**FORM 10-Q**

**SECURITIESAND EXCHANGE COMMISSIONWashington, D.C. 20549**
| **(Mark One)**                                                                                                                                                                                                                                                                                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| x                                                                                                                                                                                                                                                                                                                          | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** |
| **For the  Quarter Ended June 30, 2006**                                                                                                                                                                                                                                                                                   |
| ** **                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** |
| **or**                                                                                                                                                                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                                                                                                                 | ** ** | ** ** |
| o                                                                                                                                                                                                                                                                                                                          | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE   SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                                                       | ** ** | ** ** |
| **For the  transition period  from                    to                          ** |

 

**Commissionfile number 0-19386**

**FISCHERIMAGING CORPORATION**(Exact name of Registrant as specified in its charter)

| **DELAWARE**                              |   | **36-2756787**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State of  incorporation)                 |   | (I.R.S. Employer  Identification No.) |
|                                      |   |                                  |
| **370  Interlocken Blvd., Suite 400**     |   |                                  |
| **Broomfield,  Colorado**                 |   | **80021**                             |
| (Address of  principal executive offices) |   | (Zip Code)                            |

 

Registrant’s telephone number, including area code:

**(303) 452-6800**

Indicate by checkmark whether the Registrant (i) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports) and (ii) has been subject to such filingrequirements for the past 90 days.

Yes x   No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

Large acceleratedfiler o                                            Acceleratedfiler o                                       Non-acceleratedfiler x

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No x

The number of shares of Registrant’s Common Stockoutstanding as of August 10, 2006 was 9,398,817.

 

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**FISCHERIMAGING CORPORATION**

**FORM 10-Q**

**INDEX**

| **PART I.**  |   | **FINANCIAL  INFORMATION**                                                                                 |
|--------------|--------|------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                       |
| Item 1.      |   | Consolidated  Financial Statements                                                                         |
|         |   | Consolidated  Balance Sheets—June 30, 2006 (unaudited) and December 31, 2005                          |
|         |   | Consolidated  Statements of Operations (unaudited)—Three and Six-months ended June 30, 2006  and 2005 |
|         |   | Consolidated  Statements of Cash Flows (unaudited)— Six-months ended June 30, 2006 and 2005           |
|         |   | Notes  to Consolidated Financial Statements (unaudited)                                                    |
|         |   |                                                                                                       |
| Item 2.      |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                |
|         |   |                                                                                                       |
| Item 3.      |   | Quantitative  and Qualitative Disclosures About Market Risk                                                |
|         |   |                                                                                                       |
| Item 4.      |   | Controls and  Procedures                                                                                   |
|         |   |                                                                                                       |
| **PART II.** |   | **OTHER INFORMATION**                                                                                      |
| ** **   |   | ** **                                                                                                 |
| Item 1.      |   | Legal Proceedings                                                                                          |
|         |   |                                                                                                       |
| Item 1A.     |   | Risk  Factors                                                                                              |
| Item 2.      |   | Unregistered  Sales of Equity Securities and Use of Proceeds                                               |
| Item 3.      |   | Defaults Upon  Senior Securities                                                                           |
| Item 4.      |   | Submission of  Matters to a Vote of Security Holders                                                       |
| Item 5.      |   | Other Information                                                                                          |
| Item 6.      |   | Exhibits                                                                                                   |
|         |
| SIGNATURES   |

 

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# **PART I.FINANCIAL INFORMATION**

**Item 1. Financial Statements**

#### **FISCHER IMAGING CORPORATIONCONSOLIDATED BALANCE SHEETS(amounts in thousands except share data)**

| ** **                                                                                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                   | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                   | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                                                   |       |              |       |                  |       |
| Current Assets:                                                                                                                              |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                   |       | $                 | 2,448      |                  | $          | 4,499 |   |
| Restricted cash                                                                                                                              |       | 391               |       | —                |       |
| Accounts  receivable, net of allowance for doubtful accounts of $139 and $383 at June  30, 2006 and December 31, 2005, respectively          |       | 655               |       | 4,026                 |       |
| Inventories, net                                                                                                                             |       | 447               |       | 4,329                 |       |
| Prepaid expenses  and other current assets                                                                                                   |       | 385               |       | 1,305                 |       |
| Total current assets                                                                                                                         |       | 4,326             |       | 14,159                |       |
| Property and equipment:                                                                                                                      |       |              |       |                  |       |
| Manufacturing  equipment                                                                                                                     |       | 14                |       | 331                   |       |
| Office equipment  and leasehold improvements                                                                                                 |       | 9                 |       | 208                   |       |
| Total property  and equipment                                                                                                                |       | 23                |       | 539                   |       |
| Less:  accumulated depreciation                                                                                                              |       | —            |       | —                |       |
| Property and equipment, net                                                                                                                  |       | 23                |       | 539                   |       |
| Long-term prepaid insurance,                                                                                                                 |       | 806               |       | —                |       |
| Total assets                                                                                                                                 |       | $                 | 5,155      |                  | $          | 14,698 |   |
|                                                                                                                                         |       |              |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                               |       |              |       |                  |       |
| Current Liabilities:                                                                                                                         |       |              |       |                  |       |
| Accounts payable                                                                                                                             |       | $                 | 1,501      |                  | $          | 2,722 |   |
| Accrued salaries  and wages                                                                                                                  |       | 204               |       | 665                   |       |
| Customer  deposits                                                                                                                           |       | 9                 |       | 1,009                 |       |
| Accrued  warranties                                                                                                                          |       | 311               |       | 1,040                 |       |
| Deferred service  revenue                                                                                                                    |       | 20                |       | 1,667                 |       |
| Other current  liabilities                                                                                                                   |       | 1,106             |       | 2,583                 |       |
| Total current  liabilities                                                                                                                   |       | 3,151             |       | 9,686                 |       |
| Commitments and  contingencies                                                                                                               |       |              |       |                  |       |
| Stockholders’ Equity:                                                                                                                   |       |              |       |                  |       |
| Preferred Stock,  5,000,000 shares authorized:                                                                                               |       |              |       |                  |       |
| Series C Junior  participating preferred stock, $.01 par value, 500,000 shares authorized, no  shares issued and outstanding                 |       | —            |       | —                |       |
| Series D  Convertible preferred stock, $.01 par value, 506,667 shares authorized, no  shares issued and outstanding                          |       | —            |       | —                |       |
| Common stock, $.01 par  value, 25,000,000 shares authorized; 9,398,817 shares issued and outstanding  at June 30, 2006 and December 31, 2005 |       | 94                |       | 94                    |       |
| Paid-in capital                                                                                                                              |       | 49,455            |       | 49,455                |       |
| Accumulated deficit                                                                                                                          |       | (47,545           | )          | (44,240               | )          |
| Accumulated other  comprehensive loss                                                                                                        |       | —            |       | (297                  | )          |
| Total  stockholders’ equity                                                                                                             |       | 2,004             |       | 5,012                 |       |
| Total liabilities and  stockholders’ equity                                                                                             |       | $                 | 5,155      |                  | $          | 14,698 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

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**FISCHER IMAGING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Amounts in thousands except pershare data)**

**(Unaudited)**

| ** **                                                              | ** ** | **Three-months Ended** | ** ** | **Six-months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                                                              | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                                              | ** ** | **2006**                    | ** ** | **2005**                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                              | ** ** | ** **                  | ** ** | ** **                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                               |       |                        |       |                      |       |   |   |   |   |
| Products                                                                |       | $                           | 3,904      |                      | $          | 7,664 |   | $ | 7,841 |   | $ | 18,408 |   |
| Services                                                                |       | 1,654                       |       | 3,525                     |       | 4,703 |   | 7,235 |   |
| Total revenues                                                          |       | 5,558                       |       | 11,189                    |       | 12,544 |   | 25,643 |   |
| Cost of sales:                                                          |       |                        |       |                      |       |   |   |   |   |
| Products                                                                |       | 3,327                       |       | 10,438                    |       | 7,169 |   | 18,544 |   |
| Services                                                                |       | 1,618                       |       | 4,251                     |       | 5,088 |   | 8,657 |   |
| Total cost of  sales                                                    |       | 4,945                       |       | 14,689                    |       | 12,257 |   | 27,201 |   |
| Gross margin                                                            |       | 613                         |       | (3,500                    | )          | 287 |   | (1,558 | ) |
| Operating expenses:                                                     |       |                        |       |                      |       |   |   |   |   |
| Research and  development                                               |       | —                      |       | 2,062                     |       | — |   | 4,002 |   |
| Selling and  marketing                                                  |       | —                      |       | 2,069                     |       | — |   | 4,046 |   |
| General and  administrative                                             |       | 945                         |       | 2,964                     |       | 2,926 |   | 4,795 |   |
| Impairment of  long-lived assets                                        |       | —                      |       | —                    |       | 230 |   | — |   |
| Total operating  expenses                                               |       | 945                         |       | 7,095                     |       | 3,156 |   | 12,843 |   |
| Loss from operations                                                    |       | (332                        | )          | (10,595                   | )          | (2,869 | ) | (14,401 | ) |
| Other income and  (expense):                                            |       |                        |       |                      |       |   |   |   |   |
| Other financing  (expense) income                                       |       | —                      |       | 2,520                     |       | — |   | (12 | ) |
| Interest expense                                                        |       | (3                          | )          | (894                      | )          | (69 | ) | (1,212 | ) |
| Interest income                                                         |       | 17                          |       | 4                         |       | 39 |   | 5 |   |
| Other expense,  net                                                     |       | (269                        | )          | (142                      | )          | (406 | ) | (64 | ) |
| Net loss                                                                |       | $                           | (587       | )                         | $          | (9,107 | ) | $ | (3,305 | ) | $ | (15,684 | ) |
| Net loss per share:                                                     |       |                        |       |                      |       |   |   |   |   |
| Basic and  diluted                                                      |       | $                           | (0.06      | )                         | $          | (0.97 | ) | $ | (0.35 | ) | $ | (1.67 | ) |
| Weighted average shares  used to calculate net (loss) income per share: |       |                        |       |                      |       |   |   |   |   |
| Basic and  diluted                                                      |       | 9,399                       |       | 9,383                     |       | 9,399 |   | 9,383 |   |

 

The accompanying notesare an integral part of these consolidated financial statements.

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**FISCHER IMAGING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

**(Unaudited)**

| ** **                                                                                         | ** ** | **Six-months ended** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------|------------|
| ** **                                                                                         | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** |
| ** **                                                                                         | ** ** | **2006**                  |       | **2005** |   |
| Cash flows from  operating activities:                                                             |       |                      |       |   |   |
| Net (loss)                                                                                         |       | $                         | (3,305     | ) | $ | (15,684 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities:                       |       |                      |       |   |   |
| Depreciation and  amortization                                                                     |       | —                    |       | 594 |   |
| Amortization of  debt issue costs                                                                  |       | —                    |       | 760 |   |
| Bad debt expense                                                                                   |       | 87                        |       | 300 |   |
| Loss upon  substantially completing liquidation of the European subsidiaries                       |       | 75                        |       | — |   |
| Other financing  expense                                                                           |       | —                    |       | 12 |   |
| Other                                                                                              |       | 11                        |       | 118 |   |
| Impairment of  long-lived assets                                                                   |       | 230                       |       | — |   |
| Change in  current assets and liabilities                                                          |       |                      |       |   |   |
| Accounts  receivable, net                                                                          |       | 2,733                     |       | (73 | ) |
| Inventories, net                                                                                   |       | 3,747                     |       | 5,086 |   |
| Prepaid expenses  and other current assets                                                         |       | 66                        |       | (236 | ) |
| Accounts payable                                                                                   |       | (1,340                    | )          | 174 |   |
| Accrued  warranties                                                                                |       | (562                      | )          | (725 | ) |
| Customer  deposits                                                                                 |       | (263                      | )          | (70 | ) |
| Deferred service  revenue                                                                          |       | (1,111                    | )          | 558 |   |
| Other                                                                                              |       | (2,076                    | )          | 132 |   |
| Net cash used in  operating activities                                                             |       | (1,708                    | )          | (9,054 | ) |
|                                                                                               |       |                      |       |   |   |
| Cash flows (used in)  provided by investing activities:                                            |       |                      |       |   |   |
| Funding of  Fischer Imaging Employee Trust                                                         |       | (600                      | )          | — |   |
| Payments made  from Fischer Imaging Employee Trust                                                 |       | 214                       |       | — |   |
| Proceeds from  sale of property and equipment                                                      |       | 251                       |       | — |   |
| Europe cash on  hand at time of substantially completing liquidation of the European  subsidiaries |       | (197                      | )          | — |   |
| Redemption of  certificate of deposit (restricted cash)                                            |       | —                    |       | 514 |   |
| Purchases of  property and equipment                                                               |       | —                    |       | (454 | ) |
| Net cash (used  in) provided by investing activities                                               |       | (332                      | )          | 60 |   |
|                                                                                               |       |                      |       |   |   |
| Cash flows provided by  financing activities:                                                      |       |                      |       |   |   |
| Proceeds from  sale of common stock                                                                |       | —                    |       | 55 |   |
| Proceeds from  senior secured promissory notes                                                     |       | —                    |       | 7,000 |   |
| Proceeds from  junior secured promissory note                                                      |       | —                    |       | 5,000 |   |
| Payment of debt  issue costs                                                                       |       | —                    |       | (471 | ) |
| Proceeds from  line of credit                                                                      |       | —                    |       | 3,311 |   |
| Repayments on  line of credit                                                                      |       | —                    |       | (4,765 | ) |
| Payment on  leases                                                                                 |       | —                    |       | (224 | ) |
| Net cash  provided by financing activities                                                         |       | —                    |       | 9,906 |   |
|                                                                                               |       |                      |       |   |   |
| Effect of exchange rate  changes on cash                                                           |       | (11                       | )          | (28 | ) |
|                                                                                               |       |                      |       |   |   |
| Net decrease in cash  and cash equivalents                                                         |       | (2,051                    | )          | 884 |   |
| Cash and cash  equivalents, beginning of period                                                    |       | 4,499                     |       | 1,939 |   |
| Cash and cash equivalents, end of period                                                           |       | $                         | 2,448      |   | $ | 2,823 |   |
|                                                                                               |       |                      |       |   |   |
| Supplemental Cash Flow Information:                                                                |       |                      |       |   |   |
| Non-cash change in  stock warrant obligation                                                       |       | —                    |       | (1,800 | ) |
| Non-cash increase in  debt issue costs                                                             |       | —                    |       | 1,788 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

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**FISCHER IMAGING CORPORATION**

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE SIX-MONTHS ENDED June 30,2006**

**(UNAUDITED)**

**(1)   GENERAL**

**Organization**

Fischer Imaging Corporation,together with its wholly owned subsidiaries (“Fischer” or the “Company”),services and sells products that meet selected needs of the broader radiology,electrophysiology and surgical markets. The Company’s primary focus prior to the consummation of the Hologictransaction on September 29, 2005 (as discussed below) was designing,manufacturing and selling mammography and digital imaging products and usingits digital imaging technology in screening and diagnostic mammograms andminimally invasive breast biopsy to aid in the early identification of breastcancer. Prior to the Kodak arrangement (as discussed below) Fischer alsoserviced mammography and digital imaging products used in the diagnosis ofbreast cancer and other diseases.

In December 2005, the Board ofDirectors approved the liquidation and wind-up of Fischer’s Europeansubsidiaries.  Europe started theliquidation process on May 4, 2006 and a liquidator was designated.  As a result, Fischer no longer has control ofits European subsidiaries.   Prior to May4, 2006, the consolidated financial statements include the accounts of FischerImaging Corporation and all subsidiaries. All significant inter-companyaccounts and transactions have been eliminated in consolidation.  As a result of deconsolidating thesubsidiaries, management recognized approximately $75,000 of losses in theaccompanying consolidated statement of operations.

**Hologic Transaction and Plan of Liquidation**

In September 2005, Fischerconsummated the sale (the “Asset Sale”) of all of its intellectual propertyrights related to its mammography business and products, including its SenoScandigital mammography and MammoTest stereotactic breast biopsy systems (the “MammographyAssets”) to Hologic, Inc. (“Hologic”). Hologic granted Fischer a non-exclusive limited license to use certainMammography Assets necessary for Fischer to continue to service and support,and satisfy warranty obligations on the installed base of SenoScan andMammoTest systems (the “Service” business); to fulfill contractual obligationsto provide MammoTest and SenoScan systems to Ethicon Endo-Surgery Europe (asubsidiary of Johnson & Johnson, Inc., “EES”) and Philips Medical SystemsDMC GmbH (“Philips”), respectively; and to carry out certain activities withrespect to Fischer’s radiology, electrophysiology and surgical (“RE&S”)business.

*Servicebusiness.*  On January 23, 2006, Fischerentered into an Intellectual Property License Agreement and Services Agreement(together, the “Kodak Agreements”) with Eastman Kodak Company (“Kodak”).  The Kodak Agreements allow Kodak to act as anauthorized service provider and provide service and support to the world-wide,excluding Mexico, installed base of Fischer’s mammography products.  The Kodak Agreements have reduced Fischer’sobligations and costs with respect to the Service business.  All Fischer mammography service contractswere cancelled by April 21, 2006 in the U.S. and by May 8, 2006 in Europe. Alldisposables revenue and time and material revenue from the Service businessended as of January 23, 2006 in the U.S. Fischer incurred $135,000 of expense related to payments made to Kodakduring the six-months ended June 30, 2006. Services cost of sales has been reduced due to reimbursement from Kodakof approximately $350,000 during the six-months ended June 30, 2006.

*Contractualobligation to EES.*  On March 9,2006, Fischer entered into an amendment (the “EES Amendment”) to theDistributor Agreement, dated December 9, 1998, as amended (the “DistributorAgreement”) between EES and Fischer.  EESplaced a binding order with Fischer for 20 MammoTest tables (collectively, the “Tables”),which were shipped to various locations in Europe during the six-months endedJune 30, 2006.  After completion of theTables, the Distributor Agreement and EES Amendment terminated and no furtherMammoTest tables will be sold.

*Contractualobligation to Philips.*  The statusof the Master Purchasing Agreement (“Philips Agreement”) between Fischer andPhilips is still unresolved as discussed further in Note 10.  As a result, management believes no revenueswill be generated from this contract.

*RE&Sbusiness.*  The RE&S business includesthree product lines (collectively the “Product Lines”):

(1)  The VersaRad-A and VersaRad-D systemsdesigned for general purpose radiographic imaging (“VersaRad Line”).  Substantially all of the sales of thisproduct are sold to Kodak under an OEM Agreement.  Fischer received a significant last time 

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purchase order from Kodak in February 2006,which was completed in May 2006. Therefore, management expects that no further VersaRad units will besold.

(2)  The EPX-60 Single Plane EP Imaging System andthe SPX Surgical Imaging System (“EPX/SPX Line”).  Management expects that no further EPX/SPXunits will be sold due to the departure of sales personnel.

(3)  The Bloom Electrophysiology Stimulator (“BloomLine”).  Sales of this product have beendeclining and backlog is currently minimal.

In order to ensure Fischercould continue to meet its warranty and service obligations and to maximize thevalue of the RE&S business, the Board approved signing a ManufacturingServices Agreement (“Byers Agreement”) with Byers Peak, Inc. (“Byers”)effective July 5, 2006.  The ByersAgreement terminates upon certain conditions or immediately upon the closing ofa sale of the RE&S business. Management estimates costs under this contract will not be more than$5,000 per month.

*Sale of RE&S Business. *On March 15, 2006, Fischer started an auctionprocess to sell its RE&S business. Fischer signed an asset purchase agreement (“RE&S Agreement”) withByers Peak, Inc. (“Byers”) on August 21, 2006. The assets to be sold are all of Fischer’s right, title and interest inand to the VersaRad Line, the EPX/SPX Line and the Bloom Line including somerelated equipment, inventory (excluding Bloom finished goods inventory),general intangibles and intellectual property necessary to design, manufacture,market, sell, distribute, support and repair the Product Lines (“RE&SAssets”).  Under the RE&S Agreement,Byers agreed, subject to the fulfillment of certain conditions, to purchase theRE&S Assets, and assume service contract and warranty repair obligations,for a minimum purchase price of $260,000 to be paid over a period ending nolater than one year from the date of closing of the transaction (“Closing”).  In addition, Byers agreed to pay Fischer upto another $80,000 depending on the number of Bloom units sold by Byers duringthe year after the Closing.

If the RE&S Agreement isnot closed, the Company may be left with continuing obligations in connectionwith RE&S related service and warranty obligations.  The Company will seek alternative serviceproviders to provide continuation of service for these obligations in suchcircumstances.

*Liquidation Plan andBankruptcy. *Under Delaware law, anysale of all or substantially all of Fischer’s assets requires approval by Fischer’sstockholders.  The Board has determinedthat the sale of the assets related to the RE&S Agreement is considered asale of all or substantially all of Fischer’s remaining assets.  In order to avoid the expense and time delayinvolved in securing stockholder approval and in light of Fischer’sdeteriorating financial position, the Board elected to file a petition underChapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in theUnited States Bankruptcy Court for the District of Colorado, and such petitionwas filed on August 22, 2006. Fischer will immediately move to have the saleunder the RE&S Agreement approved pursuant to §363(b) and (f) of theBankruptcy Code.  Management expects itcould be up to two months before the Closing is complete.

 The Board of Directors intends to either filea liquidating plan of reorganization (“Liquidation Plan”) or convert theChapter 11 case to a liquidating case under Chapter 7 of the Bankruptcy Codeafter the closing of the RE&S Agreement. If a Liquidation Plan is filed, the Liquidation Plan must be approved bycreditors, interest holders and the Bankruptcy Court after notice and ahearing.  It is contemplated that theLiquidation Plan will provide for the liquidation or sale of all of Fischer’sassets and the distribution of the proceeds pursuant to the priority schemeallowed under the Bankruptcy Code.  It isanticipated that in either a Chapter 11 or Chapter 7 liquidation, theliquidation process would occur over a one to two year period. Management isunable to predict whether any amounts will be available for distribution tostockholders.

**Basis of Presentation**

In management’s opinion,the accompanying unaudited consolidated balance sheets, statements ofoperations and statements of cash flows contain all adjustments necessary topresent fairly in all material respects the financial position of the Companyat June 30, 2006, its results of operations for the three-months and six-monthsended June 30, 2006 and 2005 and its cash flows for the six-months ended June30, 2006 and 2005.  Results of operationsand cash flows for the interim periods may not be indicative of the results ofoperations and cash flows for the full fiscal year.

Prior year amounts havebeen reclassified to conform to the current year’s presentation.

The unauditedconsolidated financial statements should be read in conjunction with theconsolidated financial statements and footnotes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2005.

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As a result offiling a petition under Chapter 11 of title 11 of the Bankruptcy Code, thebasis of accounting will change from the going concern basis to that of theliquidation basis of accounting on August 22, 2006. Under the liquidation basisof accounting, assets are stated at their estimated net realizable value andliabilities are stated at their estimated settlement amounts, which estimateswill be periodically reviewed and adjusted as appropriate. The valuation ofassets at their net realizable value and liabilities at their anticipatedsettlement amounts represent estimates, based on present facts andcircumstances, of the net realizable value of assets and the costs associatedwith carrying out the Liquidation Plan and dissolution based on certain assumptions.  Other than the write-down of approximately$1.0 million of prepaid insurance, management currently estimates there wouldbe no further material adjustments needed under the liquidation basis.

**Stock Based Compensation**

During the three-monthsended March 31, 2006, the Company adopted the provisions of and beganaccounting for stock-based compensation in accordance with, the FinancialAccounting Standards Board’s Statement of Financial Accounting Standards No.123—revised 2004 (“SFAS 123R”), “Share—Based Payment” which replaced Statementof Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock—BasedCompensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting forStock Issued to Employees.”  Under thefair value recognition provisions of this statement, stock—based compensationcost is measured at the option grant date based on the fair value of the awardand is recognized as an expense on a straight—line basis over the requisiteservice period, which is the vesting period where applicable or in the case ofoption grants that vest immediately, over the appropriate period prior to thegrant date.  The Company elected themodified—prospective method, under which prior periods are not revised forcomparative purposes.  The valuationprovisions of SFAS 123R apply to new option grants and to option grants thatwere outstanding as of January 1, 2006 and subsequently modified.  Estimated compensation cost for option grantsthat were outstanding as of the effective date and are not expected to beforfeited will be recognized over the remaining service period using thecompensation cost estimated for the SFAS 123 pro forma disclosures.

The adoption of SFAS 123Rhad no impact on the consolidated financial position, results of operations andcash flows.  As a result of a reductionin work force, unvested options outstanding as of December 31, 2005 are notexpected to vest.  The 2004 EquityIncentive Plan allows for automatic annual grants upon each year of director’sservice of 10,000 per director on January 1. The compensation expense related to this annual grant is recognized overthe prior year of service.  No furthergrants under the Company’s stock option plans are expected.

The following table setsforth the pro forma amounts of net income and net income per share, for thethree and six-months ended June 30, 2005, that would have resulted if Fischerhad accounted for the option grants under employee stock plans under the fairvalue recognition provisions of SFAS 123 (in thousands, except per shareamounts).
|                                                | ** ** | **Three-months ended** | ** ** | **Six-months ended** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                                     | ** ** | **June 30, 2005**           | ** ** | **June 30, 2005**         | ** ** |
| ** **                                     | ** ** | ** **                  | ** ** | ** **                | ** ** |
| ** **                                     | ** ** | ** **                  | ** ** | ** **                | ** ** |
| Net loss as  reported                          |       | $                           | (9,107     | )                         | $          | (15,684 | ) |
| Fair value-based compensation cost, net of tax |       | (136                        | )          | (211                      | )          |
| Pro forma net loss                             |       | $                           | (9,243     | )                         | $          | (15,895 | ) |
|                                           |       |                        |       |                      |       |
| Basic and  diluted loss per share:             |       |                        |       |                      |       |
| As reported                                    |       | $                           | (0.97      | )                         | $          | (1.67 | ) |
| Pro forma                                      |       | $                           | (0.99      | )                         | $          | (1.69 | ) |

 

**(2)   REVENUERECOGNITION**

The Company follows theprovisions of SEC Staff Accounting Bulletin No. 104, “Revenue Recognition inFinancial Statements” (“SAB 104”) which provides for revenue recognition whenpersuasive evidence of an arrangement exists, delivery has occurred, the priceis fixed and determinable and collectibility is reasonably assured. The Company’sstandard business practice requires that sales transactions be supported by anexecuted sales agreement or an executed purchase order. The Company recognizesproduct revenue for its medical equipment when title and risk of loss havetransferred to the customer and the Company has no post-shipment performanceobligations other than installation or training.   Where installation and/or training servicesare provided in a sales agreement and they have not been completed at the timeproduct revenue is recognized, the fair value of these services is deferred andsubsequently recognized as revenue when each of the services are performed. Incases where the sales agreement prescribes additional consequential performanceobligations or requires specific performance

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criteria be met for customer acceptance, the Companydefers revenue recognition on the product sale until such conditions aresatisfied.

The Company bills servicecontracts and extended warranty agreements in advance either monthly,quarterly, annually or at the time of the product sale, depending upon thecustomers’ request.  The amounts billedare recorded as deferred revenue and recognized as revenue ratably during theperiod for which the contracts are in effect. The Company recognizes revenue from services billed on a time andmaterial basis when the services are performed. The Company also sells replacement parts to customers and recordsrevenue at the time of shipment when title transfers. Certain replaced partsmay be returned for partial credit, and the Company records sales allowancesbased on historical experience to account for the future effect of thosereturns.

Accounts receivable arecarried at original invoice amounts less an estimate for doubtful accounts andsales returns based on a periodic review of outstanding receivables. Allowancesare provided for known and anticipated credit losses as determined bymanagement in the course of regularly evaluating individual customerreceivables. This evaluation takes into consideration a customer’s financialcondition and credit history as well as current economic conditions. Accountsreceivable are written off when deemed uncollectible. Recovery of accountsreceivable previously written off are recorded when received.

**(3)   INVENTORIES**

The Company valuesinventory at the lower of cost or market using the first-in, first-out (FIFO)method. The Company assesses the recoverability of inventory based onobsolescence or overstocked inventory equal to the difference between the costof inventory and the estimated market value based upon historical experienceand assumptions about future demand and changes in market conditions. Inaddition, the Company included estimates of the market for its remaininginventory for the RE&S business based upon the value under the RE&SAgreement.  These assessments requirejudgments and estimates, and valuation adjustments for excess and obsoleteinventory may be recorded based on these periodic assessments.

Inventories consisted ofthe following components (in thousands): 
|                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                   | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| Raw materials                                |       | $                 | 929        |                  | $          | 5,120 |   |
| Work in process  and finished goods          |       | 1,430             |       | 6,340                 |       |
| Reserve for  excess and obsolete inventories |       | (1,912            | )          | (7,131                | )          |
| Inventories, net                             |       | $                 | 447        |                  | $          | 4,329 |   |

 

The following provides an explanation of the change inthe reserve for excess and obsolete inventories:
| Balance at beginning of year                          |   | $      | 7,131 |   |
|-------------------------------------------------------|--------|--------|-------|--------|
| Reversal of  provision due to results of actual sales |   | (326   | )     |
| Removal of  Europe balances at time of liquidation    |   | (500   | )     |
| Write-offs  charged to reserve                        |   | (4,393 | )     |
| Balance at June 30,  2006                             |   | $      | 1,912 |   |

 

 

**(4)    IMPAIRMENT OF LONG-LIVEDASSETS**

The Company’s policy isto evaluate whether there has been a permanent impairment in the value oflong-lived assets, of certain identifiable intangibles and of goodwill whencertain events have taken place that indicate that the remaining balance maynot be recoverable.  Fischer evaluatesthe carrying value of its property and equipment at the consolidated levelsince the Company believes that is the lowest identifiable level of cash flowsfor these assets.  Management completed arecoverability test as of March 31, 2006.

Since the futureestimated cash inflows were estimated to be near zero, the carrying amounts ofthe assets exceeded the estimated undiscounted cash flows.  Management estimated the fair value of theassets by reviewing the value of the remaining businesses and other long-livedassets and determined an impairment had occurred.  Fair value of the long-lived assets wasdetermined through inquiry of advisors and comparison to other sales of fixedassets.  Therefore, an impairment oflong-lived assets of $0.2 million was recognized during the three-months endedMarch 31, 2006, leaving approximately $227,000 net book value as of March 31,2006 in the United States.

During the three-monthsended June 30, 2006, the Board authorized and completed the sale of themajority of the 

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remaining fixed assets in the United States.  As a result, cash proceeds of approximately$214,000 were generated during the three-months ended June 30, 2006.

**(5)    RESTRUCTURING EXPENSE**

The Company entered intotermination and retention arrangements from June 2005 through March 2006 withapproximately 102 employees in the U.S. and Europe.  All areas of the Company were impacted.   Retention payments under these agreementsearned over the period July 1, 2005 through December 31, 2005 were $0.7million, of which $0.3 million were paid in January 2006 and the remainder waspaid in July 2006.  Retention paymentsunder these agreements earned over the period January 1, 2006 through June 30,2006 are were $0.4 million and were paid in July 2006.  Termination payments, earned upon involuntarytermination, are estimated to be $1.4 million. Retention payments were recognized as expense over the period earned,and termination payments were expensed over the period beginning with the dateof signing agreements through the earlier of the communicated involuntarytermination dates or October 31, 2006.

The Company recognizedadditional restructuring expense in the amount of $0.3 million and $1.5 millionrelated to these arrangements during the three-months and six-months ended June30, 2006, respectively.  The majority ofrestructuring expense was recognized in the consolidated statements ofoperations as products cost of sales for the three-months ended June 30,2006.  Restructuring expense wasrecognized in the consolidated statements of operations as $0.6 million inproducts cost of sales, $0.7 million in services cost of sales and $0.2 millionin general and administrative expense for the six-months ended June 30,2006.  Management estimates its remainingfuture restructuring expense under these plans will be less than $0.1 millionto be recognized during the remainder of 2006.

A portion of the paymentsto be made under the termination and retention arrangements will be paid fromthe irrevocable Fischer Imaging Employee Trust (the “Trust”).  During the three-months ended June 30, 2006,the Trust paid $214,000 of amounts due under the termination and retentionarrangements.  This Trust was establishedin 2006 for the specific purpose of paying amounts owed under termination andretention arrangements or general wages to employees. The Trust was funded bythe Company on January 2, 2006 with $600,000 of cash as authorized by the Boardof Directors.

The following is a rollforward of the restructuring accrual (in thousands):
| Balance at December 31, 2005                              |   | $      | 539    |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Expense                                                   |   | 1,487  |   |
| Removal of  unpaid Europe balances at time of liquidation |   | (44    | )      |
| Payments                                                  |   | (1,647 | )      |
| Balance at June 30,  2006                                 |   | $      | 335    |   |

 

The restructuringaccrual is included in “Other Current Liabilities” in the accompanyingconsolidated balance sheet.

**(6)    OTHER FINANCINGEXPENSE**

On February 22, 2005, the Company entered into a Noteand Warrant Purchase Agreement (the “Purchase Agreement”) with ComVest.  At closing, Fischer issued and sold a seniorsecured promissory note in the principal amount of $5.0 million (the “InitialNote”) to ComVest. In connection with the issuance of the Initial Note, Fischerissued to ComVest a warrant (the “Warrant”) to purchase 2,000,000 shares ofCommon Stock at an exercise price of $4.25 per share.

OnMarch 29, 2005 the Company amended the Purchase Agreement and ComVest provided$2.0 million in funding under a secondary note (the “Secondary Note”), bringingFischer’s total borrowing from ComVest to $7.0 million (the “Notes”).  Also in connection with the funding of theSecondary Note, the Company agreed to amend the Warrant to provide ComVest witha put option, exercisable at $0.90 per warrant share, upon the occurrence ofcertain trigger events.

SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity,” and EITF 00-19, “Accounting for Derivative Financial InstrumentsIndexed to, and Potentially Settled in, a Company’s Own Stock” each requireissuers to classify as liabilities (or assets under certain circumstances)freestanding financial instruments which, at inception, require or may requirean issuer to settle an obligation by transferring assets.  SFAS No. 150 required the warrants issuedsubject to a put under the Purchase Agreement to be classified as a liabilityin an amount equal to the estimated fair value.

As of February 22, 2005and March 31, 2005, the stock warrant obligation fair value was estimated to be$2.9 million 

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and $4.3 million, respectively.  As required per APB Opinion No. 14, “Accountingfor Convertible Debt and Debt Issued with Stock Purchase Warrants,” theissuance proceeds were allocated between the amount applicable to the debt andthe amount applicable to the warrant based upon relative fair values of thedebt and the warrants at issuance date. As a result, Fischer increased “Debt issue costs” by $1.8 million.  The difference of $2.5 million between theestimated fair value at March 31, 2005 of $4.3 million and the fair value as ofJune 30, 2005 of $1.8 million was recognized as non-cash “Other Financing Income”in the consolidated income statements for the three-months ended June 30, 2005.

The fair value of thestock warrant obligation was estimated using the Black-Scholes option-pricingmodel.  The stock price was discounted by40% to consider marketability of the common stock itself and the resultingBlack-Scholes fair value was discounted by 20% to consider the lack ofmarketability of the warrant.  Thefollowing summarizes the significant assumptions:
|                               | ** ** | **March 31, 2005** | ** ** | **February 22, 2005** | ** ** |
|-------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Stock price  (10-day average) |       | $                            | 6.22       |                            | $          | 4.55 |   |
| Discounted stock  price       |       | $                            | 3.73       |                            | $          | 2.73 |   |
| Volatility                    |       | 94.9                         | %          | 94.9                            | %          |
| Dividend yield                |       | 0.00                         | %          | 0.00                            | %          |
| Risk-free  interest rate      |       | 4.24                         | %          | 3.89                            | %          |
| Expected life  (years)        |       | 5.00                         |       | 5.00                            |       |
| Black-Scholes  fair value     |       | $                            | 2.70       |                            | $          | 1.84 |   |
| Fair value per warrant  share |       | $                            | 2.16       |                            | $          | 1.47 |   |

 

In connection with theclosing of the Asset Sale, ComVest exercised its put option, and at closing,Fischer paid $1.8 million in satisfaction of the stock warrant obligation.  In addition, amounts due under the ComVestpromissory notes were paid upon the closing of the Asset Sale.

**(7)   NET EARNINGS PER SHARE**

Basic earnings or lossper share is computed by dividing the Company’s net income or loss by theweighted average number of shares of common stock outstanding at the reportingdate. Diluted earnings or loss per share is determined by dividing the netearnings or loss by the sum of the weighted average number of common sharesoutstanding, and if not anti-dilutive, the effect of outstanding stock optionsdetermined utilizing the treasury stock method.

For the three andsix-months ended June 30, 2006 and 2005, 513,250 and 1,194,000, respectively,of options to purchase shares of common stock were outstanding but not includedin the computation of diluted earnings per share because the effect would havebeen anti-dilutive.

**(8)   COMPREHENSIVE LOSS**

Comprehensive lossis defined as the change in equity of an enterprise other than the changeresulting from investments by, or distributions to, its owners. For theCompany, comprehensive loss includes only net loss and foreign currencytranslation adjustments as follows (in thousands):
|                                           | ** ** | **Three-months Ended** | ** ** | **Six-months Ended** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                                | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                                | ** ** | **2006**                    | ** ** | **2005**                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net loss                                  |       | $                           | (587       | )                         | $          | (9,107 | ) | $ | (3,305 | ) | (15,684 | ) |
| Foreign currency  translation adjustments |       | 303                         |       | (45                       | )          | 297 |   | (28 | ) |
| Comprehensive loss                        |       | $                           | (284       | )                         | $          | (9,152 | ) | $ | (3,008 | ) | (15,712 | ) |

 

**(9)   SEGMENT AND CUSTOMERINFORMATION**

The Company hashistorically operated in a single industry segment: the design, manufacture andmarketing of specialty digital imaging systems and other medical devicesprimarily used in screening, diagnostic and interventional procedures, and theprovision of service to its installed base. The Company manufactured itsproducts in the United States and distributed them

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in the UnitedStates, Europe and elsewhere.   TheCompany’s chief operating decision maker historically used consolidated resultsto make operating and strategic decisions.

Internationally, theCompany marketed and supported its products primarily through its subsidiariesand various dealers.  Revenues areattributed to geographic areas based on the location of the customer.  International long-lived assets were locatedin Switzerland.  The following tablerepresents a summary of revenues and long-lived assets (in thousands):
|                      | ** ** | **Three-months Ended** | ** ** | **Six-months Ended** | ** ** |
|----------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **           | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **           | ** ** | **2006**                    | ** ** | **2005**                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:            |       |                        |       |                      |       |   |   |   | ** ** |
| United States        |       | $                           | 3,076      |                      | $          | 9,020 |   | $ | 8,418 |   | $ | 21,863 | ** ** |
| Other  International |       | 2,482                       |       | 2,169                     |       | 4,126 |   | 3,780 | ** ** |
| Total                |       | $                           | 5,558      |                      | $          | 11,189 |   | $ | 12,544 |   | $ | 25,643 | ** ** |

 
|                          | ** ** | **As of**    | ** ** |
|--------------------------|------------|-------------------|------------|
| ** **               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
| ** **               | ** ** | **2006**          | ** ** | **2005** | ** ** |
| ** **               | ** ** | ** **        | ** ** | ** ** | ** ** |
| Long-lived  assets, net: |       |              |       |   |   |
| United States            |       | $                 | 23         |   | $ | 469 |   |
| International            |       | —            |       | 70 |   |
| Total                    |       | $                 | 23         |   | $ | 539 |   |

 

The Company’s revenueshave generally been concentrated among customers in the healthcare industry andconsist of healthcare organizations, government facilities and dealers. TheCompany establishes an allowance for uncollectible accounts based upon factorssurrounding the credit risk of specific customers, historical trends and otherinformation. Accounts receivable are generally unsecured.

Customers representinggreater than 10% of the Company’s revenue during any of the reporting periods:
|                            | ** ** | **Three-months Ended** | ** ** | **Six-months Ended** | ** ** |
|----------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                 | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                 | ** ** | **2006**                    | ** ** | **2005**                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Ethicon-Endo Surgery,  Inc |       | 47.6                        | %          | 15.4                      | %          | 42.6 | % | 11.4 | % |
| Eastman Kodak Company      |       | 32.8                        | %          | 7.1                       | %          | 22.5 | % | 7.8 | % |

 

Revenue grouped bysimilar products and services (in thousands):                
|                             | ** ** | **Three-months Ended** | ** ** | **Six-months Ended** | ** ** |
|-----------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                  | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                  | ** ** | **2006**                    | ** ** | **2005**                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| Product Revenue:            |       |                        |       |                      |       |   |   |   |   |
| Digital Mammography         |       | $                           | 320        |                      | $          | 1,156 |   | $ | 320 |   | $ | 3,940 |   |
| Stereotactic Breast  Biopsy |       | 1,554                       |       | 5,059                     |       | 2,681 |   | 10,701 |   |
| RE&S Products           |       | 2,030                       |       | 1,449                     |       | 4,840 |   | 3,767 |   |
|  Service Revenue       |       | 1,654                       |       | 3,525                     |       | 4,703 |   | 7,235 |   |
| Total                       |       | $                           | 5,558      |                      | $          | 11,189 |   | $ | 12,544 |   | $ | 25,643 |   |

 

**(10)   COMMITMENTS AND CONTINGENCIES**

**Litigation**

On December 20, 2005, University Health Network (“UHN”)and Mount Sinai Hospital (“Mount Sinai”) filed a Statement of Claim in OntarioCanada against Fischer and Horizon Medical Services Ltd. (“Horizon”) andasserted claims seeking to recover damages relating to their purchase of twoSenoScan units from Fischer.  In summary,UHN and Mount Sinai alleged, among other things, that the SenoScan units, whichwere manufactured by Fischer and sold by Horizon, an entity authorized to sell

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these types of machines in Canada, were defective and did not conform tocertain agreed specifications.  The suitwas settled out of court in July 2006 for an amount immaterial to Fischer’sfinancial condition and cash flow.

On December 21, 2005, Fischer filed a complaint and jurydemand against Cedara Software Corporation (“Cedara”) seeking damages arisingfrom Cedara’s breach of a contract to sell software applications products.  Cedara answered the complaint on January 30,2006 and filed a counterclaim for unpaid invoices and other relief.  The suit was settled out of court in July2006 for an amount immaterial to Fischer’s financial condition and cash flow.

**Federal Trade Commission**

Fischer received in October 2005 a request from the Federal Trade FTC (“FTC”)asking that Fischer voluntarily produce certain information and material to theFTC in connection with the Asset Sale. On January 31, 2006, Fischer received additional information requestsfrom the FTC in the form of a Subpoena Duces Tecum and Civil InvestigativeDemand as part of this ongoing investigation. Fischer responded to the FTC requests. On July 7, 2006 the FTC announced its decision to challenge, and theentry into a consent agreement with respect to Hologic’s 2005 purchase of theMammoTest prone stereotactic breast biopsy systems (“SBBS”) from Fischer. Inits complaint, the FTC alleged that Hologic’s acquisition of the SBBS harmedAmerican consumers by eliminating Hologic’s only significant competitor for thesale of SBBSs in the United States. According to the FTC’s announcement, underthe consent agreement, Hologic is required and has agreed to sell to Siemens AGthe prone SBBS assets Hologic acquired from Fischer.

**Regulatory Actions**

The Company is subject to periodic inspections by theFood and Drug Administration (“FDA” or the “agency”).  The primary purpose of these inspections isto verify the compliance of a company’s quality system with the requirements ofFDA’s Good Manufacturing Practices, also known as the Quality SystemRegulation, and other FDA regulations governing medical devices.  During these inspections, the agencyevaluates a company’s state of compliance with various FDA regulations and theadequacy of the company’s actions to correct observations from earlierinspections and Warning Letter(s).  Inearly 2005, the FDA conducted an inspection of the Company’s Quality Systemwith the above objectives. On May 13, 2005 the FDA completed the inspection andpresented a Form 483 formally describing observations with respect to theCompany’s compliance with various FDA requirements. This inspection did notresolve the issues described in the Warning Letter issued to the Company inDecember 2002 by the FDA, which, as a result, remains in effect.  The Company retained the services of aconsultant and responded to the Form 483 findings.  The response described a corrective actionplan to address each of the observations included on the Form 483.  To date, there has been no written responsefrom the FDA regarding the adequacy of the Company’s corrective actionplan.   However, the Company has attendedtwo meetings with the FDA regarding the status of the corrective actions duringwhich the Company’s corrective action plan and actions taken have beendiscussed.  The Company has completed thecorrective action plan defined in the response to the observations and is nowoperating according to the changes put into effect.

Communication will continue with the FDA regarding theCompany’s ongoing progress in ensuring the effectiveness of the correctiveactions that have been taken.   The Company’s goal is to address the FDA’sinspectional observations without the agency pursuing additional regulatory orenforcement action.  There can be noassurance, however, that the Company’s efforts will be successful and that theFDA will not pursue such actions which could include, but not be limited to,the issuance of another Warning Letter; a court-ordered injunction; productseizures; recall of products; and criminal and/or civil proceedings.  If an injunction is issued, it may precludethe Company from shipping products or replacement parts until corrective actionis taken and verified by the FDA.

In 2006, the FDA has indicated that the 5.2.X versions ofthe software currently running on Fischer’s SenoScan systems should be recalledfor a known archiving issue.  Afterconsultation with the Company’s Notified Body, it was determined that thisissue and its correction did not meet the criteria for a recall in the EU.  Fischer has recently developed and releasedto the general market a version 5.2.2 software release to correct the knownarchiving issue as well as increase functions for servicing the SenoScanunit.  Fischer submitted an initialrecall plan to the FDA that indicated the target completion date of thesoftware upgrades to be June 30, 2006 in the U.S.  Due to scheduling conflicts with customers tocomplete the action required to install the new software version, a revisedplan has been submitted with a target completion date of December 31, 2006.  Management estimates that the costs relatedto this recall will be minimal.

**Philips**

Fischer received notification on September 2, 2005 by Philips that it hadceased sales activities with respect to the SenoScan product and that itintended to terminate the Philips Agreement should the Asset Sale be approvedby the Company’s stockholders and consummated. Fischer met with Philips inNovember 2005 to communicate that Fischer had retained the right perform itsobligations under the Philips Agreement but that, absent additional fundingfrom Philips, it did not have the

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financial ability to perform the Philips Agreement.  Philips subsequently offered to settle thematter without litigation. However, in view of the financial settlementproposed by Philips, Fischer declined Philips’ offer of settlement and referredPhilips to the dispute resolution provisions of the Philips Agreement.  Fischer is unable to predict whether Philipsmay file a suit or the amount, if any, that may be demanded by Philips, or theexpense related to defending any claim. Fischer has recognized a liability for a customer deposit made byPhilips in advance of shipping the SenoScan product in the amount of $0.3million.  Any payments made by Fischer toor in connection with a claim by Philips may materially reduce amounts, if any,that may be available for satisfaction of creditor claims and distribution toFischer’s stockholders.

**Contingent Claims**

 On June 7, 2005, the Securities and ExchangeCommission (“SEC”) filed a complaint in the United States District Court forthe District of Colorado (“SEC Lawsuit”) and asserted claims for variousviolations of the Securities Acts, including fraud, falsified books andrecords, deceit of auditors and false SEC filings against the following formerofficers and directors of the Company: Louis Rivelli, Rodney Johnson, Stephen Burke, Teresa Ayers, CraigStevenson and Robert Hoffman (together, “Defendants”).  Some or all of the Defendants have notifiedthe Company of potential claims or may assert claims for advancement and/orindemnification relating to, without limitation: attorneys’ fees and costs (ifany) incurred in the defense of the SEC Lawsuit that have not been or will notbe reimbursed pursuant to insurance policies; any settlement of the claimsasserted in the Lawsuit; or any judgment obtained in the SEC Lawsuit.  The amount of such potential liabilitiescannot be estimated at this time and could have a material impact on thecreditors and/or stockholders.

In addition, additional unknown or contingent claimscould arise.  If the amount of suchclaims are greater than management’s estimates, liabilities that have alreadybeen paid or settled could be unwound. This could result in additional expenses not currently recorded.

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Cautionary Language**

This reportcontains forward-looking information that involves risk and uncertainties,including statements regarding our plans, objectives, expectations, andintentions.  Such statements include,without limitation:

·                  statements regarding variousestimates we have made in preparing our financial statements;

·                  our intentand ability to satisfy RE&S service and warranty obligations pendingcompletion of the sale of RE&S Assets;

·                  the anticipatedtime it will take to close the RE&S Agreement;

·                  our actionswith respect to the sale of the RE&S business and Product Lines;

·                  our planswith respect to a Liquidation Plan or conversion of the Chapter 11 filingto Chapter 7;

·                  theanticipated time it will take to complete the liquidation process;

·                  our abilityto locate an alternative service provider for RE&S service and warrantyobligations if the RE&S business is not sold in its entirety;

·                  costs underthe Byers Agreement;

·                  potentiallitigation or demand from Philips, including the effect of any payments toPhilips and the expense of defending any claim on potential distributions tostockholders and creditors;

·                  the likelihoodthat additional claims of which management is not aware may arise;

·                  our abilityto make distributions to stockholders; and

·                  statementsof our expectations, beliefs, future plans and strategies, anticipateddevelopments and other matters that are not historical facts.

Theseforward-looking statements are subject to known and unknown risks anduncertainties that could cause actual results to differ materially from thoseanticipated.  Factors that could causeactual results to materially differ include, without limitation, our intent andability to satisfy RE&S service and warranty obligations pending completionof the sale of RE&S Assets; the anticipated time it will take to close theRE&S Agreement; our plans with respect to a Liquidation Plan or conversionof the Chapter 11 filing to Chapter 7; the anticipated time it will take tocomplete the liquidation process, the likelihood that additional claims ofwhich management is not aware may arise, adverse actions taken by regulatoryagencies, potential product defects or related performance resulting in productrecalls and significant liability and legal costs; our ability to close theRE&S Agreement, and our ability to make distributions to stockholders.  Other factors that could adversely affect ourbusiness are described in our Risk Factors described in our Annual Report onForm 10-K for the year ended December 31, 2005 as revised by Part II, Item 1ARisk Factors of this Form 10-Q.  Exceptas otherwise required by law, we expressly disclaim any obligation orundertaking to release publicly any updates or revisions to any such statementsto reflect any change in our expectations or any change in events, conditionsor circumstances on which any such statement is based.

**Critical Accounting Policies**

Criticalaccounting policies are those that are most important to the portrayal of ourfinancial condition and operating results, and require management to make itsmost difficult and subjective judgments, often as a result of the need to makeestimates on matters that are inherently uncertain. These judgments are basedon our historical experience, terms of existing contracts, our observance oftrends in the industry, information provided by our customers and informationavailable from other outside sources, as appropriate. Actual results may differfrom these estimates under different assumptions or conditions.

The critical accountingpolicies that we believe affect the more significant judgments and estimatesused in the preparation of our consolidated financial statements presented inthis report are described in the Management’s Discussion and Analysis ofFinancial Condition and Results of Operations included in our Annual Report onForm 10-K for the fiscal year ended December 31, 2005. There have been nomaterial changes to our critical accounting policies, as described in that Form10-K, except for the impairment of long-lived assets.

Our policy is to evaluatewhether there has been a permanent impairment in the value of long-lived assetswhen certain events have taken place that indicate that the remaining balancemay not be recoverable.  We evaluate thecarrying value of our property and equipment at the consolidated level since webelieve that is the lowest identifiable level of cash flows for theseassets.  As a result of further declinesin the stock price and a decision to liquidate the remaining long-lived assetsin our building, management determined a recoverability test should be completedas of March 31, 2006

Since the futureestimated cash outflows are currently estimated to be near zero, the carryingamounts of the assets exceeded the estimated undiscounted cash flows.  Management estimated the fair value of theassets by reviewing the value of the remaining businesses and other long-livedassets and determined an impairment had occurred.  Fair value of the long-lived assets wasdetermined through inquiry of advisors and comparison to other sales of fixedassets.  Therefore, an impairment oflong-lived assets of $0.2 million was recognized during the three-months endedMarch 31, 2006.

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**Overview**

Prior to signing the KodakAgreements on January 23, 2006, we serviced mammography and digital imagingproducts used in the diagnosis of breast cancer and other diseases as discussedin Note 1 of the accompanying consolidated financial statements. Our primaryfocus prior to the consummation of the Hologic Asset Sale on September 29, 2005(as discussed below) was designing, manufacturing and selling mammography anddigital imaging products and using our digital imaging technology in screeningand diagnostic mammograms and minimally invasive breast biopsy to aid in theearly identification of breast cancer. We continue to service and sell productsthat meet selected needs of the broader radiology, electrophysiology andsurgical markets.

In September 2005, we consummatedthe sale (the “Asset Sale”) of all of our intellectual property rights relatedto our mammography business and products, including rights to our SenoScandigital mammography and MammoTest stereotactic breast biopsy systems toHologic, Inc. (“Hologic”).  Under theAsset Sale Agreement, Hologic granted us a non-exclusive limited license to usecertain Mammography Assets necessary for us to continue our Service business;to fulfill contractual obligations to provide MammoTest and SenoScan systems toEES and Philips, respectively; and to carry out certain activities with respectto our RE&S business.  As of May 31,2006, no further revenue will be generated from the intellectual property soldto Hologic.

As a result, service and productrevenues have significantly declined from the prior year.

*Sale of RE&S Business. *As discussed further in Note 1 of the accompanyingconsolidated financial statements, on March 15, 2006, we started an auctionprocess to sell the RE&S business. We signed the RE&S Agreement with Byers on August 21, 2006.  The assets to be sold are all of Fischer’sright, title and interest in and to the VersaRad Line, the EPX/SPX Line and theBloom Line including some related equipment, inventory (excluding Bloomfinished goods inventory), general intangibles and intellectual propertynecessary to design, manufacture, market, sell, distribute, support and repairthe Product Lines (“RE&S Assets”). Under the RE&S Agreement, Byers agreed, subject to the fulfillmentof certain conditions, to purchase the RE&S Assets, and assume servicecontract and warranty repair obligations, for a minimum purchase price of$260,000 to be paid over a period ending no later than one year from the dateof closing of the transaction (“Closing”). In addition, Byers agreed to pay Fischer up to another $80,000 dependingon the number of Bloom units sold by Byers during the year after the Closing.

*Liquidation Plan and Bankruptcy. *Under Delaware law, any sale of all or substantially all ofour assets requires approval by our stockholders.  The Board has determined that the sale of theassets related to the RE&S Agreement is considered a sale of all or substantiallyall of our remaining assets.  In order toprevent the expense and time delay involved in securing stockholder approvaland in light of our financial condition, the Board elected to file a petitionunder Chapter 11 of title 11 of the Bankruptcy Code and such petition was filedon August 22, 2006 in the United States Bankruptcy Court for the District ofColorado.  We will immediately move tohave the RE&S Agreement approved pursuant to §363(b) and (f) of theBankruptcy Code.  We expect it could beup to two months before the Closing is complete.

The factors listed above, amongothers, raise substantial doubt about our ability to continue as a goingconcern. The consolidated financial statements presented in this Form 10-Q, andthe accompanying discussion, do not include any adjustments that might resultfrom the outcome of this uncertainty.  Asa result of filing a petition under Chapter 11 of title 11 of the BankruptcyCode, our basis of accounting will change from the going concern basis to thatof the liquidation basis of accounting on August 22, 2006. Under theliquidation basis of accounting, assets are stated at their estimated netrealizable value and liabilities are stated at their estimated settlementamounts, which estimates will be periodically reviewed and adjusted asappropriate. The valuation of assets at their net realizable value andliabilities at their anticipated settlement amounts represent estimates, basedon present facts and circumstances, of the net realizable value of assets andthe costs associated with carrying out the Liquidation Plan and dissolutionbased on certain assumptions.  Other thanthe write-down of approximately $1.0 million of prepaid insurance, managementcurrently estimates there would be no further material adjustments needed underthe liquidation basis.

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**Results of Operations**

The following table sets forth the percentage ofrevenues represented by certain data included in our statements of operationsfor the periods indicated:
|                                 | ** ** | **Three-months Ended** | ** ** | **Six-months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                      | ** ** | **June 30,**           | ** ** | **June 30,**         | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| ** **                      | ** ** | **2006**               | ** ** | **2005**             | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                       |       |                   |       |                 |       |   |   |   |   |
| Product revenues                |       | 70.2                   | %          | 68.5                 | %          | 62.5 | % | 71.8 | % |
| Service revenues                |       | 29.8                   |       | 31.5                 |       | 37.5 |   | 28.2 |   |
| Total revenues                  |       | 100.0                  |       | 100.0                |       | 100.0 |   | 100.0 |   |
| Cost of sales:                  |       |                   |       |                 |       |   |   |   |   |
| Products                        |       | 59.9                   |       | 93.3                 |       | 57.1 |   | 72.4 |   |
| Services                        |       | 29.1                   |       | 38.0                 |       | 40.6 |   | 33.7 |   |
| Research and development        |       | —                 |       | 18.4                 |       | — |   | 15.6 |   |
| Selling and marketing           |       | —                 |       | 18.5                 |       | — |   | 15.8 |   |
| General and administrative      |       | 17.0                   |       | 26.5                 |       | 23.3 |   | 18.7 |   |
| Impairment of long-lived assets |       | —                 |       | —               |       | 1.8 |   | — |   |
| Loss from operations            |       | (6.0                   | )          | (94.7                | )          | (22.8 | ) | (56.2 | ) |
| Other income (expense), net     |       | (4.6                   | )          | 13.3                 |       | (3.5 | ) | (5.0 | ) |
| Net (loss) income               |       | (10.6                  | )%         | (81.4                | )%         | (26.3 | )% | (61.2 | )% |

 

**ProductRevenues**

Total revenues decreased 50.3% to $5.6 million for thethree-months ended June 30, 2006 from $11.2 million for the three-months endedJune 30, 2005.  Product revenuesdecreased 49.1% to $3.9 million in the three-months ended June 30, 2006from $7.7 million in the three-months ended June 30, 2005.

·                  SenoScan digitalmammography product revenue during the three-months ended June 30, 2005 was$1.2 million.  As a result of the AssetSale, there was only one sale of $0.3 million in the three-months ended June30, 2006 and there will be no further sales of SenoScan.

·                  Revenues fromour MammoTest breast biopsy products decreased 69.3% or $3.5 million to$1.6 million in the three-months ended June 30, 2006 from$5.1 million in the three-months ended June 30, 2005. The decrease inMammoTest product revenue is a direct result of the Asset Sale and a slightdecrease in average sales price as we completed the last time purchase orderfrom EES at prices lower than prior year. There will be no further sales of MammoTest.

·                  TheRE&S products revenues increased $0.6 million to $2.0 million in thethree-months ended June 30, 2006 from $1.4 million in the three-months endedJune 30, 2005.  The sales increase onRE&S products in the three-months ended June 30, 2006, as compared to thethree-months ended June 30, 2005 was primarily due to $1.2 million volumeincrease in VersaRad x-ray products as a result of the last time buy purchaseorder from Kodak, offset by volume decreases in EPX/SPX and Bloom of $0.6million.  Upon closing the RE&SAgreement, there will be no further sales of any of these products.

Total revenues decreased 51.1% to $12.5 million forthe six-months ended June 30, 2006 from $25.6 million for the six-months endedJune 30, 2005.  Product revenuesdecreased 57.4% to $7.8 million in the six-months ended June 30, 2006 from$18.4 million in the six-months ended June 30, 2005.

·                  SenoScan digitalmammography product revenue during the six-months ended June 30, 2005 was $3.9million.  As a result of the Asset Sale,there was only one sale of $0.3 million in the six-months ended June 30, 2006 andthere will be no further sales of SenoScan.

·                  Revenues fromour MammoTest breast biopsy products decreased 74.9% or $8.0 million to$2.7 million in the six-months ended June 30, 2006 from $10.7 millionin the six-months ended June 30, 2005. The decrease in MammoTest productrevenue is a direct result of the Asset Sale and a slight decrease in averagesales price as we completed the last time purchase order from EES at priceslower than prior year.  There will be nofurther sales of MammoTest.

·                  TheRE&S products revenues increased $1.1 million to $4.8 million in thesix-months ended June 30, 2006 from $3.8 million in the six-months ended June30, 2005.  The sales increase on RE&Sproducts in the six-months 

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ended June 30, 2006, as compared to the six-monthsended June 30, 2005 was primarily due to $2.5 million volume increase inVersaRad x-ray products as a result of the last time buy purchase order fromKodak, offset by volume decreases in EPX/SPX and Bloom of $1.3 million.  Upon closing the RE&S Agreement, there willbe no further sales of any of these products.

**Service Revenues**

Our service revenues forthe three-months ended June 30, 2006 decreased 53.1% to $1.7 million from $3.5million during the three-months ended June 30, 2005. The decreases in thethree-month period ended June 30, 2006 in relation to the comparable periods in2005 are primarily due to a reduction of MammoTest and SenoScan units onservice contracts in both the U.S. and Europe, the result of cancellation ofservice contracts in the U.S. as customers purchased service contracts fromKodak and the lack of revenue from Europe for two-thirds of the quarter due tothe substantial completion of the liquidation of our Europeansubsidiaries.  In addition, all disposables revenueand time and material revenue from the Service business ceased as of January23, 2006 in the U.S.  We expectrevenue to decline to near zero since the only remaining service contracts andservice revenue will be generated from the RE&S product lines.  RE&S service revenue in the three-monthsended June 30, 2006 was approximately $250,000. Upon closing the RE&S Agreement, there will be no further revenuefrom RE&S service contracts.

Our service revenues forthe six-months ended June 30, 2006 decreased 35.0% to $4.7 million from $7.2million during the comparable period in 2005. The decreases in the six-monthperiod ended June 30, 2006 in relation to the comparable periods in 2005 areprimarily due to a reduction of MammoTest and SenoScan units on servicecontracts in both the U.S. and Europe and a result of cancellation of servicecontracts in the U.S. as customers purchased service contracts from Kodak.  In addition, all disposables revenue and time and materialrevenue from the Service business was ended as of January 23, 2006 in theU.S.  We expect revenue to declineto near zero since the only remaining service contracts and service revenuewill be generated from the RE&S product lines.  RE&S service revenue in the six-monthsended June 30, 2006 was approximately $517,000. Upon closing the RE&S Agreement, there will be no further revenuefrom RE&S service contracts.

**Cost of Sales—Products**

Cost of sales forproducts in the three-months ended June 30, 2006 was $3.3 million, or85.2% of product revenues, compared to $10.4 million, or 136.2% of productrevenues, in the three-months ended June 30, 2005. Cost of sales for productsin the three-months ended June 30, 2006 includes $0.3 million in restructuringexpense related to termination and retention arrangements, a reversal of excessand obsolete inventory reserves of approximately $0.3 million as a result ofhigher than expected revenues and reversals of certain accruals for customercommitments of $0.4 million.  The cost ofsales for products in the three-months ended June 30, 2006 excluding theseitems would have been $3.8 million, or 98.3% of product revenues.  The reserve for excess and obsoleteinventories increased by $4.2 million in the three-months ended June 30, 2005.  In addition, cost of sales included $0.6million in the three-months ended June 30, 2005 for purchase commitments thatmanagement estimated it was contractually liable to pay related to excessinventories.  The cost of sales forproducts in the three-months ended June 30, 2005 excluding the charges relatedto these reserves would have been $5.7 million, or 74.4% of productrevenues.  The overall remaining increasein cost of product sales as a percentage of product revenues is primarily dueto lower than average sales price of the MammoTest product and higher warrantycosts due to outsourcing of service.

Cost of sales forproducts in the six-months ended June 30, 2006 was $7.2 million, or 91.4%of product revenues compared to $18.5 million, or 100.7% of productrevenues, in the six-months ended June 30, 2005. Cost of sales for products inthe six-months ended June 30, 2006 includes $0.6 million in restructuringexpense related to termination and retention arrangements, a reversal of excessand obsolete inventory reserves of approximately $0.3 million as a result of higherthan expected revenues and reversals of certain accruals for customercommitments of $0.4 million.  The cost ofsales for products in the six-months ended June 30, 2006 excluding these itemswould have been $7.3 million or 93.6% of product revenues.  The reserve for excess and obsoleteinventories increased by $4.2 million in the six-months ended June 30,2005.  In addition, cost of salesincluded $0.6 million in the six-months ended June 30, 2005 for purchasecommitments that management estimated it was contractually liable to payrelated to excess inventories.  The costof sales for products in the six-months ended June 30, 2005 excluding thecharges related to these reserves would have been $13.9 million, or 75.6% ofproduct revenues.  The overall remainingincrease in cost of product sales as a percentage of product revenues isprimarily due to lower than average sales price of the MammoTest product andhigher warranty costs due to outsourcing of service.

**Cost of Sales—Service**

Cost of sales for servicesfor the three-months ended June 30, 2006 decreased 61.9% to $1.6 millionfrom $4.3 million in the three-months ended June 30, 2005.  As a percent of service revenues, cost ofservice sales decreased to 97.8% in the three-months ended June 30, 2006 from120.6% in the three-months ended June 30, 2005. Approximately $2.2 million of the 

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decrease in cost of sales is due to reductions inheadcount and related employee benefits. The majority of service employeeemployment with Fischer was terminated on April 7, 2006 in the U.S. and April30, 2006 in Europe.

Cost of sales forservices for the six-months ended June 30, 2006 decreased 41.2% to$5.1 million from $8.7 million in the six-months ended June 30,2005.  Approximately $3.5 million of thedecrease in cost of sales is due to reductions in headcount and relatedemployee benefits and reimbursement from Kodak for a portion of service costsoffset by $0.7 million in restructuring expense related to termination andretention arrangements.

**Research and Development Expenses**

Research anddevelopment expenses decreased to zero in the three-months and six-months endedJune 30, 2006 from $2.1 million and $4.0 million in the three-months andsix-months ended June 30, 2005, respectively. Our efforts prior to the AssetSale were focused on redesigning older products for improved reliability andserviceability and enhancing the features, functionality and reliability of theSenoScan product.

**Selling and Marketing Expenses**

Selling and marketingexpenses decreased to zero in the three-months and six-months ended June 30,2006 from $2.1 million and $4.0 million in the three-months and six-monthsended June 30, 2005, respectively. Effective June 30, 2005, we terminatedmarketing activity and associated personnel. Shortly before closing the Asset Sale, all sales personnel wereterminated as part of the restructuring plan, which accounts for the remainingreduction.

**General and Administrative Expenses**

General andadministrative expenses decreased 68.1% to $0.9 million in the three-monthsended June 30, 2006 from $3.0 million in the three-months ended June 30,2005.  Our spending for legal costs andfinancial advisory services was $0.8 million lower in the three-months endedJune 30, 2006 as compared to the three-months ended June 30, 2005 due thereduction of work related to the Asset Sale and the settlement of a lawsuit forless than the original accrual.  Inaddition, we experienced $0.3 million bad debt expense during the three-monthsended June 30, 2005 as a result of an inability to collect on certain accountsreceivable, which did not reoccur in 2006. The remaining change is due to headcount reductions which occurred inthe last half of 2005.

General andadministrative expenses decreased 39.0% to $2.9 million in the six-monthsended June 30, 2006 from $4.8 million in the six-months ended June 30,2005.  Our spending for legal costs andfinancial advisory services was $0.6 million lower in the first half of 2006 ascompared to the first half of 2005 due the reduction of work related to theAsset Sale offset slightly by additional work related to the FTC and thesettlement of a lawsuit for less than the original accrual.  In addition, we experienced $0.3 million baddebt expense during the six-months ended June 30, 2005 as a result of aninability to collect on certain accounts receivable, which did not reoccur in2006.  The remaining change is due toheadcount reductions which occurred in the last half of 2005.

**Impairment of Long-Lived Assets**

As discussed inNote 4 of the accompanying consolidated financial statements and CriticalAccounting Policies,****we recognized$0.2 million of impairment of long-lived assets in the three-months ended March31, 2006.

**Other Financing Expense**

As discussed in Note 6 ofthe consolidated financial statements, we were required to recognize the fairvalue of the ComVest warrants as a stock warrant obligation.  The amount recognized in the three-monthsended June 30, 2005 was approximately $2.5 million.

**Interest Expense/Interest Income**

Interest expense for thethree-months ended June 30, 2006 decreased to $3,000 from $894,000 for thethree-months ended June 30, 2005.  Theinterest expense in the three-months ended June 30, 2005 was related intereston the secured promissory notes entered into in the first quarter of 2005 withComVest and amortization of the related debt issue costs.   The secured promissory notes were paid offupon closing of the Asset Sale.

Interest expense for thesix-months ended June 30, 2006 decreased to $69,000 from $1.2 million for thesix-months ended June 30, 2005.  Theinterest expense in the six-months ended June 30, 2005 was related interest onthe secured promissory 

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notes entered into in the first quarter of 2005 withComVest and amortization of the related debt issue costs. Interest expense inthe six-months ended June 30, 2006 is related to interest payments made as aresult of settling certain state and local sales tax audits.

**Other expense, net**

Other expense, netincludes approximately $259,000 paid to or on behalf of our Europeansubsidiaries to settle obligations related to our contract with EES for whichour European subsidiary owed approximately $349,000.  In addition, we recognized approximately$75,000 of loss from substantial completion of the liquidation of the Europeansubsidiaries.

**Income Taxes**

We estimated that wewould not owe taxes for 2006 and 2005. Accordingly, no income tax benefit orprovision was recorded. This was determined based upon the anticipated 2006results of operations and an available domestic net operating losscarry-forward of $32.4 million and $0.7 million of foreign net operatingloss carry-forwards at December 31, 2005. As of June 30, 2006 we had a 100%valuation allowance against our deferred tax asset that resulted in a net deferredtax asset of $0.

**Liquidity and Capital Resources**

As of June 30, 2006, wehad $2.4 million in unrestricted cash and $2.0 million in working capitalcompared to $4.5 million in cash and $4.5 million in working capital atDecember 31, 2005.  The $2.5 million netdecrease in working capital is mainly the result of funding our operatinglosses, $1.5 million of which were due to restructuring expense recognizedduring the period, with the remainder due to funding operations.  In addition, we spent $1.0 million in cash topurchase directors and officer liability insurance run-off coverage during thefirst quarter of 2006.

A portion of the paymentsto be made under the termination and retention arrangements will be paid fromthe irrevocable Fischer Imaging Employee Trust (the “Trust”).  This Trust was established in 2006 for thespecific purpose of paying amounts owed under termination and retentionarrangements or general wages to employees. The Trust was funded on January 2,2006 with $600,000 of cash as authorized by the Board of Directors.  The Trust has funded $0.3 million intermination and retention arrangements through June 30, 2006.

In order to avoid the expense and time delayinvolved in securing stockholder approval of the RE&S Agreement and inlight of our deteriorating financial position, the Board elected to file apetition under Chapter 11 of title 11 the Bankruptcy Code, and such petitionwas filed on August 22, 2006.

As of July 31, 2006, wehad $1.3 million in unrestricted cash. We expect that this cash will be spent on the following:

·                  settleremaining balance sheet obligations,

·                  supportoperations through closing of the RE&S Agreement and complete the closingof the RE&S Agreement,

·                  fundlegal costs to proceed through the bankruptcy process, and support theliquidation process,

·                  othercosts related to bankruptcy such as liquidation fees, and

·                  payadministrative costs to wind up operations.

Operations have beensignificantly reduced since May 31, 2006, when we completed production andexited our main operating facility.  Wecurrently have three employees plus approximately 15 part-time and full-timeindependent contractors.  In addition, wecurrently lease temporary office and warehouse space on a month-to-month basis.

Stockholders would onlyreceive a distribution after all assets have been liquidated and all creditorshave been paid in full.  Any distributionwill be made pursuant to the priorities set forth in the Bankruptcy Code.  Under the Bankruptcy Code, the distributionpriority generally is as follows: (i) secured creditors to the extent of thevalue of such creditor’s collateral; (ii) postpetition administrative creditors(e.g., creditors who do business with the debtor after the filing of thebankruptcy petition and provide necessary goods and services), (iii) priorityclaims such as unpaid prepetition wages and certain tax claims, (iv) unsecuredcreditors including trade creditors and (v) stockholders. Under the BankruptcyCode, no class of claimants is entitled to a distribution unless the classeswith greater priority have been paid in full or have agreed to a differenttreatment.

Management cannotaccurately estimate the amount of distribution to our stockholders, if any,until the following are finalized or resolved:

·                  approval of theLiquidation Plan under the Bankruptcy Code or conversion to Chapter 7,

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·                  determinationof any additional unknown or contingent claims through the bankruptcy process,and

·                  the impact ofPhilips’ actions with respect to the Philips Agreement.

**Contractual Obligations**

As ofJune 30, 2006, we had no contractual obligations.

**Backlog**

As of June 30, 2006, wehad backlog of near zero consistent with the backlog as of December 31, 2005.

**Item3.    Quantitative and Qualitative Disclosures About MarketRisk**

**Foreign Currency Risk**

Prior to the start of liquidation proceedings in Europe, we were exposedto foreign currency risks through our subsidiary operations in Switzerland andGermany. We no longer believe this is a significant risk to our business.  We attempt to minimize our exposure toforeign currency and other international business risks by: (1) generallyrequiring payments in U.S. dollars; (2) using letters of credit; and (3)requiring advance deposits and through other means.

**Interest Rate Risk**

At June 30, 2006,we had approximately $0.1 million in certificate of deposits and $1.9 millionin money market accounts that earn interest at variable interest rates and aretherefore subject to interest rate fluctuations.  At times, cash balances with our financialinstitution exceed FDIC insurance limits.

**Item4.    Controls and Procedures**

We carried out anevaluation, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by thisreport.  Our disclosure controls andprocedures are designed to provide reasonable assurance that informationrequired to be disclosed in our reports filed under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. Based on this evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that, as of the end of the period covered by thisreport, our disclosure controls and procedures are effective in this regard.

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**PART II.OTHER INFORMATION**

**Item 1. Legal Proceedings:**

On December 20, 2005, University Health Network (“UHN”) and Mount SinaiHospital (“Mount Sinai”) filed a Statement of Claim in Ontario, Canada againstFischer and Horizon Medical Services Ltd. (“Horizon”) and asserted claimsseeking to recover damages relating to their purchase of two SenoScan unitsfrom us.  In summary, UHN and Mount Sinaiallege, among other things, that the SenoScan units, which were manufactured byus and sold by Horizon, an entity authorized to sell these types of machines inCanada, were defective and did not conform to certain agreedspecifications.  The suit was settled outof court in July 2006 for an amount immaterial to our financial condition andcash flows.

We received in October 2005 a request from the FTC asking that wevoluntarily produce certain information and material to the FTC in connectionwith the Asset Sale.  On January 31,2006, we received additional information requests from the FTC in the form of aSubpoena Duces Tecum and Civil Investigative Demand as part of this ongoinginvestigation. We responded to the FTC requests.  On July 7, 2006 the FTC announced itsdecision to challenge, and the entry into a consent agreement with respect toHologic’s 2005 purchase of the MammoTest prone stereotactic breast biopsysystems (“SBBS”) from us. In its complaint, the FTC alleged that Hologic’sacquisition of the SBBS harmed American consumers by eliminating Hologic’s onlysignificant competitor for the sale of SBBSs in the United States. According tothe FTC’s announcement, under the consent agreement, Hologic is required andhas agreed to sell to Siemens AG the prone SBBS assets Hologic acquired fromus.

On December 21, 2005, we filed a complaint and jury demand against CedaraSoftware Corporation (“Cedara”) seeking damages arising from Cedara’s breach ofa contract to sell software applications products.  Cedara answered the complaint on January 30,2006 and filed a counterclaim for unpaid invoices and other relief.  The suit was settled out of court in July2006 for an amount immaterial to our financial condition and cash flows.

**Item 1A. Risk Factors**

The following risks are no longer considered significant:

·                  We may be unable to fulfill last time purchase orders from Kodak and EESat all or in a timely manner.

·                  Our vendors and suppliers may fail to deliver components for ourproducts.

·                  Regulatory agencies could take adverse action which could have an adverseimpact on our ability to continue in operation.

·                  Our plans to liquidate and wind-up our European subsidiaries may requireadditional cash or may prevent us from meeting our EES obligations.

·                  We may be unable to retain key employees.

·                  Failure to collect accounts receivable on a timely basis would materiallyadversely affect us.

·                  We are the subject of a continuing FTCinvestigation, and the FTC may elect to bring further action against us.

All other risks remain unchanged.

The following are new risks:

**Lackof Segregation of Duties.**

During the three-monthsended June 30, 2006, a lack of segregation of duties was introduced due to thesignificant downsizing of staff in the organization in conjunction with thedownsizing of the Company.  Certainduties are still segregated but others cannot be segregated while the organizationhas three employees and a few independent contractors dealing with generaladministrative and financial matters. This normally constitutes a significant deficiency in internal controls;however, management has determined that considering the employees involved, thenature of the business operations being conducted and the control procedures inplace, the risks associated with such lack of segregation of duties areinsignificant and the potential benefits of adding additional employees toclearly segregate duties do not justify the expenses associated with suchincreases.  The existence of thisweakness and deficiency potentially subjects us to additional risk that theremay be material misstatements in the future as a result of the misapplicationof United States generally accepted accounting principles or the improperrecording of our accounts from the lack of segregation of duties.

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**Potentialclass action lawsuit.**

Historically, extraordinary corporate actions, such as the filing of a petitionunder the Bankruptcy Code, often lead to securities class action lawsuits beingfiled against a company. In the event such litigation should occur, it islikely to be expensive and, even if we ultimately prevail, the process will betime consuming and will divert management’s attention from implementing theLiquidation Plan. If we do not prevail in any such lawsuit, we may be liablefor damages or we may be unable to complete some transactions that wecontemplate as part of the Liquidation Plan if approved. We cannot predict theoutcome or the amount of expenses and damages but the amounts could have amaterial adverse effect on our business, results of operations and financialcondition and the timing and amount of liquidating distributions to our stockholders,if any.

**Contingent Claims**

On June 7, 2005,the Securities and Exchange Commission (“SEC”) filed a complaint in the UnitedStates District Court for the District of Colorado (“SEC Lawsuit”) and assertedclaims for various violations of the Securities Acts, including fraud,falsified books and records, deceit of auditors and false SEC filings againstthe following former officers and directors of the Company:  Louis Rivelli, Rodney Johnson, Stephen Burke,Teresa Ayers, Craig Stevenson and Robert Hoffman (together, “Defendants”).  Some or all of the Defendants have notifiedus of potential claims or may assert claims for advancement and/orindemnification relating to, without limitation: attorneys’ fees and costs (ifany) incurred in the defense of the SEC Lawsuit that have not been or will notbe reimbursed pursuant to insurance policies; any settlement of the claimsasserted in the Lawsuit; or any judgment obtained in the SEC Lawsuit.  The amount of such potential liabilitiescannot be estimated at this time and could have a material impact on thecreditors and/or stockholders.

In addition,additional unknown or contingent claims could arise.  If the amount of such claims are greater thanmanagement’s estimates, liabilities that have already been paid or settledcould be unwound.  This could result inadditional expenses not currently recorded.

**Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds:**   Notapplicable

**Item 3. Defaults Upon SeniorSecurities:**    Not applicable.

**Item 4. Submission of Matters toa Vote of Security Holders:**   Not applicable.

**Item 5. Other Information:**   Notapplicable.

**Item 6. Exhibits:**

**(a)   Exhibits:**
| The following is a list of exhibits filed as  part of this Report on Form 10-Q. |
|--------------------------------------------------------------------------------------|
|                                                                                 |   |   |
| 10.1                                                                                 |   | Asset Purchase Agreement by and between Fischer  Imaging Corporation and Byers Peak, Inc. dated as of August 21, 2006. |
| 31.1                                                                                 |   | Certification of Steven Durnil, Chief Executive  Officer and President, pursuant to Rule 13a-14(a) under the Securities  Exchange Act of 1934. |
| 31.2                                                                                 |   | Certification of David Kirwan, Chief Financial  Officer, pursuant to Rule 13a-14(a) under the Securities Exchange Act of  1934. |
| 32.1                                                                                 |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * |
| 32.2                                                                                 |   | Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * |

 

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#### **SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Date: August 22, 2006 |   | FISCHER IMAGING CORPORATION             |
|-----------------------|--------|-----------------------------------------|
|                  |   | /s/   STEVEN DURNIL      |   |
|                  |   | Steven Durnil                           |
|                  |   | *Chief Executive Officer and President* |
| Date: August 22, 2006 |   |                                    |
|                  |   | /s/   DAVID KIRWAN       |   |
|                  |   | David Kirwan                            |
|                  |   | *Chief Financial Officer*               |

 

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