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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549


                                   FORM 10-K


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

                  For the fiscal year ended December 31, 1999

  [_]        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 1, 2000 was approximately $23,248,000.

  The number of shares of Registrant's Common Stock outstanding on March 1,
2000 was 7,058,000.

                      DOCUMENTS INCORPORATED BY REFERENCE

  Portions of the Registrant's Proxy Statement for its 2000 Annual Meeting of
Stockholders to be filed on or prior to May 5, 2000, are incorporated by
reference into Part III of this Form 10-K.

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                          FISCHER IMAGING CORPORATION

                               TABLE OF CONTENTS

<TABLE>
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                                                                          Page
                                                                          ----

                                     Part I

 <C>      <S>                                                             <C>
 Item 1.  Business......................................................    1
 Item 2.  Properties....................................................   21
 Item 3.  Legal Proceedings.............................................   21
 Item 4.  Submission of Matters to a Vote of Security Holders...........   22

                                    Part II

           Market for Registrant's Common Equity and Related Stockholder
 Item 5.  Matters.......................................................   23
 Item 6.  Selected Consolidated Financial Data..........................   26
             Management's Discussion and Analysis of Financial Condition
 Item 7.  and Results of Operations.....................................   27
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk....   35
 Item 8.  Financial Statements and Supplementary Data...................  F-1
             Changes in and Disagreements with Accountants on Accounting
 Item 9.  and Financial Disclosure......................................   35

                                    Part III

 Item 10. Directors and Executive Officers of the Registrant............   36
 Item 11. Executive Compensation........................................   36
                     Security Ownership of Certain Beneficial Owners and
 Item 12. Management....................................................   36
 Item 13. Certain Relationships and Related Transactions................   36

                                    Part IV

            Exhibits, Financial Statement Schedules, and Reports on Form
 Item 14. 8-K...........................................................   37
          Signatures....................................................   39
</TABLE>
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                                    PART I

ITEM 1. BUSINESS

  Fischer Imaging Corporation, incorporated in the State of Delaware in 1991,
designs, manufactures and markets specialty and general purpose medical
imaging systems for diagnosing and treating disease. The Company's newer
products are directed towards medical specialties, such as diagnosing and
treating breast cancer, heart disease and vascular disease, in which image-
guided, minimally invasive therapies are replacing open surgical procedures.
The Company also has designed and manufactured 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 proprietary products serve major markets including: Breast
Cancer Screening and Biopsy, Electrophysiology, Endovascular and
Interventional, and General Radiology.

  As an OEM, the Company has designed and manufactured specialty x-ray imaging
components and subsystems for several leading medical equipment manufacturers
including the GE Medical Systems division of General Electric Company, Varian
Associates, Inc., and Picker International, Inc. The Company has been
withdrawing from the OEM business during the last several years.

  Breast Cancer Imaging and Biopsy Markets

  Market Overview

  Breast cancer is the leading cause of death from cancer in the United States
among the 30 million women between the ages of 40 and 55 and the second
leading cause of death from cancer among all women. According to the American
Cancer Society, each year about 200,000 new cases of breast cancer are
diagnosed and 50,000 women die from the disease. The incidence of breast
cancer increases with age, rising from about 100 cases per 100,000 women at
age 40 to about 400 cases per 100,000 women at age 65. Thus, the Company
believes that the significant aging of the population, combined with improved
education and awareness of breast cancer and diagnostic methods, will lead to
an increased number of breast cancer screening and diagnostic procedures.

  Successful treatment of breast cancer is largely dependent on early
detection of malignant lesions. According to the National Cancer Institute,
the five-year survival rate decreases from about 90% to 70% after the cancer
has spread to the lymph nodes, and to less than 20% after it has spread to
organs such as the lungs, liver, or brain. Current methods of detecting breast
cancer typically include clinical and self-examination and conventional x-ray
screening mammography. While these methods can indicate the presence of
lesions, they cannot indicate whether the lesions are benign or malignant. If
an examination or screening mammogram detects a suspicious lesion, or if other
breast cancer symptoms are present, additional diagnostic mammography is
typically ordered.

  When the results of a diagnostic mammogram are inconclusive, a breast biopsy
is typically performed. The Company believes that over one million biopsies
are performed each year, 70% to 90% of which result in a benign diagnosis. The
most common forms of biopsy are: (1) open surgical, (2) stereotactic core
needle and (3) 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. An important advantage of
open surgical biopsy is that a sufficient tissue sample necessary for
definitive diagnosis is usually obtained. However, the procedure has several
disadvantages:

  .  it typically must be performed in an operating room under general
     anesthesia,

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  .  the surgery takes about one hour and requires one to two days of
     recuperation at home,

  .  the skin incision and the large amount of tissue removed may be
     disfiguring,

  .  internal scar tissue can interfere with the ability to detect suspicious
     lesions during subsequent mammograms, and

  .  including surgical fees and operating room costs, the cost per procedure
     is believed to be about $2,500 to $5,000.

  Stereotactic Core Needle Biopsy. "Stereotactic" refers to the technique of
locating a lesion in a three-dimensional field and directing the tip of a core
needle to the site of the lesion for tissue removal and biopsy. Pioneered by
the Company and several radiologists in the late 1980's, stereotactic core
needle biopsy is a less-invasive, lower cost, and less disfiguring alternative
to open surgery. 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 primarily by radiologists,
the procedure is now being widely adopted by surgeons as they become aware of
the accuracy and less-invasive nature of the procedure. The typical cost for
the procedure is believed to be about $750 to $1,200.

  During a stereotactic core needle biopsy procedure, the patient lies face
down in a prone position on an x-ray imaging table with the breast hanging
pendulant through an opening in the table. The x-ray imaging system and the
doctor's work space is under the table. The physician is able to locate the
lesion in a three-dimensional field by the use of stereotactic x-ray imaging
and accurately position the core needle to within one millimeter for tissue
sample removal. The patient is given a local anesthetic during the less than
one hour procedure, and a small nick is made in the patient's skin which, at
the conclusion of the procedure, can be covered with a Band-Aid. As with open
surgical biopsy, the tissue sample is sent to a pathology laboratory for
analysis.

  The Company believes that the number of stereotactic core needle biopsy
procedures has grown from about 500 per year in 1990 to, in recent years, over
300,000 per year. This increase is believed to be driven by the clinical and
cost advantages as well as improvements in tissue removal systems (such as the
Mammotome(TM) device from Ethicon-Endo Surgery, Inc., a Johnson & Johnson
Company, which can be used in conjunction with the Company's Mammotest
system). Television programs in recent years which discuss the benefits of
stereotactic core needle biopsy have increased awareness both among women and
among managed care organizations as to the cost savings and less-invasive
nature of the procedure. The Company believes that another factor causing an
increase in the number of biopsies requested, including stereotactic, is the
fact that the leading cause of malpractice lawsuits against physicians is the
failure to detect breast cancer on a timely basis.

  Medicare Coverage. On December 7, 1999 the Health Care Financing
Administration ("HCFA") provided a national coverage decision memorandum for
image guided breast biopsy. HCFA's memorandum concluded that, "percutaneous
image guided breast biopsy is as accurate as open surgical biopsy" and
recommended a national coverage policy for percutaneous image guided breast
biopsy. HCFA estimated that 78% of Medicare beneficiaries underwent open
surgical biopsy procedures while 14% were stereotactically performed and 7%
performed under ultrasound. The Company believes that HCFA's National Coverage
Decision may well provide an improved coding and reimbursement environment for
stereotactic breast biopsy in future years.

  Ultrasound-Guided Core Needle Biopsy. Ultrasound imaging can play an
important supporting role to mammography due to its ability to diagnose cysts
and to properly characterize masses. An additional advantage is that the
patient is not exposed to x-ray radiation. The quality of ultrasound equipment
has only recently improved to the level needed for breast imaging and, as yet,
those who perform mammograms are generally not well trained in breast
ultrasound imaging techniques. Nonetheless, the Company believes that the
capability of ultrasound to permit the identification of some breast masses
without exposing the patient to x-ray radiation may result in increased use of
ultrasound for diagnosis of breast masses and for guiding core needle biopsies
in the future.

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  Other Technologies In Development. Other developing technologies that may be
used to detect, diagnose, and improve the diagnosis and treatment of breast
cancer include digital mammography and magnetic resonance imaging. The Company
has products under development using both of these technologies:

  Digital Mammography. Digital mammography provides a number of advantages
over conventional x-ray mammography:

  .  With digital mammography, the image is acquired electronically and
     displayed on a computer monitor, which allows image contrast to be
     varied. This can allow a mammogram image to be contrast adjusted, so
     that it can be interpreted appropriately without subjecting the patient
     to a second mammogram. Because younger women typically have denser
     breast tissue, which is not visualized adequately with film mammography,
     this feature may be particularly useful in screening women under age 50.

  .  A properly designed digital mammography system can reduce radiation
     dosage by at least a factor of two.

  .  Other benefits include: (1) real time acquisition (film processing is
     not necessary), (2) storage of the mammogram in digital memory or on
     digital archival media, (3) an ability to implement computer-aided
     diagnosis algorithms, and (4) telemammography (digital transmission of
     mammograms for remote display and diagnosis).

  Magnetic Resonance Imaging. Breast magnetic resonance imaging ("Breast MR"),
performed with the 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, Breast MR, while more sensitive than other imaging
techniques, is no more specific than conventional x-ray mammography.
Therefore, the capability to perform core needle biopsy using MR guidance is
currently needed.

  The Company believes that Breast MR with biopsy capabilities will be used
primarily to provide physicians and patients with additional information
concerning the appropriateness of lumpectomy (removal of a breast tumor and
surrounding tissue) as opposed to mastectomy (removal of the entire breast).
It may also be used for imaging patients with a high risk of cancer recurrence
or in other 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). First introduced in 1989, the Company's
Mammotest stereotactic core needle biopsy system is designed expressly for
core needle biopsy of the breast. The Mammotest system consists 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 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 produces breast tissue
images on nearly a real time basis. With the aid of proprietary software, the
coordinates of a breast lesion can be quickly calculated using a computer
trackball. These coordinates are then transmitted to the Autoguide, a motor-
driven needle holder assembly that precisely aims the biopsy needle at the
lesion. Mammovision has become a standard for providing computer-based imaging
for the Mammotest system.

  Since 1990, over 1,200 Mammotest systems have been installed worldwide, with
the vast majority of installations occurring in the United States.

  Mammotest Plus(TM)/Mammovision Plus(TM). The Company introduced Mammotest
Plus(TM) and Mammovision Plus in November 1995. The Mammotest Plus system
permits 360 degree access to the breast.

                                       3
<PAGE>

It also incorporates the features of Target on Scout(TM) and Lateral Arm that
allow small breasts (less than 2.5cm when compressed) and breast lesions in
difficult locations to be biopsied more easily.

  Mammovision Plus is a CCD imaging system that features the ability to remove
the camera from the Mammotest table, allowing the Mammovision Plus camera to
be installed on the Company's HFX diagnostic mammography system. As a result,
near real time digital imaging can be performed in conjunction with standard
diagnostic mammography. This allows the equipment cost to be spread across the
larger number of mammogram procedures that could be performed on a standard
diagnostic mammography system, 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, depending on features selected,
ranges from $195,000 to $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 marketing
alliance with Ethicon Endo-Surgery, Inc., a Johnson & Johnson company. The
Mammotest Plus "S" is based on the Mammotest Plus prone biopsy system, with
enhancements designed to support the more advanced techniques performed in the
surgical market segment. The list price of the Mammotest Plus "S" system is
approximately $280,000.

  HFX(TM) Mammography System. HFX is designed to perform high quality, low
dose diagnostic mammograms quickly, easily and efficiently. Using a
proprietary x-ray tube, the HFX generates excellent spatial resolution,
particularly at the front edge of the image receptor where mammograms
involving magnification are performed. The HFX is available in a two-tube
configuration for integration with the Mammotest, providing a cost-efficient
system capable of performing mammograms as well as stereotactic core needle
breast biopsies. The HFX system ranges in price from $50,000 to $70,000.

  HFX Plus(TM) Mammography System. The HFX Plus includes all the features of
the HFX system and adds digital spot imaging. The HFX Plus is designed to
accept the removable CCD camera from a Mammotest Plus stereotactic table. This
allows communication with a Mammovision Plus digital workstation. Dense or
thin, low absorption tissue areas can be evaluated on the digital camera.
Digital technology gives a wider range of contrast controls, allowing enhanced
visualization of faint lesions as compared to conventional film screen
imaging. The list price of the HFX Plus is $62,000.

  MammoSound(TM). MammoSound, currently under development, will combine the
Mammotest Plus "S" prone biopsy system and its traditional x-ray imaging
capability with ultrasound imaging. This new concept will add stereotactic
precision to ultrasound biopsy, while adding ultrasound's superior capability,
in some cases, to more accurately characterize breast masses as benign or
malignant. Combining x-ray and ultrasound capabilities utilizing the same
prone table should also be of benefit where floor space is limited.

  SenoScan(R) Digital Mammography System. The Company is a leader in the
development of full field of view digital mammography systems. Digital
mammography provides a number of advantages over film screen mammography,
including:

  .  improved imaging of dense breast tissue through greater ability to vary
     image contrast

  .  reduced radiation dosage to the patient,

  .  real time imaging, and

  .  the ability to store images in a digital format, allowing transmission
     over high-speed telecommunication networks, thus allowing remote
     diagnosis.

  The Company believes that SenoScan, its full-field digital mammography
system, will offer these advantages. The Company believes there is a large
potential market for digital mammography. The SenoScan digital mammography
system may represent a significant technological advance in the imaging of
breast tissue, especially in younger women who generally have denser breast
tissue that is more difficult to successfully image using film screen
mammography technology. As reported by the American Cancer Society, about 20%
of breast cancer cases detected occur in women under age 50.

                                       4
<PAGE>

  SenoScan, introduced as a prototype in 1997, is presently installed in six
locations. The six systems have performed clinical testing on about 1,500
patients in support of the Company's planned 510 (k) pre-market clearance or
PMA application. Recent information from the FDA indicates a change in the
type of study the FDA is requiring for pre-market clearance of digital
mammography. See "Business--Government Regulation." On January 31, 2000 the
FDA cleared the Senograph 2000D from General Electric for marketing in the
U.S. The clearance was achieved under a PMA or Pre Market Approval application
which must demonstrate safety and effectiveness. The FDA's decision,
recommended by an Advisory Panel to the FDA on December 16, 1999, has
clarified several aspects of clinical study requirements of the FDA. The
Company is proceeding to conduct reader studies using data from patients
acquired during the previous three years. The results of these studies, along
with technical information, are planned to be submitted to the FDA during 2000
in support of either a 510 (k) pre-market notice or a PMA application. The FDA
has provided guidance to the Company setting out clinical trial results that
would be required in order to achieve a 510 (k) pre-market notification.
Should the Company's clinical studies not meet the level of accuracy specified
for a 510 (k) clearance, the Company plans to submit its data as part of a PMA
application.

  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 Signa 1.5T magnetic
resonance imaging system provided by GE Medical Systems, which constitutes a
significant portion of the installed base of magnetic resonance imaging
systems. This installed base is believed to consist of about 4,000 operational
systems in the United States. Clinical trials of the prototype system, which
would test the system's ability to reliably biopsy breast lesions using
magnetic resonance imaging as its guidance modality, are underway at a
university hospital. The Company believes that the primary use of Breast MR,
combined with biopsy capabilities, will be to provide the physician and
patient with additional information concerning known cancers, and to evaluate
the appropriateness of lumpectomy as opposed to mastectomy.

  Electrophysiology Markets

  Market Overview

  The Company estimates that about 350,000 of the 550,000 annual heart attack
deaths in the United States are related to ventricular tachycardia (very rapid
heartbeat) or other cardiac arrhythmias that may cause sudden death. Cardiac
arrhythmias are irregular heartbeats that arise when the normal pattern of
electrical impulses in the heart is disrupted. Cardiac arrhythmias can range
from isolated premature contractions to tachycardia, which may lead to life-
threatening episodes of ventricular fibrillation (rapid, uncoordinated
contraction of the ventricles resulting in a lack of synchronization between
heartbeats and pulse beats).

  Atrial fibrillation is a common form of atrial tachycardia. Currently,
approximately 2.2 million people in the United States are believed to have
this condition. Although the condition is not normally in itself life
threatening, the importance of treatment is that, according to an industry
source, atrial fibrillation may cause 75,000 strokes per year. Strokes occur
when clots in the heart are dislodged, resulting in blockage of cerebral
arteries. Episodes of atrial fibrillation can cause this dislodging to occur.
Atrial fibrillation is normally treated by a procedure called cardioversion,
in which an electrical shock is applied to the chest to restore a normal
pattern of electrical impulses in the heart.

  The treatment of arrhythmia patients typically involves a diagnostic study
of the electrical functioning of the heart (an "electrophysiology" or "EP"
study). Treatment following the EP study may include: (1) prescription of an
anti-arrhythmic drug, (2) corrective open heart surgery, (3) implantation of a
implantable cardiovertor defibrillator ("ICD") or (4) interventional therapy
such as radio frequency ("RF") ablation. The Company estimates that about
200,000 EP studies are performed each year.

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  EP studies are performed by inducing an arrhythmia through electrical
stimulation of the heart using a catheter inserted through the skin into veins
leading into the patient's heart. EP studies are increasingly being undertaken
in dedicated EP laboratories. Tilt table testing is also performed to observe
presence or absence of transient fainting when the patient is returned to an
upright position. If it is concluded that the patient should have 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 remain constant over the
next several years in view of the increased use of ICD implantation, the
development of RF ablation, and the use of new catheter-based technologies for
treating ventricular tachycardia and atrial fibrillation. ICDs are typically
used when patients who have experienced ventricular tachycardia are believed
to be at risk of ventricular fibrillation and sudden cardiac death. The
Company expects continued growth in the use of ICDs because of studies
indicating that ICDs may be a more effective therapy for ventricular
fibrillation than current drug therapies. The development of transvenous leads
(involving the use of intravenous catheters) for ICDs and smaller device sizes
that allow chest implantation will allow ICDs to be implanted in an outpatient
setting, probably in a dedicated device implantation suite, as opposed to a
more expensive hospital operating room. The Company believes growing use of
chest implantation of ICDs will provide an expanding market opportunity for
the 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
(remove) the abnormal tissue. RF ablation has also been used successfully to
treat certain ventricular tachycardia. Current research by
electrophysiologists is studying the use of catheter-based technology in an
interventional procedure to permanently cure patients with recurrent atrial
fibrillation.

  Products

  The Company's strategy has been to develop and market an integrated,
dedicated EP laboratory that 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 personnel requirements.
The Company's EP products offer specialized features specifically designed for
the electrophysiologist. The Company offers:

  .  a choice of ceiling or floor mounted c-arm positioners incorporating
     motorized isocentric c-arm movement, a feature that allows 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). The EP/X system, introduced in 1995, is an economical, state of
the art single plane x-ray imaging system designed to meet the general EP
requirements of most community and teaching hospitals. The EP/X is offered
with the Company's patented automatic pulse progressive fluoroscopy system as
an option. The

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list price of the system ranges from $400,000 to $450,000. As a result of
healthcare industry cost containment pressures, many of the Company's EP
system orders include the EP/X system.

  EP/X/2/(TM). The EP/X/2/, a cost-effective, ceiling suspended, bi-plane
fluoroscopy system, is designed to meet all the positioning requirements of
electrophysiologists, with easy access to the patient. The Company believes
that bi-plane imaging will be important for new, developing EP procedures such
as catheter treatment for ventricular tachycardia or atrial fibrillation. The
Company believes a ceiling suspended system is versatile enough for use in
either a dedicated EP laboratory or in a surgical suite. As a lower cost
alternative, the EP/X/2/ complements the Company's bi-plane Cardiac CX/Pegasus
imaging system. The list price of the EP/X/2/ system is well below the lowest
price of currently available competing systems. FDA 510(k) clearance for the
EP/X/2/ was obtained in 1997. The EP/X/2/ system, which has a list price of
$800,000, is installed in many leading EP laboratories throughout the United
States.

  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 over $1,000,000.

  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.

  EP Stimulators. The Company currently markets the DTU-215 EP Stimulator, a
four-channel stimulator for use in EP laboratories and has under development
the EP/Stim, a computer-driven stimulation system, that would allow the
physician to load his personal protocols for performing electrophysiology
procedures. The DTU-215 EP Stimulator lists for $22,000. During 1999, the
Company continued work on a 510(k) notification for the EP/Stim to the FDA,
and now believes this submission will occur during 2000 after extensive FDA
review.

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

  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 a fatty
substance called "plaque". Atherosclerosis affects both coronary and
peripheral arteries. Repair of partially blocked arteries that are impairing
the normal flow of blood has traditionally been through open surgical
procedures performed by vascular surgeons in a hospital operating room. In a
similar setting, vascular surgeons repair aneurysms (balloon like enlargements
of an artery) which, if left untreated, can rupture and cause death.

  As an alternative to open surgery, catheter techniques have been used for
over a decade to treat a significant number of vascular disorders. These
techniques are performed through the skin, rather than using open surgery, and
thus are less-invasive and costly. High performance x-ray imaging guidance is
required. 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 close up again over time. More
recently, stents, delivered to the narrowing of the artery on a

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catheter, have been implanted. Studies have shown that stents keep the artery
open longer. Catheter-based techniques to remove plaque have also been
successful and are frequently performed in conjunction with stent
implantation.

  Vascular surgeons are increasingly involved in hospital purchasing decisions
for x-ray imaging systems and are becoming trained in the performance of these
newer, less-invasive vascular (non-coronary) procedures. Historically,
relatively less sophisticated mobile c-arm intensifiers have provided the
required x-ray imaging capability for vascular surgeons. Now, however, more
complex vascular procedures, including carotid stenting and abdominal aortic
aneurysm repairs using stent grafts, require more complex x-ray imaging
capability.

  Abdominal aortic aneurysms are vascular enlargements which are difficult to
treat and, if left untreated, become increasingly susceptible to rupture,
usually resulting in death. Several companies have developed stent grafts that
are deployed across the aneurysm following the introduction of a catheter
through the skin. The x-ray imaging requirements for this form of repair are
demanding and typically cannot be met by the capabilities of mobile c-arm
intensifier systems. The Company believes that stent grafts will eventually
provide a less-invasive method of treating the estimated 190,000 abdominal
aortic aneurysms 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 associated with the procedure.

  In addition, the use of laparoscopic cholecystectomy (minimally-invasive
gall bladder removal) procedures has grown substantially over the last several
years. These procedures usually require the use of x-ray systems 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 will continue to prefer
catheter-directed techniques such as peripheral angioplasty and stent
placements in an operating room setting using angiographic x-ray imaging
systems with similar capabilities as found in dedicated x-ray laboratories.
The Company also believes that vascular surgeons will prefer newly evolving,
high risk procedures such as repairs of abdominal aortic aneurysms and carotid
and iliac stenting in an operating room where open surgery will be immediately
available if necessary.

  Products

  2000/2001 Series. The 2000/2001 Series of products include specialized x-ray
imaging systems designed to meet the x-ray imaging needs of the operating room
during open heart and other open surgical procedures. Specific features
include:

  .  a ceiling suspended isocentric c-arm x-ray imaging system,

  .  state of the art angiographic and digital image management capabilities,

  .  a surgical table with motorized control for rotation, tilting and
     elevation

  .  an unobstructed 80 inch cantilevered carbon fiber table top that
     supports the patient and permits full body x-ray imaging, and

  .  with the 2001 system, increased x-ray tube heat capacity and the ability
     to add a 12 inch image intensifier.

  An important feature of the 2000/2001 Series systems is high-line variable
frame rate progressive fluoroscopy, which allows x-ray dosage reduction of up
to 80% with no loss in image quality. The Company believes this feature is
important because many technicians who perform catheter placements, pacemaker
implantation and general orthopedics are not trained in radiology.


                                       8
<PAGE>

  The Company is not aware of any other company making dedicated x-ray imaging
systems for surgery with features similar to those of the 2000/2001 Series. A
number of manufacturers provide low cost mobile c-arm intensifier systems
designed for the x-ray imaging requirements during surgery. However, the
2000/2001 Series is believed to have several advantages over a mobile c-arm,
including improved image quality, ease and speed of positioning, x-ray dose
reduction and on-line angiographic image processing. The Company believes
these product features are particularly important to endovascular surgeons.
Since 1991, the Company's 2000/2001 Series systems have been distributed by
International Surgical Systems under a marketing agreement. ISS's list price
for the 2000/2001 Series products is approximately $499,000.

  Imager III. The Company's Imager III system is a universal x-ray imaging
system designed for a wide variety of endovascular and other interventional
radiology procedures. Incorporated in these systems are digital image
processing computers, which allow reduced x-ray dosage and improved image
quality, and sophisticated positioning control over the patient and the x-ray
source, permitting the physician to efficiently achieve all the angles
necessary to complete a procedure.

  With its own product (the DPS-100) and though arrangements with the digital
processing companies Infimed and Camtronics, the Company offers as an add-on
to the Imager III and other general purpose systems, the capability to
digitally capture and enhance images, allowing immediate diagnosis. The image
archiving capabilities and the possibility of fewer images per case offered by
digital capture devices can reduce film and personnel costs.

  The list price of Imager III systems ranges from $500,000 to $800,000
depending on the components included.

  General Radiology Products

  The Company also 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 requiring minimal patient movement, making it well
suited for emergency room applications. It is also a versatile general
radiographic system, allowing x-ray of the chest, skeleton, head, or other
extremities. The list price of the Traumex ranges from $140,000 to $200,000.

  Rad DX/MX. The Company manufactures and sells Rad DX, Rad MX, and other
general radiographic systems to hospitals and clinics. The Rad DX product line
includes x-ray imaging products used in clinics and physicians' offices, and
has a list price of about $35,000. The Rad MX, generally sold to hospitals,
has a list price of $80,000 to $120,000.

  DR1000C Digital Chest System. Under a joint product development and
marketing arrangement with Direct Radiography Corp. ("DRC"), a subsidiary of
Hologic, Inc., the Company has developed a dedicated digital chest system
incorporating DRC's DirectRay(TM) direct-to-digital x-ray capture system. To
date, the DR1000C is installed and operational at twelve sites, throughout
Europe and the US. See "Strategic Alliances". The list price of the DR1000C is
approximately $350,000.

  DR1000 Digital Traumex. The DR1000 Digital Traumex is a digital version of
the Company's versatile and highly successful Traumex emergency room and
general purpose x-ray system. Incorporating DRC's DirectRay(TM) direct-to-
digital x-ray capture system, several DR1000 systems are installed in Europe
and the United States. The DR1000 has a list price of $395,000.


                                       9
<PAGE>

  OEM Agreements

  The Company has designed and manufactured specialty x-ray imaging components
and subsystems for several leading medical products companies as an OEM. Sales
under OEM contracts amounted to about 27% of the Company's 1999 total
revenues. As a result of difficulty in forecasting market demand and generally
low gross margins, the Company has decided to de-emphasize the OEM business.

  GE Medical Systems. GE Medical Systems, currently the holder of a 7%
interest in the Company, has been a significant customer, accounting for
approximately 20.3% of the Company's 1999 total revenues. GE Medical Systems
has purchased Tilt-C positioners from the Company under the terms of its OEM
contract. The Tilt-C positioner is a multi-purpose 90 degree tilting table
with a cantilevered table top and sophisticated positioner controls. These are
used in biopsies and other interventional procedures, as well as in general
imaging studies. On March 29, 1999, the Company announced an agreement with
General Electric Company, on behalf of GE Medical Systems, under which 826,666
or 62% of the 1,333,333 shares of Series D Convertible Preferred Stock owned
by GE Medical Systems were exchanged for a non-exclusive right to manufacture
the Tilt-C system. The Company has completed its manufacturing activity for GE
Medical Systems in early 2000. In late 1999 GE Medical exercised its
registration right on the remaining 506,667 shares of Preferred Stock that is
owned. See also the related discussion at "Item 5-Market for Registrant's
Common Equity and Related Stockholder Matters--Risks Associated with Shares
Eligible for Future Sale" later in this report.

  Varian. Under its OEM contract with Varian, which expired in October 1998,
the Company provided a line of x-ray generators and imaging systems as
components of Varian's Ximatron radiotherapy simulator system. Under
requirements of this contract, the Company expects to continue to supply
Varian with parts for such system components for several years.

  Storz. Under its ten-year OEM agreement with Storz, which expired in 1998,
the Company designed and manufactured the c-arm x-ray imaging system used with
Storz Medical's Modulith SLX lithotripter (a non-invasive system for breaking
kidney stones), which is sold worldwide. The Company expects to continue
furnishing parts for the system components previously sold to Storz, as
required by the OEM contract.

  Picker. In March 1997, the Company agreed to supply cardiac catheterization
systems for international markets. During 1999 the Company and Picker agreed
to terminate the supply agreement for various products. Under a previous OEM
agreement that expired in February 1997, the Company supplied Picker with
radiographic and fluoroscopic systems, including the x-ray generator, imaging
chain, table and tube stand. During 1999, the Company and Picker agreed to
terminate the supply agreement for various products. The Company expects to
continue to provide parts for such systems over the next several years.

  ISS. The Company sells its 2000 and 2001 Series specialized 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. 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,
which originally expired in December 1998, has been extended to December 2000.

Risks Associated With OEM Agreements--Changes in OEM customer business
strategies, fluctuations in product demand, or contract renegotiations with
OEM customers could adversely affect shipments and/or profitability under OEM
contracts.

  The Company's decision to withdraw from the OEM business will result in
significant reduction in revenue in future years. For example, in 1999 the
Company sold to GE Medical over $6.3 million in Tilt-C systems as

                                      10
<PAGE>

well as a $6.2 million manufacturing license. OEM business activity has been a
significant portion of the Company's revenues in recent years, as shown in the
table below:

<TABLE>
<CAPTION>
                                               Year Ended December 31,
                                         --------------------------------------
                                           1999      1998      1997      1996
                                         --------  --------  --------  --------
                                         (In thousands, except percentages)
<S>                                      <C>       <C>       <C>       <C>
OEM revenues............................ $ 17,721  $ 14,604  $ 17,826  $ 31,422
Percentage of total revenues............     26.8%     24.4%     31.3%     40.5%
Total revenues.......................... $ 66,071  $ 59,804  $ 56,908  $ 77,508
</TABLE>

  Future OEM revenues are planned to approach zero as the Company gradually
fulfills its obligation to supply spare parts for its prior OEM customers.
While the Company plans to continue to have collaborative agreements with
companies in the diagnostic imaging industry, these agreements will mainly
include the distribution and sale of complete primary imaging systems as
opposed to the supply of components and subsystems to OEM customers. In
addition, the Company plans to provide services such as installation, warranty
service and service contracts for the end use customers purchasing the
Company's products. The Company believes that its OEM business has produced
lower than required gross margins. In addition, demands for research and
development expenditures have not allowed the Company to focus on development
of its own proprietary products.

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 control over the sales process and customer contacts, and
ongoing service revenues. The Company believes that sales of its more
sophisticated products such as breast imaging and biopsy systems, EP and
endovascular systems may be enhanced by 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 can be more effectively sold by dealers because such
products require broader distribution and more competitive pricing. Therefore,
the Company primarily markets its general radiology systems through dealer
organizations. Some of these dealers market the Company's entire product line,
while others focus exclusively on the general radiology market. As of December
31, 1999, the Company had 18 direct sales people whose territories primarily
cover large metropolitan areas and about 10 independent dealers covering the
remainder of the United States. The Company also expects to continue to
benefit from a marketing alliance with Ethicon Endo-Surgery, which has a
direct sales organization and marketing resources substantially larger than
those of the Company. See "Strategic Alliances."

  Historically, the Company's marketing efforts have been focused in the
United States. However, the Company has also attempted to expand 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 relationships in Asia and Europe. International sales have also been
made through dealers in Latin America and the Middle East. In recent years,
the Company's efforts to expand internationally have met with limited success.
Therefore, the marketing alliances that have produced encouraging results in
the United States may, in the future, receive greater emphasis internationally
as a means of expanding the Company's markets. As of December 31, 1999, the
Company had 10 direct sales people and about 30 dealers conducting the
Company's international sales efforts.

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

  The Company's service organization is responsible for installing its
products and providing warranty service. Products sold by the direct sales
force carry limited warranties covering parts and labor for periods

                                      11
<PAGE>

ranging from six to twelve months. Products sold through dealers and to OEM
customers carry more limited warranties, with terms ranging from six to twelve
months and typically covering only parts or components. Service personnel
offer maintenance service either under contracts or at hourly rates. The
direct service organization also provides maintenance service in some foreign
countries. In other foreign countries, the Company utilizes dealers and third
parties to provide maintenance service for its products. As of December 31,
1999, the Company employed 38 field and technical support engineers and 13
administrative and management personnel in its U.S. service organization.

International Operations--The costs, uncertainty of product acceptance, and
other elements of doing business internationally could affect whether the
Company can be successful in establishing profitable international operations.

  Revenues from customers based outside the United States accounted for 15.4%,
15.6%, and 18.7% of the Company's total revenues in 1999, 1998, and 1997,
respectively. These revenues included sales to foreign OEM customers of 3.2%,
11.5%, and 6.8% of the Company's 1999, 1998, and 1997 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.

See Note 11 "Operating and Geographic Segment Information", of Notes to
Consolidated Financial Statements for additional information.

Strategic Alliances--The Company's ability to meet manufacturing demand,
achieve market acceptance of new products, and obtain financial sponsorship
will determine the success of strategic alliances.

  The Company has strategic marketing and distribution alliances that it
believes will allow it to compete more effectively in the markets for its
products.

  Ethicon Endo-Surgery, Inc., a Johnson & Johnson company. Since October 1997,
the Company has been operating under a marketing partnership with Ethicon
Endo-Surgery, Inc. 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.
To date, the Company has been able to attain sufficient manufacturing capacity
necessary to meet the additional demand generated by this marketing
partnership.

  In December 1998, the Company entered into an agreement with Ethicon Endo-
Surgery Europe for the distribution of the Mammotest system in Europe. Under
this agreement, the Company will provide applications and service support,
while EES Europe is responsible for sales of the Mammotest system. Under the
terms of this agreement, in the event the Company in the future was unable to
meet certain potential delivery obligations, Ethicon Endo-Surgery could have
the right to demand a liquidated damages amount of $600,000 and terminate the
agreement.

                                      12
<PAGE>

  Digital Radiography Corp. In November 1997, the Company entered into an
alliance with Digital Radiography Corp., now a subsidiary of Hologic, Inc.
under which the Company and DRC jointly developed digital radiographic systems
utilizing DRC's FDA-cleared DirectRay(TM) digital image detector technology
and the Company's positioning and x-ray components. Potential clinical
benefits of digital image acquisition over film-based 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.

Under a draft agreement, manufacturing, installation, service, and support
functions would generally be performed by the Company, while marketing and
sales would be performed by both companies. The Company is currently operating
under the draft agreement.

  The first system developed under this alliance was a dedicated digital chest
system (DR1000C), which is now installed in twelve sites. The next major
product was a digital version of the Company's versatile and highly successful
Traumex emergency room and general purpose x-ray system (DR1000). Currently,
over twenty systems are installed globally. See "General Radiography
Products".

  In January 1999, the Agfa-Gevaert Group announced an agreement to acquire
Sterling, the parent company of Direct Radiography Corp., but not Direct
Radiography Corp. itself. In June 1999, Hologic acquired DRC from Sterling.
While the Company and Hologic are working under the terms of a draft agreement
negotiated with Sterling, there is no agreement between the parties at this
time.

  Kodak. On November 28, 1999, Kodak announced at the Radiological Society of
North America in Chicago that Analogic, in conjunction with the Company and
Digital Radiography Corp., will build two digital systems for Kodak, the
DR5000 and DR9000. Analogic since that time has purchased, on the behalf of
Kodak, several systems from the Company and has provided a purchase order to
the Company for more than 50 systems. While the Company, Kodak and Analogic
continue to work together to deliver these systems, there is no formal
agreement between the companies at this time.

Backlog

  The Company's backlog generally includes only product orders for which
delivery is requested within the upcoming twelve months. Although the Company
has orders with longer than twelve month lead times, such orders are included
in backlog only when the requested delivery date falls within a twelve month
period.

  As of December 31, 1999 and 1998, the Company's backlog was approximately
$14.2 million and $26.9 million, respectively. About half of the reduction in
the Company's backlog was from the planned withdrawal from the OEM business.
The balance in backlog reduction results from manufacturing improvements and
the elimination of overdue shipments to customers. Backlog as of any
particular date should not be relied upon as being indicative of the Company's
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(R), its full field digital mammography
system employing CCD imaging technology. In addition, the Company is expending
significant research efforts to integrate breast ultrasound with the Mammotest
system (MammoSound(TM)). Research and development expenditures totaled $5.9
million, $6.4 million and $6.0 million in 1999, 1998, and 1997, respectively.

                                      13
<PAGE>

  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 limited funding for the clinical
testing of SenoScan.

  The Company also has a research arrangement with the University of Toronto's
Department of Medical Physics to jointly evaluate the Company's digital
mammography SenoScan(R) 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, 1999, the Company
employed 24 engineers and technicians in research and development.

Risks of Technological Change and New Products--Quick response to
technological change will be critical to the Company's future success.

  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. Alternative surgical
procedures or technologies or new medications may also be developed and
marketed. 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. Therefore, 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 in a timely or cost-effective
manner, 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 success of new
products is dependent on successful product design efforts, receipt of FDA
clearances, and upon market acceptance.

  The Company has a number of potential new products in various stages of
development. Current research and development efforts are focused on the
development of SenoScan, its full-field digital mammography system, for which
clinical trials are continuing but which has not yet received pre-market
clearance from the FDA. In addition, significant efforts are being expended on
ultrasound, as well as full-field digital mammography. These products involve
technological innovation and require significant planning, design, development
and testing at the technological, product and manufacturing process levels.
Significant investments in research and development, equipment, inventory,
manufacturing and marketing are also required. Lengthy and expensive clinical
trials could also be required prior to submission to the FDA for 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 strategies of competitors, some of which hold greater
resources than the Company, could adversely impact the Company's success.

  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
advantages in one or more of these areas:

                                      14
<PAGE>

  .  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,
including GE Medical Systems, Siemens, Philips, Toshiba, Shimadzu, and Picker,
as well as a number of other companies such as Trex Medical Corporation. 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 more quickly adapt 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. 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, 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. In December 1998, following the acquisition of
U.S. Surgical Corporation by Tyco Corporation, Trex announced the termination
of its OEM agreement with U. S. Surgical for the sale of the stereotactic
table manufactured by Lorad on a private label basis. In December 1999 Trex
Medical announced it had agreed to repurchase $4.7 million in inventory from
USSC. It is expected that these repurchased systems will be available on the
market at low prices, harming the Company's ability to sell its system at
normal prices. See Item 3 "Legal Proceedings" for a discussion of the
Company's patent infringement litigation against Lorad.

Government Regulation--The Company's success is dependent on complying with
the complex regulatory requirements of a variety of U.S. and international
governmental agencies.

  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
"Quality Systems Regulations", which include testing, quality control and
documentation procedures for design and manufacturing. 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 later that
year. Following an inspection which concluded in December 1996, the FDA issued
Inspectional Observations Form 483 ("Form 483") and a Warning Letter
concerning manufacturing practices at its Denver facility. The FDA requested a
written response to the Warning Letter regarding planned corrective actions
and a favorable third-party certification of the Company's manufacturing and
quality systems. These actions were completed. In October 1998, following a
periodic inspection, the FDA issued a Form 483 regarding possible deficiencies
in manufacturing, quality, and documentation practices. The Company has
submitted its response to the Form 483 and is instituting corrective actions.

  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

                                      15
<PAGE>

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 recent issuance of another Form 483
increases the possibility that one or more of these sanctions could be imposed
in the future. 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. 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 a requirement to file
medical device reports 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 reportable events, in its quality control
system to make any changes necessary to reduce or eliminate similar events in
the future. The FDA utilizes Medical Device Reports 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 pre-market approvals. The filing of Medical Device Reports
indicating unexpected product hazards or the failure to comply with medical
device reporting requirements could have a material adverse effect on 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 under the FDA's 510(k) pre-market
notification process, which is generally less time consuming than the more
involved pre-market approval process for Class III medical devices (a "PMA").
The Company believes that most of its currently anticipated future products
and substantial modifications to existing products will be eligible for the
510(k) pre-market notification process. However, the FDA has now provided two
pre-market approval pathways for full-field digital imaging mammography
systems like the SenoScan system being developed by the Company. The Company
plans to submit either a 510(k) pre-market notification application or a PMA
for its SenoScan system during 2000. The FDA has provided the Company clinical
study requirements that, if met, would allow a 510(k) submission for the
SenoScan system. The Company will decide which clearance pathway is
appropriate following analysis of its clinical data. The Company plans to
submit a PMA if the data would not allow a 510(k) submission.

  Under a PMA the FDA has the right to 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) pre-market 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 incur
significant costs in obtaining or maintaining its foreign regulatory
approvals. The Company has obtained the certifications necessary to permit the
"CE" mark to be attached to those products currently being sold in Europe. The
CE mark is an international symbol of quality that is now required for sales
into the countries which are members of the European Union. While the Company
has 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
approvals.


                                      16
<PAGE>

  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 concerning its radiation
emitting products to the FDA and, sometimes, to the first purchasers of the
products. Product Defect Reports describe any safety related product defects
or the failure of a product to conform to an applicable standard of which the
Company has become aware. Additionally, the Company is required to submit
Accidental Radiation Occurrence 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 a Medical Device Report and an Accidental Radiation Occurrence
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 currently engaged in discussions with the FDA regarding the
FDA's order to recall a number of its diagnostic mammography systems. The
Company's position, mirrored by the National Electrical Manufacturers
Association, is that the FDA's position is inconsistent with prior performance
standards published for mammography systems. There is no assurance, however,
that the Company will not be required to recall over 500 mammography systems.
The Company is unable to estimate the cost of such a recall at this time.

  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--The Company's future success is very dependent on
the reimbursement policies of various governmental agencies.

  Medicare reimbursement for hospitals represents about 40% of all hospital
revenues. Since 1983, Medicare has limited reimbursement to a fixed amount,
based on specified categories of diagnosis known as Diagnosis Related Groups.
Hospital profit margins have been reduced significantly since the introduction
of fixed reimbursement amounts based on Diagnosis Related Groups. 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, Medicare
reimbursement rates are reduced to reflect the adoption of a new procedure or
technique and, as a result, hospitals are generally willing to implement new
cost saving technologies before these downward adjustments in rates become
effective. 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 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.

  Beginning in 1992, Medicare phased in over a five year period a system under
which 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.

                                      17
<PAGE>

  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. Other
legislation has limited Medicare reimbursement of these fees, which has 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. For example, the Balanced Budget Act of
1997, enacted by Congress in August 1997, reduces capital expenditure payments
to hospitals by some two percent for the period October 1, 1997 through
September 30, 2002. 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 policies of government
agencies 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 facility in
Denver, Colorado. Production processes 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 some 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, 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 costs. Moreover, there can be no assurance 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.

Manufacturing and Operating Risks--The Company's success is dependent upon
establishing appropriate manufacturing processes, resolving supply issues,
obtaining adequate manufacturing resources, and being able to contain
manufacturing costs.

  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.

                                      18
<PAGE>

Product Liability, Market Withdrawal, and Product Recalls--Potential product
defects or related performance or safety issues might result in product
recalls, loss of market share and significant legal or insurance costs.

  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 product recalls, which could have a material adverse affect on
the Company's business, financial condition and results of operations.

Patents and Intellectual Property--Patents, trademarks, and confidentiality
agreements could be ineffective in protecting the Company's proprietary
information.

  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.

  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, however, that the Company's current or future patents 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 proprietary rights to the same
extent as 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 be found to have infringed on patents of others
and, as a result, could be required to alter its products or processes or
acquire licensing rights. Such rights might not be available on commercially
reasonable terms, if at all, requiring the Company to cease making and selling
any infringing products and pay damages for past infringement.

  The Company also relies on trade secrets and proprietary know-how that 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 an individual during the
course of his or her relationship with the Company is not to be disclosed to
third parties, except in specific circumstances. They also generally provide
that all inventions conceived by the individual in the course his or her
services to the Company are 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.

  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. On March

                                      19
<PAGE>

29, 1999, the Company announced an agreement to transfer to GE Medical Systems
non-exclusive rights to manufacture this OEM product, in exchange for 826,666
or 62% of the 1,333,333 shares of Series D Convertible Preferred Stock owned
by GE Medical Systems. See also related discussion at "Item 5--Market for
Registrant's Common Equity and Related Stockholder Matters--Risks Associated
with Shares Eligible for Future Sale" later in this report. 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), SenoScan(R), EPIC(R),
Mammovision(R), and TRAUMEX(R) are registered trademarks of the Company, and
Mammotest Plus(TM), Mammotest Plus "S"(TM), Mammovision Plus(TM),
MammoSound(TM), HFX(TM), HFX Plus(TM), Cardiac CX/Pegasus(TM), Target on
Scout(TM), EPACE(TM), and EP/Stim(TM), EP/X(TM), and EP/X/2/(TM) are
trademarks of the Company.

Employees

  As of December 31, 1999, the Company had 289 employees, including 144 in
manufacturing, 24 in engineering, 99 in sales, marketing and service and 22 in
administration. None of the Company's employees are parties to a collective
bargaining agreement. The Company considers relations with its employees to be
satisfactory.

Risk of Dependence on Key Personnel--The departure of key employees could
adversely affect the Company's future success.

  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
nor, typically, with other executives. 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.

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 (running through June 2002), estimated facility closing costs, severance
and certain other non-recurring costs associated with this decision. In
January 1999, the Company fulfilled its remaining obligations for this
facility by agreeing to a $1.0 million lease buyout, completing the Addison
closure. Not all production had been successfully transferred, however, and in
the second quarter of 1999, the Company accrued an additional $750,000
provision for the Addison closure, principally for the discontinuing of a
product line formerly produced in that facility, including related acceptance
issues. See Note 6 of Notes to Consolidated Financial Statements.

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

                                      20
<PAGE>

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:

<TABLE>
<CAPTION>
          Member                                      Affiliation
          ------                                      -----------
   <C>                                  <S>
   David G. Bragg, M. D................ Professor Emeritus and Former Chairman,
                                        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
</TABLE>

ITEM 2. PROPERTIES

  The Company maintains leased office and manufacturing facilities in Denver,
Colorado. This facility includes approximately 120,000 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 stockholder. The Denver facilities
include the Company's headquarters. The Company also leases office space in
Denmark, Germany, Australia and China. The Company believes its present
facilities can accommodate several years of growth.

  In January 1999, the Company completed the closure of its Addison
manufacturing facility. See also Item 1, "Other Developments".

ITEM 3. LEGAL PROCEEDINGS

  The Company is a defendant in various lawsuits incident to the operation of
its business. In addition, the Company may from time to time be engaged in
litigation or other legal proceedings concerning disputes with its OEM
customers. Management believes that there are no pending legal proceedings
that would have a material adverse effect on the Company's consolidated
financial position.


                                      21
<PAGE>

  In April 1992, the Company filed a patent infringement lawsuit against
Lorad, now owned by Trex Medical, 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. In April 1998, following receipt of patent No.
5,735,264, the Company filed a second patent suit against Trex Medical, also
in U. S. District Court for the District of Colorado. In July 1998, the U.S.
District Court granted the Company's Motion to Consolidate the two patent
infringement suits. The consolidated suit 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. Pre-trial discovery and deposition activity is now complete.
A Markman hearing was held June 2, 1999 regarding claims construction
interpretation. The parties await the judge's decision. The Company expects a
final pre-trial conference to occur in the summer of 2000, and that a trial
date may be set at that time.

  The company was party to a lawsuit, as guarantor of work performed by a now-
bankrupt dealer in the United Kingdom. Damages and legal fees totaling
approximately $1.5 million were being sought for allegedly deficient pre-
installation site review and installation work. The trial ended on February
25, 1999 and the Company prevailed. The plaintiff's appeal has subsequently
been denied. The Company foresees no further expenses related to this issue.

  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. The Company has met with the patent holder and is in the process of
discussing terms of a license for the patent in question.

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

  Not Applicable.

                                      22
<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.

<TABLE>
<CAPTION>
                                                                     High   Low
                                                                     ----- -----
      <S>                                                            <C>   <C>
      1998
      First Quarter................................................. $5.63 $3.63
      Second Quarter................................................  5.00  3.31
      Third Quarter.................................................  4.44  2.25
      Fourth Quarter................................................  3.13  1.91
      1999
      First Quarter................................................. $2.38 $1.25
      Second Quarter................................................  2.00  1.38
      Third Quarter.................................................  1.63  0.94
      Fourth Quarter................................................  2.38  0.91
</TABLE>

  As of March 1, 2000, there were about 250 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--Significant fluctuations in the
Company's quarterly operating performance or in stock market performance
generally could cause the price of the Company's Common Stock to be highly
volatile.

  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 of Fluctuations in Quarterly Results of Operations--Various factors
identified in this report are likely to continue to cause significant
fluctuations in operating results.

  The Company has experienced fluctuations in its quarterly operating results
and anticipates that such fluctuations will continue and could intensify.
Factors giving rise to fluctuations in operating results include, but are not
necessarily limited to, those identified in the "Overview" section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Form 10-K. Fluctuations in operating
results may result in volatility in the price of the Common Stock. Although
the Company has taken significant steps to return to profitability, there can
be no assurance that profitability will be achieved or, if achieved, that
levels of profitability will not vary significantly between quarters.

  Based on the foregoing, the Company believes that future revenues, expenses,
and operating results are likely to vary significantly from quarter to
quarter. As a result, quarter-to-quarter comparisons of operating results are
not necessarily meaningful or indicative of future performance. Further, it is
likely that, from time to time, the Company's future quarterly operating
results will be below the expectations of public market analysts or investors.
In such event, or in the event that adverse medical device market conditions
prevail, or are perceived

                                      23
<PAGE>

to prevail, with respect to the Company's business or generally, the market
price of the Company's Common Stock would likely be materially adversely
affected.

Risks Associated with Shares Eligible for Future Sale--Conversion of the
convertible preferred stock held by G.E. Medical, exercises of a significant
number of stock options, or other substantial sales of Common Stock could
adversely effect the market price of Common Stock.

  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 1, 2000 there
were approximately 7,058,000 shares of Common Stock outstanding, and there
were 1,094,000 shares reserved for issuance upon exercise of outstanding stock
options, 462,000 of which were then exercisable. Additionally, 506,667 shares
of the Company's Series D Convertible Preferred Stock ("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 demanded registration rights with respect to
this stock, and the stock is currently available for sale upon conversion to
common stock.

  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--Policies
of the Company could be significantly influenced by the voting power of the
Company's officers, directors, and significant shareholders.

  The Company's officers and directors beneficially own, in the aggregate,
approximately 20% of the Company's Common Stock as of March 1, 2000. As a
result, the officers and directors are 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 506,667 shares of the Company's
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 7% 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--Certain terms of the Company's charter and
other agreements, and the concentration of share ownership, could discourage
purchases of or offers to purchase the Company, even if favorable to
stockholders.

  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

                                      24
<PAGE>

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, 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 506,667 shares of Common Stock, which would
then equal approximately 7% of the Company's outstanding Common Stock.
Pursuant to an agreement between the Company and General Electric Company
announced March 29, 1999, GE Medical Systems acquired non-exclusive Tilt-C
manufacturing rights in exchange for 826,666 or 62% of the 1,333,333 shares of
Convertible Preferred Stock previously owned by GE Medical Systems. The shares
of Convertible Preferred Stock owned by 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 7
"Stockholders' Investment," of Notes to Consolidated Financial Statements for
information regarding the Company's Retention Bonus Plan.

                                      25
<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, 1999 and 1998, and the consolidated statement of
operations data for each of the three years in the period ended December 31,
1999 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, 1997, 1996 and 1995, and
the consolidated statement of operations data for the two years in the period
ended December 31, 1996 is 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,
                                  --------------------------------------------
                                   1999     1998      1997     1996     1995
                                  -------  -------  --------  -------  -------
                                   (In thousands, except per share data)
<S>                               <C>      <C>      <C>       <C>      <C>
Statement of Operations Data:
Revenues
  Products and services.........  $59,871  $59,804  $ 56,908  $77,508  $76,750
  Sale of manufacturing license
   (Note 7).....................    6,200      --        --       --       --
                                  -------  -------  --------  -------  -------
    Total.......................   66,071   59,804    56,908   77,508   76,750
Cost of sales
  Products and services.........   36,697   36,883    39,252   47,073   46,905
  Sale of manufacturing license
   (Note 7).....................      400      --        --       --       --
                                  -------  -------  --------  -------  -------
    Total.......................   37,097   36,883    39,252   47,073   46,905
                                  -------  -------  --------  -------  -------
      Gross profit..............   28,974   22,921    17,656   30,435   29,845
                                  -------  -------  --------  -------  -------
Operating expenses:
  Research and development......    5,850    6,394     6,043    6,746    6,690
  Selling, marketing and
   service......................   15,783   15,299    16,323   18,776   15,461
  General and administrative....    5,945    5,284     4,988    4,863    4,800
  Litigation loss...............      --       500       --       --       --
  Restructuring provisions......      750      --      2,900      --       --
                                  -------  -------  --------  -------  -------
    Total operating expenses....   28,328   27,477    30,254   30,385   26,951
                                  -------  -------  --------  -------  -------
(Loss) earnings from
 operations.....................      646   (4,556)  (12,598)      50    2,894
Interest expense................     (753)    (357)     (181)    (595)    (678)
Interest income.................       91       74       271      138       62
Other income (expense), net and
 unusual charges................     (327)      38      (760)    (163)      (1)
                                  -------  -------  --------  -------  -------
(Loss) earnings before income
 taxes..........................     (343)  (4,801)  (13,268)    (570)   2,277
Provision (benefit) for income
 taxes..........................      --     2,002       --      (209)     --
                                  -------  -------  --------  -------  -------
Net (loss) earnings.............  $  (343) $(6,803) $(13,268) $  (361) $ 2,277
                                  =======  =======  ========  =======  =======
Net (loss) earnings per common
 share
  Basic.........................  $  (.05) $  (.97) $  (1.91) $  (.06) $   .41
                                  =======  =======  ========  =======  =======
  Diluted.......................  $  (.05) $  (.97) $  (1.91) $  (.06) $   .36
                                  =======  =======  ========  =======  =======
Shares used to calculate (loss)
 earnings per share
  Basic.........................    7,029    6,980     6,949    6,299    5,561
                                  =======  =======  ========  =======  =======
  Diluted.......................    7,029    6,980     6,949    6,299    6,331
                                  =======  =======  ========  =======  =======
Balance Sheet Data (at end of
 period):
Working capital.................  $14,739  $19,095  $ 25,179  $36,187  $23,635
Total assets....................   41,009   50,969    49,144   60,432   55,650
Total debt......................    7,134    7,425       533      432    4,722
Total stockholders' investment..   21,716   28,430    35,185   47,805   33,584
</TABLE>

                                      26
<PAGE>

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

  Forward-looking Statements and Risks of Investing in the Company

  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 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 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
about:

  . resolutions of deficiencies noted by the FDA,

  . the adequacy of financial resources,

  . future operating results including revenues and expenses,

  . sales under the Company's strategic alliances, OEM agreements and
    otherwise, including marketing arrangements for Mammotest and other
    products,

  . the status of SenoScan and other new products in development,

  . the size and growth of the Company's markets,

  . the success of efforts to reduce manufacturing and other costs,

  . manufacturing capacity and capabilities,

  . submissions to the FDA and receipt of FDA approvals and clearances,

  . availability of raw materials and components, 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 risks of investing in the Company set forth:

(1)  in the Business section of this Form 10-K under the headings: "Risks
     Associated with OEM Agreements," "Sales and Marketing," "International
     Operations," "Strategic Alliances", "Risks of Technological Change and
     New Products," "Risks of New Product Development and Market Acceptance,"
     "Competition," "Government Regulation," "Government Reimbursement,"
     "Manufacturing and Operating Risks," "Product Liability, Market
     Withdrawal, and Product Recalls," "Patents and Intellectual Property,"
     "Risk of Dependence on Key Personnel,"

(2)  in the Market for Registrant's Common Equity and Related Stockholder
     Matters under the headings "Risk of Price Volatility of Common Stock,"
     "Risks of Fluctuations in Quarterly Results of Operations," "Risks of
     Fluctuations in Quarterly Results of Operations," "Risks Associated with
     Shares Eligible for Future Sale," "Risks Associated with Control by
     Management and Certain Stockholders," and "Certain Anti-Takeover
     Effects,"

(3)  in the Management's Discussion and Analysis of Financial Condition and
     Results of Operations ("MD&A") section under the "Overview," "Year 2000
     Update," "Quantitative and Qualitative Disclosures About Market Risk,"
     "FDA Regulation," and "Recent Developments" headings,

(4)  elsewhere in the Business, MD&A, and other sections of this Form 10-K,

(5)  and in the Company's Quarterly Reports on Form 10-Q under the "Overview"
     section of MD&A and elsewhere.

                                      27
<PAGE>

Overview

 Risk of Continued Losses

  The Company designs, manufactures and markets specialty and general purpose
medical imaging systems for the diagnosis and treatment of disease. The
Company's newer products are directed towards medical specialties, such as
diagnosing and treating breast cancer, heart disease and vascular disease, in
which image-guided, minimally invasive therapies are replacing open surgical
procedures.

  Except for the last nine months of 1995, the first nine months of 1996, the
last three months of 1999, and excluding the first quarter 1999 one-time gain
from the sale of a manufacturing license, the Company has experienced
significant losses since 1993. Significant factors giving rise to recent
losses include: costs associated with excessive manufacturing capacity;
intense competition for certain of the Company's products; declining margins
and demand for OEM products; and a general slowdown in capital expenditures by
hospitals. The Company cannot predict when it will return to profitability,
although it has taken significant steps to reduce costs and improve sales,
including:

  . entering into distribution partnerships in 1997 and 1998 with Ethicon
    Endo-Surgery for the marketing and sale of Mammotest breast biopsy
    systems in the United States and in Europe,

  . entering into a strategic alliance with Direct Radiography Corp., a
    subsidiary of Hologic, Inc. for the marketing and sale of digital
    radiography products (See the "Strategic Alliances" heading of the
    Business Section of this Form 10-K),

  . closure of the Company's Addison, Illinois manufacturing facility, and

  . other actions to reduce operating expenses and manufacturing costs.

  Improvement in the Company's results of operations will depend on many
factors, including:

  . sufficient demand for the Company's products to offset the effects of the
    reductions in OEM business,

  . the adequacy of financial resources,

  . the Company's ability to maintain or increase gross margins,

  . the effectiveness of efforts to control manufacturing and other costs,

  . effective negotiation and implementation of product distribution
    arrangements,

  . effective implementation of domestic and international marketing and
    sales strategies, and

  . the development and introduction of new products that compete
    successfully.

  Because improved factory utilization was believed to be a key factor in
returning to profitability, the Company decided in the third quarter of 1997
to close its Addison, Illinois manufacturing facility and outsource or
transfer Addison production. In January 1999, the Company fulfilled its
remaining obligations for this facility by agreeing to a $1.0 million lease
buyout, completing the Addison closure. Not all production had been
successfully transferred, however, and in the second quarter of 1999, the
Company accrued an additional $750,000 provision for the Addison closure,
principally for the discontinuing of a product line formerly produced in that
facility, including related acceptance issues. See Note 6 of Notes to
Consolidated Financial Statements.

  The Company expects continued significant quarterly and annual fluctuations
in revenues, operating results and net income, depending on such factors as:

  . delays in development projects,

  . the timing issues with respect to the receipt, manufacture, and shipment
    of large system product orders,

  . new product introductions or marketing initiatives by the Company or its
    competitors,

  . the effects of managed healthcare on capital expenditures and
    reimbursement,

  . increases in marketing, research, and other costs in relation to sales,

                                      28
<PAGE>

  . regulatory clearance of new products,

  . the effect of general economic conditions of the Company's markets,

  . seasonal patterns and other timing issues affecting customer purchasing
    decisions, and

  . the outcome of claims against the Company.

  These factors can occur unexpectedly and, because many of the Company's
costs are fixed, the Company may not be able to sufficiently reduce its costs
in periods when revenues are less than anticipated and may, as a result,
suffer unexpectedly larger losses.

  Over the past several years, the Company has attempted to expand its
international sales and marketing efforts, which had resulted in losses from
its international operations until this year. In 1999, the Company showed a
profit internationally largely due to the distribution partnership with
Ethicon-Endo Surgery. Additionally, the Company's exposure to foreign currency
and other international business risks may increase as its international
business grows. The Company attempts to minimize these risks by: (1) generally
requiring payments in U.S. dollars, (2) using letters of credit, and (3)
requiring advance deposits and through other means. There can be no assurance,
however, international sales efforts will be successful or that associated
risks can be minimized. International revenues declined substantially in 1998
and 1997, but increased significantly during 1999.

  Sales of the Company's Mammotest breast biopsy systems have fluctuated
significantly in recent years, based on changes in competitive conditions. For
example, Mammotest sales were lower in 1997 as compared to 1996, due in part
to aggressive competition within the surgical stereotactic core needle breast
biopsy market from U.S. Surgical, which was then selling breast biopsy systems
purchased from Trex Medical, the Company's principal competitor in this
market. The Company's sales in this market improved in 1998, in part due to
its marketing partnership with Ethicon-Endo Surgery. In December 1998, U. S.
Surgical decided to cease distributing breast biopsy systems and, therefore,
terminated its supply agreement with Trex Medical. While long-term competitive
conditions may become more favorable to the Company, it is uncertain whether
the near-term impact on Mammotest sales will be favorable or unfavorable. In
1999, sales in this market improved due to improved manufacturing efficiency
and the continuing partnership with Ethicon-Endo Surgery.

  The Company's partner in developing digital imaging products for the general
radiography market had been Direct Radiography Corp., a subsidiary of Sterling
Diagnostic Imaging. In early 1999, the Agfa-Gevaert Group acquired Direct
Radiography's parent company, Sterling Diagnostic Imaging, Inc. Direct
Radiography was not included in this acquisition, but was later sold to
Hologic Corporation in June 1999. The Company does not have a definitive
agreement with Direct Radiography or Hologic. At this time the Company cannot
predict whether and if an agreement will be reached.

Year 2000 Update

  The Company is not currently aware of, nor anticipates, any significant
problems among its customers as a result of the failure of the Company's
products to differentiate between years in the 1900s and years in the 2000s.
In addition, the Company did not experience any serious problems among the
various computer systems used by the Company and, to the best of the Company's
knowledge, none of its significant suppliers experienced and serious problems
among the various computer systems used by such suppliers. The Company
incurred no significant expenses with regards to the Year 2000 project that
fell outside of routine upgrades to desktop personal computers and hardware.

Quantitative and Qualitative Disclosures About Market Risk

  Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows of the Company due to adverse
changes in financial and commodity market prices and rates. The Company is
exposed to market risk in the areas of changes in United States interest rates
and changes in foreign currency exchange rates as measured against the United
States dollar. These exposures are directly related to its normal

                                      29
<PAGE>

operating and funding activities. Historically and as of December 31, 1999,
the Company has not used derivative instruments or engaged in hedging
activities.

 Interest Rate Risk

  The interest payable on the Company's revolving line of credit is variable
based on the prime rate and, is therefore, affected by changes in market
interest rates. At December 31, 1999, approximately $5.8 million was
outstanding with an interest rate of 9.50% (prime plus 1%). The line of credit
is cancelable upon 30 days notice by the lender. On April 13, 2000, the
Company entered into a three-year line of credit with a bank for $8.0 million,
which replaces the line of credit in place at December 31, 1999. Borrowings
under the new agreement will bear interest at the bank's prime rate, 9.0% at
March 31, 2000. If the interest rate on the Company's line of credit had been
2% higher than the rates in effect for its year ended December 31, 1999, the
Company would have incurred additional interest expense of approximately
$160,000 for the year, with an associated $.02 increase in the per share loss
for that year. The Company attempts to manage its interest rate risk by
monitoring interest rates which are available under other types of lending
instruments and through other lenders.

 Foreign Currency Risk

  The Company has wholly-owned subsidiaries in Australia, Germany and France.
Local assets and liabilities, principally intercompany debt to the parent
company, are recorded in local currencies, thereby creating exposures to
changes in exchange rates. These changes may positively or negatively affect
the Company's operating results. As disclosed at Note 11 to Notes to
Consolidated Financial Statements, revenues in foreign currency through all
foreign subsidiaries constituted approximately 15% of 1999 total revenues for
the Company. The Company therefore does not believe that foreseeable near-term
changes in exchange rates will have a material effect on future earnings, fair
values or cash flows of the Company and has chosen not to enter into foreign
currency hedging instruments. There can be no assurance that such an approach
will prove to have been successful, especially in the event of a significant
and sudden decline in the value of any of the applicable local currencies.

FDA Regulation

  The Company is subject to periodic inspections by the Food and Drug
Administration, whose primary purpose is to audit the Company's compliance
with Quality System Regulations, which include testing, quality control and
documentation procedures. In March 1995, the Company's Denver facility
received a Warning Letter from the FDA concerning documentation and other
deficiencies. The Company rectified these deficiencies and resolved the matter
with the FDA in June 1995. In December 1996, following an inspection of the
Denver facility, the FDA issued Inspectional Observations Form 483 and a
subsequent Warning Letter regarding manufacturing practices. As required, the
Company responded as to planned corrective actions and obtained a favorable
third-party certification of manufacturing and quality systems. In October
1998, following a subsequent inspection, the FDA issued a Form 483 regarding
possible deficiencies in manufacturing, quality, and documentation practices.
The Company submitted its response to the Form 483 and is instituting
corrective actions.

  Failure to satisfy FDA requirements can result in: (1) the Company's
inability to receive awards of federal government contracts; (2) an inability
to receive new marketing or export clearances; or (3) FDA enforcement actions
including, among other things, product seizure, injunction, and/or criminal or
civil proceedings which could be initiated without further notice. Although
the Company strives to operate within FDA requirements, there can be no
assurance that deficiencies can be corrected or that the Company can satisfy
future FDA compliance concerns. Sanctions resulting from FDA compliance
reviews or related delays in product clearances could have a material adverse
effect on the Company.

                                      30
<PAGE>

Results of Operations, Excluding Restructuring Charges and Other One-Time
Items

  The company's results of operations for the years ended December 31, are as
follows (in thousands):

<TABLE>
<CAPTION>
                                                 Increase (Decrease)
                                         -------------------------------------
                                                                        Net
                                                    Gross   Operating  Income
                                         Revenues  Profit   Expenses   (Loss)
                                         --------  -------  --------- --------
<S>                                      <C>       <C>      <C>       <C>
Year Ended December 31, 1999:
Reported results of operations.......... $66,071   $28,974   $28,328  $   (343)
Restructuring provision (1).............     --        --       (750)      750
Sale of manufacturing license (2).......  (6,200)   (5,800)      --     (5,800)
Accruals for contractual issues.........     --        --       (886)      886
                                         -------   -------   -------  --------
Normalized results of operations........ $59,871   $23,174   $26,692  $ (4,507)
                                         =======   =======   =======  ========
Year Ended December 31, 1998:
Reported results of operations.......... $59,804   $22,921   $27,477  $ (6,803)
Accruals for litigation loss (3)........     --        --       (500)      500
                                         -------   -------   -------  --------
Normalized results of operations........ $59,804   $22,921   $26,977  $ (6,303)
                                         =======   =======   =======  ========
Year Ended December 31, 1997:
Reported results of operations.......... $56,908   $17,656   $30,254  $(13,268)
Restructuring provision (4).............     --        --     (2,900)    2,900
                                         -------   -------   -------  --------
Normalized results of operations........ $56,908   $17,656   $27,354  $(10,368)
                                         =======   =======   =======  ========
</TABLE>
--------
(1)  During the second quarter of 1999, the Company decided to discontinue a
     product line previously produced in its Addison, Illinois manufacturing
     facility and recorded an additional facility closing charge of $750,000,
     primarily for related product warranty issues. See Note 6 of Notes to
     Consolidated Financial Statements.

(2)  During the first quarter of 1999, the Company sold to G. E. Medical
     Systems a non-exclusive right to manufacture the Tilt-C system, in
     exchange for 826,666 shares of Series D Convertible Preferred Stock
     previously owned by G. E. Medical Systems. See Note 7 to Notes to
     Consolidated Financial Statements.

(3)  The litigation loss of $0.5 million, or 0.8% of total revenue, is the
     result of the Company's guarantee of work performed by a now-bankrupt
     dealer in the United Kingdom.

(4)  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 (running through June 2002),
     estimated facility closing costs, severance and certain other non-
     recurring costs associated with this decision.

  The remainder of Management's Discussion and Analysis of Results of
Operations will be based on normalized results of operations for the years
ended December 31.

                                      31
<PAGE>

  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:

<TABLE>
<CAPTION>
                                 1999    1998    1997
                                 -----   -----   -----
   <S>                           <C>     <C>     <C>
   Revenues....................  100.0%  100.0%  100.0%
   Cost of sales...............   61.3    61.7    69.0
                                 -----   -----   -----
     Gross profit..............   38.7    38.3    31.0
                                 -----   -----   -----
   Operating expenses:
     Research and development..    9.8    10.7    10.6
     Selling, marketing and
      service..................   26.4    25.6    28.7
     General and
      administrative...........    8.4     8.8     8.8
                                 -----   -----   -----
       Total operating
        expenses...............   44.6    45.1    48.1
                                 -----   -----   -----
   Loss from operations........   (5.9)   (6.8)  (17.1)
   Interest expense............   (1.3)   (0.6)   (0.3)
   Interest income.............    0.2     0.1     0.5
   Other income (expense),
    net........................   (0.5)    0.1    (1.3)
                                 -----   -----   -----
   Loss before income taxes....   (7.5)   (7.2)  (18.2)
   Provision for income taxes..    --      3.3     --
                                 -----   -----   -----
   Net loss....................   (7.5)% (10.5)% (18.2)%
                                 =====   =====   =====
</TABLE>
--------
* Based on normalized results of operations. See "Results of Operations,
  Excluding Restructuring Charge and Other One-Time Items" on Page 31 of this
  Form 10-K.

1999 Compared to 1998

  Revenues. Normalized revenues increased from $59.8 million in 1998 to $59.9
million in 1999. The normalized revenue year over year was largely unchanged
including an increase in shipments of Mammotest and other mammography products
and an increase in service revenues, offset by planned reductions in OEM
product shipments and decreased general radiology product shipments. The
increase in mammography product sales was, in significant part, due to the
favorable effects of the Company's marketing partnership with Ethicon Endo-
Surgery. See "--Overview." The decline in OEM shipments is, in part, due to
the Company's decision to de-emphasize low margin OEM business.

  Gross Profit. Gross profit as a percentage of total revenues increased from
38.3% in 1998 to 38.7% in 1999. This increase was due to the favorable effects
of reducing fixed overhead costs in the third and fourth quarters of 1999, as
well as a shift in product mix to relatively higher margin mammography and
service business, from relatively lower margin OEM product sales. Partially
offsetting this increase was an increase in unfavorable manufacturing costs
from $4.9 million in 1998 to $5.8 million in 1999.

  Research and Development Expenses. Research and development expenses were
$5.9 million, or 9.8% of total revenues, in 1999, as compared to $6.4 million,
or 10.7% of total revenues, in 1998. The decrease in research and development
expenses is primarily attributable to the headcount reductions that took place
in the third quarter of 1999. As a percentage of total revenues, research and
development expenses are also decreased. The decrease in research and
development was also due to lower contract expenditures related to digital
imaging products for mammography and general radiography.

  Selling, Marketing and Service Expenses. Selling, marketing and service
expenses increased to $15.8 million in 1999 as compared to $15.3 million in
1998. As a percentage of total revenues, selling, marketing and service
expenses increased from 25.6% in 1998 to 26.4% in 1999. The increase in
selling, marketing, and service expenses and the increase as a percentage of
total revenues are primarily due to higher domestic service expenses
associated with higher service revenues, partially offset by lower marketing
and international sales expenditures, as the Company has increased its
reliance on the marketing outlays and international distribution efforts of
its marketing and distribution partners.

                                      32
<PAGE>

  General and Administrative Expenses. General and administrative expenses
decreased to $5.1 million in 1999 from $5.3 million in 1998. General and
administrative expenses decreased to 8.4% of total revenues in 1999 as
compared to 8.8% in 1997. The decrease in general and administrative expenses
was due to lower legal expenses in 1999 as compared to 1998, partly offset by
higher administrative expenses. The decrease in legal expenses is primarily
due to reduced costs associated with the Company's patent infringement lawsuit
against Lorad, which is expected to commence during 2000. (See Item 3, Legal
Proceedings.)

  Interest Expense. Interest expense increased to $0.8 million in 1999 from
$0.4 million in 1998. The increase in interest expense is primarily due to an
increase in borrowings under the Company's line of credit. These borrowings
were primarily used to fund increases in working capital. See "Liquidity and
Capital Resources."

  Net Loss. The net loss declined from $6.3 million in 1998 to $4.5 million in
1999. The decrease is primarily attributable to an increase in sales of
mammography product shipments and an increase in service revenues and the $2.0
million write off of deferred tax assets included in the net loss recorded in
1998, offset by planned reductions in OEM product shipments and decreased
general radiology product shipments.

1998 Compared to 1997

  Revenues. Revenues increased from $56.9 million in 1997 to $59.8 million in
1998. The revenue increase was due to a 40% increase in shipments of Mammotest
and other mammography products and a significant increase in service revenues,
offset by declines in shipments of OEM and general radiology products. The
increase in mammography product sales was, in significant part, due to the
favorable effects of the Company's marketing partnership with Ethicon Endo-
Surgery. See "--Overview." The decline in general radiology shipments was due
to shipment delays caused by the transfer of production of general radiology
products from the Company's Addison, Illinois manufacturing facility, which is
now closed. The decline in OEM shipments is, in part, due to the Company's
decision to de-emphasize low margin OEM business.

  Gross Profit. Gross profit as a percentage of total revenues increased from
31.0% in 1997 to 38.3% in 1998. This increase was due to the favorable effects
of reducing fixed factory capacity costs, through the closure of the Company's
Addison manufacturing facility, and to the shift in product mix to relatively
higher margin mammography and service business, from relatively lower margin
OEM product sales.

  Research and Development Expenses. Research and development expenses were
$6.4 million, or 10.7% of total revenues, in 1998, as compared to $6.0
million, or 10.6% of total revenues, in 1997. The modest increase in research
and development expenses is primarily attributable to costs associated with
developing a digital general radiography system in conjunction with Sterling.
As a percentage of total revenues, research and development expenses are
essentially unchanged. 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 and general radiography a key focus
of the Company's research and development activities.

  Selling, Marketing and Service Expenses. Selling, marketing and service
expenses decreased to $15.3 million in 1998 as compared to $16.3 million in
1997. As a percentage of total revenues, selling, marketing and service
expenses decreased from 28.7% in 1997 to 25.6% in 1998. The decrease in
selling, marketing, and service expenses and the decrease as a percentage of
total revenues are primarily due to planned reductions in marketing
expenditures, as strategic marketing partners have assumed part of the cost of
product marketing.

  General and Administrative Expenses. General and administrative expenses
increased to $5.3 million in 1998 from $5.0 million in 1997. General and
administrative expenses equaled 8.8% of total revenues in both 1998 and 1997.
The increase in general and administrative expenses was due to higher legal
expenses in 1998 as compared to 1997, partly offset by cost savings associated
with continued efforts to reduce operating expenses. The increase in legal
expenses was primarily due to preparations for the Company's patent
infringement lawsuit against Lorad. (See Item 3, Legal Proceedings.)

                                      33
<PAGE>

  Interest Expense. Interest expense increased to $0.4 million in 1998 from
$0.2 million in 1997. The increase in interest expense is primarily due to an
increase in borrowings under the Company's line of credit beginning in mid-
1998. These borrowings were primarily used to fund increases in working
capital. See "Liquidity and Capital Resources."

  Net Loss. The net loss declined from $10.4 million in 1997 to $6.3 million
in 1998. The decrease is primarily attributable to an increase in sales of
mammography product shipments and an increase in service revenues, both of
which are relatively high margin, and the favorable effects of the Addison
factory closure on manufacturing costs, partially offset by the $2.0 million
write off of deferred tax assets.

Income Taxes

  The Company's effective tax rate was 0% and 42% in 1999 and 1998,
respectively. The 1999 and 1998 rates reflect increases of $1.5 million and
$3.4 million, respectively, in the valuation allowance against net deferred
tax assets. These increases are due mainly to uncertainty relating to the
realizability of net deferred tax assets due to the Company's recent history
of net operating losses. At December 31, 1999, the Company had valuation
allowances of approximately $10.3 million. The realizability of net deferred
tax assets is dependent on the Company's ability to generate future taxable
income, and the Company's estimate of realizable deferred tax assets may
change in the near future.

Liquidity and Capital Resources

  During 1999, the Company generated $1.2 million of cash flow from operations
and utilized $0.7 million in investing activities and $0.2 million in
financing activities, resulting in a $0.1 million increase in cash. The cash
flow generated from operations was primarily due to a decrease in working
capital. The decrease in working capital consisted primarily of a $5.7 million
decrease in inventories. The favorable effects on cash from changes in working
capital were partially offset by a $1.5 million decrease in accounts payable,
a $1.3 million decrease in customer deposits and $1.0 million of payments for
restructuring costs. Cash utilized in investing activities decreased from $1.4
million in 1998 to $0.7 million in 1999, due in part to a decrease in capital
expenditures. Cash utilized in financing activities during 1999 primarily
reflected $0.3 million in repayments of long-term debt.

  During 1998, the Company utilized $7.5 million of cash flow in operations
and $1.4 million in investing activities, while generating $6.4 million from
financing activities, resulting in a $2.5 million decrease in cash. The cash
flow utilized in operations was primarily due to an increase in working
capital, offset by a modest favorable cash impact of the Company's 1998 net
loss before non-cash expenses. The increase in working capital consisted
primarily of a $6.6 million increase in inventories, a $2.7 million increase
in trade accounts receivable, and $1.1 million of payments for restructuring
costs. The unfavorable effects on cash from changes in working capital were
partially offset by a $1.5 million increase in customer deposits and $1.0
million of increases in accounts payable and other current liabilities,
resulting in a $7.8 million net unfavorable impact from changes in working
capital. Cash utilized in investing activities decreased from $1.7 million in
1997 to $1.4 million in 1998, due in part to an increase in capital
expenditures financed through capital lease arrangements. Cash generated from
financing activities during 1998 primarily reflected $6.6 million in
borrowings under the Company's revolving line of credit agreement, made to
finance operating losses.

  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 $0.7 million, positively impacted cash flow
from operations. 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 $0.1 million.

                                      34
<PAGE>

  On December 31, 1999, the Company had $1.1 million in cash and cash
equivalents and working capital of $14.7 million. The Company has a $10.0
million revolving line of credit arrangement, subject to borrowing base
restrictions, of which $4.2 million was unused.

  On April 13, 2000, the Company entered into a line of credit with a bank for
$8.0 million which replaces the credit facility in place at December 31, 1999.
Under the terms of the agreement, the Company will have available up to $8.0
million of credit subject to borrowing base limitations based on eligible
receivables and inventory. The agreement is for a term of the three years and
is secured by all tangible assets of the Company. Borrowings under the
agreement will bear interest at the bank's prime rate, 9.0% at March 31, 2000.
The Company will also be subject to certain financial covenants, as defined.

  The Company has experienced significant losses in four of the last five
years ended December 31, 1999 and has also had negative cash flows from
operations in three of those five years, resulting in the depletion of
substantially all of the Company's cash.

  The Company has taken actions to improve its liquidity and reduce the level
of operating losses. Most notably, the Company has entered into a line of
credit with a bank for $8.0 million (see Note 13) and has significantly
reduced the workforce in the third and fourth quarters of 1999. Management
believes the full benefits of the workforce reductions will be seen in 2000.
If the Company were to need additional funds for operations, management
believes it can obtain financing at or above current levels from multiple
sources by securitizing accounts receivable, inventories and other tangible
assets.

  The Company has no present plans for capital expenditures in 2000 materially
different from recent years.

Recent Developments

  In February 2000, the Company received a $5.4 million purchase order from
Analogic Corp. to build and deliver, in conjunction with Analogic and Digital
Radiography Corp., DR5000 and DR9000 digital systems for Kodak. While the
Company, Kodak and Analogic continue to work together to deliver these
systems, there is no formal agreement between the companies at this time.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  The information contained under the caption "Quantitative and Qualitative
Disclosures About Market Risk" included in the MD&A section on Pages 30
through 31 of this Form 10-K is incorporated herein by reference.

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

  Not Applicable.

                                      35
<PAGE>

                                    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 2000 Proxy Statement to be filed on or prior to May 5, 2000.

ITEM 11. EXECUTIVE COMPENSATION

  The information required by this Item is incorporated by reference to the
Company's 2000 Proxy Statement to be filed on or prior to May 5, 2000.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

  The information required by this Item is incorporated by reference to the
Company's 2000 Proxy Statement to be filed on or prior to May 5, 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

  The information required by this Item is incorporated by reference to the
Company's 2000 Proxy Statement to be filed on or prior to May 5, 2000.

                                       36
<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 pages F-3 through F-23 of this Form 10-K.

    2. Financial Statement Schedules.

      None

    3. Exhibits.

      The following are filed as part of this report:

<TABLE>
<CAPTION>
 Exhibit
 Number                          Description of Exhibit
 -------                         ----------------------
 <C>     <S>
  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(4)

  4.2    Certificate of Designation for the Series D Convertible Preferred
         Stock(4)

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

 10.2    Purchase Agreement, dated August 29, 1994, between the Company and
         General Electric Company on behalf of GE Medical Systems(4)

 10.3    Nonemployee Director Stock Option Plan, as amended(5)

 10.4    Stock Option Plan(1)

 10.5    Retention Bonus Plan(3)

 10.6    Lease Agreement, dated July 31, 1992, between the Company and JN
         Properties(2)

 10.7    Stock Purchase Agreement, dated as of June 20, 1995, between the
         Company and General Electric Company, acting through its GE Medical
         Systems Division ("GEMS")(4)

 10.8    Registration Rights Agreement, dated as of June 20, 1995, between the
         Company and GEMS(4)

 10.9    Manufacturing and License Agreement, dated as of June 20, 1995,
         between the Company and GEMS(4)

 10.10   Amendment, dated as of June 20, 1995, to Purchase Agreement, dated as
         of August 29, 1994, between the Company and GEMS(4)

 10.11   Agreement dated October 10, 1997, between the Company and Ethicon
         Endo-Surgery, Inc. with Addendum dated January 28, 1998(5)

 21      List of Subsidiaries(6)

 23      Consent of Arthur Andersen LLP(6)

 27      Financial Data Schedule(6)
</TABLE>
--------
(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.

                                       37
<PAGE>

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

(3)  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.

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

(5)  Incorporated by reference to the Company's Form 10-K for the year ended
     December 31, 1997, as filed with the Commission on March 31, 1998.

(6)  Filed herewith.

  (b) Reports on Form 8-K

  None

  (c) Exhibits

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

  (d) Financial Statement Schedules

  None

                                       38
<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

                                                  /s/ Morgan W. Nields
Date: April 14, 2000                      By: _________________________________
                                                      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.

<TABLE>
<CAPTION>
             Signature                           Title                  Date
             ---------                           -----                  ----

<S>                                  <C>                           <C>
      /s/ Morgan W. Nields           Chairman of the Board, Chief  April 14, 2000
____________________________________  Executive Officer,
          Morgan W. Nields            Principal Executive Officer

      /s/ Louis E. Rivelli           President, Chief Operating    April 14, 2000
____________________________________  Officer
          Louis E. Rivelli

    /s/ David G. Bragg, M.D.         Director                      April 14, 2000
____________________________________
        David G. Bragg, M.D.

      /s/ Thomas J. Cable            Director                      April 14, 2000
____________________________________
          Thomas J. Cable

      /s/ Fred Burbank, MD           Director                      April 14, 2000
____________________________________
          Fred Burbank, MD

      /s/ Kathryn A. Paul            Director                      April 14, 2000
____________________________________
          Kathryn A. Paul
</TABLE>

                                      39
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          FISCHER IMAGING CORPORATION

                       CONSOLIDATED FINANCIAL STATEMENTS

                                     INDEX

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Public Accountants.................................. F-2
Financial Statements:
  Consolidated Balance Sheets--December 31, 1999 and 1998................. F-3
  Consolidated Statements of Operations--For the Years Ended
   December 31, 1999, 1998 and 1997....................................... F-4
  Consolidated Statements of Stockholders' Investment--For the Years Ended
   December 31, 1999, 1998 and 1997....................................... F-5
  Consolidated Statements of Cash Flows--For the Years Ended
   December 31, 1999, 1998 and 1997....................................... F-6
  Notes to Consolidated Financial Statements.............................. F-7
</TABLE>

                                      F-1
<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, 1999 and 1998, and the related consolidated statements of operations,
stockholders' investment and cash flows for each of the three years in the
period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Fischer Imaging
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.

  /s/ Arthur Andersen LLP

Denver, Colorado,
 January 21, 2000
 (except with respect to the matters in Note 13
 as to which the date is is April 13, 2000).

                                      F-2
<PAGE>

                          FISCHER IMAGING CORPORATION

                          CONSOLIDATED BALANCE SHEETS
                    (Amounts in thousands except share data)

<TABLE>
<CAPTION>
                                                              December 31,
                                                            ------------------
                                                              1999      1998
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
                          ------
CURRENT ASSETS
  Cash and cash equivalents................................ $  1,056  $    929
  Trade accounts receivable, net of allowance for doubtful
   accounts of approximately $1,741 and $726 at December
   31, 1999 and 1998, respectively.........................   15,897    16,797
  Inventories, net.........................................   15,064    22,023
  Prepaid expenses and other current assets................      912     1,098
                                                            --------  --------
    Total current assets...................................   32,929    40,847
                                                            --------  --------
PROPERTY AND EQUIPMENT (at cost)
  Manufacturing equipment..................................    9,641     9,467
  Office equipment and leasehold improvements..............    5,963     5,936
                                                            --------  --------
                                                              15,604    15,403
  Less--Accumulated depreciation...........................   11,730     9,994
                                                            --------  --------
    Property and equipment, net............................    3,874     5,409
                                                            --------  --------
INTANGIBLE ASSETS, net (Note 3)............................    2,399     2,957
DEFERRED COSTS AND OTHER ASSETS............................    1,807     1,756
                                                            --------  --------
    Total assets........................................... $ 41,009  $ 50,969
                                                            ========  ========
         LIABILITIES AND STOCKHOLDERS' INVESTMENT
         ----------------------------------------
CURRENT LIABILITIES
  Notes payable and current maturities of long-term debt
   (Note 5)................................................ $  6,031  $  6,838
  Trade accounts payable...................................    3,671     5,204
  Accrued salaries and wages...............................    1,792     2,225
  Customer deposits........................................    1,289     2,599
  Accrued warranty and installation costs..................    1,672     1,124
  Accrued restructuring costs (Note 6).....................      --      1,015
  Deferred service revenue.................................    1,156     1,132
  Other current liabilities................................    2,579     1,615
                                                            --------  --------
    Total current liabilities..............................   18,190    21,752
LONG-TERM DEBT (Note 5)....................................    1,103       587
OTHER NONCURRENT LIABILITIES...............................      --        200
                                                            --------  --------
    Total liabilities......................................   19,293    22,539
                                                            --------  --------
COMMITMENTS AND CONTINGENCIES (Note 12)
STOCKHOLDERS' INVESTMENT
  Common Stock, $.01 par value, 25,000,000 shares
   authorized, 7,028,855 and 6,980,150 shares issued and
   outstanding at December 31, 1999 and 1998,
   respectively............................................       70        70
  Preferred Stock, 5,000,000 shares authorized:
   Series C Junior Participating Preferred Stock, $.01 par
    value, 500,000 shares authorized, no shares issued and
    outstanding............................................      --        --
   Series D Convertible Preferred Stock, $.01 par value,
    506,667 shares authorized, issued and outstanding at
    December 31, 1999 and 1,333,333 outstanding at December
    1998; liquidation preference of $3,800,000 and
    $10,000,000 at December 31, 1999 and 1998, respectively
    (Note 7)...............................................        5        13
  Additional paid-in capital...............................   43,264    49,366
  Accumulated deficit......................................  (21,802)  (21,459)
  Accumulated other comprehensive income...................      179       440
                                                            --------  --------
    Total stockholders' investment.........................   21,716    28,430
                                                            --------  --------
    Total liabilities and stockholders' investment......... $ 41,009  $ 50,969
                                                            ========  ========
</TABLE>

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

                                      F-3
<PAGE>

                          FISCHER IMAGING CORPORATION

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

<TABLE>
<CAPTION>
                                                      For the Years Ended
                                                          December 31,
                                                    --------------------------
                                                     1999     1998      1997
                                                    -------  -------  --------
<S>                                                 <C>      <C>      <C>
REVENUES
  Products and services............................ $59,871  $59,804  $ 56,908
  Sale of manufacturing license (Note 7)...........   6,200      --        --
                                                    -------  -------  --------
    Total..........................................  66,071   59,804    56,908
COST OF SALES
  Products and services............................  36,697   36,883    39,252
  Sale of manufacturing license (Note 7)...........     400      --        --
                                                    -------  -------  --------
    Total..........................................  37,097   36,883    39,252
                                                    -------  -------  --------
    Gross profit...................................  28,974   22,921    17,656
                                                    -------  -------  --------
OPERATING EXPENSES
  Research and development.........................   5,850    6,394     6,043
  Selling, marketing and service...................  15,783   15,299    16,323
  General and administrative.......................   5,945    5,284     4,988
  Litigation loss (Note 12)........................     --       500       --
  Restructuring provision (Note 6).................     750      --      2,900
                                                    -------  -------  --------
    Total operating expenses.......................  28,328   27,477    30,254
                                                    -------  -------  --------
(LOSS) EARNINGS FROM OPERATIONS....................     646   (4,556)  (12,598)
  Interest expense.................................    (753)    (357)     (181)
  Interest income..................................      91       74       271
  Other (expense) income, net......................    (327)      38      (760)
                                                    -------  -------  --------
LOSS BEFORE INCOME TAXES...........................    (343)  (4,801)  (13,268)
  Provision for income taxes.......................     --     2,002       --
                                                    -------  -------  --------
NET LOSS........................................... $  (343) $(6,803) $(13,268)
                                                    =======  =======  ========
LOSS PER SHARE (Note 2)
  Basic and Diluted................................ $  (.05) $  (.97) $  (1.91)
                                                    =======  =======  ========
SHARES USED TO CALCULATE LOSS PER SHARE (Note 2)
  Basic and Diluted................................   7,029    6,980     6,949
                                                    =======  =======  ========
</TABLE>


        The accompanying notes are an integral part of these statements.

                                      F-4
<PAGE>

                          FISCHER IMAGING CORPORATION

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

<TABLE>
<CAPTION>
                                     Series C
                                      Junior      Series D                           Accumulated
                    Common Stock   Participating Convertible Additional                 Other
                  ----------------   Preferred    Preferred   Paid-in   Accumulated Comprehensive Comprehensive
                   Shares   Amount     Stock        Stock     Capital     Deficit   Income (Loss)     Loss       Total
                  --------- ------ ------------- ----------- ---------- ----------- ------------- ------------- -------
<S>               <C>       <C>    <C>           <C>         <C>        <C>         <C>           <C>           <C>
BALANCES,
 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        506
Net loss........        --   --          --          --           --      (13,268)       --          (13,268)   (13,268)
                                                                                                    --------
Comprehensive
 loss...........        --   --          --          --           --          --         --         $(12,762)       --
                  ---------  ---       -----         ---      -------    --------       ----        ========    -------
BALANCES,
 December 31,
 1997...........  6,948,648   69         --           13       49,235     (14,656)       524                     35,185
Shares purchased
 under Employee
 Stock Purchase
 Plan...........     31,502    1         --          --           131         --         --                         132
Cumulative
 translation
 adjustment.....        --   --          --          --           --          --         (84)       $    (84)       (84)
Net loss........        --   --          --          --           --       (6,803)       --           (6,803)    (6,803)
                                                                                                    --------
Comprehensive
 loss...........        --   --          --          --           --          --         --         $ (6,887)       --
                  ---------  ---       -----         ---      -------    --------       ----        ========    -------
BALANCES,
 December 31,
 1998...........  6,980,150   70         --           13       49,366     (21,459)       440                     28,430
Shares purchased
 under Employee
 Stock Purchase
 Plan...........     48,705  --          --          --            90         --         --                          90
Series D shares
 surrendered in
 exchange for
 Tilt-C Mfg.
 Rights.........        --   --          --           (8)      (6,192)        --         --                      (6,200)
Cumulative
 translation
 adjustment.....        --   --          --          --           --          --        (261)       $   (261)      (261)
Net loss........        --   --          --          --           --         (343)       --             (343)      (343)
                                                                                                    --------
Comprehensive
 loss...........        --   --          --          --           --          --         --         $   (604)       --
                  ---------  ---       -----         ---      -------    --------       ----        ========    -------
BALANCES,
 December 31,
 1999...........  7,028,855  $70       $ --          $ 5      $43,264    $(21,802)      $179                    $21,716
                  =========  ===       =====         ===      =======    ========       ====                    =======
</TABLE>

       The accompanying notes are an integral part of these statements.

                                      F-5
<PAGE>

                          FISCHER IMAGING CORPORATION

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (Amounts in thousands)

<TABLE>
<CAPTION>
                                                      For the Years Ended
                                                          December 31,
                                                    --------------------------
                                                     1999     1998      1997
                                                    -------  -------  --------
<S>                                                 <C>      <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss......................................... $  (343) $(6,803) $(13,268)
                                                    -------  -------  --------
  Adjustments to reconcile net loss to net cash
   (used in) provided by operating activities--
    Preferred Stock Exchange.......................  (6,200)     --        --
    Restructuring provision........................     750      --      2,900
    Restructuring costs............................  (1,015)  (1,065)     (820)
    Depreciation...................................   2,122    2,271     1,981
    Amortization of intangible assets..............     558      658       712
    Litigation loss contingency....................     --       500       --
    Write-off of investment........................     100      --        --
    Provision for doubtful accounts................     963       41       256
    Provision for excess and obsolete inventories..   1,100    1,638     2,028
    Deferred income tax provision..................     --     2,002       611
    Sales and retirements of assets................      71      244       170
    Foreign exchange (gains) losses................     (98)    (131)      720
    Change in current assets and liabilities--
      Trade accounts receivable....................    (313)  (2,706)    4,212
      Inventories..................................   5,709   (6,611)    3,331
      Prepaid expenses and other current assets....     186       71       120
      Trade accounts payable.......................  (1,533)     328      (279)
      Accrued salaries and wages...................    (433)     198      (133)
      Customer deposits............................  (1,310)   1,463        78
      Accrued warranty and installation costs......     548       34      (318)
      Deferred service revenue.....................      24      361       (34)
      Other current liabilities....................     241      151      (157)
    Other..........................................      22     (191)      299
                                                    -------  -------  --------
      Total adjustments............................   1,492     (744)   15,677
                                                    -------  -------  --------
      Net cash provided by (used in) operating
       activities..................................   1,149   (7,547)    2,409
                                                    -------  -------  --------
CASH FLOWS FROM INVESTING ACTIVITIES
  Capital expenditures.............................    (658)  (1,299)   (1,728)
  Other............................................     --      (100)      --
                                                    -------  -------  --------
    Net cash used in investing activities..........    (658)  (1,399)   (1,728)
                                                    -------  -------  --------
CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from sale of common stock, net..........      90      132       142
  Net borrowings (repayments) under line of credit
   agreement.......................................      51    6,572       --
  Repayments of long-term debt.....................    (342)    (315)     (459)
                                                    -------  -------  --------
    Net cash provided by (used in) financing
     activities....................................    (201)   6,389      (317)
                                                    -------  -------  --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH............    (163)      47      (214)
                                                    -------  -------  --------
NET (DECREASE) INCREASE IN CASH AND CASH
 EQUIVALENTS.......................................     127   (2,510)      150
CASH AND CASH EQUIVALENTS, beginning of period.....     929    3,439     3,289
                                                    -------  -------  --------
CASH AND CASH EQUIVALENTS, end of period........... $ 1,056  $   929  $  3,439
                                                    =======  =======  ========
SUPPLEMENTAL CASH FLOW DISCLOSURES
  Cash interest payments........................... $   649  $   397  $    119
  Cash income tax (refunds) payments, net..........      43     (416)     (308)
  Non-cash capital expenditures (capital lease
   financing)......................................     --       635       560
</TABLE>

        The accompanying notes are an integral part of these statements.

                                      F-6
<PAGE>

                          FISCHER IMAGING CORPORATION

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          For the Three Years Ended December 31, 1999, 1998 and 1997

(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 100%-owned Fischer Imaging (Deutschland) GMB and Fischer
Imaging (France) S.A.R.L. ("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.

 Liquidity and Continuing Losses

  The Company has experienced significant losses in four of the last five
years ended December 31, 1999 and has also had negative cash flows from
operations in three of those five years, resulting in the depletion of
substantially all of the Company's cash. At December 31, 1999, the Company had
approximately $5.8 million of outstanding borrowings under its revolving line
of credit agreement, while the borrowing base was $10.0 million.

  The Company has taken actions to improve its liquidity and reduce the level
of operating losses. Most notably, the Company has entered into a line of
credit with a bank for $8.0 million (see Note 13) and has significantly
reduced the workforce in the third and fourth quarters of 1999. Management
believes the full benefits of the workforce reductions will be seen in 2000.
If the Company were to need additional funds for operations, management
believes it can obtain financing at or above current levels from multiple
sources by securitizing accounts receivable, inventories and other tangible
assets.

(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.

                                      F-7
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 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.

  Inventories consist of the following components (in thousands):
<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
   <S>                                                         <C>      <C>
   FIFO cost--
     Raw materials, net....................................... $ 6,878  $ 8,444
     Work in process and finished goods.......................   8,493   14,099
   LIFO valuation adjustment..................................    (307)    (520)
                                                               -------  -------
     Inventories, net......................................... $15,064  $22,023
                                                               =======  =======
</TABLE>

 Property and Equipment

  Significant additions and improvements are capitalized at cost, while
maintenance and repairs that do not improve or extend the life of the
respective assets are charged to 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 that range from 10 to 15 years.

                                      F-8
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 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.

  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):

<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
   <S>                                                         <C>      <C>
   Cost....................................................... $ 3,796  $ 3,539
   Less--Accumulated amortization.............................  (3,350)  (2,999)
                                                               -------  -------
     Software development costs, net.......................... $   446  $   540
                                                               =======  =======
</TABLE>

  The Company recorded amortization expense of approximately $351,000,
$399,000 and $488,000 in 1999, 1998 and 1997, respectively

 Other Current Liabilities

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

<TABLE>
<CAPTION>
                                                                  1999   1998
                                                                 ------ ------
   <S>                                                           <C>    <C>
   Accrued sales, property, and other state and local taxes..... $  636 $  594
   Litigation loss contingency reserve..........................    --     500
   Other........................................................  1,943    521
                                                                 ------ ------
     Total other current liabilities............................ $2,579 $1,615
                                                                 ====== ======
</TABLE>

 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 gains or losses are included in the consolidated
statements of operations as a component of other income (expense).

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

 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.

                                      F-9
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 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 Earnings or Loss Per Share

  The Company presents basic and diluted earnings or loss per share in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share" ("SFAS 128"), which establishes standards for computing
and presenting basic and diluted loss 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.

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

<TABLE>
<CAPTION>
                                                              1999 1998  1997
                                                              ---- ----- -----
   <S>                                                        <C>  <C>   <C>
   Shares of convertible preferred stock (as if converted)... 507  1,333 1,333
   Effect of stock options (treasury stock method)...........   1      1    23
</TABLE>

 Recently Issued Accounting Pronouncements

  Staff Accounting Bulletin No. 101. On December 3, 1999, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB 101 summarizes the SEC's
views on the application of generally accepted accounting principles to
selected revenue recognition issues. The application of the guidance in SAB
101 will be required in the Company's second quarter of 2000. The effects of
applying this guidance will be reported as a cumulative effect of a change in
accounting principle in accordance with Accounting Principle Board Opinion No.
20, "Accounting Changes."

  The Company has historically recognized 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. The
guidance provided in SAB 101 states that customer acceptance provisions
contained in arrangements are substantive, bargained-for terms of the
arrangement and thus the SEC believes that revenue should not be recognized
until customer acceptance occurs or the acceptance provisions lapse. The
Company is currently evaluating the impact of SAB 101.

  Statement of Financial Accounting Standards No. 133/137. In June 1999, the
Financial Accounting Standards Board issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133--An Amendment of SFAS No. 133," which deferred the
effective date of SFAS No. 133 until fiscal years beginning after June 15,
2000. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. Among other things, the
statement requires that an entity recognize all derivative instruments on the
balance sheet as either assets or liabilities, and to account for those
instruments at fair value. The Company does not typically enter into

                                     F-10
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

arrangements that would fall under the scope of SFAS No. 133 and thus,
management believes that SFAS No. 133 will not significantly affect its
financial condition and results of operations.

 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"). The Company has
adopted the disclosure option of SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires companies that do not account
for stock-based compensation under the fair value method prescribed by the
statement to disclose the pro forma 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):

<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
   <S>                                                         <C>      <C>
   Goodwill................................................... $ 2,785  $ 2,785
   Non-competition agreement..................................   3,569    3,569
                                                               -------  -------
                                                                 6,354    6,354
   Less--Accumulated amortization.............................  (3,955)  (3,397)
                                                               -------  -------
     Intangible assets, net................................... $ 2,399  $ 2,957
                                                               =======  =======
</TABLE>

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

(4) INCOME TAXES

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

<TABLE>
<CAPTION>
                                                      1999     1998     1997
                                                     -------  -------  -------
   <S>                                               <C>      <C>      <C>
   Current
     Federal........................................ $   --   $   --   $  (471)
     State..........................................     --       --      (140)
                                                     -------  -------  -------
       Total current benefit........................     --       --      (611)
                                                     -------  -------  -------
   Deferred
     Federal........................................  (1,350)  (1,211)  (3,458)
     State..........................................    (131)    (142)    (296)
     Valuation allowance............................   1,481    3,355    4,365
                                                     -------  -------  -------
       Total deferred provision.....................     --     2,002      611
                                                     -------  -------  -------
         Total provision............................ $   --   $ 2,002  $   --
                                                     =======  =======  =======
</TABLE>

                                     F-11
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The statutory federal income tax rate was 35% for the years ended December
31, 1999, 1998, and 1997. 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:

<TABLE>
<CAPTION>
                                                       1999    1998    1997
                                                      ------   -----   -----
   <S>                                                <C>      <C>     <C>
   Statutory tax rate................................  (35.0)% (35.0)% (35.0)%
   Increase (decrease) due to:
     State income taxes..............................  (25.2)   (3.3)   (4.7)
     Foreign activity (included in) not in tax
      return......................................... (301.6)    9.1     4.1
     Nondeductible expenses..........................   19.2     1.0     1.0
     Valuation allowance.............................  431.8    69.9    32.9
     Tax credits.....................................  (81.0)    --      1.7
     Other...........................................   (8.2)    --      --
                                                      ------   -----   -----
   Effective tax rate................................    --  %  41.7 %   --  %
                                                      ======   =====   =====
</TABLE>

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

<TABLE>
<CAPTION>
                                                       1999    1998      1997
                                                       -----  -------  --------
   <S>                                                 <C>    <C>      <C>
   Domestic........................................... $(516) $(4,363) $(11,684)
   Foreign............................................   173     (438)   (1,584)
                                                       -----  -------  --------
     Total............................................ $(343) $(4,801) $(13,268)
                                                       =====  =======  ========
</TABLE>

                                     F-12
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Components of net deferred tax assets (liabilities) as of December 31, 1999
and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
                                                               1999     1998
                                                              -------  -------
   <S>                                                        <C>      <C>
   Current--
     Warranty reserves....................................... $   374  $   308
     Bad debt reserves.......................................     662      276
     Accrued vacation........................................     162      191
     Restructuring reserve...................................     --       386
     Other accrued liabilities...............................     439      238
     Other...................................................   2,764    2,557
     Less--Valuation allowance...............................  (4,401)  (3,956)
                                                              -------  -------
   Net current deferred tax asset............................ $   --   $   --
                                                              =======  =======
   Noncurrent--
     Software capitalization................................. $  (169) $  (205)
     Tax credits.............................................   1,186      908
     Deferred service revenue................................     112      133
     Depreciation............................................     279      --
     Net operating loss carryforward.........................   4,338    3,919
     Other...................................................     106       61
     Less--Valuation allowance...............................  (5,852)  (4,816)
                                                              -------  -------
   Net noncurrent deferred tax asset......................... $   --   $   --
                                                              =======  =======
</TABLE>

  For income tax reporting purposes, the Company has approximately $11,415,000
of net operating loss carryforwards that expire at various dates through 2019.
The Company also has available research and development tax credits of
approximately $1,020,000, expiring at various dates through 2019, and
alternative minimum tax credits of $166,000. Realization is dependent on
generating sufficient taxable income prior to the expiration dates of the
respective tax credits.

  During 1999 and 1998, the Company increased its valuation allowance by
$1,481,000 and $3,355,000, respectively, due mainly to uncertainty relating to
the realizability of the 1999 and 1998 net operating loss carryforwards and
the previously described available income tax credits. The amount of the
deferred tax asset considered realizable could be adjusted in the near term if
future taxable income materializes.

(5) NOTES PAYABLE AND LONG-TERM DEBT

  Notes payable and long-term debt as of December 31, 1999 and 1998, consist
of the following (in thousands):
<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
   <S>                                                         <C>      <C>
   Note payable under revolving line of credit...............  $ 5,803  $ 6,572
   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................................................      475      827
   Other.....................................................      856       26
                                                               -------
                                                                 7,134    7,425
   Less--Current maturities..................................   (6,031)  (6,838)
                                                               -------  -------
   Long-term debt............................................  $ 1,103  $   587
                                                               =======  =======
</TABLE>

                                     F-13
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Revolving Credit Agreement

  The Company has available up to $10.0 million of credit, subject to further
restrictions based on eligible receivables, inventory, and Company liquidation
value. The maximum amount which could have been drawn under these borrowing
base restrictions was approximately $10.0 million as of December 31, 1999. The
revolving credit agreement is renewable on a monthly basis and 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 bear interest at one percent over the bank's prime rate of interest,
or 9.50% at December 31, 1999. The Company's principal lender may withdraw the
revolving credit facility at any time upon giving the Company thirty days
notice. Subsequent to year end, the Company entered into a line of credit
which replaces the line of credit in place at December 31, 1999 (see Note 13).

  Future maturities of notes payable and long-term debt are as follows (in
thousands):

<TABLE>
       <S>                                                                <C>
       Year ended December 31,
         2000............................................................ $6,031
         2001............................................................    136
         2002............................................................    147
         2003............................................................    820
                                                                          ------
         Total........................................................... $7,134
                                                                          ======
</TABLE>

(6) RESTRUCTURING PROVISION

  During 1997, the Company decided to close its Addison, Illinois
manufacturing facility and, accordingly, recorded a $2.9 million restructuring
provision for remaining lease obligations (through June 2002), net of
estimated sublease payments, estimated facility closing costs, severance and
certain other non-recurring costs associated with this decision. During the
years ended December 31, 1999, 1998 and 1997, the Company spent approximately
$1.0 million, $1.1 million and $0.8 million, respectively, for severance and
facility closing costs. In January 1999, the Company fulfilled its remaining
obligations for this facility by agreeing to a $1.0 million lease buyout,
completing the Addison closure. Not all production had been successfully
transferred, however, and in the second quarter of 1999, the Company accrued
an additional $750,000 provision for the Addison closure, principally for the
discontinuing of a product line formerly produced in that facility, including
related acceptance issues.

(7) STOCKHOLDERS' INVESTMENT

  The Company is authorized to issue 5,000,000 shares of $.01 par value
preferred stock, which 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.

                                     F-14
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  On March 29, 1999, the Company announced an agreement with General Electric
Company, on behalf of GE Medical Systems, under which 826,666 or 62% of the
1,333,333 shares of Series D Convertible Preferred Stock owned by GE Medical
Systems were exchanged for a non-exclusive right to manufacture the Tilt-C
system. The sale of the manufacturing rights to the Tilt-C system was recorded
at fair value, estimated to be $6.2 million.

 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. Current participants, including
all executive officers of the Company, were 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 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.

(8) STOCK BASED COMPENSATION

 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.

                                     F-15
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  A summary of the status of the 1991 Plan as of December 31, 1999, 1998, and
1997 and the changes during those periods is as follows:

<TABLE>
<CAPTION>
                                          1999          1998          1997
                                      ------------  ------------  ------------
   <S>                                <C>           <C>           <C>
   Outstanding at January 1.........       768,925       764,000       709,625
   Granted..........................       440,000       162,500       185,000
   Exercised........................           --            --         (6,850)
   Canceled.........................      (148,275)     (157,575)     (123,775)
                                      ------------  ------------  ------------
   Outstanding at December 31.......     1,060,650       768,925       764,000
                                      ============  ============  ============
   Exercisable at December 31.......       394,296       321,968       247,844
                                      ============  ============  ============
   Range of exercise prices, at end
    of period.......................  $1.00-$11.00  $3.06-$11.00  $4.00-$11.00
   Weighted average exercise prices:
     At beginning of period.........  $       5.56  $       5.91  $       5.91
     At end of period...............          4.02          5.56          5.91
     Exercisable at end of period...          5.62          6.03          6.23
     Options granted................          1.46          4.15          5.85
     Options exercised..............           --            --           4.38
     Options canceled...............          4.42          5.82          5.91
   Weighted average end of period
    remaining contractual life (in
    years)..........................           7.6           7.4           8.2
   Weighted average fair value of
    options granted during period...  $       0.98  $       2.36  $       3.89
</TABLE>

  The following summary shows, as of December 31, 1999 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:

<TABLE>
<CAPTION>
              Range of exercise prices                      Shares  Price
              ------------------------                      ------- ------
       <S>                                                  <C>     <C>
       Weighted average exercise price for options
        outstanding:
         $1.00-$3.05....................................... 392,500 $ 1.41
         $3.06-$4.99....................................... 162,500   4.05
         $5.00-$5.99....................................... 461,000   5.72
         $6.00-$7.99.......................................  15,500   7.27
         $8.00-$11.00......................................  29,150  10.25
       Weighted average exercise price for options
        exercisable:
         $1.00-$3.05.......................................  10,416 $ 1.00
         $3.06-$4.99.......................................  88,542   4.18
         $5.00-$5.99....................................... 250,688   5.68
         $6.00-$7.99.......................................  15,500   7.27
         $8.00-$11.00......................................  29,150  10.25
       Weighted average remaining contractual life (in
        years):
         $1.00-$3.05....................................... 392,500 $ 9.49
         $3.06-$4.99....................................... 162,500   7.49
         $5.00-$5.99....................................... 461,000   6.35
         $6.00-$7.99.......................................  15,500   6.16
         $8.00-$11.00......................................  29,150   2.76
</TABLE>

                                      F-16
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  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:

<TABLE>
<CAPTION>
                                                               1999  1998  1997
                                                               ----  ----  ----
       <S>                                                     <C>   <C>   <C>
       Dividend rate..........................................    0%    0%    0%
       Expected volatility....................................   79%   78%   77%
       Risk-free interest rate................................ 5.53% 5.55% 5.92%
       Expected life (in years)...............................  5.0   4.5   5.0
</TABLE>

  Certain of the options granted under the 1991 Plan vest upon attainment of
performance objectives as well as over time. 85,000 options granted in
December 1996 and outstanding at December 31, 1999, with an exercise price of
$5.81 per share, are fully vested. Also outstanding as of December 31, 1999
are 160,000 options granted in December 1995 that 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.

Nonemployee Director Stock Option Plan

  The Company's Nonemployee Director Stock Option Plan ("Director Plan"),
adopted in 1993 and as amended in June 1998, authorizes the granting of
nonqualified options to acquire up to 300,000 shares of common stock at a
price not less than fair market value on the date of grant. The Director Plan
allows for automatic annual grants upon each year of a director's service. The
stock options issued under the Director Plan may be exercised at any time from
date of grant, with a maximum option term of ten years.

  A summary of the status of the Director Plan as of December 31, 1999, 1998,
and 1997 and the changes during those periods are as follows:

<TABLE>
<CAPTION>
                                             1999        1998          1997
                                          ----------- -----------  ------------
   <S>                                    <C>         <C>          <C>
   Outstanding at January 1.............       89,000     101,000        64,000
   Granted..............................       36,000      24,000        37,000
   Cancelled............................          --      (36,000)          --
                                          ----------- -----------  ------------
   Outstanding and exercisable at
    December 31.........................      125,000      89,000       101,000
                                          =========== ===========  ============
   Range of exercise prices, at end of
    period..............................  $1.00-$4.25 $4.00-$4.25  $4.00-$13.38
   Weighted average exercise prices:
     Outstanding, at beginning of
      period............................  $      4.20 $      7.76  $       8.36
     Outstanding, at end of period......         3.52        4.20          7.76
     Exercisable, at end of period......         3.52        4.20          7.76
     Options granted....................         1.83        4.19          6.72
     Options cancelled..................          --         7.96           --
   Weighted average remaining end of
    period contractual life (in years)..          7.4         7.7           7.6
   Weighted average fair value of
    options granted during period.......  $      1.00 $      2.29  $       3.65
</TABLE>

                                     F-17
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  The following summary shows, as of December 31, 1999 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 Director Plan:

<TABLE>
<CAPTION>
                                                                 Life
            Range of exercise prices             Shares Price (in years)
            ------------------------             ------ ----- ----------
   <S>                                           <C>    <C>   <C>
   Weighted average exercise price for options
    outstanding (all of which are exercisable):
     $1.00-$3.99................................ 36,000 $1.83    9.25
     $4.00-$4.25................................ 89,000  4.20    6.66
</TABLE>

  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:

<TABLE>
<CAPTION>
                                                               1999  1998  1997
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Dividend rate..............................................    0%    0%    0%
   Expected volatility........................................   79%   78%   77%
   Risk-free interest rate.................................... 5.25% 5.41% 6.39%
   Expected life (in years)...................................  3.0   3.0   3.0
</TABLE>

 Other

  The Company issued 25,000 options to external consultants in 1999, all of
which were outstanding and 14,000 of which were exercisable at December 31,
1999. These option prices range from $5.00 to $6.50.

 Employee Stock Purchase Plan

  Under the Employee Stock Purchase Plan ("Employee Plan"), adopted in
December 1991 and as amended in June 1998, the Company is authorized to issue
up to 400,000 shares of common stock to its full-time employees, nearly all of
whom are eligible to participate. Under terms of the Employee Plan, employees
can have from 2% to 5% of their salary withheld to purchase 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 Employee Plan,
the Company issued 48,705 and 31,502 and 21,463 shares during the years ended
December 31, 1999, 1998 and 1997, respectively, relating to employee
withholdings from the preceding years.

 Stock-Based Compensation Plans

  The fair value of the stock options granted in 1999, 1998, and 1997 was
estimated to be approximately $500,000, $500,000 and $900,000, 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):

<TABLE>
<CAPTION>
                                                      1999    1998      1997
                                                      -----  -------  --------
   <S>                                                <C>    <C>      <C>
   Net loss:
     As reported..................................... $(343) $(6,803) $(13,268)
     Pro forma.......................................  (811)  (7,364)  (13,589)
   Net loss per common share, diluted:
     As reported..................................... $(.05) $  (.97) $  (1.91)
     Pro forma.......................................  (.12)   (1.06)    (1.96)
</TABLE>

                                     F-18
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


(9) BENEFIT PLANS

 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 that ratably vest over a
four-year period. The Company made $160,000 of discretionary contributions for
the 1999 plan year but made no contributions for the years ended December 31,
1998 and 1997.

 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 1999,
1998, and 1997, the Company accrued bonuses of approximately $100,000 in each
year, respectively, under this plan.

(10) 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 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. The current annual rent is $744,000. All taxes, insurance,
and maintenance expenses of the facility are the responsibility of the
Company.

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

  In the second quarter of 1995, the Company issued 1,333,333 shares of Series
D Convertible Preferred Stock to GEMS (see Note 7). On March 29, 1999, the
company announced an agreement with General Electric Company, on behalf of GE
Medical Systems, under which 826,666 or 62% of the 1,333,333 shares of
Convertible Preferred Stock owned by GE Medical Systems were exchanged for a
non-exclusive right to manufacture the Tilt-C system leaving 506,667
outstanding, currently representing a 7% ownership interest in the Company on
an if-converted basis. GEMS is also a significant customer, providing revenues
to the Company of approximately $13.4 million or 20.3%, $3.5 million or 5.9%
of total revenues and $4.3 million or 7.5%, in 1999, 1998 and 1997,
respectively.

                                     F-19
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


(11) SEGMENT INFORMATION

 Operating and Geographic Segments

  The Company operates in a single industry segment: the design, manufacture,
and marketing of x-ray imaging systems. Because of differences in distribution
costs, strategies, and aftermarket potential, the Company separately manages
and reports operating results for products sold by the Company (proprietary)
from those manufactured for sale to other medical products companies under
Original Equipment Manufacturer ("OEM") contracts. The Company's manufacturing
and most distribution activities are in the United States, including export
sales to Europe, primarily, and elsewhere. The Company also has marketing
operations in Europe and Australia. The following is a summary of the
Company's operations by segment (in thousands):

<TABLE>
<CAPTION>
                                   United States
                          -------------------------------
                            Proprietary                     International
                          ---------------                  ----------------  Internal
                          Domestic Export   OEM    Total   Australia Europe   Sales     Total
                          -------- ------ ------- -------  --------- ------  --------  -------
<S>                       <C>      <C>    <C>     <C>      <C>       <C>     <C>       <C>
1999:
 Revenues:
   Product..............  $28,821  $9,475 $11,521 $49,817   $  129   $1,110  $(1,278)  $49,778
   Service..............    9,342     --      --    9,342      196      555      --     10,093
   Sale of manufacturing
    license.............      --      --    6,200   6,200      --       --       --      6,200
                          -------  ------ ------- -------   ------   ------  -------   -------
                           38,163   9,475  17,721  65,359      325    1,665   (1,278)   66,071
                          -------  ------ ------- -------   ------   ------  -------   -------
 Costs of sales:
   Product..............   14,788   5,860   8,192  28,840       82      354     (438)   28,838
   Service..............    2,037     --      --    2,037       75       78     (161)    2,029
   Sale of manufacturing
    license.............      --      --      400     400      --       --       --        400
                          -------  ------ ------- -------   ------   ------  -------   -------
   Allocated............   16,825   5,860   8,592  31,277      157      432     (599)   31,267
                          -------  ------ ------- -------   ------   ------  -------   -------
   Unallocated..........                            5,830      --       --       --      5,830
                                                  -------   ------   ------  -------   -------
                                                   37,107      157      432     (599)   37,097
                                                  -------   ------   ------  -------   -------
Gross profit............                           28,252      168    1,233     (679)   28,974
Operating expenses......                           27,703      407      897     (679)   28,328
                                                  -------   ------   ------  -------   -------
(Loss) income from
 operations.............                              549     (239)     336      --        646
Interest expense........                             (527)    (114)    (112)     --       (753)
Interest income.........                               82        8        1      --         91
Other (expense) income..                             (620)     163      130      --       (327)
                                                  -------   ------   ------  -------   -------
Net (loss) income.......                          $  (516)  $ (182)  $  355  $   --    $  (343)
                                                  =======   ======   ======  =======   =======
Other information:
 Identifiable assets....                          $39,206   $1,004   $  799            $41,009
                                                  =======   ======   ======            =======
 Capital expenditures...                          $   658   $  --    $  --             $   658
                                                  =======   ======   ======            =======
 Depreciation...........                          $ 2,109   $   13   $  --             $ 2,122
                                                  =======   ======   ======            =======
 Amortization...........                          $   558   $  --    $  --             $   558
                                                  =======   ======   ======            =======
</TABLE>


                                     F-20
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
                                  United States
                         --------------------------------
                           Proprietary                      International
                         ---------------                   ----------------  Internal
                         Domestic Export   OEM    Total    Australia Europe   Sales    Total
                         -------- ------ ------- --------  --------- ------  -------- --------
<S>                      <C>      <C>    <C>     <C>       <C>       <C>     <C>      <C>
1998:
 Revenues:
 Product................ $31,407  $4,771 $14,604 $ 50,782    $ 475   $ 520    $(866)  $ 50,911
 Service................   8,528     --      --     8,528      173     192      --       8,893
                         -------  ------ ------- --------    -----   -----    -----   --------
                          39,935   4,771  14,604   59,310      648     712     (866)    59,804
                         -------  ------ ------- --------    -----   -----    -----   --------
 Costs of sales:
   Product..............  17,972   2,862   9,531   30,365      366     295     (866)    30,160
   Service..............   1,671     --      --     1,671      139      40      --       1,850
                         -------  ------ ------- --------    -----   -----    -----   --------
   Allocated............  19,643   2,862   9,531   32,036      505     335     (866)    32,010
                         -------  ------ -------
   Unallocated..........                            4,873      --      --       --       4,873
                                                 --------    -----   -----    -----   --------
                                                   36,909      505     335     (866)    36,883
                                                 --------    -----   -----    -----   --------
 Gross profit...........                           22,401      143     377      --      22,921
 Operating expenses.....                           26,703      520     254      --      27,477
                                                 --------    -----   -----    -----   --------
 Loss from operations...                           (4,302)    (377)    123      --      (4,556)
 Interest expense.......                              (34)    (110)   (213)     --        (357)
 Interest income........                               53       15       6      --          74
 Other expense, net.....                              (80)     (98)    216      --          38
 Income taxes...........                           (2,002)     --      --       --      (2,002)
                                                 --------    -----   -----    -----   --------
 Net loss...............                         $ (6,365)   $(570)  $ 132    $ --    $ (6,803)
                                                 ========    =====   =====    =====   ========
 Other information:
   Identifiable assets..                         $ 49,379    $ 629   $ 961            $ 50,969
                                                 ========    =====   =====            ========
   Capital
    expenditures........                         $  1,299    $ --    $ --             $  1,299
                                                 ========    =====   =====            ========
   Depreciation.........                         $  2,233    $  10   $  28            $  2,271
                                                 ========    =====   =====            ========
   Amortization.........                         $    658    $ --    $ --             $    658
                                                 ========    =====   =====            ========
1997:
 Revenues:
   Product.............. $27,927  $3,180 $17,826 $ 48,933    $ 966   $ 409    $(971)  $ 49,337
   Service..............   7,057     --      --     7,057      197     317      --       7,571
                         -------  ------ ------- --------    -----   -----    -----   --------
                          34,984   3,180  17,826   55,990    1,163     726     (971)    56,908
                         -------  ------ ------- --------    -----   -----    -----   --------
 Costs of sales:
   Product..............  15,806   1,963  11,012   28,781      732     412     (836)    29,089
   Service..............   1,774     --      --     1,774       68     110     (135)     1,817
                         -------  ------ ------- --------    -----   -----    -----   --------
   Allocated............  17,580   1,963  11,012   30,555      800     522     (971)    30,906
                         -------  ------ ------- --------    -----   -----    -----   --------
   Unallocated..........                            8,346      --      --       --       8,346
                                                 --------    -----   -----    -----   --------
                                                   38,901      800     522     (971)    39,252
                                                 --------    -----   -----    -----   --------
 Gross profit...........                           17,089      363     204      --      17,656
 Operating expenses.....                           29,196      633     425      --      30,254
                                                 --------    -----   -----    -----   --------
 Income (loss) from
  operations............                          (12,107)    (270)   (221)     --     (12,598)
 Interest expense.......                              132     (116)   (197)     --        (181)
 Interest income........                              251       16       4      --         271
 Other income
  (expense).............                              (11)    (370)   (379)     --        (760)
                                                 --------    -----   -----    -----   --------
 Net income (loss)......                         $(11,735)   $(740)  $(793)   $ --    $(13,268)
                                                 ========    =====   =====    =====   ========
 Other information:
   Identifiable assets..                         $ 47,647    $ 920   $ 577            $ 49,144
                                                 ========    =====   =====            ========
   Capital
    expenditures........                         $  1,725    $   3   $ --             $  1,728
                                                 ========    =====   =====            ========
   Depreciation.........                         $  1,957    $   9   $  15            $  1,981
                                                 ========    =====   =====            ========
   Amortization.........                         $    712    $ --    $ --             $    712
                                                 ========    =====   =====            ========
</TABLE>

                                      F-21
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Internal sales from the United States to Australia and Europe are recorded
on the basis of transfer pricing established by the Company. International
sales to OEM customers are managed and, therefore, reported as part of OEM
business results.

 Significant Customers

  The Company's revenues generally are concentrated among customers in the
healthcare industry and from customers under 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. Accounts receivable are generally unsecured.

  During 1999, 1998, and 1997, the following customers represented greater
than 5% of the Company's revenues:
<TABLE>
<CAPTION>
                                                               1999  1998  1997
                                                               ----  ----  ----
   <S>                                                         <C>   <C>   <C>
   Proprietary products:
     Ethicon-Endo Surgery.....................................  7.3% -- %  -- %
     Diagnostic Imaging (dealer)..............................  --   6.7   --
   OEM products:
     GE Medical Systems (a related party)..................... 20.3  5.9   7.5
     International Surgical Systems...........................  --   7.9   5.0
     Picker International.....................................  --   7.9   --
     Storz Medical............................................  --   --    5.3
     Varian Associates........................................  --   --    5.5
</TABLE>

  The OEM customers are medical products companies for whom the Company
manufactures sub-components and systems under OEM contracts. Sales under OEM
contracts constitute a substantial portion of the Company's revenues and trade
accounts receivable. As of December 31, 1999 and 1998, amounts owed to the
Company under OEM contracts were approximately $3.1 million and $3.4 million,
respectively. Revenues from OEM customers, which can fluctuate significantly,
represented 27%, 24%, and 31% of the Company's revenue in 1999, 1998, and
1997, respectively. There is no assurance that OEM arrangements will be
renewed upon expiration nor, generally, are minimum order quantities specified
in these agreements.

(12) COMMITMENTS AND CONTINGENCIES

 Litigation

  The Company is involved in miscellaneous litigation arising in the ordinary
course of business. Management believes the resolution of these contingencies
will not have a material adverse impact on the Company's operations or
financial position.

 Operating Leases

  The Company leases buildings (see Note 10) and equipment under various
operating lease agreements that provide for the following minimum future lease
payments (in thousands):

<TABLE>
       <S>                                                               <C>
       2000............................................................. $ 1,007
       2001.............................................................   1,007
       2002.............................................................   1,001
       2003.............................................................     744
       2004.............................................................     744
       Thereafter.......................................................   5,642
                                                                         -------
       Total............................................................ $10,145
                                                                         =======
</TABLE>


                                     F-22
<PAGE>

                          FISCHER IMAGING CORPORATION

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Total rent expense was approximately $900,000, $1,600,000 and $1,900,000 in
1999, 1998, and 1997, respectively.

 Regulatory Actions

  The Company's Denver facility 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, which include testing,
quality control and documentation procedures.

  In March 1995, the Company was issued a Warning Letter concerning
documentation and other deficiencies. The Company rectified these deficiencies
and resolved the matter with the FDA later that year.

  Following an inspection which concluded in late 1996, the FDA issued
Inspectional Observations Form 483 ("Form 483") and Warning Letter concerning
deficiencies in manufacturing practices. The FDA requested and subsequently
received 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.

  In October 1998, following a periodic inspection, the FDA issued a Form 483
regarding possible deficiencies in manufacturing, quality, and documentation
practices. The Company has responded to the Form 483 and is presently
instituting corrective actions.

  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 issuance of a Form 483 in 1998 increases the possibility
that one or more of these sanctions could be imposed in the future.

  The Company is currently engaged in discussions with the FDA regarding the
FDA's order to recall a number of its diagnostic mammography systems. The
Company's position, mirrored by the National Electrical Manufacturers
Association, is that the FDA's position is inconsistent with prior performance
standards published for mammography systems. There is no assurance, however,
that the Company will not be required to recall over 500 mammography systems.
The Company is unable to estimate the cost of such a recall at this time.

  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. Ongoing compliance reviews and/or related delays in product clearances
could 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.

(13) SUBSEQUENT EVENT

  On April 13, 2000, the Company entered into a line of credit with a bank for
$8.0 million which replaces the credit facility in place at December 31, 1999.
Under the terms of the agreement, the Company will have available up to $8.0
million credit subject to borrowing base limitations based on eligible
receivables and inventory. The agreement is for a term of three years and is
secured by all tangible assets of the Company. Borrowings under the agreement
will bear interest at the bank's prime rate, 9.0% at March 31, 2000. The
Company will also be subject to certain financial covenants, as defined.

                                     F-23