sheets. The Company does not enter into derivative contracts to manage
its interest rate or foreign exchange risk.

       INVENTORIES

Inventories, which include costs of materials, direct labor, and manufacturing
overhead, are priced at the lower of cost (using primarily the last-in,
first-out ("LIFO") method of valuation) or market. Writedowns for excess and
obsolete inventories are charged to expense in the period when conditions giving
rise to the writedowns are first recognized.


                                      F-6

<PAGE>


Inventories consist of the following components (in thousands):

                                                      1997            1996
    FIFO cost-
         Raw materials                            $  11,960        $ 16,244
         Work in process and finished goods          11,705          12,507
    LIFO valuation adjustment                          (586)           (893)
                                                   --------         -------
         Total before valuation reserves             23,079          27,858
    Less valuation reserves                          (5,706)         (5,126)
                                                   --------         -------
         Inventories, net                         $  17,373        $ 22,732
                                                   ========         =======

       PROPERTY AND EQUIPMENT

Significant additions and improvements are capitalized at cost, while
maintenance and repairs which do not improve or extend the life of the
respective assets are charged to operations as incurred.

Manufacturing and office equipment are depreciated 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.

       SERVICE PARTS

Service parts used for servicing installed equipment that are not currently
active production parts are stated at cost and depreciated on a straight-line
basis over five years. The Company capitalizes service parts as a component of
manufacturing equipment in the accompanying consolidated balance sheets.

       LONG-LIVED ASSETS

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, an
impairment loss is recognized. Otherwise, an impairment loss is not recognized.

       INTANGIBLE ASSETS

Intangible assets resulting from acquisitions are stated at cost, net of
accumulated amortization, and are being amortized using the straight-line method
over their estimated useful lives which range from 10 to 15 years. Other
intangible assets, comprised primarily of licensing agreements, are amortized
over periods ranging from 3 to 7 years.

       SOFTWARE DEVELOPMENT COSTS

Certain costs to enhance existing application software products or to develop
new software products have been capitalized. These costs are amortized on a
straight-line basis over an estimated useful life of three years.


                                      F-7

<PAGE>


As of December 31, the following amounts were reflected in the consolidated
balance sheets as a component of deferred costs and other assets (in thousands).


                                                   1997            1996

   Cost                                         $  3,196        $  2,900
   Less-Accumulated amortization                  (2,639)         (2,164)
                                                 -------         -------
        Software development costs, net         $    557        $    736
                                                 =======         =======

       OTHER CURRENT LIABILITIES
Other current liabilities consist of the following (in thousands):
                                                   1997            1996

   Customer deposits                            $  1,136        $  1,058
   Accrued warranty and installation costs         1,090           1,408
   Accrued sales, property, and other state
        and local taxes                              688             645
   Other                                             276             476
                                                 -------         -------
        Total other current liabilities         $  3,190        $  3,587
                                                 =======         =======

Estimated costs of warranty and installation obligations are recognized at the
time of sale.

       FOREIGN OPERATIONS

The functional currency for the Company's foreign operations is the applicable
local currency. Assets and liabilities of foreign subsidiaries are translated at
the respective year end exchange rates, while the statements of operations are
translated at average exchange rates during the year. Exchange rate fluctuations
on translating foreign currency into U.S. dollars result in unrealized gains or
losses referred to as translation adjustments, which are recorded as a separate
component of stockholders' investment. Transactions denominated in other than a
foreign operation's functional currency can also result in exchange gains or
losses being reflected in the results of operations. Foreign currency losses
included in the consolidated statements of operations as a component of other
expense approximated $0.7 million, $0.1 million, and $0.2 million in 1997, 1996,
and 1995, respectively.

       REVENUE RECOGNITION

The Company recognizes revenue when title and risk of ownership passes to the
customer which generally, as to shipments with FOB destination terms, is when
received by the customer and, for shipments with FOB shipping point terms, is
upon departure from the Company's dock.

       ADVERTISING COSTS

The Company expenses advertising costs as incurred, except for the costs of
advertising literature, which are capitalized and amortized over the expected
period of future benefit.

       SIGNIFICANT CUSTOMERS

The Company's revenues generally are concentrated among customers in the
healthcare industry and from customers under Original Equipment Manufacturer
("OEM") contracts. The Company establishes an allowance for uncollectible
accounts based upon factors surrounding the credit risk of specific customers,
historical trends, and other information.

                                      F-8

<PAGE>


During 1997, 1996, and 1995, the following customers represented greater than 5%
of the Company's revenues:

                                             1997          1996          1995

  Dornier                                     --           7.0%          6.1%
  GE Medical Systems (a related party)       7.5%         12.9%         10.3%
  International Surgical Systems             5.0%           --            --
  Picker International                        --            --           7.6%
  Storz Medical                              5.3%           --            --
  Varian Associates                          5.5%          8.4%          9.8%

All of these customers are OEM's for whom the Company manufactures
sub-components and systems under OEM contracts. Sales under these and other OEM
contracts constitute a substantial portion of the Company's revenues and trade
accounts receivable. As of December 31, 1997 and 1996, amounts owed the Company
under OEM contracts were approximately $4.7 million and $7.0 million,
respectively. Revenues from OEM customers have fluctuated significantly on a
quarterly and annual basis and represented 31%, 41%, and 41% of the Company's
revenue in 1997, 1996, and 1995, respectively. The Company believes that OEM
relationships will continue as a significant aspect of future results of
operations because of the mutual benefit associated with the opportunity to
share product development costs and the cost savings from manufacturing
efficiencies. However, there is no assurance that these OEM arrangements will be
renewed nor, generally, are minimum order quantities specified in these
agreements.

       SPONSORED RESEARCH AND DEVELOPMENT

The Company from time to time engages in research and development activities for
other companies. This sponsored research and development is recognized as
revenue as the requirements are fulfilled or as certain development milestones
are completed under the terms and conditions of the related research and
development agreements. Costs incurred in connection with these activities are
recognized in cost of sales as incurred.

       NET (LOSS) EARNINGS PER SHARE

In 1997, the Company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" ("SFAS 128"), which was required to be adopted on December
15, 1997. This statement establishes standards for computing and presenting
basic and diluted earnings per share. Under this statement, 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. Diluted earnings or loss
per share is determined by dividing the net earnings or loss by the sum of (1)
the weighted average number of common shares outstanding, (2) if not
anti-dilutive, the number of shares of convertible preferred stock (Note 7) as
if converted upon issuance, and (3) if not anti-dilutive, the effect of
outstanding stock options determined utilizing the treasury stock method. As a
result of adopting SFAS 128, reported (loss) earnings per share for 1996 and
1995 were restated. The effect of this accounting change on previously reported
(loss) earnings per share was as follows:
                                                     1997      1996     1995

  Primary (loss) earnings per share
    under previous reporting requirements         $ (1.60)   $ (.05)   $ .36
  Effect of SFAS 128                                 (.31)     (.01)     .05
                                                   ------     -----     ----
  Basic (loss) earnings per share as restated       (1.91)     (.06)     .41
  Effect of SFAS 128                                    -         -     (.05)
                                                   ------     -----     ----
  Diluted (loss) earnings per share               $ (1.91)   $ (.06)   $ .36
                                                   ======     =====     ====


                                      F-9

<PAGE>


A reconciliation between the number of securities used to calculate basic and,
where anti-dilutive, diluted earnings per share is as follows:


                                                           1997    1996    1995

Weighted average number of common shares outstanding
   (Shares used in Basic Earnings Per Share Computation)  6,949   6,299   5,561
                                                         ------  ------  ------
Shares of convertible preferred stock (as if converted)   1,333   1,333     704
Effect of stock options (treasury stock method)              23     344      66
                                                         ------  ------  ------
Shares used in Diluted Earnings Per Share
    Computation, if dilutive                              8,305   7,976   6,331
                                                         ======  ======  ======

In both 1997 and 1996, the effects of the convertible preferred stock and stock
options were excluded from the calculation of diluted earnings per share since
the result would have been anti-dilutive. As of December 31, 1997 and 1996,
there were, respectively, 865,000 and 774,000 outstanding options to purchase
shares of Common Stock, under the 1993 Nonemployee Director Stock Option Plan
and the 1991 Stock Option Plan.

       STOCK-BASED COMPENSATION PLANS

The Company accounts for its stock-based compensation plans under the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25"). Effective in 1995,
the Company adopted the disclosure option of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS
123 requires that companies which do not choose to account for stock-based
compensation under the fair value method prescribed by the statement, shall
disclose the pro forma effects on earnings and earnings per share as if the fair
value method had been adopted. Additionally, certain other disclosures are
required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS 123.

       RECLASSIFICATIONS

Certain reclassifications have been made in the financial statements of prior
years to conform to the current year presentation.


(3)    INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

                                                  1997            1996

         Goodwill                              $  2,785        $  2,785
         Non-competition agreement                3,569           3,569
         Licensing agreements and other             828             948
                                                -------         -------
                                                  7,182           7,302
         Less- Accumulated amortization          (3,567)         (2,975)
                                                -------         -------
              Intangible assets, net           $  3,615        $  4,327
                                                =======         =======

The non-competition agreement and substantially all of the goodwill resulted
from the Company's September 1992 acquisition of Bloom Associates, Ltd.


                                     F-10

<PAGE>


(4)    INCOME TAXES

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

                                              1997       1996        1995
Current-

   Federal                                $   (471)    $  299    $  1,049
   State                                      (140)       104         176
                                           -------      -----     -------
   Total current (benefit) provision          (611)       403       1,225
                                           -------      -----     -------
Deferred
   Federal                                  (3,458)      (102)        217
   State                                      (296)       (10)         19
   Valuation allowance                       4,365       (500)     (1,461)
                                           -------      -----     -------
  Total deferred provision (benefit)           611       (612)     (1,225)
                                           -------      -----     -------
        Total benefit                     $      -     $ (209)   $      -
                                           =======      =====     =======


The statutory federal income tax rate was 35% for the years ended December 31,
1997, 1996, and 1995. Reasons for the difference between the 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:

                                              1997       1996       1995

Statutory tax rate                           (35.0)%    (35.0)%     35.0%
Increase (decrease) due to:
   State income taxes                         (4.7)      (2.1)       5.7
   Loss of subsidiaries not in tax return      4.1       72.4        8.7
   Nondeductible expenses                      1.0       24.0       15.8
   Foreign sales corporation commissions        --      (11.6)        --
   Valuation allowance on net deferred
        tax assets                            32.9      (87.7)     (64.2)
   Other                                       1.7        3.3       (1.0)
                                             -----      -----      -----
Effective tax rate                              --%     (36.7)%       --%
                                             =====      =====      =====


A tax benefit of $163,000, resulting from the sale of option shares by
employees, has been allocated to additional paid-in capital during 1996.

The domestic versus foreign component of the Company's (loss) earnings before
income taxes is as follows (in thousands):
                                              1997       1996        1995

Domestic                                  $(11,684)    $  644     $ 2,958
Foreign                                   (  1,584)    (1,214)       (681)
                                           -------      -----      ------
       Total                              $(13,268)    $ (570)    $ 2,277
                                           =======      =====      ======

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 consolidated return because they are not expected to reverse in the
foreseeable future.


                                      F-11

<PAGE>


Components of net deferred tax assets (liabilities) as of December 31, 1997 and
1996 are as follows (in thousands):
                                                     1997            1996
  Current-
       Warranty reserves                         $    319        $    392
       Inventory reserves                           2,145           1,997
       Bad debt reserves                              296             244
       Accrued vacation                               216             284
       Restructuring reserve                          448               -
       Other accrued liabilities                      132              49
       Other                                          107             109
       Less- Valuation allowance                   (2,329)           (808)
                                                  -------         -------
   Net current deferred tax asset                $  1,334        $  2,267
                                                  =======         =======
   Noncurrent-
       Software capitalization                   $   (212)       $   (280)
       Tax credits                                    877             528
       Deferred service revenue                       177             238
       Restructuring reserve                          342               -
       Net operating loss carryforward              2,495               -
       Other                                           77             104
       Less- Valuation allowance                   (3,088)           (244)
                                                  -------         -------
   Net noncurrent deferred tax asset             $    668        $    346
                                                  =======         =======


For income tax reporting purposes, the Company has approximately $6,567,000 of
net operating loss carryforwards that expire at various dates through 2012. The
Company also has available income tax credits of approximately $742,000,
expiring at various dates through 2009, and alternative minimum tax credits of
$135,000. Realization is dependent on generating sufficient taxable income prior
to the expiration dates of the respective tax credits.

During 1997, the Company increased its valuation allowance by $4,365,000, due
mainly to uncertainty relating to the realizability of the 1997 net operating
loss carryforwards and the previously described available income tax credits.
During 1996, the Company reduced its valuation allowance by $500,000 due mainly
to results of operations of companies in the domestic consolidated tax return.
The amount of the deferred tax asset considered realizable could be reduced in
the near term if estimates of future taxable income do not materialize.


(5)    NOTES PAYABLE AND LONG-TERM DEBT

Notes payable and long-term debt as of December 31, 1997 and 1996, consist of
the following (in thousands):
                                                    1997             1996

   Capitalized lease obligations;
     interest rates ranging from 6% to 19%;
     monthly principal and interest payments
     due in varying amounts through August
     2002; secured by leased equipment           $    505        $    382
   Other                                               28              50
                                                  -------         -------
                                                      533             432
   Less- Current maturities                          (224)           (283)
                                                  -------         -------
   Long-term debt                                $    309        $    149
                                                  =======         =======

                                F-12


<PAGE>


REVOLVING CREDIT AGREEMENT

Subsequent to year end, the Company renewed, on a short-term basis, its bank
revolving credit arrangement, which expired in February 1997. Under terms of
this renewal, the Company has available up to $15.0 million of credit, subject
to further restrictions based on eligible receivables, inventory, and Company
liquidation value. The agreement, which extends through June 30, 1998 and is
renewable on a monthly basis thereafter, is secured by the Company's accounts
receivable, inventory, and fixed assets. Renewals are subject to a renewal fee
of $5,000 per month, and borrowings under the agreement will bear interest at
one percent over the bank's prime rate of interest, or 9.5% at December 31,
1997.

Future maturities of notes payable and long-term debt, principally under
capitalized lease obligations, are as follows (in thousands):

         Year ended December 31-
            1998                                      $   224
            1999                                          134
            2000                                          105
            2001                                           32
            Thereafter                                     38
                                                       ------
                     Total                            $   533
                                                       ======

(6)    RESTRUCTURING PROVISION

During the third quarter of 1997, the Company decided to close its Addison,
Illinois manufacturing facility and, accordingly, recorded a $2.9 million
restructuring provision for the anticipated shortfall between required lease
payments and estimated sublease payments during the facility's remaining lease
term (which runs through June 2002), estimated facility closing costs, severance
and certain other non-recurring costs associated with this decision. The Company
expects that the closure of the facility will be completed in the near future.
During the year ended December 31, 1997, the Company spent approximately $0.8
million for severance and facility closing costs.

(7)    STOCKHOLDERS' INVESTMENT

The Company is authorized to issue 5,000,000 shares of $.01 par value preferred
stock, which shares may be issued in one or more series and with such powers,
preferences and rights as the Company's Board of Directors may determine. In
June 1995, the Company issued 1,333,333 shares of Series D Convertible Preferred
Stock to GE Medical Systems ("GEMS") for $10 million. The preferred stock is
non-voting and not redeemable, bears no stated dividend, has a $7.50 per share
preference upon liquidation and is convertible into common stock on a
one-for-one basis (subject to customary anti-dilution protection) at the option
of the holder. The terms of the investment restrict GEMS to 25% ownership of the
Company and, under certain change of control conditions, permit GEMS to exchange
its preferred stock for rights to independently manufacture Tilt-C systems.

On June 27, 1996, the Company completed the sale of 1,200,000 shares of its
common stock at $12.00 per share. Proceeds, net of underwriting discount and
other expenses, of $13.1 million were primarily utilized to repay approximately
$6.4 million of existing indebtedness under the Company's bank revolving credit
agreement. The remaining proceeds were invested in short-term, investment grade
securities. If the sale of common shares had been completed as of the beginning
of the year, and assuming the proceeds and utilization of proceeds remained the
same, earnings per share for the year ended December 31, 1996 would have been
increased by $.02.


                                      F-13

<PAGE>


(8)    EMPLOYEE BENEFIT PLANS

       1991 STOCK OPTION PLAN

The Company's 1991 Stock Option Plan ("1991 Plan"), adopted June 1991 and as
subsequently amended, authorizes the granting of incentive and nonqualified
stock options to acquire up to 1,250,000 shares of the Company's common stock by
employees and consultants of the Company. Exercise terms for the options granted
are 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 10 years. The 1991 Plan also
permits the granting of stock appreciation rights, although none have been
granted.

A summary of the status of the 1991 Plan as of December 31, 1997, 1996, and 1995
and the changes during those periods is as follows:

                                              1997         1996         1995


Outstanding at January 1                    709,625      895,625      396,225
Granted                                     185,000      513,000      624,000
Exercised                                    (6,850)     (75,550)      (7,000)
Canceled                                   (123,775)    (623,450)    (117,600)
                                            -------     --------     --------
Outstanding at December 31                  764,000      709,625      895,625
                                            =======      =======      =======
Exercisable at December 31                  247,844      134,250      143,375
                                            =======      =======      =======
Range of exercise prices,                     $4.00-       $4.00-       $4.00-
   at end of period                          $11.00       $11.00       $11.00

Weighted average exercise prices:
   At beginning of period                     $5.91        $8.34        $6.27
   At end of period                            5.91         5.91         8.34
   Exercisable at end of period                6.23         7.01         7.29
   Options granted                             5.85         5.81         9.19
   Options exercised                           4.38         6.40         4.25
   Options canceled                            5.91         9.31         6.18

Weighted average end of period
   remaining contractual life
   (in years)                                   8.2          8.6          9.3

Weighted average fair value of
   options granted during period              $3.89        $2.91        $5.18


                                      F-14

<PAGE>


The following summary shows, as of December 31, 1997 and for the price ranges
indicated, the weighted average exercise price, weighted average exercise price
of options exercisable, and the remaining contractual life of options granted
under the 1991 Plan:

         RANGE OF EXERCISE PRICES                 SHARES      PRICE
     Weighted average exercise
      price for options outstanding:
         $4.00 - $4.99                            56,875      $4.46
         $5.00 - $5.99                           634,000       5.73
         $6.00 - $7.99                            39,000       7.11
         $8.00 - $11.00                           34,125      10.36

     Weighted average exercise
      price for options exercisable:
         $4.00 - $4.99                            38,636      $4.46
         $5.00 - $5.99                           163,583       5.70
         $6.00 - $7.99                            11,500       7.42
         $8.00 - $11.00                           34,125      10.36

     Weighted average remaining
      contractual life (in years):
         $4.00 - $4.99                            56,875       6.91
         $5.00 - $5.99                           634,000       8.47
         $6.00 - $7.99                            39,000       8.37
         $8.00 - $11.00                           34,125       4.60

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
assumptions:

                                                   1997       1996      1995

     Dividend rate                                    0%         0%        0%
     Expected volatility                             77%        78%       74%
     Risk-free interest rate                       5.92%      5.67%     5.97%
     Expected life (in years)                       5.0        3.0       5.7

Certain of the options granted by the Company's Board of Directors under the
1991 Plan vest upon attainment of performance objectives as well as over time.
As of December 31, 1997, 137,500 options granted in December 1996 with an
exercise price of $5.81 per share, vest upon the earlier of (1) when the market
value of the Company's stock has reached targeted price levels for a period of
20 consecutive trading days, (2) upon the attainment of certain annual earnings
per share targets, or (3) 25% six months from date of grant, with the remainder
vesting in equal monthly installments over the following 24 months. Also as of
December 31, 1997, 200,000 options, granted in December 1995 and modified in
December 1996 to, among other things, adjust the exercise price to $5.81 per
share, vest when the market value of the Company's stock has reached targeted
price levels for a period of 45 consecutive trading days or 9 years and 11
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.

       1993 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN

The Company's Nonemployee Director Stock Option Plan ("1993 Director Plan"),
adopted in 1993, authorizes the granting of nonqualified options to acquire up
to 200,000 shares (as amended in May 1997) of common stock at a price not less
than fair market value on the date of grant. The 1993 Director Plan allows for
automatic annual grants upon each year of a director's service. The stock
options issued under the 1993 Director Plan may be exercised at any time from
date of grant, with a maximum option term of five years.


                                      F-15

<PAGE>


A summary of the status of the 1993 Director Plan as of December 31, 1997, 1996,
and 1995 and the changes during those periods is as follows:

                                                1997         1996       1995

Outstanding at January 1                       64,000       46,000     34,000
Granted                                        37,000       18,000     18,000
Exercised                                           -            -     (6,000)
                                              -------       ------     ------
Outstanding at December 31                    101,000       64,000     46,000
                                              =======       ======     ======
Exercisable at December 31                    101,000       64,000     46,000
                                              =======       ======     ======

Range of exercise prices,                       $4.00-       $4.00-     $4.00-
   at end of period                            $13.38       $13.38      $8.75

Weighted average exercise prices:
   At beginning of period                       $8.36        $6.40      $7.47
   At end of period                              7.76         8.36       6.40
   Exercisable at end of period                  7.76         8.36       6.40
   Options granted                               6.72        13.38       4.00
   Options exercised                                -            -       5.25

Weighted average remaining end
   of period contractual life
   (in years)                                     2.6          2.7        3.2

Weighted average fair value of
   options granted during period                $3.65        $5.98      $1.76

The following summary shows, as of December 31, 1997 and for the price ranges
indicated, the weighted average exercise price for outstanding options, all of
which are exercisable, and the remaining contractual life of options granted
under the 1993 Director Plan:

           RANGE OF EXERCISE PRICES                      SHARES        PRICE
     Weighted average exercise price for options
        outstanding (all of which are exercisable):
        $4.00 - $6.50                                     30,000      $5.25
        $6.51 - $9.00                                     53,000       7.28
        $9.01 - $13.38                                    18,000      13.38

     Weighted average remaining contractual life
        (in years):
        $4.00 - $6.50                                     30.000       1.65
        $6.51 - $9.00                                     53,000       2.93
        $9.01 - $13.38                                    18,000       3.15

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
assumptions:

                                    1997              1996             1995
     Dividend rate                     0%                0%               0%
     Expected volatility              77%               78%              74%
     Risk-free interest rate        6.39%             5.67%            5.97%
     Expected life (in years)        3.0               2.0              2.0

        1991 DIRECTOR PLAN
The Director Stock Option Plan, adopted in 1991, ("1991 Director Plan") for
nonemployee directors of the Company authorized the granting of nonqualified
options to acquire 50,000 shares of common stock at a price not less than fair
market value on date of grant. During 1996 and 1995, no options were granted,
exercised, or canceled. During 1997, the remaining 6,000 options outstanding
under this plan were canceled.


                                      F-16

<PAGE>


       EMPLOYEE STOCK PURCHASE PLAN

In December 1991, the Board of Directors adopted an Employee Stock Purchase
Plan, effective for the plan year beginning January 1, 1992. Under the plan, the
Company is authorized to issue up to 200,000 shares of common stock to its
full-time employees, nearly all of whom are eligible to participate. Under terms
of the plan, employees can have from 2% to 5% of their salary withheld to
purchase the Company's common stock. The purchase price of the stock is 85% of
the lower of its beginning-of-the-year or end-of-year market price. Under the
plan, the Company issued 21,463, 24,522 and 22,027 shares during the years ended
December 31, 1997, 1996, and 1995, respectively, relating to employee
withholdings from the preceding years.

       STOCK-BASED COMPENSATION PLANS

The fair value of the stock options granted in 1997, 1996, and 1995 was
estimated to be approximately $.9 million, $1.2 million, and $1.2 million,
respectively, which, under SFAS 123, would be amortized as compensation expense
over the vesting period of the options. Had compensation cost been recorded
consistent with SFAS 123 utilizing the assumptions detailed above, the Company's
pro forma net loss and net loss per share would have been as follows for the
years ended December 31 (in thousands, except per share data).

                                                     1997       1996       1995
Net (loss) earnings:
     As reported                                 $(13,268)   $  (361)   $ 2,277
     Pro forma                                    (13,589)      (541)     1,828
Net (loss) earnings per common share, diluted:
     As reported                                 $  (1.91)   $ (0.06)   $   .36
     Pro forma                                      (1.96)     (0.09)       .29

       401(K) PLAN

In 1985, the Company established The Fischer Imaging Employee Capital
Accumulation Plan, which is governed by Section 401(k) of the Internal Revenue
Code. Employees with a minimum of six months of service are eligible for the
plan. The Company makes discretionary contributions which vest over a four-year
period. Total Company contributions were approximately $0, $0, and $0.1 million,
for the years ended December 31, 1997, 1996, and 1995, respectively.

       INCENTIVE COMPENSATION PLAN

The Company has an incentive compensation plan under which management employees,
including the Company's executive officers, receive cash bonuses. The amounts of
such bonuses are determined based upon the Company's sales growth,
profitability, and employees' performances as compared to performance objectives
established by the Board of Directors. During the years ended 1997, 1996, and
1995, the Company accrued bonuses of approximately $0.1 million, $0, and $0.1
million, respectively, under this plan.

(9)    RELATED PARTY TRANSACTIONS

The Company leases its manufacturing and administrative facility from JN
Properties (a general partnership whose partners include the Company's
chairman/chief executive officer and another stockholder/director of the
Company). The lease, which expires in July 2012, provides for adjustments of
base rent in 2000, 2005, and 2010, based on the then fair market rental value of
the premises. The increases are subject to a 7% maximum increase in each
adjustment year. Effective January 1, 1996, the annual rent increased from
$696,000 to $744,000. All taxes, insurance, and maintenance expenses of the
facility are the responsibility of the Company.


                                      F-17

<PAGE>


In the second quarter of 1995, the Company issued  1,333,333  shares of Series D
Convertible  Preferred Stock to GEMS (see Note 7), currently  representing a 16%
ownership  interest  in the  Company on an  if-converted  basis.  GEMS is also a
significant  customer,  providing  revenues to the Company of approximately $4.3
million or 7.5% and $10.0 million or 12.9% of total revenues,  in 1997 and 1996,
respectively.

(10)   FOREIGN OPERATIONS

The Company operates in a single industry segment with operations in the U.S.,
Europe, and Australia. The following is a summary of the Company's foreign
operations (in thousands):

                                               1997         1996         1995
Revenues:
  U. S. Operations:
      Domestic                              $ 46,291     $ 61,087     $ 58,548
      Export (primarily Europe)                8,728       11,041       13,939
  Foreign Operations:
      Europe                                     726        2,482        2,829
      Australia                                1,163        2,898        1,434
  Transfers between geographic areas             971        4,123        2,796
  Eliminations                                  (971)      (4,123)      (2,796)
                                             -------      -------      -------
  Total                                     $ 56,908     $ 77,508     $ 76,750
                                             =======      =======      =======
Earnings (loss) from operations:
  U.S.                                      $(12,107)    $    841     $  3,629
  Europe                                        (221)        (569)        (682)
  Australia                                     (270)        (122)        (103)
  Eliminations                                     -         (100)          50
                                             -------      -------      -------
  Total                                     $(12,598)    $     50     $  2,894
                                             =======      =======      =======
Identifiable Assets:
  U.S.                                      $ 52,948     $ 63,105     $ 56,924
  Europe                                         577        1,581        2,214
  Australia                                      920        1,797        1,062
  Eliminations                                (5,331)      (6,051)      (4,550)
                                             -------      -------      -------
  Total                                     $ 49,144     $ 60,432     $ 55,650
                                             =======      =======      =======

Transfers between geographic areas are recorded on the basis of intercompany
prices established by the Company.

(11)   INVESTMENTS AND ACQUISITIONS

       TETRAD CORPORATION

The Company owns 526,191 shares of common stock of Tetrad Corporation
("Tetrad"), an interoperative diagnostic ultrasound system manufacturer. The
shares, which are not readily marketable, were acquired in a 1993 purchase and
in a subsequent bridge financing. Tetrad was reorganized and downsized in 1995,
due to continuing softness in the market for minimally invasive surgical
equipment. Since then, Tetrad has been able to continue developing and seeking
commercialization of its technology base by financing its operations through
proceeds from third-party development contracts. Therefore, although near term
developments could prove otherwise, the Company believes its investment in
Tetrad, which is accounted for at its $550,000 cost, is not impaired and,
accordingly, has not provided any reserve for the possible reduction in the
long-term value of its investment.


                                      F-18

<PAGE>


       FISCHER MIDWEST MINORITY INTEREST

During 1996, the Company acquired the 45% minority interest of Fischer Imaging
Midwest, Inc., its domestic marketing subsidiary, in exchange for shares of the
Company's stock. The Company accounted for this transaction as a purchase,
acquiring the minority interest with a net book value of approximately $331,000,
and recording goodwill of approximately $270,000, which is being amortized on a
straight-line basis over 15 years.

(12)   COMMITMENTS AND CONTINGENCIES

       OPERATING LEASES

The Company leases buildings (see Note 9) and equipment under various operating
lease agreements which provide for the following minimum future lease payments
(in thousands):

              1998                                           $ 1,756
              1999                                             1,644
              2000                                             1,612
              2001                                             1,633
              2002                                             1,198
              Thereafter                                       7,130
                                                              ------
                      Total                                  $14,973
                                                              ======

Approximately $3.8 million of the future minimum lease payments relates to the
Company's Addison, Illinois manufacturing facility. This amount, net of
anticipated sublease income, has been accrued as part of the restructuring
provision relating to the closing of this facility. (See Note 6).

Total rent expense was $1.9 million, $1.8 million and $1.7 million in 1997,
1996, and 1995, respectively.

        REGULATORY ACTIONS

The Company 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 ("GMPs"), which include testing,
quality control and documentation procedures. In March 1995, the Company was
issued a Warning Letter concerning documentation and other deficiencies at its
Denver facility. The Company rectified these deficiencies and resolved the
matter with the FDA in June 1995. In September 1995, the Company received a
Warning Letter from the FDA with respect to documentation and other deficiencies
at its Chicago facility. The Company corrected these deficiencies, obtained
third-party certification of its corrections, and was notified by the FDA that
these actions resolved the matter.

In December 1996, following an inspection, the FDA issued Inspectional
Observations Form 483 ("Form 483") regarding manufacturing practices at its
Denver facility. Subsequently, the FDA issued a Warning Letter concerning
deficiencies noted during the December 1996 inspection. The FDA requested a
written response to the Warning Letter regarding the Company's planned
corrective actions and a favorable third-party certification of the Company's
manufacturing and quality systems. The Company has completed these actions,
including the receipt and submission to the FDA of a favorable third-party
certification, and believes it has resolved the FDA's GMP concerns. Failure to
satisfy FDA requirements can result in the Company's inability to receive awards
of federal government contracts, to receive new marketing or export clearance
for products manufactured at its Denver facility, or FDA enforcement actions
including, among other things, product seizure, injunction, and/or criminal or
civil proceedings being initiated without further notice. The Company also
received separate correspondence from the


                                      F-19

<PAGE>


Center for Device Evaluation and Research ("CDRH")  regarding  violations of the
Electronic Product Radiation Control Performance Standard.  The Company believes
that it has been able to correct the deficiencies noted in the Form 483, the FDA
Warning Letter, and the communication  from the CDRH,  although no assurance can
be given that the corrections  will be sufficient.  Although the Company strives
to  operate  within  the  requirements  imposed  by  the  FDA,  there  can be no
assurances that noted  deficiencies have been corrected or that the Company will
be able to satisfy future FDA compliance  concerns.  Ongoing  compliance reviews
and/or related delays in future product clearances could have a material adverse
effect on the Company.

        PURCHASE COMMITMENTS

The Company has entered into an agreement with a vendor for the development and
production of certain components to be used in one of the Company's new
products. In order to retain exclusive rights to the technology developed, the
Company must order a minimum quantity of units or pay approximately $680,000.
Should the minimum quantity be ordered, the total commitment through 1999 would
approximate $7.2 million.

In the normal course of business, the Company enters into various long-term
commitments with vendors to provide customized materials for use in the
Company's products.

        RETENTION BONUS PLAN

In December 1995, the Board of Directors adopted a Retention Bonus Plan (the
"Plan"). Under the Plan, the Company will vest all options to purchase shares of
Common Stock and will make payments to executive officers and other key
employees of the Company (the "Participants") in the event of a change of
control of the Company. A "change of control" under the Plan is defined to
include acquisition of 35% or more of the Company's outstanding Common Stock,
certain changes in the composition of the Board of Directors, a consolidation or
merger in which the Company is not the surviving corporation, the sale or other
transfer of 50% or more of the assets or earnings power of the Company, the
adoption of a plan of liquidation or dissolution of the Company, 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. The Participants, which presently include the
executive officers of the Company, are selected by the Board of Directors, who
may select additional Participants in the future.

       ANTI-TAKEOVER CONTINGENCIES

In November 1994, the Board of Directors declared a dividend of 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 (including Morgan W. Nields,
Chairman and Chief Executive Officer, Kinney L. Johnson, member of the Board of
Directors, and GE Medical Systems) acquire more than a 15% beneficial interest
in the Company. The purpose of these rights is to assure that the Company's
Board of Directors has sufficient control to prevent a takeover of the Company
at less than its fair value.

        LITIGATION

The Company is also actively contesting various lawsuits in which it has been
named as defendant. In management's opinion, the effect of these disputes, if
any, will not have a significant effect on the accompanying consolidated
financial statements.

                                      F-20


<PAGE>

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

            Not Applicable.


                                    PART III


ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

            The information required by this Item is incorporated by reference
to the Company's 1998 Proxy Statement to be filed on or prior to April 30, 1998.

ITEM 11.    EXECUTIVE COMPENSATION

            The information required by this Item is incorporated by reference
            to the Company's 1998 Proxy Statement to be filed on or prior to
            April 30, 1998.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

            The information required by this Item is incorporated by reference
            to the Company's 1998 Proxy Statement to be filed on or prior to
            April 30, 1998.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

            The information required by this Item is incorporated by reference
            to the Company's 1998 Proxy Statement to be filed on or prior to
            April 30, 1998.


                                       35

<PAGE>


                                     PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
            ON FORM 8-K

(a)         Documents filed as part of this report:

            1.    Financial Statements.

                        See page F-0 of this Form 10-K.

            2.    Financial Statement Schedules.

                        See page F-0 of this Form 10-K.

            3.    Exhibits.

                        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 /(7)/

10.1           Works Contract and Manufacturing Agreement, dated October 28,
               1988, between the Company and Storz Medical AG, as amended on
               January 21, 1991 /(2)/

10.2           Agreement, dated October 5, 1990, between the Company and
               Dornier Medizintechnik GmbH /(1)/

10.3           Cooperative Research and Development Agreement, dated
               September 24, 1993, between the Company and The Regents of the
               University of California /(6)/

10.4           Purchase Agreement, dated October 2, 1993, between the Company
               and Varian Associates Inc. /(5)/

10.5           Purchase Agreement, dated August 29, 1994, between the Company
               and General Electric Company on behalf of GE Medical
               Systems /(7)/


                                       36

<PAGE>


EXHIBIT
NUMBER                  DESCRIPTION OF EXHIBIT

10.6           Royalty Agreement, dated as of April 18, 1980, between the
               Company and Jesse T. Littleton, M.D. /(1)/

10.7           Nonemployee Director Stock Option Plan, as amended /(8)/

10.8           Stock Option Plan /(1)/

10.9           Employee Stock Purchase Plan /(3)/

10.10          Retention Bonus Plan /(6)/

10.11          Lease Agreement, dated as of June 12, 1992, between the
               Company and the Teachers' Retirement System of the State of
               Illinois /(5)/

10.12          Lease Agreement, dated July 31, 1992, between the Company and
               JN Properties /(4)/

10.13          Stock Purchase Agreement, dated as of June 20, 1995, between
               the Company and General Electric Company, acting through its GE
               Medical Systems Division ("GEMS") /(7)/

10.14          Registration Rights Agreement, dated as of June 20, 1995,
               between the Company and GEMS /(7)/

10.15          Manufacturing and License Agreement, dated as of June 20,
               1995, between the Company and GEMS /(7)/

10.17          Amendment, dated as of June 20, 1995, to Purchase Agreement,
               dated as of August 29, 1994, between the Company and GEMS /(7)/

10.18          Agreement dated October 10, 1997, by and between the Company
               and Ethicon Endo-Surgery, Inc., with Addendum dated January 28,
               1998. /(8)/ /(9)/

   21          List of Subsidiaries /(8)/

   23          Consent of Arthur Andersen LLP /(8)/

   27          Financial Data Schedule /(8)/


                                       37

<PAGE>


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

      /(1)/ Incorporated by reference to the Company's Registration Statement on
            Form S-1, File No. 33-41537, as filed with the Securities and
            Exchange Commission (the "Commission") on July 3, 1991.

      /(2)/ Incorporated by reference to Amendment No. 1 to the Company's
            Registration Statement on Form S-1, File No. 33-41537, as filed with
            the Commission on
            July 18, 1991.

      /(3)/ Incorporated by reference to the Company's Registration Statement on
            Form S-8, File No. 33-44599, as filed with the Commission on
            December 3, 1991.

      /(4)/ Incorporated by reference to the Company's Form 10-K for the year
            ended December 31, 1992, as filed with the Commission.

      /(5)/ Incorporated by reference to the Company's Form 10-K for the year
            ended December 31, 1993, as filed with the Commission.

      /(6)/ Incorporated by reference to the Company's Form 10-K for the year
            ended December 31, 1994, as filed with the Commission on April 14,
            1995.

      /(7)/ Incorporated by reference to the Company's Form 8-K, as filed with
            the Commission on July 3, 1995.

      /(8)/ Filed herewith.

     /(9)/  Confidential Treatment is being sought from the Commission with
            respect to portions of these agreements, which portions
            have been omitted from the attached copies of the exhibits and
            have been filed separately with the Commission.


                                       38

<PAGE>


      (b)   Reports on Form 8-K
            None

      (c)   Exhibits
            See Item 14(a)(3) of this Form 10-K.

      (d)   Financial Statement Schedules See F-0 of this Form 10-K.


                                       39

<PAGE>

                                   SIGNATURES


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


                                    Fischer Imaging Corporation



Date:   March 30, 1998              By:  /S/ MORGAN W. NIELDS
                                       --------------------------------
                                        Morgan W. Nields
                                        Chairman of the Board, Chief Executive
                                        Officer, and Director


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



/S/ MORGAN W. NIELDS                Chairman of the Board,       March 30, 1998
-------------------------------
Morgan W. Nields                    Chief Executive Officer,
                                    Principal Executive Officer


/S/ WILLIAM C. FEE                  Vice  President, Chief       March 30, 1998
-------------------------------     Accounting Officer, Principal
William C. Fee                      Accounting and Financial
                                    Officer


/S/ DAVID G. BRAGG, M.D.            Director                     March 30, 1998
-------------------------------
David G. Bragg, M.D.


/S/ THOMAS J. CABLE                 Director                     March 30, 1998
-------------------------------
Thomas J. Cable


/S/ KINNEY L. JOHNSON               Director                     March 30, 1998
-------------------------------
Kinney L. Johnson


/S/FRANK W. T. LAHAYE               Director                     March 30, 1998
-------------------------------
Frank W. T. LaHaye


-------------------------------     Director                     March 30, 1998
Kathryn A. Paul