**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 June 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 check markwhether the Registrant (i) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports) and (ii) has been subject to such filing requirementsfor 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

 

The number of shares ofRegistrant’s Common Stock outstanding as of August 10, 2005 was 9,398,817.

 

 

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**FISCHERIMAGING CORPORATION**

 

**FORM 10-Q**

 

**INDEX**

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

 

2

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# **PART I. FINANCIALINFORMATION**

# ** **

**Item 1.Financial Statements**

 

#### **FISCHERIMAGING CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(amountsin thousands except share data)**

 
| ** **                                                                                                                                                                         | ** ** | **June 30,  2005** | ** ** | **December 31,****2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **(Unaudited)**         | ** ** | ** **                    | ** ** |
| **ASSETS**                                                                                                                                                                         |       |                    |       |                          |       |
| Current Assets:                                                                                                                                                                    |       |                    |       |                          |       |
| Cash and cash equivalents                                                                                                                                                          |       | $                       | 2,823      |                          | $          | 1,939 |   |
| Certificate of deposit, restricted cash                                                                                                                                            |       | —                  |       | 514                           |       |
| Accounts receivable, net of allowance for doubtful  accounts of $1,060 and $650 at June 30, 2005 and December 31, 2004,  respectively                                    |       | 7,059                   |       | 7,286                         |       |
| Inventories, net                                                                                                                                                                   |       | 10,948                  |       | 16,034                        |       |
| Debt issue costs                                                                                                                                                                   |       | 1,499                   |       | —                        |       |
| Prepaid expenses and other current assets                                                                                                                                          |       | 987                     |       | 751                           |       |
| Total current assets                                                                                                                                                               |       | 23,316                  |       | 26,524                        |       |
| Property and equipment:                                                                                                                                                            |       |                    |       |                          |       |
| Manufacturing equipment                                                                                                                                                            |       | 5,553                   |       | 5,129                         |       |
| Office equipment and leasehold improvements                                                                                                                                        |       | 6,078                   |       | 6,300                         |       |
| Total property and equipment                                                                                                                                                       |       | 11,631                  |       | 11,429                        |       |
| Less: accumulated depreciation                                                                                                                                                     |       | (8,050                  | )          | (7,612                        | )          |
| Property and equipment, net                                                                                                                                                        |       | 3,581                   |       | 3,817                         |       |
| Intangible assets, net                                                                                                                                                             |       | 1,011                   |       | 1,033                         |       |
| Total assets                                                                                                                                                                       |       | $                       | 27,108     |                          | $          | 31,374 |   |
|                                                                                                                                                                               |       |                    |       |                          |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                      |       |                    |       |                          |       |
| Current Liabilities:                                                                                                                                                               |       |                    |       |                          |       |
| Accounts payable                                                                                                                                                                   |       | $                       | 10,840     |                          | $          | 10,666 |   |
| Current maturities under capital lease obligation                                                                                                                                  |       | —                  |       | 224                           |       |
| Senior secured promissory notes                                                                                                                                                    |       | 7,000                   |       | —                        |       |
| Junior secured promissory note                                                                                                                                                     |       | 5,000                   |       | —                        |       |
| Stock warrant obligation                                                                                                                                                           |       | 1,800                   |       | —                        |       |
| Accrued salaries and wages                                                                                                                                                         |       | 1,278                   |       | 1,617                         |       |
| Customer deposits                                                                                                                                                                  |       | 3,053                   |       | 3,123                         |       |
| Accrued warranties                                                                                                                                                                 |       | 2,288                   |       | 3,013                         |       |
| Deferred service revenue                                                                                                                                                           |       | 1,679                   |       | 1,121                         |       |
| Other current liabilities                                                                                                                                                          |       | 3,122                   |       | 2,591                         |       |
| Total current liabilities                                                                                                                                                          |       | 36,060                  |       | 22,355                        |       |
| Long-term debt                                                                                                                                                                     |       | —                  |       | 1,454                         |       |
| Non-current deferred revenue                                                                                                                                                       |       | 912                     |       | 972                           |       |
| Total liabilities                                                                                                                                                                  |       | 36,972                  |       | 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 sharesissued 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 June 30,  2005 and December 31, 2004, respectively |       | 94                      |       | 94                            |       |
| Paid-in capital                                                                                                                                                                    |       | 49,455                  |       | 49,400                        |       |
| Accumulated deficit                                                                                                                                                                |       | (58,317                 | )          | (42,633                       | )          |
| Accumulated other comprehensive loss                                                                                                                                               |       | (296                    | )          | (268                          | )          |
| Total stockholders’ (deficit) equity                                                                                                                                          |       | (9,064                  | )          | 6,593                         |       |
| Total liabilities and stockholders’ equity                                                                                                                                    |       | $                       | 27,908     |                          | $          | 31,374 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

 

3

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**FISCHERIMAGING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

**(Unaudited)**

 
| ** **                                                              | ** ** | **Three-Months Ended**  | ** ** | **Six-Months Ended**          | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| ** **                                                              | ** ** | **June 30,  2005** | ** ** | **June 30,********2004** | ** ** | **June 30,********2005** | ** ** | **June 30,********2004** | ** ** |
| Revenues:                                                               |       |                    |       |                          |       |   |   |   |   |
| Products                                                                |       | $                       | 7,664      |                          | $          | 16,063 |   | $ | 18,408 |   | $ | 24,600 |   |
| Services                                                                |       | 3,525                   |       | 3,716                         |       | 7,235 |   | 7,185 |   |
| Total revenues                                                          |       | 11,189                  |       | 19,779                        |       | 25,643 |   | 31,785 |   |
| Cost of sales:                                                          |       |                    |       |                          |       |   |   |   |   |
| Products                                                                |       | 10,438                  |       | 11,700                        |       | 18,544 |   | 17,734 |   |
| Services                                                                |       | 4,251                   |       | 4,085                         |       | 8,667 |   | 8,211 |   |
| Total cost of sales                                                     |       | 14,689                  |       | 15,785                        |       | 27,201 |   | 25,945 |   |
| Gross margin                                                            |       | (3,500                  | )          | 3,994                         |       | (1,558 | ) | 5,840 |   |
| Operating expenses:                                                     |       |                    |       |                          |       |   |   |   |   |
| Research and development                                                |       | 2,062                   |       | 1,209                         |       | 4,002 |   | 2,579 |   |
| Selling and marketing                                                   |       | 2,069                   |       | 2,899                         |       | 4,046 |   | 5,564 |   |
| General and administrative                                              |       | 2,964                   |       | 1,943                         |       | 4,795 |   | 4,180 |   |
| Total operating expenses                                                |       | 7,095                   |       | 6,051                         |       | 12,843 |   | 12,323 |   |
| Loss from operations                                                    |       | (10,595                 | )          | (2,057                        | )          | (14,401 | ) | (6,483 | ) |
| Other income and (expense):                                             |       |                    |       |                          |       |   |   |   |   |
| Other financing (expense) income                                        |       | 2,520                   |       | —                        |       | (12 | ) | — |   |
| Interest expense                                                        |       | (894                    | )          | (14                           | )          | (1,212 | ) | (21 | ) |
| Interest income                                                         |       | 4                       |       | 1                             |       | 5 |   | 2 |   |
| Patent settlement income                                                |       | —                  |       | 5,150                         |       | — |   | 5,150 |   |
| Other (expense) income, net                                             |       | (142                    | )          | 74                            |       | (64 | ) | 28 |   |
| Net (loss) income                                                       |       | $                       | (9,107     | )                             | $          | 3,154 |   | $ | (15,684 | ) | $ | (1,324 | ) |
| Net (loss) income per share:                                            |       |                    |       |                          |       |   |   |   |   |
| Basic                                                                   |       | $                       | 0.97       |                          | $          | 0.34 |   | $ | 1.67 |   | $ | (0.14 | ) |
| Diluted                                                                 |       | $                       | 0.97       |                          | $          | 0.33 |   | $ | 1.67 |   | $ | (0.14 | ) |
| Weighted average shares used to calculate net (loss)  income per share: |       |                    |       |                          |       |   |   |   |   |
| Basic                                                                   |       | 9,383                   |       | 9,360                         |       | 9,383 |   | 9,352 |   |
| Diluted                                                                 |       | 9,383                   |       | 9,433                         |       | 9,383 |   | 9,352 |   |

 

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

 

4

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**FISCHERIMAGING CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(amountsin thousands)**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Six-months ended**    | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                 | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** |
| Cash flows from operating activities:                                                      |       |                    |       |   |   |
| Net (loss)                                                                                 |       | $                       | (15,684    | ) | $ | (1,324 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                    |       |   |   |
| Depreciation                                                                               |       | 572                     |       | 503 |   |
| Amortization of intangible assets                                                          |       | 22                      |       | 22 |   |
| Amortization of debt issue costs                                                           |       | 760                     |       | — |   |
| Other financing (expense)                                                                  |       | 12                      |       | — |   |
| Loss on disposal of property and equipment                                                 |       | 118                     |       | — |   |
| Change in current assets and liabilities                                                   |       |                    |       |   |   |
| Accounts receivable, net                                                                   |       | 227                     |       | (1,456 | ) |
| Inventories, net                                                                           |       | 5,086                   |       | 1,749 |   |
| Prepaid expenses and other current assets                                                  |       | (236                    | )          | (46 | ) |
| Accounts payable                                                                           |       | 174                     |       | (24 | ) |
| Accrued warranties                                                                         |       | (725                    | )          | 1,382 |   |
| Customer deposits                                                                          |       | (70                     | )          | 2,676 |   |
| Deferred service revenue                                                                   |       | 558                     |       | 30 |   |
| Other                                                                                      |       | 132                     |       | 141 |   |
| Net cash (used in) provided by operating activities                                        |       | (9,054                  | )          | 3,653 |   |
|                                                                                       |       |                    |       |   |   |
| Cash flows from investing activities:                                                      |       |                    |       |   |   |
| Redemption of certificate of deposit (restricted  cash)                                    |       | 514                     |       | — |   |
| Purchases of property and equipment                                                        |       | (454                    | )          | (460 | ) |
| Net cash provided by (used in) investing activities                                        |       | 60                      |       | (460 | ) |
|                                                                                       |       |                    |       |   |   |
| Cash flows from financing activities:                                                      |       |                    |       |   |   |
| Proceeds from sale of common stock                                                         |       | 55                      |       | 40 |   |
| Proceeds from senior secured promissory notes                                              |       | 7,000                   |       | — |   |
| Proceeds from junior secured promissory note                                               |       | 5,000                   |       | — |   |
| Payment of debt issue costs                                                                |       | (471                    | )          | — |   |
| Proceeds from line of credit                                                               |       | 3,311                   |       | — |   |
| Repayments on line of credit                                                               |       | (4,765                  | )          | — |   |
| Payments on capital lease obligation                                                       |       | (224                    | )          | (102 | ) |
| Net cash provided by (used in) financing activities                                        |       | 9,906                   |       | (62 | ) |
|                                                                                       |       |                    |       |   |   |
| Effect of exchange rate changes on cash                                                    |       | (28                     | )          | 49 |   |
|                                                                                       |       |                    |       |   |   |
| Net increase in cash and cash equivalents                                                  |       | 884                     |       | 3,180 |   |
| Cash and cash equivalents, beginning of period                                             |       | 1,939                   |       | 1,910 |   |
| Cash and cash equivalents, end of period                                                   |       | $                       | 2,823      |   | $ | 5,090 |   |
|                                                                                       |       |                    |       |   |   |
| Supplemental Cash Flow Information:                                                        |       |                    |       |   |   |
| Non-cash change in stock warrant obligation                                                |       | (1,800                  | )          | — |   |
| Non-cash increase in debt issue costs                                                      |       | 1,788                   |       | — |   |

 

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

 

5

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**FISCHER IMAGINGCORPORATION**

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THETHREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2005**

**(UNAUDITED)**

 

**(1)   GENERAL**

 

**Organization**

 

FischerImaging Corporation, together with its wholly owned subsidiaries, (“Fischer” orthe “Company”) designs, manufactures and sells innovative mammography anddigital imaging products used in the diagnosis of breast cancer and otherdiseases. The Company’s primary focus is on using its digital imagingtechnology in screening and diagnostic mammograms and minimally invasive breastbiopsy to aid in the early identification of breast cancer. The Company sellshigh-resolution digital mammography products, enabling radiologists, surgeonsand other healthcare treatment professionals to diagnose or rule outdisease early and treat patients with less-invasive procedures. The Company hasalso refocused its efforts to market and sell products that meet selected needsof the broader radiology and electrophysiology markets. The consolidatedfinancial statements include the accounts of Fischer Imaging Corporation andall subsidiaries. All significant inter-company accounts and transactions havebeen 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 receivedfrom ComVest in February 2005 and the $2.0 million loan proceeds receivedfrom ComVest 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.  Due to difficulties in reducing costs,further delays in the SenoScan redesign program and the declines in revenue andother negative developments; however, the Company was left with insufficientcash 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 form the basis for substantially all of Fischer’sbusiness, to Hologic for a cash purchase price of $32.0 million (the “AssetSale”).  The Mammography Assets alsorepresent substantially all of Fischer’s assets for purposes of Delawarelaw.  The value of the Mammography Assetssold is zero on Fischer’s consolidated balance sheets.  Hologic has 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 (“Service” business);to fulfill contractual obligations for providing MammoTest and SenoScan systemsto Ethicon Endo-Surgery Europe (a subsidiary of Johnson & Johnson, Inc.,“EES”) and Philips Medical Systems DMC GmbH (“Philips”), respectively; and tocarry out certain activities with respect to Fischer’s radiology,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 will likely use most of this loan forworking capital purposes prior to the closing of the Asset Sale.  Significant delays in the special meeting ofthe stockholders and the closing of the transaction, however, could result inthe proceeds of the loan being insufficient to support operations throughclosing.  Hologic will deduct all amountsoutstanding under the promissory note from the purchase price payable at theclosing of the Asset Sale (the “Hologic Closing”).

 

Theremaining proceeds from the Asset Sale will be used to pay outstandingobligations, to satisfy operational responsibilities in respect of otherobligations (including service and warranty obligations and obligations underthe EES and Philips agreements); and to continue exploring strategicalternatives for Fischer’s RE&S business and its 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.

 

6

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Completionof the Asset Sale requires, among other things, the approval of stockholdersholding a majority of Fischer’s outstanding shares of common stock.  Additional conditions to the closing of theAsset Sale include obtaining the consent of Fischer’s landlord, JN Properties,a company controlled by Morgan Nields, a substantial stockholder and formerdirector, chair of the Board, chief executive officer and chief technologyofficer of Fischer, and satisfaction or waiver by Fischer or Hologic ofcustomary conditions set forth in the Asset Sale Agreement.

 

Inconjunction with the Asset Sale, the Company entered into severance andretention arrangements with certain senior executive officers and othernon-senior executive 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 $1.1 million and $0.8 million,respectively.  Severance payments, earnedupon involuntary termination, are estimated to be $1.3 million.  Retention payments will be recognized as expenseover the period earned and severance payments will not be expensed until theinvoluntary termination dates are known.

 

As of March 31,2005 and June 30, 2005 the Company failed to meet a financial covenantcontained in the ComVest Purchase Agreement requiring the Company to achievecertain EBITDA loss targets, which is an event of default giving ComVest theright to accelerate amounts due under such Notes.  As discussed further in Note 4, managementobtained a forbearance (the “Forbearance”) of these defaults through September 21,2005 subject to extension for consecutive 30-day periods (“ForbearancePeriod”) at ComVest’s sole and absolute discretion. Therefore, the seniorsecured promissory notes have been classified as a current liability in theattached consolidated balance sheets. Due to the continuing Forbearance and the Company’s inability to meetother conditions to further funding under the ComVest Purchase Agreement, theCompany will not be able to obtain further advances under the terms of the ComVestPurchase Agreement.  This factor, amongothers, raises substantial doubt about the Company’s ability to continue as agoing concern. The consolidated financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

If the Asset Sale isapproved by Fischer’s stockholders and completed, Hologic would be the solebeneficiary of any future earnings and growth in revenues from the MammographyAssets except for activities related to the retained assets / businesses.  Fischer would receive the purchase price anduse such proceeds as discussed above. After the Asset Sale, Fischer would continue to service and support, andsatisfy the warranty obligations, on the installed base of SenoScan andMammoTest systems and fulfill contractual obligations by providing MammoTestand SenoScan systems to EES and Philips, respectively.  Fischer expects that it would take immediatesteps after the closing to reduce its operating costs by reducing the number ofemployees to the minimum number needed to conduct Fischer’s remainingbusinesses, terminating contracts that are terminable, and negotiating releasesfrom remaining contractual arrangements.

 

Fischer may not be successful in reducing operating costsand may therefore continue to incur substantial losses and reductions in cashas a result of satisfying and maintaining our contractual obligations whileexploring strategic alternatives for the RE&S and Service businesses.  In addition to selling these businesses, wemay be forced into establishing alternative arrangements to satisfy ourservice, warranty and product distribution obligations. In this case, Fischermay 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 Fischer would be forced to liquidate.

 

Fischer plans to actively seek buyers for its RE&S andService businesses and has hired a strategic advisor to assist with thisprocess.  The Service business willlikely be difficult to sell in light of the continuing warranty obligationsthat will need to be assumed by a buyer. The search for buyers may be time consuming, and Fischer may havedifficulty supporting its RE&S business and service and warrantyobligations while pursuing possible transactions.  In addition, Hologic has a right of firstrefusal with respect to any written offer for the purchase of Fischer’scontinuing Service business.  This rightmay significantly reduce the interest of potential buyers and make it difficultfor Fischer to sell such business.

 

If the Asset Sale is not consummated, there can be noassurance that Fischer can obtain an alternative solution to Fischer’sliquidity issues.  In that event, andunless Fischer could find such an alternative solution, Fischer would haveinsufficient funds to continue to operate.

 

**Basis of Presentation**

** **

In management’s opinion,the accompanying unaudited consolidated balance sheets, statements ofoperations and statements of cash flows contain all adjustments necessary topresent fairly in all material respects the financial position of the Companyat June 30, 2005, its results of operations for the three months andsix-months ended June 30, 2005 and 2004 and its cash flows for the sixmonths ended June 30, 2005 and 2004. Results of operations and cash flows for the interim periods may not beindicative of the results of operations and cash flows for the full fiscalyear.

 

7

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As a result of the AssetSale Agreement, the following non-recurring adjustments were recorded:

 

•                  Theresults for the three-months ended June 30, 2005 include an increase of$4.2 million to the reserve for excess and obsolete inventories as more fullydiscussed in Note 3.

•                  Theresults for the three-months ended June 30, 2005 include an increase tocost of sales of $0.6 million for purchase commitments that managementestimates it is contractually liable to pay related to excess inventories.

•                  Theresults for the three-months ended June 30, 2005 include expenses forlegal and financial advisory fees related to the Asset Sale in the amount of$0.4 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 than thecurrent market price at the grant date. The following table illustrates theeffect on net income and earnings per share if the Company had applied the fairvalue recognition provisions of SFAS No. 123 “Accounting for Stock-BasedCompensation, “ 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**  | ** ** | **Six-Months Ended**          | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| ** **                                     | ** ** | **June 30,  2005** | ** ** | **June 30,********2004** | ** ** | **June 30,****2005** | ** ** | **June 30,  2004** | ** ** |
|                                           |       |                    |       |                          |       |   |   |   |   |
| Net (loss) income as reported                  |       | $                       | (9,107     | )                             | $          | 3,154 |   | $ | (15,684 | ) | $ | (1,324 | ) |
| Fair value-based compensation cost, net of tax |       | (136                    | )          | (246                          | )          | (211 | ) | (578 | ) |
| Pro forma net (loss) income                    |       | $                       | (9,243     | )                             | $          | 2,908 |   | $ | (15,895 | ) | $ | (1,902 | ) |
|                                           |       |                    |       |                          |       |   |   |   |   |
| Basic (loss) income per share:                 |       |                    |       |                          |       |   |   |   |   |
| As reported                                    |       | $                       | (0.97      | )                             | $          | 0.34 |   | $ | (1.67 | ) | $ | (0.14 | ) |
| Pro forma                                      |       | (0.99                   | )          | 0.31                          |       | (1.69 | ) | (0.20 | ) |
|                                           |       |                    |       |                          |       |   |   |   |   |
| Diluted (loss) income per share:               |       |                    |       |                          |       |   |   |   |   |
| As reported                                    |       | $                       | (0.97      | )                             | $          | 0.33 |   | $ | (1.67 | ) | $ | (0.14 | ) |
| Pro forma                                      |       | (0.99                   | )          | 0.31                          |       | (1.69 | ) | (0.20 | ) |

 

**Recently Issued Accounting Pronouncements**

** **

TheFASB has issued SFAS No. 123 (revised), “Share-Based Payment” which supersedes Accounting PrinciplesBoard (“APB”) No. 25, “Accountingfor Stock Issued to Employees” and its related implementation guidance.  Under SFAS No. 123 (revised), allshare-based payments would be treated as other forms of compensation byrecognizing the costs, generally measured as the fair value at the date ofgrant, in the income statement.  Fischerwill be required to adopt SFAS No. 123 (revised) for its fiscal yearbeginning January 1, 2006. Fischer is evaluating the requirements of SFAS No. 123and has not yet determined which method of adoption it will employ or theimpact on its results of operations, financial position 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

 

8

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provisions of SFAS 151 are effective for inventorycosts incurred during fiscal years beginning after June 15, 2005. Theadoption of SFAS 151 is not expected to have a material impact on the Company’sresults 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.

 

The Company bills servicecontracts and extended warranty agreements in advance either monthly, quarterly,annually or at the time of the product sale, depending upon the customers’request.  The amounts billed are recordedas deferred revenue and recognized as revenue ratably during the period forwhich the contracts are in effect.  TheCompany recognizes revenue from services billed on a time and material basiswhen the services are performed.  TheCompany also sells replacement parts to customers and records revenue at thetime of shipment when title transfers. Certain replaced parts may be returned forpartial credit, and the Company records sales allowances based on historicalexperience to account for the future effect of those returns.

 

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 cost ofinventory and the estimated market value based upon historical experience andassumptions 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 reserve for excess andobsolete inventories increased by $4.2 million in the three-months ended June 30,2005.

 

Inventories consisted ofthe following components (in thousands):

 
| ** **                                  | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials                               |       | $                       | 7,893      |                        | $          | 8,952 |   |
| Work in process and finished goods          |       | 8,784                   |       | 8,866                       |       |
| Reserve for excess and obsolete inventories |       | (5,729                  | )          | (1,784                      | )          |
| Inventories, net                            |       | $                       | 10,948     |                        | $          | 16,034 |   |

 

**(4)    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. Borrowingsunder the line of credit agreement accrued interest at the bank’s prime rate,plus 2.75%, with a minimum total interest rate of 7%.  The outstanding balance as of December 31,2004 was $1.5 million.  On February 22,2005, the Company refinanced the $2.5 million then outstanding under thiscredit facility on a long-term debt basis with ComVest and terminated thiscredit facility.  The Company accountedfor the refinanced debt as long-term in the accompanying balance sheet as of December 31,2004 pursuant to FASB Statement No. 6, “Classification of Short-termObligations Expected to be Refinanced.”

 

9

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On February 22,2005, the Company entered into the ComVest Purchase Agreement, which providesfor 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.  The Warrant isexercisable from the occurrence of certain events or August 23, 2005,whichever is earlier, until February 22, 2010.

 

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 the fundingof the secondary note, the Company agreed to amend the Warrant to provideComVest with a put option, exercisable at $0.90 per warrant share, upon theoccurrence of certain trigger events. The trigger events include a change of control (including a sale of theCompany or a substantial portion of its assets), liquidation or dissolution ofthe Company or any action by the Company relating to bankruptcy or seekingappointment of a receiver or trustee. The signing of the Asset Sale Agreement is considered a trigger eventallowing ComVest to exercise its put option at the Hologic Closing.

 

TheCompany entered into a Registration Rights Agreement with ComVest on February 22,2005 that originally required that the Company file a registration statementsufficient to cover the common shares underlying the Warrants by June 22,2005.  Effective June 22, 2005 theagreement was modified to extend the date to the earlier of the November 1,2005 or 10 business days after the Hologic Closing.  If the registration statement is not declaredeffective by October 22, 2005 or is not available for use by ComVest for adefined period of time, Fischer must pay $50,000 for each 30-day periodthat these conditions exist.  Effective June 22,2005, the agreement was modified to waive the fee that normally would bepayable if the Hologic Closing occurs and Fischer makes full payment of theNotes and the put option prior to November 1, 2005.

 

TheNotes issued under the ComVest Purchase Agreement bear interest at a per annumbase rate of 8.5% subject to increase to 11.5% per annum upon the occurrence ofan event of default with a maturity of the earlier of (i) August 15,2008 or (ii) a sale of the Company and are secured by all of the assets ofthe Company, as provided in a Security Agreement between the Company andComVest. Accrued interest on the Notes is payable, commencing on November 15,2005 and quarterly thereafter on each February 15, May 15, August 15and November 15. Principal on the Notes is payable in ten equal quarterlyinstallments, each in an amount equal to one (1%) of the original principalamount of the Notes, with a final payment of the remaining principaloutstanding under the Notes due on August 15, 2008. The first installmentof principal is payable on February 15, 2006, with successive installmentscontinuing on each May 15, August 15, November 15 and February 15thereafter.  Upon the Hologic Closing,Fischer will make full payment of the Notes and accrued interest.

 

At March 31, 2005and June 30, 2005 the Company failed to meet a financial covenantcontained in the ComVest Purchase Agreement requiring the Company to achievecertain EBITDA loss targets, which is an event of default, giving ComVest theright to accelerate amounts due under such Notes.  Management obtained a Forbearance of thedefaults through September 21, 2005 subject to extension for consecutive 30-dayperiods at ComVest’s sole and absolute discretion. Therefore, the Notes havebeen classified as a current liability in the attached consolidated balancesheets.  Due to the continuingForbearance and the Company’s inability to meet other conditions to furtherfunding under the ComVest Purchase Agreement, ComVest will not provide furtheradvances.  In addition, the interest rateunder the Notes shall be 11.50% until the Forbearance Period ends.  Fischer paid a forbearance fee to ComVest of$87,500 during the three-months ended June 30, 2005 and paid $35,000 forforbearance of the June 30, 2005 financial covenant violation andextension of the Forbearance Period on August 15, 2005.  An additional $25,000 forbearance fee will beaccrued and paid monthly for each succeeding extension of the ForbearancePeriod.

 

SFAS No. 150, “Accountingfor Certain Financial Instruments with Characteristics of Both Liabilities andEquity,” and EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock” eachrequire issuers to classify as liabilities (or assets under certaincircumstances) freestanding financial instruments which, at inception, requireor may require an issuer to settle an obligation by transferring assets.  SFAS No. 150 required the Warrantsissued to ComVest with a put option to be classified as a liability in anamount equal to the estimated fair value. Since the Warrants can be exercised within one year of the balance sheetdate, the stock warrant obligation has been classified as a current liabilityon the consolidated balance sheets as of June 30, 2005.

 

As of February 22,2005, March 31, 2005 and June 30, 2005, the stock warrant obligationfair value was estimated to be $2.9 million, $4.3 million and $1.8 million,respectively.  As required per APBOpinion No. 14, “Accounting for Convertible Debt and Debt Issued withStock Purchase Warrants,” the issuance proceeds must be allocated between theamount applicable to the debt and the amount applicable to the Warrant basedupon relative fair values of the debt and the Warrants at issuance date.  As a result, Fischer increased “Debt issuecosts” by $1.8 million, which were originally being amortized through March 31,2006.  Effective June 22, 2005, theremaining Debt issue costs are being amortized through October 31, 2005,the estimated date of the Hologic Closing. The difference of $2.5 million between the estimated fair value at March 31,2005

 

10

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of $4.3 million and the estimated fair value as of June 30,2005 of $1.8 million has been recognized as non-cash Other Financing Income inthe consolidated income statements for the three-months ended June 30,2005.  Future changes in the fair valueof the stock warrant obligation will be recognized as either an increase ordecrease in “Other Financing Expense”.

 

The fair value of thestock warrant obligation is estimated using the Black-Scholes option-pricingmodel.  The stock price has beendiscounted by 40% to consider marketability of the common stock itself and theresulting Black-Scholes fair value has been discounted by 20% to consider thelack of marketability of the Warrant.  Inaddition, the minimum fair value is the cash value of the put option of $1.8million or $0.90 per warrant share.  Thefollowing summarizes the significant assumptions:

 
| ** **                   | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** | **February 22, 2005** | ** ** |
|------------------------------|------------|------------------------|------------|-------------------------|------------|----------------------------|------------|
|                         |       |                   |       |                    |       |                       |       |
| Stock price (10-day average) |       | $                      | 1.99       |                    | $          | 6.22                       |       | $ | 4.55 |   |
| Discounted stock price       |       | $                      | 1.19       |                    | $          | 3.73                       |       | $ | 2.73 |   |
| Volatility                   |       | 102.6                  | %          | 94.9                    | %          | 94.9                       | %          |
| Dividend yield               |       | 0.00                   | %          | 0.00                    | %          | 0.00                       | %          |
| Risk-free interest rate      |       | 3.76                   | %          | 4.24                    | %          | 3.89                       | %          |
| Expected life (years)        |       | 4.75                   |       | 5.00                    |       | 5.00                       |       |
| Black-Scholes fair value     |       | $                      | 0.69       |                    | $          | 2.70                       |       | $ | 1.84 |   |
| Fair value per warrant share |       | $                      | 0.90       |                    | $          | 2.16                       |       | $ | 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.  Thepromissory note bears interest at a rate based on the Prime Rate as quoted inthe Wall Street Journal plus 2% per annum or 8.25% at June 30, 2005.  Hologic will deduct all amounts outstandingunder the promissory note from the purchase price payable at the HologicClosing.  Any event of default under theComVest Notes will also constitute an event of default under the Hologic note.

 

Thecapital lease obligation was a two-year obligation for primarily computerequipment and software. The capital lease was secured by computerequipment.  Long-term debt and capitallease obligation as of June 30, 2005 and December 31, 2004 consist ofthe following (in thousands):

 
| ** **                                                | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|
| Long-term (Credit facility refinanced to long-term  debt) |       | $        | —     |     | $          | 1,454 |   |
| Senior secured promissory notes                           |       | 7,000    |       | —   |       |
| Junior secured promissory note                            |       | 5,000    |       | —   |       |
| Capital lease obligation                                  |       | —   |       | 224      |       |
| Total                                                     |       | 12,000   |       | 1,678    |       |
| Less—Current maturities                              |       | 12,000   |       | 224      |       |
| Long-term debt                                            |       | $        | —     |     | $          | 1,454 |   |

 

**(5)  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**  | ** ** | **Six-Months Ended**    | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                     | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** | **June 30,****2005** | ** ** | **June 30,  2004** | ** ** |
| Weighted average of common shares outstanding: |       |                    |       |                    |       |   |   |   |   |
| Basic                                          |       | 9,383                   |       | 9,360                   |       | 9,383 |   | 9,352 |   |
| Dilutive effect of stock options               |       | —                  |       | 73                      |       | — |   | — |   |
| Diluted                                        |       | 9,383                   |       | 9,433                   |       | 9,383 |   | 9,352 |   |

 

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For the three-monthsended June 30, 2005 and 2004, 1,194,000 and 1,387,420, 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 six-months ended June 30, 2005 and 2004,1,194,000 and 1,460,000, respectively, of options to purchase shares of commonstock were outstanding but not included in the computation of diluted earningsper share because the effect would have been anti-dilutive. The Company hasalso excluded the impact of outstanding warrants in 2005, as the impact wouldbe anti-dilutive for all periods presented.

 

**(6)   COMPREHENSIVE (LOSS ) INCOME**

 

Comprehensive (loss)income 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 six months ended June 30,2005 resulted in a currency translation (loss) gain due to the change exchangerates in United States Dollar to the Euro during the periods.

 

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

 
| ** **                               | ** ** | **Three-Months Ended**  | ** ** | **Six-Months Ended**    | ** ** |
|------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                               | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** | **June 30,****2005** | ** ** | **June 30,  2004** | ** ** |
|                                     |       |                    |       |                    |       |   |   |   |   |
| Net (loss) income                        |       | $                       | (9,107     | )                       | $          | 3,154 |   | $ | (15,684 | ) | $ | (1,324 | ) |
| Foreign currency translation adjustments |       | (45                     | )          | 17                      |       | (28 | ) | (49 | ) |
| Comprehensive (loss) income              |       | $                       | (9,152     | )                       | $          | 3,171 |   | $ | (15,712 | ) | $ | (1,373 | ) |

 

**(7)   SEGMENT AND CUSTOMERINFORMATION**

 

The Company operates in asingle industry segment: the design, manufacture and marketing 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 chiefoperating decision maker uses consolidated results to make operating andstrategic decisions.

 

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**  | ** ** | **Six-Months Ended**    | ** ** |
|---------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **          | ** ** | **June 30,  2005** | ** ** | **June 30,  2004** | ** ** | **June 30,****2005** | ** ** | **June 30,  2004** | ** ** |
| Revenues:           |       |                    |       |                    |       |   |   |   |   |
| United States       |       | $                       | 9,020      |                    | $          | 13,057 |   | $ | 21,863 |   | $ | 22,427 |   |
| Mexico              |       | —                  |       | 4,496                   |       | — |   | 6,744 |   |
| Other International |       | 2,169                   |       | 2,226                   |       | 3,780 |   | 2,614 |   |
| Total               |       | $                       | 11,189     |                    | $          | 19,779 |   | $ | 25,643 |   | $ | 31,785 |   |

 
| ** **              | ** ** | **As of**               | ** ** |
|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
| Long-lived assets, net: |       |                    |       |   |   |
| United States           |       | $                       | 3,436      |   | $ | 3,599 |   |
| International           |       | 145                     |       | 218 |   |
| Total                   |       | $                       | 3,581      |   | $ | 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.

 

12

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

 
| ** **                 | ** ** | **Three Months Ended**        | ** ** | **Six Months Ended**          | ** ** |
|----------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                 | ** ** | **June 30,********2005** | ** ** | **June 30,********2004** | ** ** | **June 30,****2005** | ** ** | **June 30,  2004** | ** ** |
| Ethicon-Endo Surgery, Inc  |       | 15.4                          | %          | 7.9                           | %          | 11.4 | % | 5.4 | % |
| Intec Mexico, S.A. de C.V. |       | 0.0                           | %          | 22.7                          | %          | 0.0 | % | 21.2 | % |

 

Revenue grouped bysimilar products and services (in thousands):

 
| ** **                 | ** ** | **Three Months Ended**        | ** ** | **Six Months Ended**          | ** ** |
|----------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **                 | ** ** | **June 30,********2005** | ** ** | **June 30,********2004** | ** ** | **June 30,****2005** | ** ** | **June 30,  2004** | ** ** |
| Product Revenue:           |       |                          |       |                          |       |   |   |   |   |
| Digital Mammography        |       | $                             | 1,156      |                          | $          | 9,290 |   | $ | 3,940 |   | $ | 13,196 |   |
| Stereotactic Breast Biopsy |       | 5,059                         |       | 3,862                         |       | 10,701 |   | 6,842 |   |
| RE&S Products          |       | 1,449                         |       | 2,911                         |       | 3,767 |   | 4,562 |   |
| Service Revenue            |       | 3,525                         |       | 3,716                         |       | 7,235 |   | 7,185 |   |
| Total                      |       | $                             | 11,189     |                          | $          | 19,779 |   | $ | 25,643 |   | $ | 31,785 |   |

 

**(8)   COMMITMENTS AND CONTINGENCIES**

 

**Litigation**

 

On April 10,2003 and on June 3, 2003, The Sorkin, LLC and James K. Harbert filedputative class action lawsuits against us and three of the Company’s formerofficers and directors, Morgan Nields, Gerald Knudson and Louis Rivelli, in theUnited States District Court for the District of Colorado. The complaints arepurportedly brought on behalf of purchasers of shares of the Company’s commonstock during the period February 14, 2001 to April 1, 2003 and allegethat, among other things, during the putative class period, the Company and theindividual defendants made materially false statements in violation of Section 10(b) ofthe Exchange Act, Rule 10b-5 promulgated under the Exchange Act, andSection 20(a) of the Exchange Act. The complaints seek unspecifiedcompensatory damages and other relief. On August 7, 2003, the Company, andMessrs. Nields and Knudson moved to dismiss all claims asserted by TheSorkin, LLC and Harbert. On August 18, 2003, Mr. Rivelli moved todismiss all claims asserted in those lawsuits. On October 20, 2003, Mr. Harbertmoved to dismiss his lawsuit, which the court subsequently granted. On October 21,2003, the Sorkin, LLC and Mr. Harbert filed an amended class actioncomplaint. The amended complaint contains the same claims for relief against usand Messrs. Nields and Rivelli, but does not assert any claims against Mr. Knudson.In addition, the amended complaint seeks to recover unspecified compensatorydamages and other relief on behalf of purchasers of shares of its common stockduring the period February 14, 2001 to July 17, 2003. The Company, Mr. Nieldsand Mr. Rivelli filed motions to dismiss all claims asserted in theamended complaint.  On May 6, 2005the District Court heard arguments related to the motions to dismiss filed bythe Company, Mr. Nields and Mr. Rivelli.  On June 21, 2005 the court dismissed theclaims asserted in the lawsuit without prejudice.

 

TheCompany is a defendant in a breach of contract suit brought by InternationalSurgical Systems in the federal District Court of Arizona.  The suit claims that Fischer Imagingwrongfully breached an agreement to supply product to ISS, notwithstanding ISS’nonpayment, and that such breach caused the failure and bankruptcy of ISS.  The suit seeks $1.0 million in damages, plusattorneys’ fees and expenses.  TheCompany believes the suit is without merit and intends to vigorously defend thecase, as well as assert counterclaims against ISS for nonpayment.

 

TheCompany has been named as a defendant in arbitration by a customer seeking tobe repaid its purchase price related to claimed deficiencies of the SenoScanproduct.  The Company recorded reservesrelated to this sale that it believes appropriately reflects the risk of anadverse outcome in the case.  The Companyhas asserted meritorious defenses to these claims.  The Company is also a defendant in variouslawsuits incident to the operation of its business. The Company does notbelieve that any one of these pending legal proceedings would have a materialadverse effect on the consolidated financial position or results of operationsof the Company.  However, in theaggregate the expense and management distraction resulting from managingnumerous lawsuits simultaneously could have a material adverse effect on thefinancial condition and cash flow of the Company if the outcomes arecollectively unfavorable.

 

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**RegulatoryActions**

 

TheCompany is subject to periodic inspections by the Food and Drug Administration(“FDA”) whose primary purpose is to audit the Company’s compliance with GoodManufacturing Practices. These practices include testing, quality control anddocumentation of procedures. On May 13, 2005, the FDA completed theon-site portion of its inspection of the Company and presented a Form 483formally detailing its observations with respect to the Company’s compliancewith the various FDA requirements.  Thisinspection did not clear the Warning Letter issued to the Company in December 2002by the FDA.  This Warning Letter remainsin effect.  The Company has undertaken tocooperate with the FDA during its inspection, and to address items identifiedduring the inspection and on the Form 483. The Company retained the services of a consultant and developed acorrective action plan to specifically address each of the observationsincluded on the Form 483.  Manycorrective actions were completed before the May 13, 2005 closing meetingof the audit that was held between the Company and the FDA.  Since the audit-closing meeting, the Company hasprovided the FDA with regular progress reports of its corrective action.  All commitments made to the FDA in thecorrective action plan have been met to date. The Company expects to complete all corrective actions related to thisaudit by December 31, 2005.  TheCompany’s goal is to address the FDA’s inspectional observations without theagency pursuing additional regulatory or enforcement action.  There can be no assurance, however, that theCompany’s efforts will be successful and that the FDA will not pursue suchactions, which could include, among other things, the issuance of a warningletter; a court-ordered injunction; product seizures; recall of products; andcriminal and/or civil proceedings.  If aninjunction is issued, it may preclude the Company from shipping products untilcorrective action is taken and verified by the FDA.  Further, failure to satisfy the FDArequirements can result in an inability to receive awards of federal governmentcontracts or new marketing or export clearance for products.

 

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**Item 2.    Management’sDiscussion and 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 regardingachievement of certain EBITDA targets under the senior secured promissorynotes, use of the Hologic loan proceeds prior to the Hologic Closing, theexpected closing of the Hologic transaction, anticipated uses of proceeds fromthe Hologic Closing, potential distributions to stockholders, our plans toreduce operating costs our plans to sell the RE&S and Services businesses,as well as statements regarding expected future trends relating to our resultsof operations and the sufficiency of our liquidity and access to additionalcapital resources.  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;

•                  the risk that the Hologic transactionmay not be completed at all or on the time frame anticipated;

•                  our ability to manage our financialresources until the Hologic Closing;

•                  our reliance on a single source ofsupply for some key components of our products as well as the need to complywith especially high standards for those components in the manufacture of ourSenoScan product;

•                  uncertainties inherent in thedevelopment of new products and the enhancement of existing products, includingtechnical and regulatory risks, cost overruns and delays;

•                  completion of the redesign of ourSenoScan product;

•                  the risk that newly introducedproducts may contain undetected errors or defects or otherwise not perform asanticipated;

•                  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;

•                  the early stage of market developmentfor digital X-ray products;

•                  risks relating to compliance withfinancial covenants under the senior secured promissory notes and theForbearance Agreement associated therewith; achievement in the future ofcertain EBITDA targets under the senior secured promissory notes;

•                  technical innovations that couldrender products marketed or under development by us obsolete;

•                  competition;

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

•                  and reimbursement policies for theuse of our products.

 

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 endedDecember 31, 2004.  Except asotherwise required by law, we expressly disclaim any obligation or undertakingto release publicly any updates or revisions to any such statements to reflectany change in our expectations or any change in events, conditions orcircumstances on which any such statement is based.

 

**Critical Accounting Policies**

 

Criticalaccounting policies are those that are most important to the portrayal of ourfinancial condition and operating results, and require management to make itsmost difficult and subjective judgments, often as a result of the need to makeestimates on matters that are inherently uncertain. These judgments are basedon our historical experience, 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.

 

Thecritical accounting policies that we believe affect the more significantjudgments and estimates used in the preparation of our consolidated financialstatements presented in this report are described in the Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincluded in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2004. There have been no material changes to our critical accountingpolicies, as described in that Form 10-K, except for the additionalof one new critical accounting policy and the analysis of impairment completed June 30,2005.

 

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Stock Warrant Obligation

 

SFAS No. 150, “Accounting forCertain Financial Instruments with Characteristics of Both Liabilities andEquity”, and EITF 00-19, “Accounting for Derivative FinancialInstruments Indexed to, and Potentially Settled in, a Company’s Own Stock” eachrequire issuers to classify as liabilities (or assets under certaincircumstances) freestanding financial instruments which, at inception, requireor may require an issuer to settle an obligation by transferring assets.  SFAS No. 150 required the Warrantsissued to ComVest with a put option to be classified as a liability in anamount equal to the estimated fair value. Since the Warrants can be exercised within one year of the balance sheetdate, the stock warrant obligation has been classified as current on the consolidatedbalance sheets as of June 30, 2005.

 

As of February 22,2005, March 31, 2005 and June 30, 2005, the stock warrant obligationfair value was estimated to be $2.9 million, $4.3 million and $1.8 million,respectively.  As required per APBOpinion No. 14, “Accounting for Convertible Debt and Debt Issued withStock Purchase Warrants,” the issuance proceeds must be allocated between theamount applicable to the debt and the amount applicable to the Warrant basedupon relative fair values of the debt and the warrants at issuance date.  As a result, Fischer increased “Debt issuecosts” by $1.8 million, which were originally being amortized through March 31,2006.  Effective June 22, 2005, theremaining Debt issue costs are being amortized through October 31, 2005,the estimated date of the Hologic Closing. The difference of $2.5 million between the estimated fair value at March 31,2005 of $4.3 million and the fair value as of June 30, 2005 of $1.8million has been recognized as non-cash Other Financing Income in theconsolidated income statements for the three-months ended June 30,2005.  Future changes in the fair valueof the stock warrant obligation will be recognized as either an increase ordecrease in “Other Financing Expense”.

 

The fair value of the stockwarrant obligation is estimated using the Black-Scholes option-pricingmodel.  The stock price has beendiscounted by 40% to consider marketability of the common stock itself and theresulting Black-Scholes fair value has been discounted by 20% to consider thelack of marketability of the Warrant.  Inaddition, the minimum fair value is the cash value of the put option of $1.8million or $0.90 per warrant share.  Thefollowing summarizes the significant assumptions:

 
| ** **                   | ** ** | **June 30, 2005** | ** ** | **March 31, 2005** | ** ** | **February 22, 2005** | ** ** |
|------------------------------|------------|------------------------|------------|-------------------------|------------|----------------------------|------------|
|                         |       |                   |       |                    |       |                       |       |
| Stock price (10-day average) |       | $                      | 1.99       |                    | $          | 6.22                       |       | $ | 4.55 |   |
| Discounted stock price       |       | $                      | 1.19       |                    | $          | 3.73                       |       | $ | 2.73 |   |
| Volatility                   |       | 102.6                  | %          | 94.9                    | %          | 94.9                       | %          |
| Dividend yield               |       | 0.00                   | %          | 0.00                    | %          | 0.00                       | %          |
| Risk-free interest rate      |       | 3.76                   | %          | 4.24                    | %          | 3.89                       | %          |
| Expected life (years)        |       | 4.75                   |       | 5.00                    |       | 5.00                       |       |
| Black-Scholes fair value     |       | $                      | 0.69       |                    | $          | 2.70                       |       | $ | 1.84 |   |
| Fair value per warrant share |       | $                      | 0.90       |                    | $          | 2.16                       |       | $ | 1.47 |   |

 

Significant management judgment isused to estimate the fair value of the stock warrant obligation.  Management obtained advice from third partiesto support the discounts utilized but there can be no certainty that thesediscounts are an accurate reflection of the ultimate outcome.  In addition, a significant change in thestock price, discount rate applied to the stock price and discount rate appliedto the Black-Scholes fair value could have a significant impact on our futureresults.  The signing of the Asset SaleAgreement is considered a trigger event allowing ComVest to exercise its optionat the Hologic Closing.  Therefore,management estimated the fair value of the warrant to be the cash value and,due to the short-term nature, it was not discounted.  A 10% change in any of the assumption abovewould not have raised the Black-Scholes fair value above the $0.90 per warrantshare under the put option.

 

Impairment

 

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.  During thethree-months ended June 30, 2005 the following indicators of impairmentoccurred:

 

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

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

•                  Fischerplans to actively seek buyers for its RE&S and Service businesses, whichmay mean that long-lived assets and intellectual property could be sold beforethe end of its previously estimated useful life.

 

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•                  Asignificant drop in Fischer’s stock price.

•                  Lossof key personnel and changes in the organization.

 

We evaluate the carryingvalue of the majority of our property and equipment at the consolidated levelsince we believe that is the lowest identifiable level of cash flows for theseassets.  We evaluate the carrying valueof the intangibles at the consolidated level since there are no components thatconstitute a business for which discrete financial information is availablebelow the operating segment level.

 

We performed a recoverabilitytest as of June 30, 2005 by comparing the sum of the estimatedundiscounted future cash flows of Fischer under a range of possible futureoutcomes considered possible by management under the probability-weightedapproach.   The carrying amounts of theassets exceeded the estimated undiscounted cash flows and therefore, managementmeasured the fair value of the assets to determine whether an impairment lossshould be recognized.  An impairmentcharge was not recorded since the estimated discounted cash flows exceeded thecarrying amounts of the assets.  Thediscounted cash flows were greater than the undiscounted cash flows because oflosses expected in future years.

 

In assessing the recoverability of our long-livedassets and intangibles, we must make assumptions regarding estimated futurecash flows and other factors to determine the fair value of the respectiveassets.  If these estimates or theirrelated assumptions change in the future, we may be required to recordimpairment charges for these assets. Based upon a sensitivity analysis of varying the probability weighting,the maximum amount of impairment charges related to fixed assets would be $1.7million; intangibles assets, $1.0 million.

 

**Hologic Transaction and Management’s Plans**

 

We havecontinued 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; however, we were left with insufficient cashreserves to continue 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 has agreed togrant us a non-exclusive limited license to use certain Mammography Assetsnecessary for us to continue to service and support, and satisfy warrantyobligations on, the installed base of SenoScan and MammoTest systems; tofulfill contractual obligations for providing MammoTest and SenoScan systems toEES and Philips, respectively; and to carry out certain activities with respectto the RE&S business.

 

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 will likely use most of this loan forworking capital purposes prior to the closing of the Asset Sale.  Significant delays in the special meeting ofthe stockholders and the closing of the transaction, however, could result inthe proceeds of the loan being insufficient to support operations throughclosing.  Hologic will deduct all amountsoutstanding under the promissory note from the purchase price payable at theHologic Closing.

 

Theremaining proceeds from the Asset Sale will be used to pay outstandingobligations, to satisfy operational responsibilities in respect of otherobligations (including service and warranty obligations and obligation underthe EES and Philips agreements); and to continue exploring strategicalternatives for Fischer’s RE&S business and its Service business, withassociated warranty obligations.  Management expects that amounts, if any,remaining after these payments and after making adequate reserves forcontingent liabilities, would be distributed to stockholders.

 

Completionof the Asset Sale requires, among other things, the approval of stockholdersholding a majority of Fischer’s outstanding shares of common stock.  Additional conditions to the closing of theAsset Sale include obtaining the consent of Fischer’s landlord, JN Properties,a company controlled by Morgan Nields, a substantial stockholder and formerdirector, chair of the Board, chief executive officer and chief technologyofficer of Fischer, and satisfaction or waiver by Fischer or Hologic ofcustomary conditions set forth in the Asset Sale Agreement.

 

Inconjunction with the Asset Sale, the Company entered into severance andretention arrangements with certain senior executive officers and othernon-senior executive 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 $1.1 million and $0.8 million,respectively.  Severance payments earnedupon an involuntary termination are estimated to be $1.3 million.

 

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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 giving ComVest the right to accelerateamounts due under such Notes.  Asdiscussed further in Note 4, we obtained a forbearance of these defaultsthrough September 21, 2005 subject to extension for consecutive 30-dayperiods at ComVest’s sole and absolute discretion. Therefore, the seniorsecured promissory notes have been classified as a current liability in theattached consolidated balance sheets. Due to the continuing Forbearance and our inability to meet otherconditions to further funding under the ComVest Purchase Agreement, the companywill not be able to obtain further advances under the terms of the ComVestPurchase Agreement.  This factor, amongothers, raises 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.

 

If the Asset Sale isapproved by our stockholders and completed, Hologic would be the beneficiary ofany future earnings and growth in revenues from the Mammography Assets exceptfor activities related to the retained assets/business.  We would receive the purchase price and usesuch proceeds as discussed above.  Afterthe Asset Sale, we would continue to service and support, and satisfy thewarranty obligations on the installed base of SenoScan and MammoTest systemsand fulfill contractual obligations by providing MammoTest and SenoScan systemsto EES and Philips, respectively.  Weexpect that we will take immediate steps after the closing to reduce ouroperating costs by reducing the number of employees to the minimum numberneeded to conduct our remaining businesses, terminating contracts that areterminable, and negotiating releases from remaining contractual arrangements.

 

We may not be successfulin reducing operating costs and may therefore continue to incur substantiallosses and reductions in cash as a result of satisfying and maintaining ourcontractual obligations while exploring strategic alternatives for the RE&Sand Service businesses.  In addition toselling these businesses, we may be forced into establishing alternativearrangements to satisfy our service, warranty and product distributionobligations. In this case, we may then be subject to increased potentialliability under those obligations and would have to use the proceeds from theasset sales to meet these obligations. If there were not sufficient proceedsremaining from the asset sales to pay such obligations then Fischer would beforced to liquidate.

 

We plan to actively seekbuyers for our RE&S and Service businesses and have hired a strategicadvisor to assist with this process.  TheService business will likely 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.

 

If the Asset Sale is not consummated, there can be noassurance that we can obtain an alternative solution to our liquidityissues.  In that event, and unless wecould find such an alternative solution, we would have insufficient funds tocontinue to operate.

 

**Overview**

** **

We incurred a net lossof $9.1 million for the three-months ended June 30, 2005 compared to netincome of $3.2 million for the three-months ended June 30, 2004.  We incurred a net loss of $15.7 million forthe six-months ended June 30, 2005 compared to net loss of $1.3 millionfor the six-months ended June 30, 2004. The following items contributed to these results:

 

•                  Thefinancial results for the three and six-months ended June 30, 2005 include$2.5 million and $0.0 million, respectively, of non-cash other financing incomerelated to the change in fair value of the stock warrant obligation discussedin Note 4 of the consolidated financial statements.

 

•                  Thefinancial results for the three and six-months ended June 30, 2005 includean increase of $4.2 million to our reserves for excess and obsolete inventoriesas a result of a reduction in forecasted sales due to the pending Asset Saleand changes in market conditions.

 

•                  Thefinancial results for the three and six-months ended June 30, 2005 includean increase to cost of sales of $0.6 million for purchase commitments thatmanagement estimates it is contractually liable to pay related to excessinventories.

 

**•**                  The financial results for the three andsix-months ended June 30, 2005 include an increase in expenses related toemployee severance of $0.4 million.  Weeliminated 34 positions in our Thornton, Colorado facility on June 30,2005.  Most of these positions wereeliminated as part of the Company’s continued implementation of its previouslyannounced plan to improve operating efficiencies in order to reduce cost ofsales, improve gross margin and lower overall operating costs as a percentageof revenues.  In addition, a small numberof positions were eliminated as a

 

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**result of the Asset Sale.  Approximately 60% of the cash severancepayments will be paid out in the third quarter ending September 30, 2005with the balance paid out over future quarters.**

** **

•                  The financial resultsfor the****three-months ended June 30, 2005 include expenses forlegal and financial advisory fees related to the Asset Sale in the amount of$0.4 million offset by lower legal expenses in the three-months ended March 31,2005.

 

•                  The financial resultsfor the****three and six - and six-months ended June 30, 2005include interest expense, amortization of debt issue costs and fees related tothe ComVest agreements of approximately $0.8 million and $1.1 million,respectively.

 

•                  Product revenues decreasedby 52.3% to $7.7 million for the three-months ended June 30, 2005 from$16.1 million for the three-months ended June 30, 2004.  Second quarter 2004 sales included $4.3million of a non-domestic sale that was shipped in December 2003 andinstalled in the second quarter.  Theremainder of the decrease is due to sales volume decreases across all productlines mainly due to performance, workflow and connectivity solutions and lowerthan expected demand from a RE&S customer. The drop in sales led to deterioration in the gross margin from productsof $2.0 million (excluding items mentioned above).

 

•                  Werecognized patent settlement income in the amount of $5.2 million during thethree and six-months ended June 30, 2004.

 

**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**  | ** ** | **Six-Months Ended**          | ** ** |
|-----------------------------|------------|-------------------------|------------|-------------------------------|------------|
| ** **                  | ** ** | **June 30,  2005** | ** ** | **June 30,********2004** | ** ** | **June 30,********2005** | ** ** | **June 30,********2004** | ** ** |
| Revenues:                   |       |                    |       |                          |       |   |   |   |   |
| Product revenues            |       | 68.5                    | %          | 81.2                          | %          | 71.8 | % | 77.4 | % |
| Service revenues            |       | 31.5                    |       | 18.8                          |       | 28.2 |   | 22.6 |   |
| Total revenues              |       | 100.0                   |       | 100.0                         |       | 100.0 |   | 100.0 |   |
| Cost of sales:              |       |                    |       |                          |       |   |   |   |   |
| Products                    |       | 93.3                    |       | 59.2                          |       | 72.4 |   | 55.8 |   |
| Services                    |       | 38.0                    |       | 20.6                          |       | 33.7 |   | 25.8 |   |
| Research and development    |       | 18.4                    |       | 6.1                           |       | 15.6 |   | 8.1 |   |
| Selling and marketing       |       | 18.5                    |       | 14.7                          |       | 15.8 |   | 17.5 |   |
| General and administrative  |       | 26.5                    |       | 9.8                           |       | 18.7 |   | 13.2 |   |
| Loss from operations        |       | (94.7                   | )          | (10.4                         | )          | (56.2 | ) | (20.4 | ) |
| Other income (expense), net |       | 13.3                    |       | 26.3                          |       | (5.0 | ) | 16.2 |   |
| Net (loss) income           |       | (81.4                   | )%         | 15.9                          | %          | (61.2 | )% | (4.2 | )% |

 

**Product Revenues**

 

Totalrevenues decreased 43.4% to $11.2 million for the three-months ended June 30,2005 from $19.8 million for the three-months ended June 30, 2004.  Product revenues decreased 52.3% to$7.7 million for the three-months ended June 30, 2005 from$16.1 million for the three-months ended June 30, 2004.

 

•                  SenoScan digital mammography productrevenue decreased 87.6% or $8.1 million to $1.2 million in the second quarterof 2005 from $9.3 million in second quarter of 2004.  Second quarter 2004 sales included $4.3million of a non-domestic sale that was shipped in December 2003 andinstalled in the second quarter. Without this non-domestic sale, SenoScandigitalmammography product revenue decreased 76.8% or $3.8 million due to the sale offewer units and a decrease in price due to our inability to provide upgradesand enhancements to our image and workflow management software and introducingalternative workflow solutions and other performance enhancements.

•                  Revenues from our MammoTest breastbiopsy products increased 31.0% or $1.2 million to $5.1 million in thesecond quarter of 2005 from $3.9 million in the second quarter of 2004.The increase in MammoTest product revenue is primarily due to a $1.5 millionsales volume increase offset by a decline in pricing due to market

 

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conditions.  The volume increase is due to $0.4 million ofadditional sales in Europe and stronger demand for the product in the U.S.  We regained the CE Mark on our product distributedin the European Union in May 2004, enabling us to resume shipments there.

•                  RE&S products revenues decreased$1.5 million to $1.4 million in the second quarter of 2005 from $2.9 million inthe second quarter of 2004.  The salesdecrease on RE&S products in the second quarter of 2005, as compared to thesecond quarter of 2004, was primarily due to sales volume decreases in allproduct lines mainly due to a major customer ordering less than normal volumes.

 

Totalrevenues decreased 19.3% to $25.6 million for the six-months ended June 30,2005 from $31.8 million for the six-months ended June 30, 2004.  Product revenues decreased 25.2% to$18.4 million in the first six months of 2005 from $24.6 million inthe first six months of 2004.

 

•                  SenoScan digital mammography productrevenue decreased 70.1% or $9.3 million to $3.9 million in the first six monthsof 2005 from $13.2 million in the first six months of 2004.  Revenues for the six-months ended June 30,2004 included $6.5 million of a non-domestic sale that was shipped in December 2003and installed during the six months ended June 30, 2004. Without thisnon-domestic sale, SenoScandigital mammography product revenuedecreased 41.5% or $2.8 million due to the sale of fewer units and due to ourinability to provide upgrades and enhancements to our image and workflowmanagement software and introducing alternative workflow solutions and otherperformance enhancements.

•                  Revenues from our MammoTest breastbiopsy products increased 56.4% or $3.9 million to $10.7 million duringthe six-months ended June 30, 2005 from $6.8 million during thesix-months ended June 30, 2004. The increase in MammoTest product revenueis primarily due to a $4.6 million sales volume increase offset by a decline inpricing due to market conditions.  Thesales volume increase is due to $1.3 million of additional sales in Europe andstronger demand for the product in the U.S. We regained the CE Mark on our product distributed in the European Unionin May 2004, enabling us to resume shipments there.

•                  The RE&S products revenuesdecreased $0.8 million to $3.8 million during the six-months ended June 30,2005 from $4.6 million during the six-months ended June 30, 2004.  The majority of the sales decrease onRE&S was due to sales volume decreases in the Bloom and VRAD products dueto a major customer ordering fewer than normal.

 

As a result of theannouncement of the pending Asset Sale, we are faced with additionalcompetitive pressures and declining sales in the SenoScan and MammoTestarea.  In addition, perception of ourfinancial condition adversely affects our revenues.

 

**Service Revenues**

 

Our service revenues forthe three-months ended June 30, 2005 decreased 5.1% to $3.5 million from$3.7 million during the comparable quarter in 2004. The decreases in thethree-month period ended June 30, 2005 in relation to the comparableperiods in 2004 are due primarily to a decline in revenues from the sale ofspare parts.

 

Our service revenues forthe six-months ended June 30, 2005 increased 0.7% to $7.2 million from$7.2 million during the six-months ended June 30, 2004. The increases inthe six-month period ended June 30, 2005 in relation to the comparableperiod in 2004 are primarily due to higher number of MammoTest and SenoScanunits on service contracts in both the U.S. and Europe offset by a decline in revenuesfrom the sale of spare parts.

 

**Cost of Sales—Products**

 

Cost of sales forproducts in the three-months ended June 30, 2005 was $10.4 million or136.2% of product revenues compared to $11.7 million or 72.8% of productrevenues in the three-months ended June 30, 2004. As a result of areduction in forecasted sales which will result from the Asset Sale and changesin market conditions, the reserve for excess and obsolete inventories increasedby $4.2 million in the three-months ended June 30, 2005.  In addition, cost of sales increased by $0.6million in the three-months ended June 30, 2005 for purchase commitmentsthat management estimates it is contractually liable to pay related to excessinventories.  The cost of sales forproducts in the three-months ended June 30, 2005 excluding the chargesrelated to these reserves would have been $5.7 million or 74.4% of productrevenues.  The cost of sales for productsin the three-months ended June 30, 2004 excluding the impact of a higher,extended warranty provision amounting to $0.8 million associated with anon-domestic sale would have been 67.9%. The overall remaining increase in cost of product sales as a percentageof product revenues is due to the impact of lower average sales prices andexpenses recognized for commitments to provide upgrades in the SenoScan productpartially offset by a decrease in warranty provisions of $0.3 million.

 

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Cost of sales forproducts in the six-months ended June 30, 2005 was $18.5 million or100.7% of product revenues compared to $17.7 million or 72.1% of productrevenues in the six-months ended June 30, 2004. As a result of a reductionin forecasted sales which will result from the Asset Sale and changes in marketconditions, the reserve for excess and obsolete inventories increased by $4.2million in the three-months ended June 30, 2005.  In addition, cost of sales increased by $0.6million in the three-months ended June 30, 2005 for purchase commitmentsthat management estimates it is contractually liable to pay related to excessinventories.  The cost of sales forproducts in the six-months ended June 30, 2005 excluding the chargesrelated to these reserves would have been $13.9 million or 75.6% of productrevenues.  The cost of sales for productsin the six-months ended June 30, 2004 excluding the impact of a higher,extended warranty provision amounting to $1.0 million associated with anon-domestic sale would have been 68.0%. The overall remaining increase in cost of product sales as a percentageof product revenues is primarily due to the impact of lower average salesprices, an increase in manufacturing and repair costs of $1.1 million partiallyoffset by a decrease in warranty provisions of $0.7 million.  The increase in manufacturing and repaircosts was due to increased materials costs with the remainder due to rework andother manufacturing inefficiencies.

 

**Cost of Sales—Service**

 

Cost of sales forservices for the three-months ended June 30, 2005 increased 4.1% to $4.3 millionfrom $4.1 million in the three-months ended June 30, 2004.  As a percent of service revenues, cost ofservice sales increased to 120.6% in the three-months ended June 30, 2005from 109.9% in the three-months ended June 30, 2004.  The U.S. MammoTest and SenoScan units underwarranty and service contract support increased 15.2% and 61.7%, respectively,in the three-months ended June 30, 2005 compared to the three-months endedJune 30, 2004.

 

Cost of sales forservices for the six-months ended June 30, 2005 increased 5.4% to$8.7 million from $8.2 million in the six-months ended June 30,2004.  As a percent of service revenues,cost of service sales increased to 119.6% in the six-months ended June 30,2005 from 114.3% in the six-months ended June 30, 2004.  The U.S. MammoTest and SenoScan units underwarranty and service contract support increased 9.3% and 67.6%, respectively,in the six-months ended June 30, 2005 compared to the six-months ended June 30,2004.

 

**Research and Development Expenses**

 

Research anddevelopment expenses increased 70.6% to $2.1 million in the three-monthsended June 30, 2005 from $1.2 million in the three-months ended June 30,2004. We spent 18.4% of revenue on research and development in the three-monthsended June 30, 2005 compared to 6.1% in the three-months ended June 30,2004.  Our efforts have been focused onredesigning older products for improved reliability and serviceability andenhancing the features, functionality and reliability of our SenoScan product.  To support these redesign and productdevelopment efforts currently underway, contract-engineering services increased$0.5 million and expenditures for research and development materials increased$0.1 million.  Management terminatedcertain individuals on June 30, 2005 and recognized restructuring expenserelated to this termination of $0.2 million during the three-months ended June 30,2005.

 

Research anddevelopment expenses increased 55.2% to $4.0 million in the six-monthsended June 30, 2005 from $2.6 million in the six-months ended June 30,2004. We spent 15.6% of revenue on research and development in the six-monthsended June 30, 2005 compared to 8.1% in the six-months ended June 30,2004.  Our efforts have been focused onredesigning older products for improved reliability and serviceability andenhancing the features, functionality and reliability of our SenoScanproduct.  To support these redesign andproduct development efforts currently underway, contract-engineering servicesincreased $1.1 million.  Managementterminated certain individuals on June 30, 2005 and recognizedrestructuring expense related to this termination of $0.2 million during thesix-months ended June 30, 2005.

 

**Selling and Marketing Expenses**

 

Selling and marketingexpenses decreased 28.6% to $2.1 million in the three-months ended June 30,2005 from $2.9 million in the three-months ended June 30, 2004. Wespent 18.5% of revenue on selling and marketing expenses in the three-monthsended June 30, 2005 compared to 14.7% in the three-months ended June 30,2004.  The 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 $0.1 millionrecognized for employees terminated on June 30, 2005

 

Selling and marketingexpenses decreased 27.3% to $4.0 million in the six-months ended June 30,2005 from $5.6 million in the six-months ended June 30, 2004. Wespent 15.8% of revenue on selling and marketing expenses in the six-monthsended June 30, 2005 compared to 17.5% in the six-months ended June 30,2004.  The 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

 

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lower number of sales representatives, and thereduction of commissions as a result of lower sales partially offset byrestructuring expense of $0.1 million recognized for employees terminated on June 30,2005

 

**General and Administrative Expenses**

 

General andadministrative expenses increased 52.5% to $3.0 million in the three-monthsended June 30, 2005 from $1.9 million in the three-months ended June 30,2004.  Our spending for legal andfinancial advisory fees was $0.6 million higher in the three-months ended June 30,2005 as compared to the three-months ended June 30, 2004 mainly due towork related to the Asset Sale.  Inaddition, we experienced $0.3 million bad debt expense during the three-monthsended June 30, 2005 as a result of an inability to collect on certainaccounts receivable.

 

General andadministrative expenses increased 14.7% to $4.8 million in the six-monthsended June 30, 2005 from $4.2 million in the six-months ended June 30,2004.  Our spending for legal andfinancial advisory fees was $0.2 million higher in the six-months ended June 30,2005 as compared to the six-months ended June 30, 2004 mainly due to workrelated to the Asset Sale offset by a reduction in costs due in part to thecompletion of the restatement effort in April of 2004.  In addition, we experienced $0.3 million baddebt expense during the six-months ended June 30, 2005 as a result of aninability to collect on certain accounts receivable and $0.2 million higherinsurance costs due to renewal of our policies.

 

**Other Financing (Expense) Income**

 

As discussed in Note 4 ofthe consolidated financial statements, we are required to recognize the fairvalue of the warrants as a stock warrant obligation.  The amount recognized in the three andsix-months ended June 30, 2005 is approximately $2.5 million and $0.0million, respectively.

 

**Interest Expense/Interest Income**

 

Interest expense for thethree-months ended June 30, 2005 increased to $0.9 million from $0.0million for the three-months ended June 30, 2004.  Interest expense for the six-months ended June 30,2005 increased to $1.2 million from $0.0 million for the six-months ended June 30,2004.  The majority of the increase isdue to the interest expense related to the secured promissory notes enteredinto in the first quarter of 2005 and amortization of the related debt issuecosts.

 

**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 thethree-months ended June 30, 2004.

 

**Income Taxes**

 

We estimated that wewould not owe taxes for the three-month and six-month periods ended June 30,2005 and 2004. Accordingly, no income tax benefit or provision was recorded.This was determined based upon the anticipated 2005 results of operations andan available domestic net operating loss carry-forward of $31.4 millionand $4.4 million of foreign net operating loss carry-forwards at December 31,2004. As of June 30, 2005 we had a 100% valuation allowance against ourdeferred tax asset that resulted in a net deferred tax asset of $0.

 

The proposed Asset Sale will be treated as a sale ofcorporate assets in exchange for cash for the full purchase price (includingthe portion of the purchase price satisfied by Fischer’s repayment of amountsoutstanding and due Hologic under the $5.0 million secured promissorynote).  Although Fischer will recognizegain for Federal income tax purposes as a result of the Asset Sale, such gainwill be offset by Fischer’s loss from operations for the current year and itsnet operating loss carryforwards (“NOLs”). For alternative minimum tax (“AMT”) purposes only 90% of AMT taxableincome may be offset by alternative tax NOLs, and Fischer expects that theamount of AMT payable will be approximately $0.1 million.

 

**Liquidity and Capital Resources**

 

As of June 30, 2005,we had $2.8 million in cash and a $12.7 million deficit in workingcapital compared to $1.9 million in cash and $4.2 million in positiveworking capital at December 31, 2004. The $16.9 million decrease in our working capital reflects theclassification of our debt with ComVest of $7.0 million and Hologic of $5.0million as

 

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current liabilities and a$4.9 million change in current assets and liabilities.  The $4.9 million net change in current assetsand current liabilities consists primarily of a $5.1 million decrease ininventories mainly due to increases in excess and obsolescence reserves and anincrease in accrued liabilities by $0.6 million related to increases inpurchase commitments that management estimates it is contractually liable topay related to excess inventories partially offset by decreases in our accruedwarranties.

 

We used $0.5 millionof cash in our investing activities during the three-months ended June 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.

 

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 has agreed togrant us a non-exclusive limited license to use certain Mammography Assetsnecessary for us to continue to service and support, and satisfy warrantyobligations on, the installed base of SenoScan and MammoTest systems; tofulfill contractual obligations for providing MammoTest and SenoScan systems toEES and Philips, respectively; and to carry out certain activities with respectto our RE&S business.

 

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 will likely use most of this loan forworking capital purposes prior to the closing of the Asset Sale.  Significant delays in the special meeting ofthe stockholders and the closing of the transaction, however, could result inthe proceeds of the loan being insufficient to support operations throughclosing.  Hologic will deduct all amountsoutstanding under the promissory note from the purchase price payable at theclosing of the Asset Sale.

 

If the Asset Sale is approved by our stockholders andcompleted, the purchase price received in the Hologic Closing will be used aspreviously discussed.  After the AssetSale, we would continue the RE&S and Service businesses and fulfillcontractual obligations by providing MammoTest and SenoScan systems to EES andPhilips, respectively.  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 will likely be difficult to sell in light of thecontinuing warranty obligations that will need to be assumed by a buyer and theright of first refusal held by Hologic. The search for buyers may be time consuming, and we may have difficultysupporting our RE&S business and service and warranty obligations whilepursuing possible transactions.

 

We expect that we will take immediate steps after theclosing to reduce our operating costs by reducing the number of employees tothe minimum number needed to conduct the remaining businesses, terminatingcontracts that are terminable, and negotiating releases from remainingcontractual arrangements.  We may not be successful inreducing operating costs and may therefore continue to incur substantial lossesand reductions in cash as a result of satisfying and maintaining our contractualobligations while exploring strategic alternatives for the RE&S and Servicebusinesses.  In addition to selling thesebusinesses we may be forced into establishing alternative arrangements tosatisfy our service, warranty and product distribution obligations. In thiscase, we may then be subject to increased potential liability under thoseobligations and would have to use the proceeds from the asset sales to meetthese obligations.  The majority,it not all, of the proceeds from the Asset Sale, will be used for thesepurposes.  However if there were not sufficient proceeds remainingfrom the asset sales to pay such obligations then we would be forced toliquidate.

 

If the Asset Sale is not consummated, there can be noassurance that we can obtain an alternative solution to our liquidityissues.  In that event, and unless wecould find such an alternative solution, we would have insufficient funds tocontinue to operate.

 

Due to the continuingForbearance and the Company’s inability to meet other conditions to furtherfunding under the ComVest Purchase Agreement, ComVest will not provide furtheradvances.  Additional equity or debtfinancing may not be available to us on acceptable terms, or at all. Our commonstock was delisted from The NASDAQ Stock Market on July 7, 2003. Oneresult of this action is a limited public market for our common stock. Tradingis now conducted in the over-the-counter market in the so-called “Pink Sheets.”This reduced liquidity and our financial condition will likely make it difficultto raise additional capital.  In theevent that we do raise additional equity financing, our current stockholderswill be further diluted. We may not be able to incur additional indebtedness tofund our operations, since we would not be able to grant the

 

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lender a security interest in our assets sinceour assets are currently pledged as security related to our loan from ComVestand Hologic.

 

Assumingthat the Hologic transaction closes but that we continue to operate our RE&Sand Service businesses, our future capital requirements will depend on a numberof factors, including any judgments or settlements which may result from legalproceedings described in “Part II, Item 1—Legal Proceedings”; legal,accounting and other professional fees associated with such legal proceedings,efforts to develop and implement internal controls and corporate governancepolicies and procedures designed to enhance the accuracy, quality andconsistency of our financial information and reporting; costs associated withimplementing the requirements of the Sarbanes-Oxley Act of 2002, in particular,Section 404 thereof, the resources we devote to developing and supportingour products; continued progress of our research and development of potentialproducts; the need to acquire licenses to technology; and potential futuremerger and acquisition activity.

 

Thesefactors, among others, raise substantial doubt about our ability to continue asa going concern. The consolidated financial statements do not include anyadjustments that might result from the outcome of this uncertainty.

 

**Contractual Obligations**

 

Since December 31,2004, there have not been any significant changes in our contractualobligations except as discussed below:

 

•                  As discussed in Note 4 of theConsolidated Financial Statements, we entered into new borrowing arrangementswith ComVest and Hologic.

•                  As discussed in Note 4 of theConsolidated Financial Statements, we issued a Warrant to ComVest, which mayrequire us to pay $1.8 million upon the Hologic Closing.

•                  In conjunction with the Asset Sale,the Company entered into severance and retention arrangements with certainsenior executive officers and other non-senior executive employees ofFischer.  The retention payments, ifearned are payable on December 31, 2005 and June 30, 2006 for $1.1million and $0.8 million, respectively. Severance payments, earned upon involuntary terminations, are estimatedto be $1.3 million and the timing is unknown.

 

**Backlog**

** **

As of June 30, 2005,we had backlog of $8.4 million compared to a backlog of $11.5 million as of December 31,2004.  The decrease in backlog isprimarily due to reductions in MammoTest and SenoScan backlog.  Of the $8.4 million backlog as of June 30,2005, it is expected that $7.9 million will be filled in the third quarter of2005 and $0.5 million will be filled in the fourth quarter of 2005.

 

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

 

**Foreign Currency Risk**

 

Overthe past several years, we have expanded our international sales and marketingefforts. Our exposure to foreign currency and other international businessrisks may increase as our international business grows. We attempt to minimizethese 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 June 30, 2005 and December 31, 2004 wehad cash, receivables and current liabilities totaling $0.8 million and$1.2 million, respectively, that represents a net asset balancedenominated 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 $5.0million of variable rate debt outstanding as of June 30, 2005.  Due to the short-term nature of this loan, achange in the interest rates is not expected to have a significant impact onour financial results or financial condition. We do have short-term investments in low risk and no risk financialinstruments, which are readily convertible into cash, which earn interest atvariable rates.   At times, cash balanceswith our financial institution exceed FDIC insurance limits.

 

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**Item4.    Controls and Procedures**

 

We carried out anevaluation, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of 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 informationrequired to be disclosed in our reports filed under the Securities Exchange Actof 1934 is recorded, processed, summarized and reported within the time periodsspecified in the SEC’s rules and forms. 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:**

 

On April 10,2003 and on June 3, 2003, The Sorkin, LLC and James K. Harbert filedputative class action lawsuits against us and three of our former officers anddirectors, Morgan Nields, Gerald Knudson and Louis Rivelli, in the UnitedStates District Court for the District of Colorado. The complaints arepurportedly brought on behalf of purchasers of shares of the Company’s commonstock during the period February 14, 2001 to April 1, 2003 and allegethat, among other things, during the putative class period, the Company and theindividual defendants made materially false statements in violation of Section 10(b) ofthe Exchange Act, Rule 10b-5 promulgated under the Exchange Act, andSection 20(a) of the Exchange Act. The complaints seek unspecifiedcompensatory damages and other relief. On August 7, 2003, the Company, andMessrs. Nields and Knudson moved to dismiss all claims asserted by TheSorkin, LLC and Harbert. On August 18, 2003, Mr. Rivelli moved todismiss all claims asserted in those lawsuits. On October 20, 2003, Mr. Harbertmoved to dismiss his lawsuit, which the court subsequently granted. On October 21,2003, the Sorkin, LLC and Mr. Harbert filed an amended class actioncomplaint. The amended complaint contains the same claims for relief against usand Messrs. Nields and Rivelli, but does not assert any claims against Mr. Knudson.In addition, the amended complaint seeks to recover unspecified compensatorydamages and other relief on behalf of purchasers of shares of our common stockduring the period February 14, 2001 to July 17, 2003. The Company, Mr. Nieldsand Mr. Rivelli have filed motions to dismiss all claims asserted in theamended complaint.  On May 6, 2005the District Court heard arguments related to the motions to dismiss filed bythe Company, Mr. Nields and Mr. Rivelli.  On June 21, 2005 the court dismissed theclaims asserted in the lawsuit without prejudice.

 

We area defendant in a breach of contract suit brought by International SurgicalSystems in the federal District Court of Arizona.  The suit claims that Fischer Imagingwrongfully breached an agreement to supply product to ISS, notwithstanding ISS’nonpayment, and that such breach caused the failure and bankruptcy of ISS.  The suit seeks $1 million in damages, plusattorneys’ fees and expenses.  We believethe suit is without merit and intends to vigorously defend the case, as well asassert counterclaims against ISS for nonpayment.

 

Wehave been named as a defendant in one arbitration by a customer seeking to berepaid its purchase price related to claimed deficiencies of the SenoScanproduct.  We have recorded reservesrelated to this sales that we believe appropriately reflects the risk of anadverse outcome in the case.  We haveasserted meritorious defenses to these claims. We are also a defendant in various lawsuits incident to the operation ofour business. We do not believe that any one of these pending legal proceedingswould have a material, adverse effect on our consolidated financial position orresults of operations.  However, in theaggregate the expense and management distraction resulting from managingnumerous lawsuits simultaneously could have a material adverse effect on ourfinancial condition and cash flow if the outcomes are collectively unfavorable.

 

**Item 2. Unregistered Sales of Equity Securitiesand Use of Proceeds:**

 

None.

 

**Item 3. Defaults Upon Senior Securities:**

 

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, giving ComVest the right to accelerateamounts due under such Notes.  Asdiscussed further in Note 4, we obtained a forbearance of these defaultsthrough September 21, 2005 subject to extension for consecutive 30-dayperiods at ComVest’s sole and absolute discretion. Therefore, the Notes havebeen classified as a current liability in the attached consolidated balancesheets.  Due to the continuingForbearance and our inability to meet other conditions to further funding underthe ComVest Purchase Agreement, ComVest will not provide further advances.  The interest rate under the Notes shall be11.50% until the Forbearance Period ends. 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. An additional $25,000 forbearance fee will be accrued and paid monthlyfor each Forbearance Period.

 

**Item 4. Submission of Matters to a Vote ofSecurity Holders:**

 

An annual meeting of stockholders was held on June 1,2005.

 

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The following directors were re-elected to serve threeyear terms ending in the year 2008 or until their successors are duly electedand qualified:

 
| **Director**    | ** ** | **For**   | ** ** | **Against** |
|-----------------|------------|-----------|------------|-------------|
| Taylor Simonton |       | 6,221,856 |       | 771,566     |
| Larry Lenig *   |       | 6,232,653 |       | 760,769     |

 

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* Mr. Lenig resigned from the Board effective asof May 26, 2005.

 

**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.

 
| 10.31  |   | Retention and Severance Benefits Agreement for  Steven Durnil dated June 29, 2005                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                     |
| 10.32  |   | Retention and Severance Benefits Agreement for David  Kirwan dated June 29, 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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*As contemplated by SECRelease 33-8212 these exhibits are furnished with the Quarterly Report onForm 10-Q and are not deemed filed with the Securities and ExchangeCommission and are not incorporated by reference in any filing of FischerImaging Corporation under the Securities Exchange Act of 1933 or the ExchangeAct of 1934, whether made before or after the date hereof and irrespective ofany general incorporation language in such filings.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   | Date: August 15, 2005 |                                    |
|--------|----------------------------|-----------------------------------------|
|   |                       | /s/ STEVEN DURNIL                       | * * |
|   |                       | Steven Durnil                           |
|   |                       | *Chief Executive Officer and President* |
|   | Date: August 15, 2005 |                                    |
|   |                       | /s/ DAVID KIRWAN                        | * * |
|   |                       | David Kirwan                            |
|   |                       | *Chief Financial Officer*               |

 

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