**FORM 10-Q**

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 
| **(Mark  One)**                                                                                                                                                                                               |       |                                                                                                               |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                    | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |   |   |
| ** **                                                                                                                                                                                                    |       |                                                                                                               |
| **For the  Quarter Ended September 30, 2005**                                                                                                                                                            |       |                                                                                                               |
| ** **                                                                                                                                                                                                    |       |                                                                                                               |
| **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**

 

**FISCHER IMAGING CORPORATION**

(Exact name ofRegistrant as specified in its charter)

 
| **DELAWARE**                                              |   | **36-2756787**                        |
|-----------------------------------------------------------|--------|---------------------------------------|
| (State of  incorporation)                                 |   | (I.R.S. Employer  Identification No.) |
|                                                      |   |                                  |
| **12300  North Grant Street**                             |   |                                  |
| **Denver,  Colorado**                                     |   | **80241**                             |
| (Address of  principal executive offices)                 |   | (Zip Code)                            |
|                                                      |   |                                  |
| Registrant’s  telephone number, including area code: |
| **(303) 452-6800**                                   |

 

 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 duringthe preceding 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 ý   No o

 

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

 

Yes o   No ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

 

Yes o   No ý

 

The number of shares ofRegistrant’s Common Stock outstanding as of November 10, 2005 was9,398,817.

 

 

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**FISCHERIMAGING CORPORATION**

 

**FORM 10-Q**

 

**INDEX**

 
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                            |   |
|-------------------|-----------------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                                  |   |
| Item 1.           | Consolidated Financial Statements                                                                                     |   |
|              | Consolidated Balance Sheets—September 30,  2005 (unaudited) and December 31, 2004                      |   |
|              | Consolidated Statements of Operations  (unaudited)— Three and nine months ended September 30, 2005 and 2004 |   |
|              | Consolidated Statements of Cash  Flows (unaudited)— Nine months ended September 30, 2005 and 2004           |   |
|              | 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 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        |                                                                                                                  |

 

2

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# **PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

#### **FISCHERIMAGING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(amountsin thousands except share data)**

 
| ** **                                                                                                                                                                              | ** ** | **September 30,  2005** | ** ** | **December 31,****2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **(Unaudited)**              | ** ** | ** **                    | ** ** |
| **ASSETS**                                                                                                                                                                              |       |                         |       |                          |       |
| Current Assets:                                                                                                                                                                         |       |                         |       |                          |       |
| Cash and cash equivalents                                                                                                                                                               |       | $                            | 13,229     |                          | $          | 1,939 |   |
| Certificate of deposit, restricted cash                                                                                                                                                 |       | —                       |       | 514                           |       |
| Accounts receivable, net of allowance for doubtful  accounts of $1,402 and $650 at September 30, 2005 and December 31,  2004, respectively                                    |       | 5,234                        |       | 7,286                         |       |
| Inventories, net                                                                                                                                                                        |       | 6,826                        |       | 16,034                        |       |
| Prepaid expenses and other current assets                                                                                                                                               |       | 1,305                        |       | 751                           |       |
| Total current assets                                                                                                                                                                    |       | 26,594                       |       | 26,524                        |       |
| Property and equipment                                                                                                                                                                  |       | 1,676                        |       | 11,429                        |       |
| Less: accumulated depreciation                                                                                                                                                          |       | —                       |       | (7,612                        | )          |
| Property and equipment, net                                                                                                                                                             |       | 1,676                        |       | 3,817                         |       |
| Intangible assets, net                                                                                                                                                                  |       | 1,000                        |       | 1,033                         |       |
| Total assets                                                                                                                                                                            |       | $                            | 29,270     |                          | $          | 31,374 |   |
|                                                                                                                                                                                    |       |                         |       |                          |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                           |       |                         |       |                          |       |
| Current Liabilities:                                                                                                                                                                    |       |                         |       |                          |       |
| Accounts payable                                                                                                                                                                        |       | $                            | 7,688      |                          | $          | 10,666 |   |
| Current maturities under capital lease obligation                                                                                                                                       |       | —                       |       | 224                           |       |
| Accrued salaries and wages                                                                                                                                                              |       | 1,298                        |       | 1,617                         |       |
| Customer deposits                                                                                                                                                                       |       | 1,860                        |       | 3,123                         |       |
| Accrued warranties                                                                                                                                                                      |       | 2,097                        |       | 3,013                         |       |
| Deferred service revenue                                                                                                                                                                |       | 1,636                        |       | 1,121                         |       |
| Other current liabilities                                                                                                                                                               |       | 3,855                        |       | 2,591                         |       |
| Total current liabilities                                                                                                                                                               |       | 18,434                       |       | 22,355                        |       |
| Long-term debt                                                                                                                                                                          |       | —                       |       | 1,454                         |       |
| Non-current deferred revenue                                                                                                                                                            |       | —                       |       | 972                           |       |
| Total liabilities                                                                                                                                                                       |       | 18,434                       |       | 24,781                        |       |
| 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 and 9,374,484 shares issued and outstanding at September 30,  2005 and December 31, 2004, respectively |       | 94                           |       | 94                            |       |
| Paid-in capital                                                                                                                                                                         |       | 49,455                       |       | 49,400                        |       |
| Accumulated deficit                                                                                                                                                                     |       | (38,369                      | )          | (42,633                       | )          |
| Accumulated other comprehensive loss                                                                                                                                                    |       | (344                         | )          | (268                          | )          |
| Total stockholders’ equity                                                                                                                                                         |       | 10,836                       |       | 6,593                         |       |
| Total liabilities and stockholders’ equity                                                                                                                                         |       | $                            | 29,270     |                          | $          | 31,374 |   |

 

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

 

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**FISCHERIMAGING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(Amountsin thousands except per share data)**

**(Unaudited)**

 
| ** **                                                              | ** ** | **Three-Months Ended**       | ** ** | **Nine-Months Ended**        | ** ** |
|-------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                              | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| Revenues:                                                               |       |                         |       |                         |       |   |   |   |   |
| Products                                                                |       | $                            | 9,444      |                         | $          | 13,710 |   | $ | 27,852 |   | $ | 38,310 |   |
| Services                                                                |       | 3,995                        |       | 4,091                        |       | 11,230 |   | 11,276 |   |
| Total revenues                                                          |       | 13,439                       |       | 17,801                       |       | 39,082 |   | 49,586 |   |
| Cost of sales:                                                          |       |                         |       |                         |       |   |   |   |   |
| Products                                                                |       | 9,537                        |       | 8,890                        |       | 28,081 |   | 26,624 |   |
| Services                                                                |       | 3,620                        |       | 4,802                        |       | 12,277 |   | 13,013 |   |
| Total cost of sales                                                     |       | 13,157                       |       | 13,692                       |       | 40,358 |   | 39,637 |   |
| Gross margin                                                            |       | 282                          |       | 4,109                        |       | (1,276 | ) | 9,949 |   |
| Operating expenses:                                                     |       |                         |       |                         |       |   |   |   |   |
| Research and development                                                |       | 779                          |       | 1,722                        |       | 4,781 |   | 4,301 |   |
| Selling and marketing                                                   |       | 1,372                        |       | 2,257                        |       | 5,418 |   | 7,821 |   |
| General and administrative                                              |       | 3,336                        |       | 1,868                        |       | 8,131 |   | 6,048 |   |
| Impairment of long-lived assets                                         |       | 800                          |       | —                       |       | 800 |   | — |   |
| Lease termination fee                                                   |       | 4,000                        |       | —                       |       | 4,000 |   | — |   |
| Total operating expenses                                                |       | 10,287                       |       | 5,847                        |       | 23,130 |   | 18,170 |   |
| Loss from operations                                                    |       | (10,005                      | )          | (1,738                       | )          | (24,406 | ) | (8,221 | ) |
| Other income and (expense):                                             |       |                         |       |                         |       |   |   |   |   |
| Interest expense                                                        |       | (1,838                       | )          | (13                          | )          | (3,062 | ) | (34 | ) |
| Interest income                                                         |       | 2                            |       | 1                            |       | 7 |   | 3 |   |
| Patent settlement income                                                |       | —                       |       | —                       |       | — |   | 5,150 |   |
| Gain on sale of Mammography Assets                                      |       | 32,000                       |       | —                       |       | 32,000 |   | — |   |
| Other (expense) income, net                                             |       | (11                          | )          | 5                            |       | (75 | ) | 33 |   |
| Total other income and (expense)                                        |       | 30,153                       |       | (7                           | )          | 28,870 |   | 5,152 |   |
| Provision for income taxes                                              |       | 200                          |       | —                       |       | 200 |   | — |   |
| Net income (loss)                                                       |       | $                            | 19,948     |                         | $          | (1,745 | ) | $ | 4,264 |   | $ | (3,069 | ) |
| Net income (loss) per share:                                            |       |                         |       |                         |       |   |   |   |   |
| Basic                                                                   |       | $                            | 2.12       |                         | $          | (0.19 | ) | $ | 0.45 |   | $ | (0.33 | ) |
| Diluted                                                                 |       | $                            | 2.12       |                         | $          | (0.19 | ) | $ | 0.45 |   | $ | (0.33 | ) |
| Weighted average shares used to calculate net income  (loss) per share: |       |                         |       |                         |       |   |   |   |   |
| Basic                                                                   |       | 9,399                        |       | 9,363                        |       | 9,389 |   | 9,353 |   |
| Diluted                                                                 |       | 9,399                        |       | 9,363                        |       | 9,435 |   | 9,353 |   |

 

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

 

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**FISCHERIMAGING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(amountsin thousands)**

**(Unaudited)**

 
| ** **                                                                                          | ** ** | **Nine-months ended**        | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                                          | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| Cash flows from operating activities:                                                               |       |                         |       |   |   |
| Net income (loss)                                                                                   |       | $                            | 4,264      |   | $ | (3,069 | ) |
| Adjustments to reconcile net income (loss) to net  cash (used in) provided by operating activities: |       |                         |       |   |   |
| Depreciation                                                                                        |       | 853                          |       | 766 |   |
| Amortization of intangible assets                                                                   |       | 33                           |       | 33 |   |
| Amortization of debt issue costs                                                                    |       | 2,272                        |       | — |   |
| Bad debt expense                                                                                    |       | 641                          |       | 21 |   |
| Impairment of long-lived assets                                                                     |       | 800                          |       | — |   |
| Gain on sale of Mammography Assets                                                                  |       | (32,000                      | )          | — |   |
| Loss on disposal of property and equipment                                                          |       | 166                          |       | — |   |
| Other                                                                                               |       | 123                          |       | — |   |
| Change in current assets and liabilities                                                            |       |                         |       |   |   |
| Accounts receivable, net                                                                            |       | 1,411                        |       | (1,098 | ) |
| Inventories, net                                                                                    |       | 9,208                        |       | 202 |   |
| Prepaid expenses and other current assets                                                           |       | (554                         | )          | (8 | ) |
| Accounts payable                                                                                    |       | (2,978                       | )          | 2,513 |   |
| Accrued warranties                                                                                  |       | (916                         | )          | 1,690 |   |
| Customer deposits                                                                                   |       | (1,263                       | )          | (312 | ) |
| Deferred service revenue                                                                            |       | 515                          |       | 401 |   |
| Other                                                                                               |       | 598                          |       | 216 |   |
| Net cash (used in) provided by operating activities                                                 |       | (16,827                      | )          | 1,355 |   |
|                                                                                                |       |                         |       |   |   |
| Cash flows from investing activities:                                                               |       |                         |       |   |   |
| Redemption of certificate of deposit (restricted  cash)                                             |       | 514                          |       | — |   |
| Purchases of property and equipment                                                                 |       | (454                         | )          | (1,015 | ) |
| Proceeds from sale of property and equipment                                                        |       | 27                           |       | — |   |
| Proceeds from sale of Mammography Assets                                                            |       | 32,000                       |       | — |   |
| Net cash provided by (used in) investing activities                                                 |       | 32,087                       |       | (1,015 | ) |
|                                                                                                |       |                         |       |   |   |
| Cash flows from financing activities:                                                               |       |                         |       |   |   |
| Proceeds from sale of common stock                                                                  |       | 55                           |       | 56 |   |
| Proceeds from senior secured promissory notes                                                       |       | 7,000                        |       | — |   |
| Repayment of senior secured promissory notes                                                        |       | (7,000                       | )          | — |   |
| Proceeds from junior secured promissory note                                                        |       | 5,000                        |       | — |   |
| Repayment of junior secured promissory note                                                         |       | (5,000                       | )          | — |   |
| Payment of stock warrant obligation                                                                 |       | (1,800                       | )          | — |   |
| Payment of debt issue costs                                                                         |       | (471                         | )          | — |   |
| Proceeds from line of credit                                                                        |       | 3,311                        |       | — |   |
| Repayments on line of credit                                                                        |       | (4,765                       | )          | — |   |
| Payments on capital lease obligation                                                                |       | (224                         | )          | (166 | ) |
| Net cash used in financing activities                                                               |       | (3,894                       | )          | (110 | ) |
|                                                                                                |       |                         |       |   |   |
| Effect of exchange rate changes on cash                                                             |       | (76                          | )          | 88 |   |
| Net increase in cash and cash equivalents                                                           |       | 11,290                       |       | 318 |   |
| Cash and cash equivalents, beginning of period                                                      |       | 1,939                        |       | 1,396 |   |
| Cash and cash equivalents, end of period                                                            |       | $                            | 13,229     |   | $ | 1,714 |   |

 

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

 

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**FISCHERIMAGING CORPORATION**

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THETHREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2005**

**(UNAUDITED)**

 

**(1)   GENERAL**

 

**Organization**

 

FischerImaging Corporation, together with its wholly owned subsidiaries, (“Fischer” orthe “Company”) services mammography and digital imaging products used in thediagnosis of breast cancer and other diseases and manufacturers and sells suchproducts on a limited basis. The Company’s primary focus prior to theconsummation of the Hologic transaction on September 29, 2005 (asdiscussed below) was designing, manufacturing and selling mammography anddigital imaging products and using its digital imaging technology in screeningand diagnostic mammograms and minimally invasive breast biopsy to aid in theearly identification of breast cancer. The Company also continues to sellproducts that meet selected needs of the broader radiology andelectrophysiology markets. The consolidated financial statements include theaccounts of Fischer Imaging Corporation and all subsidiaries. All significantinter-company accounts and transactions have been eliminated in consolidation.

 

**Hologic Transaction and Management’s Plans**

 

Followingsignificant losses and negative cash flows from operations during 2004, whichcontinued into 2005, and delays in the SenoScan redesign program, Fischerentered into a Note and Warrant Purchase Agreement with ComVest InvestmentPartners II LLC (“ComVest”) on February 22, 2005 (the “ComVest PurchaseAgreement”), which provided for the issuance of up to $10.0 million in seniorsecured promissory notes and a warrant to purchase up to 2,000,000 shares ofFischer common stock.  In February 2005,$5.0 million in notes were issued to ComVest, and in March 2005, notes foran additional $2.0 million were issued to ComVest (the “Notes”).  The $5.0 million of loan proceeds received fromComVest in February 2005 and the $2.0 million loan proceeds received fromComVest in March 2005, were completely consumed to fund operations,working capital needs and to repay the outstanding balance of $2.5 millionunder the line of credit with Silicon Valley Bank.  In May 2005, the Company stated that itwas considering strategic alternatives and retained an international investmentbank to assist it in that process.  Dueto difficulties in reducing costs, further delays in the SenoScan redesignprogram, declines in revenue and other negative developments, the Company wasleft with insufficient cash reserves to continue operations in June 2005.

 

On June 22,2005, Fischer entered into an Asset Purchase Agreement (the “Asset SaleAgreement”) with Hologic, Inc. (“Hologic”) in which Fischer agreed to sellto Hologic all of Fischer’s intellectual property rights related to itsmammography business and products, including rights to Fischer’s SenoScan®digital mammography and MammoTest® stereotactic breast biopsy systems (the “MammographyAssets”).  Fischer agreed to sell theMammography Assets, which formed the basis for substantially all of Fischer’sbusiness, to Hologic for a cash purchase price of $32.0 million (the “AssetSale”).  The Mammography Assets alsorepresented substantially all of Fischer’s assets for purposes of Delawarelaw.  Hologic agreed to grant Fischer anon-exclusive limited license to use certain Mammography Assets necessary forFischer to continue to service and support, and satisfy warranty obligationson, the installed base of SenoScan and MammoTest systems (the “Service”business); to fulfill contractual obligations to provide MammoTest and SenoScansystems to Ethicon Endo-Surgery Europe (a subsidiary of Johnson &Johnson, Inc., “EES”) and Philips Medical Systems DMC GmbH (“Philips”),respectively; and to carry out certain activities with respect to Fischer’sradiology, electrophysiology and surgical (“RE&S”) business.

 

Inconnection with the execution of the Asset Sale Agreement, Fischer entered intoa $5.0 million interest bearing secured term loan with Hologic pursuant to aLoan Agreement, Promissory Note, Security Agreement, Patent Security Agreementand Trademark Security Agreement, each dated as of June 22, 2005.  Fischer used most of this loan for workingcapital purposes prior to the closing of the Asset Sale on September 29,2005.

 

On September 27,2005, Fischer entered into an Amendment to Lease Agreement (the “LeaseAmendment”) with JN Properties, Fischer’s landlord and a company controlled byMorgan Nields, a substantial stockholder and former director, chair of theBoard, chief executive officer and chief technology officer of Fischer.  The Lease Amendment provides for theamendment of the Lease dated July 31, 1992 between Fischer and JNProperties (the “Lease”) to allow for the early termination of the Lease within60 days of written notice from Fischer of intent to vacate or May 31,2006, whichever is earlier.  Fischer willcontinue to pay the current rental rate and comply with other terms andconditions of the Lease during the period prior to termination of theLease.  In exchange for the above,Fischer agreed to pay to JN Properties $4.0 million (the “Amendment Fee”) pluscertain accrued 2005 property taxes immediately following the closing of theHologic transaction.  In the LeaseAmendment, JN Properties granted its consent to the transactions contemplatedby the Asset Sale Agreement.  The $4.0 millionpayment has been

 

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recognized as “Leasetermination fee” in the accompanying consolidated statements of operations inaccordance with FASB Statement No. 146, “Accounting for Costs Associatedwith Exit or Disposal Activities.”

 

Alsoon September 27, 2005, Fischer entered into a Voting and Support Agreementwith Morgan Nields and the Robert L. Nields Trust and the Florence WessonNields Trust, two trusts for which Mr. Nields is a co-trustee (the “Stockholders”).  The agreement provided that the Stockholdersvote all shares beneficially owned by them (the “Shares”) in favor of approvalof the Asset Sale Agreement.  Theagreement also granted to Fischer designees an irrevocable proxy to vote theShares in favor of approval of the Asset Sale Agreement.

 

Priorto the Fischer special meeting of stockholders, on September 28, 2005,Hologic and funds managed by or otherwise related to Deerfield Management L.P.(collectively, “Deerfield”) entered into a Stock Purchase Agreement (the “StockPurchase Agreement”) pursuant to which Hologic agreed to purchase fromDeerfield 1,150,000 shares (the “Deerfield Shares”) of Fischer’s Common Stockfor a purchase price of $0.45 per share (the last reported sale price ofFischer’s Common Stock as quoted on the Pink Sheets, LLC on September 27,2005), for an aggregate purchase price of $517,500.  The Deerfield Shares representedapproximately 12.2% of the issued and outstanding shares of Fischer’s CommonStock.  Hologic’s obligation to purchasethe Deerfield Shares was conditioned on the closing of the Asset Sale.  Under the Stock Purchase Agreement, Deerfieldfurther agreed to vote the Deerfield Shares in favor of the Asset Sale at theSpecial Meeting.  On September 29,2005, immediately following the closing of the Asset Sale, Hologic purchasedthe Deerfield Shares from Deerfield as provided in the Stock PurchaseAgreement.

 

TheAsset Sale Agreement was approved by Fischer’s stockholders at a specialmeeting of stockholders held on September 28, 2005.  The value of the Mammography Assets sold waszero on Fischer’s consolidated balance sheets and therefore the entire $32.0million proceeds were recognized as Gain on sale of Mammography Assets in theaccompanying consolidated statements of operations.  The proceeds from the Asset Sale weredisbursed as follows (in thousands):

 
| Repay $5.0  million loan with Hologic, plus related interest      |   | $     | 5,114  |   |
|-------------------------------------------------------------------|--------|-------|--------|--------|
| Repay the Notes  with ComVest, plus related interest              |   | 7,444 |   |
| Payment of stock  warrant obligation with ComVest (Note 6)        |   | 1,800 |   |
| Amendment fee to  terminate Lease plus certain property taxes     |   | 4,180 |   |
| Settle certain  accounts payable due at closing of the Asset Sale |   | 931   |   |
|                                                              |   | $     | 19,469 |   |

 

Theremaining proceeds from the Asset Sale of approximately $12.5 million will beused to pay outstanding obligations, to satisfy operational responsibilities inrespect of other obligations (including service and warranty obligations andobligations under the EES and Philips agreements); and to continue exploringstrategic alternatives for Fischer’s RE&S business and its Service business,with associated warranty obligations. Management expects that amounts, if any, remaining after these paymentsand after making adequate cash reserves for contingent liabilities, would bedistributed to stockholders.

 

Concurrentwith the Asset Sale, the Company entered into severance and retentionarrangements with certain senior executive officers and other non-seniorexecutive employees of Fischer. Retention payments under these agreements are earned over the periods July 1,2005 through December 31, 2005 and January 1, 2006 through June 30,2006 and are currently estimated to be $0.9 million and $0.4 million,respectively.  Severance payments, earnedupon involuntary termination, are estimated to be $0.9 million.  Retention payments are being recognized asexpense over the period earned, and severance payments will be expensed whenthe involuntary termination dates are known.

 

Effective with the AssetSale, Hologic is the beneficiary of any future earnings and growth in revenuesfrom the Mammography Assets except for activities related to the retainedassets/businesses.  Fischer will continueto service and support, and satisfy the warranty obligations on, the installedbase of SenoScan and MammoTest systems and fulfill its contractual obligationsto provide MammoTest and SenoScan systems to EES and Philips,respectively.  Management has taken andwill continue to take steps to reduce its operating costs by reducing thenumber of employees to the minimum number needed to conduct Fischer’s remainingbusinesses, terminating certain contracts, and negotiating releases fromremaining contractual arrangements.

 

Fischer may not be successful in continuing to reduceoperating costs and may therefore continue to incur substantial losses andreductions in cash as a result of satisfying and maintaining its contractualobligations while exploring strategic alternatives for the RE&S and Servicebusinesses.

 

As part of exploring strategic alternatives for theRE&S and Service businesses, Fischer plans to actively seek buyers for itsRE&S and Service businesses and has hired a strategic advisor to assistwith this process.  The Service businessmay be difficult to sell in light of the continuing warranty obligations thatwill need to be assumed by a buyer.  Thesearch for buyers may be time consuming, and Fischer may have difficultysupporting its RE&S business and service and warranty obligations whilepursuing possible transactions.  Inaddition, Hologic has a right of first refusal with respect to any writtenoffer for the

 

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purchase ofFischer’s continuing Service business. This right may significantly reduce the interest of potential buyers andmake it difficult for Fischer to sell such business.

 

In addition to selling these businesses, Fischer may haveto establish alternative arrangements to satisfy its service, warranty andproduct distribution obligations. In this case, Fischer may then be subject toincreased potential liability under those obligations and would have to use theproceeds from the asset sales to meet these obligations. If there were notsufficient proceeds remaining from the asset sales to pay such obligations thenFischer would be forced to liquidate.

 

In 2003 Fischer established a direct sales and servicepresence in Europe in anticipation of sales opportunities for its SenoScanproduct.  The expense associated withthese operations has been high.  As aresult of the Asset Sale, the projected revenue in Europe is expected tocontinue to decline.  Therefore,management is reviewing various strategies to exit this market andsignificantly reduce or eliminate costs in Europe.

 

**Basis of Presentation**

 

In management’s opinion,the accompanying unaudited consolidated balance sheets, statements of operationsand statements of cash flows contain all adjustments necessary to presentfairly in all material respects the financial position of the Company at September 30,2005, its results of operations for the three-months and nine-months ended September 30,2005 and 2004 and its cash flows for the nine-months ended September 30,2005 and 2004.  Results of operations andcash flows for the interim periods may not be indicative of the results ofoperations and cash flows for the full fiscal year.

 

Thefactors listed above, among others, raise substantial doubt about Fischer’sability to continue as a going concern. The consolidated financial statementsdo not include any adjustments that might result from the outcome of thisuncertainty.  If the Philips Agreement iseventually terminated as discussed in Note 11, management believes it will berequired to increase its reserves for excess and obsolete inventories byapproximately $1.1 million in a future quarter. As discussed in Note 4, management assessed the recoverability of itslong-lived assets and intangibles, which included assumptions regardingestimated future cash flows and other factors, and estimated that the maximumamount of additional non-cash impairment charges related to fixed assets andintangible assets would be $1.4 million and $1.0 million, respectively.

 

As a result of the AssetSale and Lease Amendment, the following non-recurring adjustments wererecorded:

 

•                  Theresults for the three-months ended September 30, 2005 include:

•                  $0.8million of impairment of long-lived assets as more fully discussed in Note 4,

•                  $4.0million of expense related to the Lease Amendment as more fully discussed inNote 5,

•                  anincrease of $0.7 million for excess and obsolete inventories as more fullydiscussed in Note 3,

•                  expensesfor legal and financial advisory fees related to the Asset Sale in the amountof $0.6 million, and

•                  again on sale of Mammography Assets of $32.0 million.

•                  Theresults for the nine-months ended September 30, 2005 include:

•                  $0.8million of impairment of long-lived assets as more fully discussed in Note 4,

•                  $4.0million of expense related to the Lease Amendment as more fully discussed inNote 5,

•                  again on sale of Mammography Assets of $32.0 million,

•                  anincrease of $5.1 million to the provision for excess and obsolete inventories asmore fully discussed in Note 3,

•                  anincrease to cost of sales of $0.6 million for excess inventories related topurchase commitments that management estimates the Company is contractuallyliable to pay, and

•                  expensesfor legal and financial advisory fees related to the Asset Sale in the amountof $1.0 million.

 

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, 2004.

 

**Stock Based Compensation**

 

The Company’s stockoption grants are accounted for under the intrinsic value recognition andmeasurement principles of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” and related interpretations.  No stock-based employee compensation cost isrecognized in net income or loss, unless the option price is less

 

8

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than the current market price at the grant date. Thefollowing table illustrates the effect on net income and earnings per share ifthe Company had applied the fair value recognition provisions of SFAS No. 123“Accounting for Stock-Based Compensation,” to employee stock benefits.

 

For purposes of this proforma disclosure, the estimated fair value of the options are assumed to beamortized to expense over the options’ vesting periods (in thousands, exceptper share amounts).

 
| ** **                                     | ** ** | **Three-Months Ended**       | ** ** | **Nine-Months Ended**        | ** ** |
|------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|                                           |       |                         |       |                         |       |   |   |   |   |
| Net income  (loss) as reported                 |       | $                            | 19,948     |                         | $          | (1,745 | ) | $ | 4,264 |   | $ | (3,069 | ) |
| Fair value-based compensation cost, net of tax |       | 681                          |       | (300                         | )          | (470 | ) | (878 | ) |
| Pro forma net income (loss)                    |       | $                            | 20,629     |                         | $          | (2,045 | ) | $ | 3,794 |   | $ | (3,947 | ) |
|                                           |       |                         |       |                         |       |   |   |   |   |
| Basic income  (loss) per share:                |       |                         |       |                         |       |   |   |   |   |
| As reported                                    |       | $                            | 2.12       |                         | $          | (0.19 | ) | $ | 0.45 |   | $ | (0.33 | ) |
| Pro forma                                      |       | $                            | 2.19       |                         | $          | (0.22 | ) | $ | 0.40 |   | $ | (0.42 | ) |
|                                           |       |                         |       |                         |       |   |   |   |   |
| Diluted income  (loss) per share:              |       |                         |       |                         |       |   |   |   |   |
| As reported                                    |       | $                            | 2.12       |                         | $          | (0.19 | ) | $ | 0.45 |   | $ | (0.33 | ) |
| Pro forma                                      |       | $                            | 2.19       |                         | $          | (0.22 | ) | $ | 0.40 |   | $ | (0.42 | ) |

 

**Recently Issued Accounting Pronouncements**

 

TheFASB has issued SFAS No. 123 (revised 2004) (“SFAS No. 123R”), “Share-Based Payment” which supersedesAccounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees”and its related implementation guidance. Under SFAS No. 123R, all share-based payments would be treated asother forms of compensation by recognizing the costs, generally measured as thefair value at the date of grant, in the income statement.  Fischer will be required to adopt SFAS No. 123Rfor its fiscal year beginning January 1, 2006. Fischer is evaluating therequirements of SFAS No. 123R and has not yet determined which method ofadoption it will employ or the impact on its results of operations, financialposition or liquidity.

 

The FASB has issuedStatement of Financial Accounting Standards No. 151, “Inventory Costs — anamendment of ARB No. 43, Chapter 4” (“SFAS No. 151”). Theprovisions of SFAS 151 are intended to eliminate narrow differences between theexisting accounting standards of the FASB and the International AccountingStandards Board (IASB) related to inventory costs, in particular, thetreatment of abnormal idle facility expense, freight, handling costs andspoilage. SFAS No. 151 requires that these costs be recognized as currentperiod charges regardless of the extent to which they are considered abnormal.The provisions of SFAS 151 are effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The adoption of SFAS 151 isnot expected to have a material impact on the Company’s results of operations,financial position or liquidity.

 

**(2)   REVENUE RECOGNITION**

 

The Company follows theprovisions of SEC Staff Accounting Bulletin No. 104, “Revenue Recognitionin Financial Statements” (“SAB 104”) which provides for revenue recognitionwhen persuasive evidence of an arrangement exists, delivery has occurred, theprice is fixed and determinable and collectibility is reasonably assured. TheCompany’s standard business practice requires that sales transactions besupported by an executed sales agreement or an executed purchase order. TheCompany recognizes product revenue for its medical equipment when title andrisk of loss have transferred to the customer and the Company has nopost-shipment performance obligations 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 criteria be met for customeracceptance, the Company defers revenue recognition on the product sale untilsuch conditions are satisfied.

 

9

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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. Theseassessments require judgments and estimates, and valuation adjustments forexcess and obsolete inventory may be recorded based on these periodicassessments. As a result of a reduction in forecasted sales resulting from theAsset Sale and changes in market conditions, the provision for excess andobsolete inventories increased by $0.7 million and $5.1 million in the three andnine-months ended September 30, 2005, respectively.

 

Inventories consisted ofthe following components (in thousands): 

 
| ** **                                   | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials                                |       | $                            | 4,775      |                        | $          | 8,952 |   |
| Work in process  and finished goods          |       | 7,846                        |       | 8,866                       |       |
| Reserve for  excess and obsolete inventories |       | (5,795                       | )          | (1,784                      | )          |
| Inventories, net                             |       | $                            | 6,826      |                        | $          | 16,034 |   |

 

**(4)   IMPAIRMENTOF LONG-LIVED ASSETS**

 

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.  Fischer evaluates thecarrying value of the intangibles at the consolidated level since there are nocomponents that constitute a business for which discrete financial informationis available below the segment level.  Asa result of the Asset Sale, Lease Amendment and further declines in the stockprice, management determined a recoverability test should be completed as of September 30,2005.

 

Since the future estimatedcash outflows are currently estimated to be greater than the inflows as aresult of the Asset Sale, the carrying amounts of the assets exceeded theestimated undiscounted cash flows. Management estimated the fair value of the assets by reviewing the valueof the remaining businesses and other long-lived assets and determined animpairment had occurred.  Fair value ofthe long-lived assets was determined through inquiry of advisors and comparisonto other sales of fixed assets. Therefore, an impairment of long-lived assets of $0.8 million wasrecognized during the three-months ended September 30, 2005.

 

If the estimates of fairvalue change in the future, the Company may be required to record additionalimpairment charges for the long-lived assets and intangibles.  Based upon the minimum fair valuecalculations, the maximum amount of impairment charges related to property andequipment and intangible assets would be $1.4 million and $1.0 million,respectively.

 

10

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**(5)   LEASETERMINATION FEE AND RESTRUCTURING EXPENSE**

 

During the nine-monthsended September 30, 2005, the Company recognized restructuring charges inthe amount of $4.9 million of which $0.9 million is related to terminationbenefits for approximately 65 employees across all departments.  The majority of the termination benefitsexpense has been recorded as “Research and development” and “General andadministrative” in the accompanying consolidated statements of operations.  The remaining $4.0 million is related to thelease termination fee.

 

As disclosed in Note 1,on September 27, 2005, Fischer entered into a Lease Amendment with JNProperties.  The Lease Amendment providesfor the amendment of the Lease dated July 31, 1992 to allow for the earlytermination of the Lease within 60 days of written notice from Fischer ofintent to vacate or May 31, 2006, whichever is earlier.  Fischer will continue to pay the currentrental rate and comply with other terms and conditions of the Lease during theperiod prior to termination of the Lease. In exchange for the above, Fischer agreed to pay to JN Properties $4.0million plus certain accrued 2005 property taxes immediately following theclosing of the Hologic transaction.  The$4.0 million payment made on September 29, 2005 has been recognized as “Leasetermination fee” in the accompanying consolidated statements ofoperations.  The following is a rollforward of the restructuring accrual (in thousands):

 
| ** **                          | ** ** | **Termination  Benefits** | ** ** | **Lease  Termination  Fee** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|---------------------------|------------|-----------------------------|------------|-----------|------------|
| Balance at December 31,  2004  |       | $                         | —     |                        | $          | —    |       | $ | — |   |
| Expense                             |       | 862                       |       | 4,000                       |       | 4,862     |       |
| Payments                            |       | (420                      | )          | (4,000                      | )          | (4,420    | )          |
| Balance at September 30,  2005 |       | $                         | 442        |                        | $          | —    |       | $ | 442 |   |

 

The restructuring accrualis included in “Other Current Liabilities” in the accompanying consolidatedbalance sheets.

 

**(6)   BORROWINGS AND WARRANTS**

 

In June 2003,the Company entered into an $8.0 million credit facility with SiliconValley Bank, subject to restrictions based on eligible receivables. Theoutstanding balance as of December 31, 2004 was $1.5 million.  On February 22, 2005, the Companyrefinanced the $2.5 million then outstanding under this credit facility on along-term debt basis with ComVest and terminated this credit facility.  The Company accounted for the refinanced debtas long-term in the accompanying consolidated balance sheet as of December 31,2004 pursuant to FASB Statement No. 6, “Classification of Short-termObligations Expected to be Refinanced.”

 

On February 22,2005, the Company entered into the ComVest Purchase Agreement, which providedfor up to $10.0 million of senior secured debt financing.  At closing, Fischer issued and sold a seniorsecured promissory note in the principal amount of $5.0 million to ComVest. Inconnection with the issuance of this note, Fischer issued to ComVest a warrant(the “Warrant”) to purchase 2,000,000 shares of Common Stock at an exerciseprice of $4.25 per share.

 

On March 29,2005 the Company and ComVest amended the ComVest Purchase Agreement and theCompany issued and sold an additional $2.0 million senior secured promissorynote to ComVest, bringing the total amount borrowed from ComVest to $7.0million.  Also in connection with thefunding of the secondary note, the Company agreed to amend the Warrant toprovide ComVest with a put option, exercisable at $0.90 per warrant share, uponthe occurrence of certain trigger events. In connection with the closing of the Asset Sale, ComVest exercised itsput option, and at closing, Fischer paid $1.8 million in satisfaction of the stockwarrant obligation.  In addition, amountsdue under the ComVest promissory notes were paid upon the closing of the AssetSale.

 

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.

 

As of February 22,2005, the stock warrant obligation fair value was estimated to be $2.9million.  As required by APB Opinion No. 14,“Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,”the issuance proceeds must be allocated between the amount applicable to thedebt and the amount applicable to the Warrant based upon relative fair valuesof the debt and the Warrants at issuance date. As a result, Fischer increased “Debt issue costs” by $1.8 million, whichwere amortized to interest expense by the closing of the Asset Sale.

 

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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.  In addition,the minimum fair value is the cash value of the put option of $1.8 million or$0.90 per warrant share.  The followingsummarizes the significant assumptions as of February 22, 2005:

 
| Stock price (10-day  average) |   | $    | 4.55   |   |
|-------------------------------|--------|------|--------|--------|
| Discounted stock  price       |   | $    | 2.73   |   |
| Volatility                    |   | 94.9 | %      |
| Dividend yield                |   | 0.00 | %      |
| Risk-free  interest rate      |   | 3.89 | %      |
| Expected life  (years)        |   | 5.00 |   |
| Black-Scholes  fair value     |   | $    | 1.84   |   |
| Fair value per  warrant share |   | $    | 1.47   |   |

 

Aspreviously discussed, in connection with the execution of the Asset SaleAgreement, Fischer entered into a $5.0 million interest bearing secured termloan with Hologic pursuant to a Loan Agreement, Promissory Note, SecurityAgreement, Patent Security Agreement and Trademark Security Agreement, eachdated as of June 22, 2005.  Hologicdeducted all amounts outstanding under the promissory note from the purchaseprice payable at the closing of the Asset Sale.

 

Thecapital lease obligation as of December 31, 2004 was a two-year obligationfor primarily computer equipment and software. The capital lease was secured bycomputer equipment.  As of September 30,2005, all long-term debt and capital lease obligations had been paid and nofurther funding was available through those sources.  Long-term debt and capital lease obligationas of December 31, 2004 consist of the following (in thousands):

 
| Long-term  (Credit facility refinanced to long-term debt) |   | $     | 1,454  |   |
|-----------------------------------------------------------|--------|-------|--------|--------|
| Capital lease  obligation                                 |   | 224   |   |
| Total                                                     |   | 1,678 |   |
| Less—Current  maturities                             |   | 224   |   |
| Long-term debt                                            |   | $     | 1,454  |   |

 

**(7)   NETEARNINGS 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.

 

A reconciliation betweenthe number of securities used to calculate basic and diluted net loss per shareis as follows (in thousands): 

 
| ** **                                     | ** ** | **Three-Months Ended**       | ** ** | **Nine-Months Ended**        | ** ** |
|------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| Weighted average of common shares outstanding: |       |                         |       |                         |       |   |   |   |   |
| Basic                                          |       | 9,399                        |       | 9,363                        |       | 9,389 |   | 9,353 |   |
| Dilutive effect of stock options               |       | —                       |       | —                       |       | 46 |   | — |   |
| Diluted                                        |       | 9,399                        |       | 9,363                        |       | 9,435 |   | 9,353 |   |

 

For the three-monthsended September 30, 2005 and 2004, 922,750 and 1,442,924, respectively, ofoptions to purchase shares of common stock were outstanding but not included inthe computation of diluted earnings per share because the effect would havebeen anti-dilutive.  For the nine-months ended September 30, 2005 and2004, 876,402 and 1,372,676, respectively, of options to purchase shares ofcommon stock were outstanding but not included in the computation of dilutedearnings per share because the effect would have been anti-dilutive. TheCompany excluded the impact of outstanding warrants in 2005 as the put optionwas exercised and did not result in equity or would have been anti-dilutive.

 

12

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**(8)   COMPREHENSIVE INCOME (LOSS )**

 

Comprehensive income(loss) is defined as the change in equity of an enterprise other than thechange resulting from investments by, or distributions to, its owners. Foreigncurrency translation adjustments for the three and nine-months ended September 30,2005 resulted in a currency translation gain due to the change exchange ratesin United States Dollar to the Euro during the periods.

 

For the Company,comprehensive income (loss) includes only net income (loss) and foreigncurrency translation adjustments as follows (in thousands):

 
| ** **                               | ** ** | **Three-Months Ended**       | ** ** | **Nine-Months Ended**        | ** ** |
|------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                               | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
|                                     |       |                         |       |                         |       |   |   |   |   |
| Net income (loss)                        |       | $                            | 19,948     |                         | $          | (1,745 | ) | $ | 4,264 |   | $ | (3,069 | ) |
| Foreign currency translation adjustments |       | (48                          | )          | 39                           |       | (76 | ) | 88 |   |
| Comprehensive income (loss)              |       | $                            | 19,900     |                         | $          | (1,706 | ) | $ | 4,188 |   | $ | (2,981 | ) |

 

**(9)   SEGMENT AND CUSTOMERINFORMATION**

 

The Companyoperates in a single industry segment: the manufacture and service of specialtydigital imaging systems and other medical devices primarily used in screening,diagnostic and interventional procedures. The Company manufactures its productsin the United States and distributes them in the United States, Europe andelsewhere.  The Company’s chief operatingdecision makers use consolidated results to make operating and strategicdecisions.

 

Internationally, theCompany markets and supports its products primarily through it subsidiaries andvarious dealers.  Revenues are attributedto geographic areas based on the location of the customer.  International long-lived assets are locatedin Switzerland.  The following tablerepresents a summary of revenues and long-lived assets (in thousands):

 
| ** **          | ** ** | **Three-Months Ended**       | ** ** | **Nine-Months Ended**        | ** ** |
|---------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **          | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| Revenues:           |       |                         |       |                         |       |   |   |   |   |
| United States       |       | $                            | 12,520     |                         | $          | 14,811 |   | $ | 34,383 |   | $ | 37,238 |   |
| Mexico              |       | —                       |       | 562                          |       | — |   | 7,306 |   |
| Other International |       | 919                          |       | 2,428                        |       | 4,699 |   | 5,042 |   |
| Total               |       | $                            | 13,439     |                         | $          | 17,801 |   | $ | 39,082 |   | $ | 49,586 |   |

 
| ** **               | ** ** | **As of**                    | ** ** |
|--------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| Long-lived  assets, net: |       |                         |       |   |   |
| United States            |       | $                            | 1,556      |   | $ | 3,599 |   |
| International            |       | 120                          |       | 218 |   |
| Total                    |       | $                            | 1,676      |   | $ | 3,817 |   |

 

The Company’s revenuesgenerally are 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.

 

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Customers representinggreater than 10% of the Company’s revenue during any of the reporting periods:

 
| ** **                 | ** ** | **Three-Months Ended**       | ** ** | **Nine-Months Ended**        | ** ** |
|----------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| Intec Mexico, S.A. de C.V. |       | 0.0                          | %          | 3.2                          | %          | 0.0 | % | 15.0 | % |
| Eastman Kodak              |       | 11.8                         |       | 12.9                         | %          | 9.1 |   | 9.2 | % |

 

Revenue grouped bysimilar products and services (in thousands):

 
| ** **                 | ** ** | **Three-Months Ended**       | ** ** | **Nine-Months Ended**        | ** ** |
|----------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** |
| Product Revenue:           |       |                         |       |                         |       |   |   |   |   |
| Digital Mammography        |       | $                            | 3,152      |                         | $          | 4,265 |   | $ | 7,092 |   | $ | 17,461 |   |
| Stereotactic Breast Biopsy |       | 3,915                        |       | 6,626                        |       | 14,616 |   | 13,468 |   |
| RE&S Products          |       | 2,377                        |       | 2,819                        |       | 6,144 |   | 7,381 |   |
| Service Revenue            |       | 3,995                        |       | 4,091                        |       | 11,230 |   | 11,276 |   |
| Total                      |       | $                            | 13,439     |                         | $          | 17,801 |   | $ | 39,082 |   | $ | 49,586 |   |

 

**(10)   PROVISION FOR INCOME TAXES**

 

The Asset Sale will betreated as a sale of corporate assets in exchange for cash for the fullpurchase price of $32.0 million. Although Fischer will recognize gain for federal income tax purposes asa result of the Asset Sale, such gain will be offset by Fischer’s loss fromoperations for the current year and its net operating loss carryforwards (“NOLs”).  For alternative minimum tax (“AMT”) purposesonly, 90% of AMT taxable income may be offset by alternative tax NOLs, andFischer expects that the amount of AMT will be approximately $200,000.  As of September 30, 2005 the Company hada 100% valuation allowance against its deferred tax assets that resulted in anet deferred tax asset of $0.

 

**(11)   COMMITMENTS ANDCONTINGENCIES**

 

**Litigation**

 

TheCompany was a defendant in a breach of contract suit brought by InternationalSurgical Systems in the federal District Court of Arizona.  In June 2005, Fischer settled the suitfor a nominal amount, which was paid in October 2005 and accrued at September 30,2005.

 

TheCompany has received notice that it may be named as a defendant by severalcustomers seeking to be repaid their purchase price related to claimeddeficiencies in the SenoScan product. The Company has recorded reserves at September 30, 2005 related tothese sales that it believes appropriately reflects the risk of an adverseoutcome.  The Company believes that ithas asserted meritorious defenses to these claims.  The Company is also a defendant in variouslawsuits brought by vendors, suppliers and others incident to the operation ofits business. The Company does not believe that any one of these pending legalproceedings would have a material adverse effect on the consolidated financialposition or results of operations of the Company.  However, in the aggregate the potentialliability and management distraction resulting from managing numerous lawsuitssimultaneously could have a material adverse effect on the financial conditionand cash flow of the Company if the outcomes are collectively unfavorable.

 

**Regulatory Actions**

 

TheCompany is subject to periodic inspections by the Food and Drug Administration(“FDA” or the “agency”).  The primarypurpose of these inspections is to verify the compliance of a company’s qualitysystem with the requirements of FDA’s Good Manufacturing Practices, also knownas the Quality System Regulation, and other FDA regulations governing medicaldevices.  During these inspections, theagency evaluates a company’s state of compliance with various FDA regulationsand the adequacy 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 theinspection and presented a Form 483 formally describing observations withrespect to the Company’s compliance with various FDA requirements. Thisinspection did not resolve the issues described in the Warning Letter issued tothe Company in December

 

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2002 by the FDA, whichremains in effect.  The Company retainedthe services of a consultant and responded to the Form 483 findings withinone week following the conclusion of the inspection.  The response described a corrective actionplan to address each of the observations included on the Form 483.  Many corrective actions were completed beforethe May 13, 2005 conclusion of the inspection.  Since the conclusion of the inspection, theCompany has provided the FDA with periodic progress reports of its correctiveactions.  To date, there has been no writtenresponse from the FDA regarding the adequacy of the Company’s corrective actionplan.  In addition to the regular statusreports, the Company has met with the FDA regarding the status of thecorrective actions and another meeting is planned.  Communication with the FDA regarding theinspection and the Company’s progress in completing required corrective actionswill continue.  Pending feedback on andmodifications to the corrective action plan from the FDA, the Company expectsto complete corrective actions related to this inspection by December 31,2005.  The Company’s goal is to addressthe FDA’s inspectional observations without the agency pursuing additionalregulatory or enforcement action.  Therecan be no assurance, however, that the Company’s efforts will be successful andthat the FDA will not pursue such actions which could include, but not belimited to, the issuance of another Warning Letter; a court-ordered injunction;product seizures; 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. Further, failure to satisfy the FDA requirements can result in aninability to receive awards of federal government contracts or new marketing orexport clearance for products.

 

**Philips**

 

Fischerreceived notification on September 2, 2005 by Philips that it had ceasedsales activities for the present time with respect to the SenoScan product andthat it intended to terminate the Master Purchasing Agreement, dated October 14,2004, between Fischer and Philips should the Asset Sale Agreement be approvedby stockholders and consummated. Fischer has not received notification fromPhilips that the Philips Agreement has been terminated.  However, Fischer expects to meet with Philipsin November 2005 to discuss its intent to fulfill its contractualobligations and, if applicable, the terms and conditions of termination.  Fischer is unable to predict the outcome ofthese discussions or the amount, if any, that may be demanded by Philips.  Any payments made to Philips by Fischer maymaterially reduce amounts, if any, that may be available for distribution toFischer’s stockholders from the proceeds of the Asset Sale.

 

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

 

**Cautionary Language**

 

Thisreport contains forward-looking information that involves risk and uncertainties,including statements regarding our plans, objectives, expectations, andintentions.  Such statements include,without limitation, statements regarding various estimates we have made inpreparing our consolidated financial statements, statements regardinganticipated uses of proceeds from the closing of the Asset Sale, Philips’intent to terminate the Philips Agreement and potential outcomes regarding theterms and conditions of the termination including the effect of any payments toPhilips on potential distributions to stockholders, the effect on Fischer ofpotential or continuing litigation, potential distributions to stockholders,our plans to reduce operating costs, our plans to sell the RE&S and Servicebusinesses, our ability to satisfy service and warranty and productdistribution obligations, our plans with respect to our European operations, ourestimate of fair value used to estimate the impairment charge, as well asstatements regarding expected future trends relating to our results of operationsand the sufficiency of our liquidity and access to additional capitalresources.  These forward-lookingstatements are subject to known and unknown risks and uncertainties that couldcause actual results to differ materially from those anticipated.  Factors that could cause actual results tomaterially differ include, without limitation;

 

•                  the impact of continuing losses onour liquidity and our ability to take action to maintain liquidity;

•                  our ability to sell the RE&S andServices businesses;

•                  our reliance on a single source ofsupply for some key components of our products and Service business, as well asthe need to comply with especially high standards for those components in themanufacture of our SenoScan product;

•                  anticipated increases in reserves forexcess and obsolete inventories;

•                  the anticipated maximum impairmentcharges for fixed and intangible assets;

•                  our ability to negotiate claims withcreditors, vendors and customers;

•                  our ability to retain key employees;

•                  our ability to predict accurately thedemand for our products and to develop strategies to address our marketssuccessfully;

•                  technical innovations that couldrender products marketed by us obsolete;

•                  competition; and

•                  an adverse action taken by the Foodand Drug Administration regarding the Form 483 issued in May 2005.

 

Other factors that couldadversely affect our business and prospects are described in our filings withthe SEC, including our Annual Report on Form 10-K for the year ended December 31,2004.  Except as otherwise required bylaw, we expressly disclaim any obligation or undertaking to release publiclyany updates or revisions to any such statements to reflect any change in ourexpectations or any change in events, conditions or circumstances on which anysuch statement is based.

 

**Critical Accounting Policies**

 

Critical accountingpolicies are those that are most important to the portrayal of our financialcondition and operating results, and require management to make its mostdifficult 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, estimations of future cash flows, terms ofexisting contracts, our observance of trends in the industry, informationprovided by our customers and information available from other outside sources,as appropriate. Actual results may differ from these estimates under differentassumptions 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 on Form 10-Kfor the fiscal year ended December 31, 2004. There have been no materialchanges to our critical accounting policies, as described in that Form 10-K,except for analysis of impairment completed September 30, 2005.

 

Impairment

 

Our policy is to evaluatewhether there has been a permanent impairment in the value of long-livedassets, of certain identifiable intangibles and of goodwill when certain eventshave taken place that indicate that the remaining balance may not be recoverable.  During the three-months ended September 30,2005 the following indicators of impairment occurred:

 

•                  Significantadverse change to the extent in which the property and equipment are being usedas a result of the Asset Sale.

•                  LeaseAmendment entered into to allow for the early termination of the Lease within60 days of written notice of our intent to vacate or May 31, 2006,whichever is earlier.

 

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•                  Continuingoperating losses and negative cash flows in the three-months ended September 30,2005 and a forecast that demonstrates continuing losses for the foreseeablefuture.

•                  Weplan to actively seek buyers for our RE&S and Service businesses, which maymean that long-lived assets and intellectual property could be sold before theend of their previously estimated useful lives.

•                  Asignificant drop in Fischer’s stock price.

 

We evaluate the carryingvalue of our property and equipment at the consolidated level since we believethat is the lowest identifiable level of cash flows for these assets.  We evaluate the carrying value of theintangibles at the consolidated level since there are no components thatconstitute a business for which discrete financial information is availablebelow the operating segment level.

 

Since the futureestimated cash outflows are currently estimated to be greater than the inflowsas a result of the Asset Sale, the carrying amounts of the assets exceeded theestimated undiscounted cash flows.  Managementestimated the fair value of the assets by reviewing the value of the remainingbusinesses and other long-lived assets and determined an impairment hadoccurred.  Fair value of the long-livedassets was determined through inquiry of advisors and comparison to other salesof fixed assets.  Therefore, animpairment of long-lived assets of $0.8 million was recognized during thethree-months ended September 30, 2005. As a result of the impairmentcharge, depreciation expense may increase from historical rates in the future.

 

If the estimates of fairvalue change in the future, we may be required to record additional impairmentcharges for the long-lived assets and intangibles.  Based upon the minimum fair valuecalculations, the maximum amount of impairment charges related to property andequipment and intangible assets would be $1.4 million and $1.0 million,respectively.

 

**Hologic Transaction and Management’s Plans**

 

Wehave continued to experience significant losses and negative cash flows fromoperations.  The $7.0 million infinancing obtained from ComVest was completely consumed to fund operations,working capital needs and to repay the outstanding balance of $2.5 millionunder the line of credit with Silicon Valley Bank.  Due to difficulties in reducing costs,further delays in the SenoScan redesign program and the declines in revenue andother negative developments, we were left with insufficient cash reserves tocontinue operations in June 2005.

 

On June 22,2005, we entered into an Asset Sale Agreement with Hologic in which we agreedto sell to Hologic all of the Mammography Assets for a cash purchase price of$32.0 million.  Hologic agreed to grantus a non-exclusive limited license to use certain Mammography Assets necessaryfor us to continue to service and support, and satisfy warranty obligations on,the installed base of SenoScan and MammoTest systems; to fulfill contractualobligations to provide MammoTest and SenoScan systems to EES and Philips,respectively; and to carry out certain activities with respect to the RE&Sbusiness.

 

Inconnection with the execution of the Asset Sale Agreement, we entered into a$5.0 million interest bearing secured term loan with Hologic pursuant to a LoanAgreement, Promissory Note, Security Agreement, Patent Security Agreement andTrademark Security Agreement, each dated as of June 22, 2005.  We used most of this loan for working capitalpurposes prior to the closing of the Asset Sale on September 29, 2005.

 

On September 27,2005, we entered into the Lease Amendment. The Lease Amendment provides for the amendment of the Lease dated July 31,1992 to allow for the early termination of the Lease within 60 days of writtennotice from Fischer of intent to vacate or May 31, 2006, whichever isearlier.  We will continue to pay thecurrent rental rate and comply with other terms and conditions of the Leaseduring the period prior to termination of the Lease.  In exchange for the above, we agreed to pay$4.0 million plus certain accrued 2005 property taxes immediately following theclosing of the Hologic transaction.

 

Alsoon September 27, 2005, we entered into a Voting and Support Agreement withthe Stockholders.  The agreement providesthat the Stockholders will vote the Shares in favor of approval of the AssetSale Agreement.  The agreement granted usan irrevocable proxy to vote the Shares as provided in the Asset SaleAgreement.

 

Priorto the Fischer special meeting of stockholders, on September 28, 2005,Hologic and funds managed by or otherwise related to Deerfield entered into aStock Purchase Agreement pursuant to which Hologic agreed to purchase fromDeerfield the Deerfield Shares for a purchase price of $0.45 per share (thelast reported sale price of Fischer’s Common Stock as quoted on the PinkSheets, LLC on September 27, 2005), for an aggregate purchase price of$517,500.  The Deerfield Sharesrepresented approximately 12.2% of the issued and outstanding shares of Fischer’sCommon Stock.  Hologic’s obligation topurchase the Deerfield Shares was conditioned on the closing of the AssetSale.  Under the Stock PurchaseAgreement, Deerfield further agreed to vote the Deerfield Shares in favor ofthe Asset Sale at the Special Meeting. On September 29, 2005, immediately following the closing of theAsset Sale, Hologic purchased the Deerfield Shares from Deerfield as providedin the Stock Purchase Agreement.

 

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TheAsset Sale Agreement was approved by our stockholders at a special meeting ofstockholders held on September 28, 2005. The value of the Mammography Assets sold was zero on our consolidatedbalance sheets and therefore the entire $32.0 million proceeds were recognizedas Gain on sale of Mammography Assets in the accompanying consolidatedstatements of operations.  The proceedsfrom the Asset Sale were disbursed as follows (in thousands):

 
| Repay $5.0  million loan with Hologic, plus related interest      |   | $     | 5,114  |   |
|-------------------------------------------------------------------|--------|-------|--------|--------|
| Repay the Notes  with ComVest, plus related interest              |   | 7,444 |   |
| Payment of stock  warrant obligation with ComVest (Note 6)        |   | 1,800 |   |
| Amendment fee to  terminate Lease plus certain property taxes     |   | 4,180 |   |
| Settle certain  accounts payable due at closing of the Asset Sale |   | 931   |   |
|                                                              |   | $     | 19,469 |   |

 

Theremaining proceeds from the Asset Sale of approximately $12.5 million will beused to pay outstanding obligations, to satisfy operational responsibilities inrespect of other obligations (including service and warranty obligations andobligation under the EES and Philips agreements); and to continue exploringstrategic alternatives for our RE&S business and our Service business, withassociated warranty obligations. Management expects that amounts, if any, remaining after these paymentsand after making adequate reserves for contingent liabilities, would bedistributed to stockholders.

 

Concurrentwith the Asset Sale, we entered into severance and retention arrangements withcertain senior executive officers and other non-senior executive employees ofFischer.  Retention payments under theseagreements are earned over the periods July 1, 2005 through December 31,2005 and January 1, 2006 through June 30, 2006 and are currentlyestimated to be $0.9 million and $0.4 million, respectively.  Severance payments, earned upon aninvoluntary termination, are estimated to be $0.9 million.

 

These factors, amongothers, raise substantial doubt about our ability to continue as a goingconcern. The consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

Effective with the AssetSale, Hologic is the beneficiary of any future earnings and growth in revenuesfrom the Mammography Assets except for activities related to the retainedassets/businesses.  We will continue toservice and support, and satisfy the warranty obligations on, the installedbase of SenoScan and MammoTest systems and fulfill our contractual obligationsto provide MammoTest and SenoScan systems to EES and Philips,respectively.  Management has taken andwill continue to take steps to reduce our operating costs by reducing thenumber of employees to the minimum number needed to conduct our remainingbusinesses, terminating certain contracts, and negotiating releases fromremaining contractual arrangements.

 

We may not be successfulin continuing to reduce operating costs and may therefore continue to incursubstantial losses and reductions in cash as a result of satisfying andmaintaining our contractual obligations while exploring strategic alternativesfor the RE&S and Service businesses.

 

As part of exploringstrategic alternatives for the RE&S and Service businesses, we plan toactively seek buyers for our RE&S and Service businesses and have hired astrategic advisor to assist with this process. The Service business may be difficult to sell in light of the continuingwarranty obligations that will need to be assumed by a buyer.  The search for buyers may be time consuming,and we may have difficulty supporting our RE&S business and service andwarranty obligations while pursuing possible transactions.  In addition, Hologic has a right of firstrefusal with respect to any written offer for the purchase of our continuingService business.  This right maysignificantly reduce the interest of potential buyers and make it difficult forus to sell such business.

 

In addition to sellingthese businesses, we may have to establish alternative arrangements to satisfyour service, warranty and product distribution obligations. In this case, wemay then be subject to increased potential liability under those obligationsand would have to use the proceeds from the asset sales to meet theseobligations. If there were not sufficient proceeds remaining from the assetsales to pay such obligations then we would be forced to liquidate.

 

In 2003 we established a direct sales and service presencein Europe in anticipation of sales opportunities for our SenoScan product.  The expense associated with these operationshas been high.  As a result of the AssetSale, the projected revenue in Europe is expected to continue to decline.  Therefore, management is reviewing variousstrategies to exit this market and significantly reduce or eliminate costs inEurope.

 

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**Overview**

 

We reported net incomeof $19.9 million for the three-months ended September 30, 2005 compared tonet loss of $1.7 million for the three-months ended September 30,2004.  We reported net income of $4.3million for the nine-months ended September 30, 2005 compared to net lossof $3.1 million for the nine-months ended September 30, 2004.  The following items contributed to theseresults:

 

•                  Thefinancial results for the three and nine-months ended September 30, 2005include $32.0 million related to the gain on sale of our Mammography Assets asdiscussed in Note 1 of the accompanying consolidated financial statements.

 

•                  Thefinancial results for the three and nine-months ended September 30, 2005include $0.8 million of impairment of long-lived assets as more fully discussedin Note 4 of the accompanying consolidated financial statements.

 

•                  Thefinancial results for the three and nine-months ended September 30, 2005include $4.0 million of expense related to the payment of a fee to allow earlytermination of the Lease as more fully discussed in Note 5 of the accompanyingconsolidated financial statements.

 

•                  Thefinancial results for the three and nine-months ended September 30, 2005include an increase of $0.7 million and $5.1 million, respectively, to ourreserves for excess and obsolete inventories as a result of a reduction inforecasted sales due to the Asset Sale and changes in market conditions asdiscussed in Note 3 of the accompanying consolidated financial statements.

 

•                  Thefinancial results for the nine-months ended September 30, 2005 include anincrease to cost of sales of $0.6 million for excess inventories arising frompurchase commitments that management estimates Fischer is contractually liableto pay.

 

**•**                  The financial results for the three andnine-months ended September 30, 2005 include an increase in expensesrelated to cash employee severance of $0.4 million and $0.9 million,respectively.  We eliminated 34 positionsin our Thornton, Colorado facility on June 30, 2005.  Due to turnover and additional elimination ofpositions, another 82 positions have been eliminated.  Some of these positions were eliminated aspart of our continued implementation of our previously announced plan toimprove operating efficiencies in order to reduce cost of sales, improve grossmargin and lower overall operating costs as a percentage of revenues.  In addition, a number of positions wereeliminated as a result of the Asset Sale. As of September 30, 2005, approximately $0.4 million of theemployee severance for these terminations remains outstanding.  Approximately 67% of the remaining severancepayments will be paid out by December 31, 2005 with the balance paid outover the next two quarters.

 

•                  The financial resultsfor the****nine-months ended September 30, 2005 include expensesfor legal and financial advisory fees related to the Asset Sale in the amountof $1.0 million.

 

•                  The financial resultsfor the****three and nine-months ended September 30, 2005 includeinterest expense, amortization of debt issue costs and fees related to theComVest agreements and Hologic loan of approximately $1.8 million and $2.9million, respectively.

 

•                  Product revenues decreasedby 31.1% to $9.4 million for the three-months ended September 30, 2005from $13.7 million for the three-months ended September 30, 2004.  Third quarter 2004 sales included $0.6million of a non-domestic sale that was shipped in December 2003 andinstalled in the third quarter.  Theremainder of the decrease is due to sales volume decreases across all productlines mainly due to performance, workflow and connectivity solutions, theannouncement of the Asset Sale and lower than average sales prices in ourSenoScan product line.

 

•                  Werecognized patent settlement income in the amount of $5.2 million during thenine-months ended September 30, 2004.

 

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**Results of Operations**

 

The following table setsforth the percentage of revenues represented by certain data included in ourstatements of operations for the periods indicated:

 
| ** **                       | ** ** | **Three-Months Ended**       | ** ** | **Nine-Months Ended**        | ** ** |
|----------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                       | ** ** | **September 30,  2005** | ** ** | **September 30,  2004** | ** ** | **September 30,****2005** | ** ** | **September ****30,********2004** | ** ** |
| Revenues:                        |       |                         |       |                         |       |   |   |   |   |
| Product revenues                 |       | 70.3                         | %          | 77.0                         | %          | 71.3 | % | 77.3 | % |
| Service revenues                 |       | 29.7                         |       | 23.0                         |       | 28.7 |   | 22.7 |   |
| Total revenues                   |       | 100.0                        |       | 100.0                        |       | 100.0 |   | 100.0 |   |
| Cost of sales:                   |       |                         |       |                         |       |   |   |   |   |
| Products                         |       | 71.0                         |       | 49.9                         |       | 71.9 |   | 53.7 |   |
| Services                         |       | 26.9                         |       | 27.0                         |       | 31.4 |   | 26.2 |   |
| Research and  development        |       | 5.8                          |       | 9.7                          |       | 12.2 |   | 8.7 |   |
| Selling and  marketing           |       | 10.2                         |       | 12.7                         |       | 13.9 |   | 15.8 |   |
| General and  administrative      |       | 24.8                         |       | 10.5                         |       | 20.8 |   | 12.2 |   |
| Impairment of  long-lived assets |       | 6.0                          |       | —                       |       | 2.0 |   | — |   |
| Lease  termination fee           |       | 29.8                         |       | —                       |       | 10.2 |   | — |   |
| Loss from  operations            |       | (74.5                        | )          | (9.8                         | )          | (62.4 | ) | (16.6 | ) |
| Other income  (expense), net     |       | 224.4                        |       | —                       |       | 73.9 |   | 10.4 |   |
| Provision for  income taxes      |       | (1.5                         | )          | —                       |       | (0.5 | ) | — |   |
| Net (loss)  income               |       | 148.4                        | %          | (9.8                         | )%         | 11.0 | % | (6.2 | )% |

 

**Product Revenues**

 

Totalrevenues decreased 24.5% to $13.4 million for the three-months ended September 30,2005 from $17.8 million for the three-months ended September 30,2004.  Product revenues decreased 31.1%to $9.4 million for the three-months ended September 30, 2005 from$13.7 million for the three-months ended September 30, 2004.

 

•                  SenoScan digital mammography productrevenue decreased 26.1% or $1.1 million to $3.2 million in the third quarter of2005 from $4.3 million in third quarter of 2004.  Third quarter 2004 sales included $0.6million of a non-domestic sale that was shipped in December 2003 andinstalled in the third quarter of 2004. Without this non-domestic sale,SenoScandigital mammography product revenue decreased 14.9% or $0.6million due to a decrease in price due to the announcement of the Asset Sale.

•                  Revenues from our MammoTest breastbiopsy products decreased 40.9% or $2.7 million to $3.9 million in thethird quarter of 2005 from $6.6 million in the third quarter of 2004. Thedecrease in MammoTest product revenue is primarily due to decrease in salesvolume decrease.  Approximately $0.6million of the volume decline is due to receiving lower than anticipated EESorders.

•                  RE&S products revenues decreased$0.4 million to $2.4 million in the third quarter of 2005 from $2.8 million inthe third quarter of 2004.  The salesdecrease on RE&S products in the third quarter of 2005, as compared to thethird quarter of 2004, was primarily due to sales volume decreases across allproduct lines.

 

Totalrevenues decreased 21.2% to $39.1 million for the nine-months ended September 30,2005 from $49.6 million for the nine-months ended September 30, 2004.  Product revenues decreased 27.3% to$27.9 million in the first nine months of 2005 from $38.3 million inthe first nine months of 2004.

 

•                  SenoScan digital mammography productrevenue decreased 59.4% or $10.4 million to $7.1 million in the first ninemonths of 2005 from $17.5 million in the first nine months of 2004.  Revenues for the nine-months ended September 30,2004 included $7.3 million of a non-domestic sale that was shipped in December 2003and installed during the nine months ended September 30, 2004. Withoutthis non-domestic sale, SenoScandigital mammography product revenuedecreased 30.2% or $3.1 million due to the sale of fewer units and due to ourinability to provide upgrades and enhancements to our workflow managementsoftware and introducing alternative workflow solutions and other performanceenhancements and the announcement of the Asset Sale.

•                  Revenues from our MammoTest breastbiopsy products increased 8.5% or $1.1 million to $14.6 million during thenine-months ended September 30, 2005 from $13.5 million during thenine-months ended September 30, 2004. The increase in MammoTest productrevenue is primarily due to a sales volume increases due to $0.5

 

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million ofadditional sales in Europe and stronger demand for the product in the U.S earlyin the year.  We regained the CE Mark onour product distributed in the European Union in May 2004, enabling us toresume shipments there.

•                  The RE&S products revenuesdecreased $1.2 million to $6.1 million during the nine-months ended September 30,2005 from $7.4 million during the nine-months ended September 30, 2004 wasprimarily due to sales volume decreases across all product lines.

 

As a result of theannouncement of the Asset Sale, we were faced and continue to be faced withadditional competitive pressures and declining sales in the SenoScan andMammoTest area.  In addition, perceptionof our financial condition adversely affects our revenues and we expect it willfurther deteriorate in future quarters. We intend to continue to service and support, and satisfy the warrantyobligations on, the installed base of SenoScan and MammoTest systems andfulfill contractual obligations to provide MammoTest and SenoScan systems toEES and Philips, respectively.

 

Management expectsto fulfill our contractual obligations to EES but cannot predict the amount ofrevenue to be generated under this contract due to EES inability to make firmpurchase commitments.  Quarterly sales toEES have ranged from $0.2 million to $3.3 million since January 1, 2004.

 

We were informedon September 2, 2005 by Philips that it had ceased sales activities forthe present time with respect to the SenoScan product and that it intended toterminate the Master Purchasing Agreement, dated October 14, 2004, betweenFischer and Philips (the “Philips Agreement”) should the Asset Sale Agreementbe approved by stockholders and consummated. We have not received notification from Philips that the PhilipsAgreement has been terminated.  However,  we expect to meet with Philips in November 2005to discuss our intent to fulfill our contractual obligations and, ifapplicable, the terms and conditions of the termination.  We are unable to predict the outcome of thesediscussions or the amount, if any, that may be demanded by Philips.  Any payments made to Philips by us maymaterially reduce amounts, if any, that may be available for distribution toour stockholders from the proceeds of the Asset Sale. If the Philips Agreementis eventually terminated, management believes it will be required to increasereserves for excess and obsolete inventories by approximately $1.1 million in afuture quarter.

 

**Service Revenues**

 

Our service revenues forthe three-months ended September 30, 2005 decreased 2.3% to $4.0 millionfrom $4.1 million during the comparable quarter in 2004. The decreases in thethree-month period ended September 30, 2005 in relation to the comparableperiods in 2004 are primarily due to a decline in installation revenue due tolower product sales partially offset by higher number of MammoTest and SenoScanunits on service contracts in both the U.S. and Europe leading to an increasein contract revenue.

 

Our service revenues forthe nine-months ended September 30, 2005 decreased 0.4% to $11.2 millionfrom $11.3 million during the nine-months ended September 30, 2004. Theincreases in the nine-month period ended September 30, 2005 in relation tothe comparable period in 2004 are primarily due to a decline in installationrevenue due to lower product sales partially offset by higher number ofMammoTest and SenoScan units on service contracts in both the U.S. and Europeleading to an increase in contract revenue.

 

As a result of theannouncement of the Asset Sale, we were faced and continue to be faced withadditional competitive pressures and declining contract sales in the SenoScan andMammoTest area.  In addition, perceptionof our financial condition adversely affects our service revenues and we expectit will further deteriorate in future quarters.

 

**Cost of Sales—Products**

 

Cost of sales forproducts in the three-months ended September 30, 2005 was $9.5 million or101.0% of product revenues compared to $8.9 million or 64.8% of productrevenues in the three-months ended September 30, 2004. As a result ofadditional analysis of remaining finished goods inventory related to theMammography Assets on hand at September 30, 2005, including loaners andrentals, an additional $0.7 million in a provision for excess and obsoleteinventories and $0.3 million related to customer commitment obligations wererecorded in the three-months ended September 30, 2005.  The cost of sales for products in thethree-months ended September 30, 2005 excluding the charges related to thereserves would have been $8.5 million or 90.2% of product revenues.  The overall remaining increase in cost ofproduct sales as a percentage of product revenues is due to the impact of loweraverage sales prices and higher material prices.

 

Cost of sales forproducts in the nine-months ended September 30, 2005 was$28.1 million or 100.8% of product revenues compared to $26.6 millionor 69.5% of product revenues in the nine-months ended September 30, 2004.As a result of a reduction in forecasted sales which will result from the AssetSale and changes in market conditions, the provision for excess

 

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and obsolete inventories increased by $5.1 million inthe nine-months ended September 30, 2005. In addition, cost of sales increased by $0.6 million in the nine-monthsended September 30, 2005 for excess inventories arising from purchasecommitments that management estimates Fischer is contractually liable to payand $0.8 million in additional customer commitment obligations.  The cost of sales for products in thenine-months ended September 30, 2005 excluding the charges related to thesereserves would have been $21.6 million or 77.5% of product revenues.  The cost of sales for products in thenine-months ended September 30, 2004 excluding the impact of a higher,extended warranty provision amounting to $1.0 million associated with a non-domesticsale would have been 66.9%.  The overallremaining increase in cost of product sales as a percentage of product revenuesis primarily due to the impact of lower average sales prices and highermaterial prices.

 

**Cost of Sales—Service**

 

Cost of sales forservices for the three-months ended September 30, 2005 decreased 24.6% to$3.6 million from $5.1 million in the three-months ended September 30,2004.  As a percent of service revenues,cost of service sales decreased to 90.6% in the three-months ended September 30,2005 from 117.4% in the three-months ended September 30, 2004.  The U.S. MammoTest and SenoScan units underwarranty and service contract support increased 10.7% and 24.0%, respectively,in the three-months ended September 30, 2005 compared to the three-monthsended September 30, 2004. Approximately $0.5 million of the decrease in cost of sales is due toreductions in headcount and related employee benefits.  The remainder is due to a continuing decreasein parts costs related to fulfilling warranty obligations for newer and morereliable products.

 

Cost of sales forservices for the nine-months ended September 30, 2005 decreased 5.7% to$12.3 million from $13.0 million in the nine-months ended September 30,2004.  As a percent of service revenues,cost of service sales increased to 109.3% in the nine-months ended September 30,2005 from 115.4% in the nine-months ended September 30, 2004.  The U.S. MammoTest and SenoScan units underwarranty and service contract support increased 8.0% and 48.6%, respectively,in the nine-months ended September 30, 2005 compared to the nine-monthsended September 30, 2004. Approximately $0.3 million of the decrease in cost of sales is due toreductions in headcount and related employee benefits partially offset byhigher commissions due to higher rates to induce increase sales.  The remainder is due to a continuing decreasein parts costs related to fulfilling warranty obligations for newer and morereliable products.

 

**Research and Development Expenses**

 

Research and developmentexpenses decreased 54.8% to $0.8 million in the three-months ended September 30,2005 from $1.7 million in the three-months ended September 30, 2004.We spent 5.8% of revenue on research and development in the three-months ended September 30,2005 compared to 9.7% in the three-months ended September 30, 2004.  We have reduced our research and developmentefforts to those necessary to complete the Asset Sale and reduced headcount andoutside consulting expenses accordingly. Our future research and development efforts will be limited tocontinuing to ensure products meet all patient safety requirements andregulatory compliance in connection with the Service business.

 

Research and developmentexpenses increased 11.1% to $4.8 million in the nine-months ended September 30,2005 from $4.3 million in the nine-months ended September 30, 2004.We spent 12.2% of revenue on research and development in the nine-months ended September 30,2005 compared to 8.7% in the nine-months ended September 30, 2004.  Our efforts in the first half of 2005 andprior were focused on redesigning older products for improved reliability andserviceability and enhancing the features, functionality and reliability of ourSenoScan product.  To support theseredesign and product development efforts, contract-engineering servicesincreased $0.7 million.  Managementhalted these redesign efforts and terminated certain related individuals on June 30,2005. We recognized expense related to the employee terminations of $0.2 millionduring the nine-months ended September 30, 2005.

 

**Selling and Marketing Expenses**

 

Selling and marketingexpenses decreased 39.2% to $1.4 million in the three-months ended September 30,2005 from $2.3 million in the three-months ended September 30, 2004.We spent 10.2% of revenue on selling and marketing expenses in the three-monthsended September 30, 2005 compared to 12.7% in the three-months ended September 30,2004.  Effective June 30, 2005 weterminated marketing activity and associated personnel, which resulted in $0.5million savings in the three-months ended September 30, 2005.  The remaining reduction in selling andmarketing expenses was a direct result of adjustments made during 2004 to thedistribution and coverage of sales territories, which resulted in a lowernumber of sales representatives, and the reduction of commissions as a resultof lower sales.

 

Selling and marketingexpenses decreased 30.7% to $5.4 million in the nine-months ended September 30,2005 from $7.8 million in the nine-months ended September 30, 2004.We spent 13.9% of revenue on selling and marketing expenses in the nine-monthsended September 30, 2005 compared to 15.8% in the nine-months ended September 30,2004.  Effective June 30, 2005 weterminated marketing activity and associated personnel, which resulted in $0.8million savings in the nine-months

 

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ended September 30, 2005.  The remaining reduction in selling andmarketing expenses was a direct result of adjustments made during 2004 to thedistribution and coverage of sales territories, which resulted in a lowernumber of sales representatives, and the reduction of commissions as a resultof lower sales partially offset by restructuring expense of $0.2 million recognizedfor employees terminated in the nine-months ended September 30, 2005.

 

**General and Administrative Expenses**

 

General andadministrative expenses increased 78.6% to $3.3 million in thethree-months ended September 30, 2005 from $1.9 million in thethree-months ended September 30, 2004. Our spending for legal and financial advisory fees was $0.6 millionhigher in the three-months ended September 30, 2005 as compared to thethree-months ended September 30, 2004 mainly due to work related to theAsset Sale.  In addition, we experienced$0.3 million bad debt expense during the three-months ended September 30,2005 as a result of an inability to collect on certain accountsreceivable.  Severance accruals relatedto terminations were recognized in the three-months ended September 30,2005 for approximately $0.3 million.  Inaddition, $0.2 million of expense related to previously discussed retentionagreements were recognized in the three-months ended September 30, 2005.

 

General andadministrative expenses increased 34.4% to $8.1 million in the nine-monthsended September 30, 2005 from $6.0 million in the nine-months ended September 30,2004.  Our spending for legal andfinancial advisory fees was $1.0 million higher in the nine-months ended September 30,2005 as compared to the nine-months ended September 30, 2004 mainly due towork related to the Asset Sale offset by a reduction in costs due in part tothe completion of the restatement effort in April of 2004.  In addition, we experienced $0.6 million baddebt expense during the nine-months ended September 30, 2005 as a resultof an inability to collect on certain accounts receivable and $0.2 millionhigher insurance costs due to renewal of our policies.  Severance accruals related to terminationswere recognized in the nine-months ended September 30, 2005 forapproximately $0.4 million.  In addition,$0.2 million of expense related to previously discussed retention agreementswere recognized in the three-months ended September 30, 2005.

 

**Impairment of Long-Lived Assets**

 

Asdiscussed in Note 4 of the accompanying consolidated financial statements andCritical Accounting Policies, we recognized $0.8 million of impairment oflong-lived assets in the three and nine-months ended September 30, 2005.

 

**Lease Termination Fee**

 

Asdiscussed in Note 1 of the accompanying consolidated financial statements, werecognized the $4.0 million payment as “Lease termination fee” in the three andnine-months ended September 30, 2005.

 

**Interest Expense/Interest Income**

 

Interest expense for thethree-months ended September 30, 2005 increased to $1.8 million from $0.0million for the three-months ended September 30, 2004.  Interest expense for the nine-months ended September 30,2005 increased to $3.1 million from $0.0 million for the nine-months ended September 30,2004.  The majority of the increase isdue to the interest expense related to the senior secured promissory notesentered into in the first quarter of 2005, interest expense related to the notewith Hologic, and amortization of the related debt issue costs.

 

**Patent Settlement Income**

 

During the second quarterof 2002, we settled a patent infringement lawsuit and $7.2 million of thesettlement was scheduled to be received in equal annual installments of $0.9million over the remaining eight-year life of the associated patents.  We recognized patent settlement income in theamount of $0.9 million during the three-months ended June 30, 2004.  On June 2, 2004 we amended thesettlement agreement and received a one-time payment totaling $4.3 million inlieu of the six remaining $0.9 million payments that were due annually through2010 and recognized the one-time payment as patent settlement income during thenine-months ended September 30, 2004.

 

**Income Taxes**

 

We estimated that wewould not owe taxes for the three-month and nine-month periods ended September 30,2005 and 2004 in Europe and the three-month and nine-month periods ended September 30,2004 in the United States.  Accordinglyno income tax benefit or provision was recorded in Europe in 2004 and 2005 and2004 for the United States.  At December 31,2004 we had available a domestic net operating loss carry-forward of $27.2million and $4.4 million of foreign net operating loss carry-forwards.

 

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The Asset Sale will betreated as a sale (in the United States) of corporate assets in exchange forcash for the full purchase price of $32.0 million.  Although we will recognize gain for federalincome tax purposes as a result of the Asset Sale, such gain will be offset byour loss from operations for the current year and our net operating losscarryforwards (“NOLs”).  For alternativeminimum tax (“AMT”) purposes only 90% of AMT taxable income may be offset byalternative tax NOLs, and we expect that the amount of AMT will beapproximately $200,000.  As of September 30,2005 we had a 100% valuation allowance against our deferred tax assets thatresulted in a net deferred tax asset of $0.

 

**Gain on sale of Mammography Assets**

 

On September 28, 2005at a special meeting of stockholders, our stockholders approved the Asset SaleAgreement and the Asset Sale.  Uponclosing of the transaction, we recognized a $32.0 million gain from the cashsale to Hologic of our Mammography Assets.

 

**Liquidity and Capital Resources**

 

As of September 30,2005, we had $13.2 million in cash and $8.2 million in workingcapital compared to $1.9 million in cash and $4.2 million in workingcapital at December 31, 2004, with the increase consisting mainly ofproceeds of from the Asset Sale.  The$6.8 million net decrease in current assets, excluding cash, less currentliabilities is mainly caused by the following:

 

•                  a $9.2 million decrease ininventories mainly due to increases in excess and obsolescence reserves andlower purchases as a result of the Asset Sale,

•                  a decrease in accounts receivable asa result of lower revenues,

•                  decreases in our accrued warrantiesdue to lower revenues, and

•                  a decrease in accounts payable as aresult of utilizing cash received from the Asset Sale to pay vendors.

 

We used $0.5 millionof cash in our investing activities during the nine-months ended September 30,2005 for capital expenditures to support efforts in manufacturing and researchand development offset by $0.5 million due to redemption of a certificate ofdeposit that had been restricted.  Weused proceeds from the senior secured promissory notes to repay the line ofcredit with Silicon Valley Bank as discussed further in Note 6 of theaccompanying consolidated financial statements.

 

TheAsset Sale Agreement was approved by our stockholders at a special meeting ofstockholders held on September 28, 2005. A portion of the $32.0 million in proceeds from the Asset Sale wasdisbursed as follows (in thousands):

 
| Repay $5.0  million loan with Hologic, plus related interest      |   | $     | 5,114  |   |
|-------------------------------------------------------------------|--------|-------|--------|--------|
| Repay the Notes,  plus related interest                           |   | 7,444 |   |
| Payment of stock  warrant obligation with ComVest (Note 6)        |   | 1,800 |   |
| Amendment fee to  terminate Lease plus certain property taxes     |   | 4,180 |   |
| Settle certain  accounts payable due at closing of the Asset Sale |   | 931   |   |
|                                                              |   | $     | 19,469 |   |

 

Theremaining proceeds from the Asset Sale of approximately $12.5 million will beused to pay outstanding obligations, to satisfy operational responsibilities inrespect of other obligations (including service and warranty obligations andobligations under the EES and Philips agreements); and to continue exploringstrategic alternatives for our RE&S and our Service businesses, withassociated warranty obligations. Management expects that amounts, if any, remaining after these paymentsand after making adequate reserves for contingent liabilities such asoutstanding litigation, would be distributed to stockholders.

 

Concurrentwith the Asset Sale, we entered into severance and retention arrangements withcertain senior executive officers and other non-senior executive employees ofFischer.  Retention payments under theseagreements are earned over the periods July 1, 2005 through December 31,2005 and January 1, 2006 through June 30, 2006 and are currentlyestimated to be $0.9 million and $0.4 million, respectively.  Severance payments, earned upon involuntarytermination, are estimated to be $0.9 million.

 

We have received noticethat we may be named as a defendant by several customers seeking to be repaidtheir purchase price related to claimed deficiencies in the SenoScanproduct.  We have recorded reserves at September 30,2005 related to these sales that we believe appropriately reflects the risk ofan adverse outcome.  We believe that wehave asserted meritorious defenses to these claims.  We are also a defendant in various lawsuitsbrought by vendors, suppliers and others incident to the operation of ourbusiness. We do not believe that any one of these pending legal proceedingswould have a

 

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material adverse effect on the consolidatedfinancial position or results of operations of the Company.  However, in the aggregate the potentialliability could have a material adverse effect on our cash flow if the outcomesare collectively unfavorable.

 

We continue to use cashto fund operations.  Management has takenand will continue to take steps to reduce our operating costs by reducing thenumber of employees to the minimum number needed to conduct our remainingbusinesses, terminating certain contracts, and negotiating releases fromremaining contractual arrangements.

 

As discussed in Note 1of the accompanying consolidated financial statements, we received notificationon September 2, 2005 by Philips that it had ceased sales activities forthe present time with respect to the SenoScan product and that it intended toterminate Philips Agreement.  Anypayments made to Philips if the Philips Agreement is terminated may materiallyreduce amounts, if any, that may be available for distribution to ourstockholders from the proceeds of the Asset Sale.

 

As discussed in Note 11of the accompanying consolidated financial statements, we are subject toperiodic inspections by the FDA.  The FDAcompleted an inspection and presented a Form 483 formally describingobservations with respect to our compliance with various FDA requirements. Wepresented a corrective action plan to address each of the observations includedon the Form 483 and will continue to expend significant cash at leastthrough December 31, 2005, when we expect to complete our correctiveaction plan.  If the FDA requires us tomodify our corrective actions, we may be forced to spend additional funds onconsultants and attorney fees and may not be able to make any reductions in ourregulatory spending.

 

Our goal is to addressthe FDA’s inspectional observations without the agency pursuing additionalregulatory or enforcement action.  If aninjunction is issued, it may preclude us from shipping products or replacementparts until corrective action is taken and verified by the FDA.  Any such action could have a significantimpact on our future cash flows and prevent us from maximizing the value of theremaining businesses until they are sold, if that occurs.

 

We may not be successful in continuing to reduce operatingcosts and may therefore continue to incur substantial losses and reductions incash as a result of satisfying and maintaining our contractual obligationswhile exploring strategic alternatives for the RE&S and Service businesses.

 

We plan to actively seek buyers for our RE&S andService businesses and have hired a strategic advisor to assist with thisprocess.  The Service business may bedifficult to sell in light of the continuing warranty obligations that willneed to be assumed by a buyer.  Thesearch for buyers may be time consuming, and we may have difficulty supportingour RE&S business and service and warranty obligations while pursuingpossible transactions.  In addition,Hologic has a right of first refusal with respect to any written offer for thepurchase of our continuing Service business. This right may significantly reduce the interest of potential buyers andmake it difficult for us to sell such business.

 

In addition to selling these businesses, we may have toestablish alternative arrangements to satisfy our service, warranty and productdistribution obligations. In this case, we may then be subject to increasedpotential liability under those obligations and would have to use the proceedsfrom the asset sales to meet these obligations. If there were not sufficientproceeds remaining from the asset sales to pay such obligations then we wouldbe forced to liquidate.

 

Additional equity ordebt financing may not be available to us on acceptable terms, or at all. Ourcommon stock was delisted from The NASDAQ Stock Market on July 7, 2003.One result of this action is a limited public market for our common stock.Trading is now conducted in the over-the-counter market in the so-called “PinkSheets.” This reduced liquidity and our financial condition will likely make itdifficult to raise additional capital.

 

Assumingwe continue to operate our RE&S and Service businesses, our future capitalrequirements will depend on a number of factors, including any judgments orsettlements which may result from legal proceedings described in “Part II,Item 1—Legal Proceedings”; legal, accounting and other professional feesassociated with such legal proceedings, efforts to develop and implement internalcontrols and corporate governance policies and procedures designed to enhancethe accuracy, quality and consistency of our financial information andreporting; costs associated with implementing the requirements of the Sarbanes-OxleyAct of 2002, in particular, Section 404 thereof, the resources we devoteto developing and supporting our products; continued progress of our researchand development of potential products.

 

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Thesefactors, among others, raise substantial doubt about our ability to continue asa going concern. In addition, we cannot accurately estimate the amount ofdistribution to our stockholders from the proceeds of the Asset Sale, if any,until the following are finalized:

 

•                  decisions related to the strategicalternatives being investigated,

•                  strategy to exit or reduce costs inour European market,

•                  the impact of Philips actions toterminate the Philips Agreement,

•                  outcome of certain threatenedlitigation, and

•                  the FDA has responded to ourcorrective action plan.

 

**Contractual Obligations**

 

Since December 31,2004, there have not been any significant changes in our contractualobligations except concurrently with the Asset Sale, we entered into severanceand retention arrangements with certain senior executive officers and othernon-senior executive employees of Fischer. The retention payments, if earned are payable on December 31, 2005and June 30, 2006 for $0.9 million and $0.4 million, respectively.  Severance payments related to thesearrangements, earned upon involuntary terminations, are estimated to be $0.9million and the timing is unknown.

 

**Backlog**

 

As of September 30,2005, we had backlog of $7.9 million compared to a backlog of $11.5 million asof December 31, 2004.  The decreasein backlog is primarily due to reductions in MammoTest and SenoScan backlog asa result of the Asset Sale.  The majorityof the backlog as of September 30, 2005 is expected to be filled in thefourth quarter of 2005.

 

**Item 3.   Quantitative and QualitativeDisclosures About Market Risk**

 

**Foreign Currency Risk**

 

Weattempt to minimize our exposure to foreign currency and other internationalbusiness risks by: (1) generally requiring payments in U.S. dollars; (2) usingletters of credit; and (3) requiring advance deposits and through othermeans. Our international sales and marketing efforts may not be successful andwe may not successfully minimize associated risks.

 

We areexposed to foreign currency risks through our subsidiary operations inSwitzerland and Germany. At September 30, 2005 and December 31, 2004we had cash, receivables and current liabilities totaling $(0.9) million and$1.2 million, respectively, that represents a net (liability) assetbalance denominated in Euros. We do not employ any risk mitigation or hedgingtechniques with respect to amounts exposed to fluctuations in foreign currencyexchange rates.

 

**Interest Rate Risk**

 

We have short-terminvestments in low risk and no risk financial instruments, which are readilyconvertible into cash, which earn interest at variable rates.  Cash balances with our financial institutionexceed FDIC insurance limits.

 

**Item 4.   Controlsand Procedures**

 

We carried out anevaluation, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport.  Our disclosure controls andprocedures are designed with the objective of ensuring that information requiredto be disclosed in our reports filed under the Securities Exchange Act of 1934is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. The evaluation included certain control areas in which we have made, andare continuing to make, changes to improve and enhance controls.  Based on this evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of the end of the periodcovered by this report, our disclosure controls and procedures are effective inall material respects in alerting them to material information required to beincluded in our periodic SEC reports.  Indesigning and evaluating the disclosure controls and procedures, managementrecognized that even the most well designed and operated control systems aresubject to inherent limitations and assumptions about the likelihood of futureevents and can provide only reasonable assurance of achieving the desiredcontrol objectives.

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings:**

 

Wewere a defendant in a breach of contract suit brought by International SurgicalSystems in the federal District Court of Arizona.  In June 2005, we settled the suit for anominal amount, which was paid in October 2005 and accrued at September 30,2005.

 

Wereceived notice that we may be named as a defendant by several customersseeking to be repaid their purchase price related to claimed deficiencies inthe SenoScan product.  We have recordedreserves at September 30, 2005 related to these sales that we believeappropriately reflects the risk of an adverse outcome.  We believe that we have asserted meritoriousdefenses to these claims.  We are also adefendant in various lawsuits brought by vendors, suppliers and others incidentto the operation of our business. We do not believe that any one of thesepending legal proceedings would have a material adverse effect on theconsolidated financial position or results of operations of the Company.  However, in the aggregate the potentialliability and management distraction resulting from managing numerous lawsuitssimultaneously could have a material adverse effect on our financial conditionand cash flow if the outcomes are collectively unfavorable.

 

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

 

None.

 

**Item 3. Defaults Upon SeniorSecurities:**

 

As of March 31,2005 and June 30, 2005 we failed to meet a financial covenant contained inthe ComVest Purchase Agreement requiring us to achieve certain EBITDA losstargets, which is an event of default. We paid a forbearance fee to ComVest of $87,500 during the three-monthsended June 30, 2005 and paid $35,000 for forbearance of the June 30,2005 financial covenant violation and extension of the Forbearance Period on August 15,2005. We repaid the Notes on September 29, 2005 with cash proceeds fromthe Asset Sale.

 

**Item 4. Submission of Matters toa Vote of Security Holders:**

 

A special meeting of stockholders held on September 28,2005 the stockholders approved the transaction to sale to Hologic ofsubstantially all of the intellectual property rights related to ourmammography business and products, including rights to Fischer’s SenoScandigital mammography and MammoTest stereotactic breast biopsy systems:

 
| **For**   | ** ** | **Against** | ** ** |
|-----------|------------|-------------|------------|
| 5,283,628 |       | 1,800,832   |       |

 

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

 

**Item 6. Exhibits:**

 

**(a)     Exhibits:**

 

The following is a listof exhibits filed as part of this Report on Form 10-Q.

 
| 10.33 |   | Amendment to Lease dated September 27, 2005  (incorporated by reference from Exhibit 10.1 of Fischer's Form 8-K filed  September 28, 2005)           |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.34 |   | Voting and Support Agreement dated September 27,  2005 (incorporated by reference from Exhibit 10.2 of Fischer's Form 8-K  filed September 28, 2005) |
| 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: November 14,  2005 |     |                                    |     |
|-------------------------------|----------|-----------------------------------------|----------|
|                          |     | /s/   STEVEN DURNIL           |     |
|                          |     | Steven Durnil                           |     |
| * *                      | * * | *Chief Executive Officer and President* | * * |
|                          |     |                                    |     |
| Date: November 14,  2005 |     |                                    |     |
|                          |     | /s/   DAVID KIRWAN            |     |
|                          |     | David Kirwan                            |     |
| * *                      | * * | *Chief Financial Officer*               | * * |

 

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