**FORM 10-Q**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**
| **(Mark One)**                                                                                                                                                                                                       |                                                                                                          |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                                | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**  |
|                                                                                                                                                                                                                 |                                                                                                          |
| **For the  Quarter Ended September 30, 2006**                                                                                                                                                                        |
|                                                                                                                                                                                                                 |                                                                                                          |
| **or**                                                                                                                                                                                                               |
| **o**                                                                                                                                                                                                                | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                           |                                                                                                          |
| **For the  transition period  from                             to** |
| ** **                                                                                                                                                                                                           |
| **Commission  file 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.) |
| ** **                                |   | ** **                            |
| **370  Interlocken Blvd., Suite 400**     |   | ** **                            |
| **Broomfield,  Colorado**                 |   | **80021**                             |
| (Address of  principal executive offices) |   | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code:

**(303) 452-6800**

 

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

Yes x   No o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

 

Large acceleratedfiler o                                            Acceleratedfiler o                                       Non-acceleratedfiler x

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

Yes o   No x

The number of shares ofRegistrant’s Common Stock outstanding as of November 6, 2006 was 9,398,817.

 

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**FISCHERIMAGING CORPORATION**

**FORM 10-Q**

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

 

2

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# **PART I.FINANCIAL INFORMATION**

**Item 1. Financial Statements**

#### **FISCHER IMAGING CORPORATION**

#### **(DEBTOR-IN-POSSESSION)**

**CONSOLIDATEDBALANCE SHEETS**

**(amountsin thousands except share data)**
| ** **                                                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                        | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| ASSETS                                                                                                                                            |       |                   |       |                  |       |
| Current Assets:                                                                                                                                   |       |                   |       |                  |       |
| Cash and cash  equivalents                                                                                                                        |       | $                      | 1,358      |                  | $          | 4,499 |   |
| Restricted cash                                                                                                                                   |       | 128                    |       | —                |       |
| Accounts  receivable, net of allowance for doubtful accounts of $156 and $383 at September  30, 2006 and December 31, 2005, respectively          |       | 316                    |       | 4,026                 |       |
| Inventories, net                                                                                                                                  |       | 934                    |       | 4,329                 |       |
| Prepaid expenses  and other current assets                                                                                                        |       | 297                    |       | 1,305                 |       |
| Total current  assets                                                                                                                             |       | 3,033                  |       | 14,159                |       |
| Property and equipment:                                                                                                                           |       |                   |       |                  |       |
| Manufacturing  equipment                                                                                                                          |       | 14                     |       | 331                   |       |
| Office equipment  and leasehold improvements                                                                                                      |       | 8                      |       | 208                   |       |
| Total property  and equipment                                                                                                                     |       | 22                     |       | 539                   |       |
| Less:  accumulated depreciation                                                                                                                   |       | —                 |       | —                |       |
| Property and equipment,  net                                                                                                                      |       | 22                     |       | 539                   |       |
| Long-term prepaid  insurance                                                                                                                      |       | 773                    |       | —                |       |
| Total assets                                                                                                                                      |       | $                      | 3,828      |                  | $          | 14,698 |   |
|                                                                                                                                              |       |                   |       |                  |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                    |       |                   |       |                  |       |
| Current liabilities not  subject to compromise:                                                                                                   |       |                   |       |                  |       |
| Accounts payable                                                                                                                                  |       | $                      | 132        |                  | $          | 2,722 |   |
| Accrued salaries  and wages                                                                                                                       |       | 9                      |       | 665                   |       |
| Customer  deposits                                                                                                                                |       | —                 |       | 1,009                 |       |
| Accrued  warranties                                                                                                                               |       | —                 |       | 1,040                 |       |
| Deferred service  revenue                                                                                                                         |       | —                 |       | 1,667                 |       |
| Other current  liabilities                                                                                                                        |       | 1                      |       | 2,583                 |       |
| Total current  liabilities not subject to compromise                                                                                              |       | 142                    |       | 9,686                 |       |
| Total current  liabilities subject to compromise                                                                                                  |       | 1,327                  |       | —                |       |
| Total current  liabilities                                                                                                                        |       | 1,469                  |       | 9,686                 |       |
| Commitments and  contingencies                                                                                                                    |       |                   |       |                  |       |
| Stockholders’ Equity:                                                                                                                        |       |                   |       |                  |       |
| Preferred Stock,  5,000,000 shares authorized:                                                                                                    |       |                   |       |                  |       |
| Series C Junior  participating preferred stock, $.01 par value, 500,000 shares authorized, no  shares issued and outstanding                      |       | —                 |       | —                |       |
| Series D  Convertible preferred stock, $.01 par value, 506,667 shares authorized, no  shares issued and outstanding                               |       | —                 |       | —                |       |
| Common stock, $.01 par  value, 25,000,000 shares authorized; 9,398,817 shares issued and outstanding  at September 30, 2006 and December 31, 2005 |       | 94                     |       | 94                    |       |
| Paid-in capital                                                                                                                                   |       | 49,455                 |       | 49,455                |       |
| Accumulated deficit                                                                                                                               |       | (47,190                | )          | (44,240               | )          |
| Accumulated other  comprehensive loss                                                                                                             |       | —                 |       | (297                  | )          |
| Total  stockholders’ equity                                                                                                                  |       | 2,359                  |       | 5,012                 |       |
| Total liabilities and  stockholders’ equity                                                                                                  |       | $                      | 3,828      |                  | $          | 14,698 |   |

 

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

3

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**FISCHER IMAGING CORPORATION**

#### **(DEBTOR-IN-POSSESSION)**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

**(Unaudited)**
| ** **                                                              | ** ** | **Three-months Ended** | ** ** | **Nine-months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                                              | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                                              | ** ** | **2006**                    | ** ** | **2005**                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                                               |       |                        |       |                       |       |   |   |   |   |
| Products                                                                |       | $                           | 309        |                       | $          | 9,444 |   | $ | 8,150 |   | $ | 27,852 |   |
| Services                                                                |       | 146                         |       | 3,995                      |       | 4,849 |   | 11,230 |   |
| Total revenues                                                          |       | 455                         |       | 13,439                     |       | 12,999 |   | 39,082 |   |
| Cost of sales:                                                          |       |                        |       |                       |       |   |   |   |   |
| Products                                                                |       | (421                        | )          | 9,537                      |       | 6,748 |   | 28,081 |   |
| Services                                                                |       | 88                          |       | 3,620                      |       | 5,176 |   | 12,277 |   |
| Total cost of sales                                                     |       | (333                        | )          | 13,157                     |       | 11,924 |   | 40,358 |   |
| Gross margin                                                            |       | 788                         |       | 282                        |       | 1,075 |   | (1,276 | ) |
| Operating  expenses (gains):                                            |       |                        |       |                       |       |   |   |   |   |
| Research and development                                                |       | —                      |       | 779                        |       | — |   | 4,781 |   |
| Selling and marketing                                                   |       | —                      |       | 1,372                      |       | — |   | 5,418 |   |
| General and administrative                                              |       | 433                         |       | 3,336                      |       | 3,359 |   | 8,131 |   |
| Impairment of long-lived assets                                         |       | —                      |       | 800                        |       | 230 |   | 800 |   |
| Lease termination fee                                                   |       | —                      |       | 4,000                      |       | — |   | 4,000 |   |
| Gain on sale of Mammography Assets                                      |       | —                      |       | (32,000                    | )          | — |   | (32,000 | ) |
| Total operating expenses (gains)                                        |       | 433                         |       | (21,713                    | )          | 3,589 |   | (8,870 | ) |
| Income (loss)  from operations                                          |       | 355                         |       | 21,995                     |       | (2,514 | ) | 7,594 |   |
| Other income and  (expense):                                            |       |                        |       |                       |       |   |   |   |   |
| Interest expense                                                        |       | —                      |       | (1,838                     | )          | (69 | ) | (3,062 | ) |
| Interest income                                                         |       | 14                          |       | 2                          |       | 53 |   | 7 |   |
| Reorganization expenses                                                 |       | (42                         | )          | —                     |       | (42 | ) | — |   |
| Other income (expense), net                                             |       | 28                          |       | (11                        | )          | (378 | ) | (75 | ) |
| Total other  income and (expense)                                       |       | —                      |       | (1,847                     | )          | (436 | ) | (3,130 | ) |
| Provision for  income taxes                                             |       | —                      |       | 200                        |       | — |   | 200 |   |
| Net income  (loss)                                                      |       | $                           | 355        |                       | $          | 19,948 |   | $ | (2,950 | ) | $ | 4,264 |   |
| Net income  (loss) per share:                                           |       |                        |       |                       |       |   |   |   |   |
| Basic                                                                   |       | $                           | 0.04       |                       | $          | 2.12 |   | $ | (0.31 | ) | $ | 0.45 |   |
| Diluted                                                                 |       | $                           | 0.04       |                       | $          | 2.12 |   | $ | (0.31 | ) | $ | 0.45 |   |
| Weighted average  shares used to calculate net income (loss) per share: |       |                        |       |                       |       |   |   |   |   |
| Basic                                                                   |       | 9,399                       |       | 9,399                      |       | 9,399 |   | 9,389 |   |
| Diluted                                                                 |       | 9,399                       |       | 9,399                      |       | 9,399 |   | 9,435 |   |

 

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

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**FISCHER IMAGING CORPORATION**

#### **(DEBTOR-IN-POSSESSION)**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(amounts in thousands)**

**(Unaudited)**
| ** **                                                                                        | ** ** | **Nine-months ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                        | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** |
| ** **                                                                                        | ** ** | **2006**                   | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                            |       |                       |       |   |   |
| Net (loss) income                                                                                 |       | $                          | (2,950     | ) | $ | 4,264 |   |
| Adjustments to  reconcile net (loss) income to net cash used in operating activities:             |       |                       |       |   |   |
| Depreciation and amortization                                                                     |       | —                     |       | 886 |   |
| Amortization of debt issue costs                                                                  |       | —                     |       | 2,272 |   |
| Bad debt expense                                                                                  |       | 110                        |       | 641 |   |
| Impairment of long-lived assets                                                                   |       | 230                        |       | 800 |   |
| Gain on sale of Mammography Assets                                                                |       | —                     |       | (32,000 | ) |
| Loss upon substantially completing liquidation of  the European subsidiaries                      |       | 75                         |       | — |   |
| Other                                                                                             |       | 11                         |       | 289 |   |
| Change in current assets and liabilities                                                          |       |                       |       |   |   |
| Accounts receivable, net                                                                          |       | 3,049                      |       | 1,411 |   |
| Inventories, net                                                                                  |       | 3,260                      |       | 9,208 |   |
| Prepaid expenses and other current assets                                                         |       | 187                        |       | (554 | ) |
| Accounts payable                                                                                  |       | (2,356                     | )          | (2,978 | ) |
| Accrued warranties                                                                                |       | (797                       | )          | (916 | ) |
| Customer deposits                                                                                 |       | (272                       | )          | (1,263 | ) |
| Deferred service revenue                                                                          |       | (1,083                     | )          | 515 |   |
| Other                                                                                             |       | (2,528                     | )          | 598 |   |
| Net cash used in operating activities                                                             |       | (3,064                     | )          | (16,827 | ) |
|                                                                                              |       |                       |       |   |   |
| Cash flows (used  in) provided by investing activities:                                           |       |                       |       |   |   |
| Funding of Fischer Imaging Employee Trust                                                         |       | (600                       | )          | — |   |
| Payments made from Fischer Imaging Employee Trust                                                 |       | 479                        |       | — |   |
| Europe cash on hand at time of substantially  completing liquidation of the European subsidiaries |       | (197                       | )          | — |   |
| Proceeds from sale of property and equipment                                                      |       | 252                        |       | 27 |   |
| Proceeds from sale of Mammography Assets                                                          |       | —                     |       | 32,000 |   |
| Redemption of certificate of deposit (restricted  cash)                                           |       | —                     |       | 514 |   |
| Purchases of property and equipment                                                               |       | —                     |       | (454 | ) |
| Net cash (used in) provided by investing activities                                               |       | (66                        | )          | 32,087 |   |
|                                                                                              |       |                       |       |   |   |
| Cash flows used  in financing activities:                                                         |       |                       |       |   |   |
| Proceeds from sale of common stock                                                                |       | —                     |       | 55 |   |
| Proceeds from senior secured promissory notes                                                     |       | —                     |       | 7,000 |   |
| Repayment of senior secured promissory notes                                                      |       | —                     |       | (7,000 | ) |
| Proceeds from junior secured promissory note                                                      |       | —                     |       | 5,000 |   |
| Repayment of junior secured promissory note                                                       |       | —                     |       | (5,000 | ) |
| Payment of stock warrant obligation                                                               |       | —                     |       | (1,800 | ) |
| Payment of debt issue costs                                                                       |       | —                     |       | (471 | ) |
| Proceeds from line of credit                                                                      |       | —                     |       | 3,311 |   |
| Repayments on line of credit                                                                      |       | —                     |       | (4,765 | ) |
| Payment on capital lease obligations                                                              |       | —                     |       | (224 | ) |
| Net cash used in financing activities                                                             |       | —                     |       | (3,894 | ) |
|                                                                                              |       |                       |       |   |   |
| Effect of  exchange rate changes on cash                                                          |       | (11                        | )          | (76 | )) |
|                                                                                              |       |                       |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                                             |       | (3,141                     | )          | 11,290 |   |
| Cash and cash  equivalents, beginning of period                                                   |       | 4,499                      |       | 1,939 |   |
| Cash and cash  equivalents, end of period                                                         |       | $                          | 1,358      |   | $ | 13,229 |   |

 

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

5

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**FISCHER IMAGING CORPORATION**

#### **(DEBTOR-IN-POSSESSION)**

**NOTES TOTHE CONSOLIDATED FINANCIAL STATEMENTS**

**FOR THE NINE-MONTHS ENDEDSEPTEMBER 30, 2006**

**(UNAUDITED)**

**(1)   GENERAL**

**Organization**

Fischer Imaging Corporation,together with its wholly owned subsidiaries (“Fischer” or the “Company”),services and sells products that meet selected needs of the radiology,electrophysiology and surgical markets. The Company’s primary focus prior to the consummation of the Hologictransaction on September 29, 2005 (as discussed below) was designing,manufacturing and selling mammography and digital imaging products and usingits digital imaging technology in screening and diagnostic mammograms andminimally invasive breast biopsy to aid in the early identification of breast cancer.Prior to the Kodak arrangement in January 2006 (as discussed below), Fischeralso serviced mammography and digital imaging products used in the diagnosis ofbreast cancer and other diseases.

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

On August 22, 2006, Fischerfiled a petition under Chapter 11 of title 11 of the United States Code (the “BankruptcyCode”) in the United States Bankruptcy Court for the District of Colorado (“BankruptcyCourt”).  See Note 2 for further details.

**Hologic Transaction and Subsequent Transactions**

In September 2005, Fischerconsummated the sale (the “Asset Sale”) of all of its intellectual propertyrights related to its mammography business and products, including its SenoScandigital mammography and MammoTest stereotactic breast biopsy systems (the “MammographyAssets”) to Hologic, Inc. (“Hologic”) for a cash price of $32.0 million.  The value of the Mammography Assets sold waszero on Fischer’s consolidated balance sheets and therefore the entire $32.0million proceeds were recognized as Gain on sale of Mammography Assets in theaccompanying consolidated statements of operations.

Hologic granted Fischer anon-exclusive limited license to use certain Mammography Assets necessary forFischer to continue to service and support, and satisfy warranty obligations onthe installed base of SenoScan and MammoTest systems (the “Service” business);to fulfill contractual obligations to provide MammoTest and SenoScan systems toEthicon Endo-Surgery Europe (a subsidiary of Johnson & Johnson, Inc., “EES”)and Philips Medical Systems DMC GmbH (“Philips”), respectively; and to carryout certain activities with respect to Fischer’s radiology, electrophysiologyand surgical (“RE&S”) business.

In February 2005, the Company entered into a Note andWarrant Purchase Agreement with ComVest Investment Partners II LLC (“ComVest”).  In connection with the closing of the AssetSale, ComVest exercised its put option, and at closing, Fischer paid $1.8million in satisfaction of the stock warrant obligation.  In addition, amounts due under the ComVestpromissory notes were repaid upon the closing of the Asset Sale.

*Servicebusiness.*  On January 23, 2006, Fischerentered into an Intellectual Property License Agreement and Services Agreement(together, the “Kodak Agreements”) with Eastman Kodak Company (“Kodak”).  The Kodak Agreements allow Kodak to act as anauthorized service provider and provide service and support to the world-wide,excluding Mexico, installed base of Fischer’s mammography products.  The Kodak Agreements have reduced Fischer’sobligations and costs with respect to the Service business.  All Fischer mammography service contractswere cancelled by April 21, 2006 in the U.S. and by May 8, 2006 in Europe. Alldisposables revenue and time and material revenue from the Service businessended as of January 23, 2006 in the U.S. Fischer incurred $135,000 of expense related to payments made to Kodakduring the nine-months ended September 30, 2006 recognized in the accompanyingconsolidated statement of operation as Other expense.  Services cost of sales has been reduced dueto reimbursement from Kodak of approximately $350,000 during the nine-monthsended September 30, 2006.  Fischer paidapproximately $395,000 to Kodak for service contracts to cover remainingwarranty periods for certain customers, which directly reduced Accruedwarranties in the accompanying consolidated balance sheet.

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InAugust 2006, Fischer transferred its service obligations in Mexico toInstrumentation Technologies de Mexico S.A. de C.V. (“Intec”).  Fischer provided spare parts and paid relatedduties, prepaid for 30 hours of technical support and one week’s service supportfrom Kodak and paid $110,000 in cash as an incentive to assume warranty andother obligations in Mexico and to settle in other outstanding claims.  These costs directly reduced Accruedwarranties in the accompanying consolidated balance sheet.

*Contractualobligation to EES.*  On March 9,2006, Fischer entered into an amendment (the “EES Amendment”) to theDistributor Agreement, dated December 9, 1998, as amended (the “DistributorAgreement”) between EES and Fischer.  EESplaced a binding order with Fischer for 20 MammoTest tables, which were shippedto various locations in Europe during the five-months ended May 31, 2006.  After completion of the tables, theDistributor Agreement and EES Amendment terminated and no further MammoTesttables will be sold.

*Contractualobligation to Philips.*  The statusof the Master Purchasing Agreement (“Philips Agreement”) between Fischer andPhilips is still unresolved as discussed further in Note 10.

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

(1)  The VersaRad-A and VersaRad-D systemsdesigned for general purpose radiographic imaging (“VersaRad Line”).  Substantially all of the sales of thisproduct are sold to Kodak under an OEM Agreement.  Fischer received a significant last timepurchase order from Kodak in February 2006, which was completed in May 2006.

(2)  The EPX-60 Single Plane EP Imaging System andthe SPX Surgical Imaging System (“EPX/SPX Line”).

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

In order to ensure Fischercould continue to meet its warranty and service obligations and to maximize thevalue of the RE&S business, Fischer entered into a Manufacturing ServicesAgreement (“Byers Agreement”) with Byers Peak, Inc. (“Byers”) effective July 5,2006 under which Byers agreed to provide certain services and sell certainparts with respect to the RE&S business. The Byers Agreement was terminated on October 31, 2006 in anticipationof the sale of the RE&S business.

As discussed in Note 2, onAugust 21, 2006, after the completion of an auction process, Fischer signed anAsset Purchase Agreement with Byers (the “Byers Purchase Agreement”) for thepurchase of all of Fischer’s right, title and interest in and to the ProductLines and the RE&S business.  Inorder to avoid the expense and time delay involved in securing the stockholderapproval required to consummate the transaction under the Byers PurchaseAgreement, Fischer filed a petition under Chapter 11 of title 11 of theBankruptcy Code on August 22, 2006 as described in more detail in Note 2.  Fischer immediately moved to have the saleapproved pursuant to Section 363(b) and (f) of the Bankruptcy Code.  In connection with this approval process,another auction was held by the Bankruptcy Court in October 2006 in whichanother party submitted the winning bid. As discussed more fully in Note 11, Fischer signed an agreement to sellthe RE&S business (“RE&S Agreement”) to JN Properties, LLC (“JNProperties”) and closed the transaction on November 1, 2006.  JN Properties is a company whose members areMorgan Nields and Kinney Johnson.  MorganNields is a substantial stockholder and former director, chairman of the Boardand chief executive officer of Fischer. Kinney Johnson is a former director and president of Fischer.

**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 September 30, 2006, its results of operations for the three-months andnine-months ended September 30, 2006 and 2005 and its cash flows for thenine-months ended September 30, 2006 and 2005. 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.  Effective August 22, 2006, theaccompanying unaudited consolidated financial statements reflect alladjustments pursuant to the adoption of SOP 90-7, “Financial Reporting byEntities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”) that are, inthe opinion of management, necessary for a fair presentation of the financialposition and results of operations as of and for the interim period presentedherein.

Theaccompanying consolidated financial statements have been prepared on a goingconcern basis, which contemplates continuity of operations, realization ofassets and liquidation of liabilities in the ordinary course of business.  As a result of filing a petition underChapter 11 the Bankruptcy Code and the other factors listed above raisesubstantial doubt about Fischer’s ability to continue as a going concern.  The consolidated financial statementspresented in this Form 10-Q do not include any adjustments that might resultfrom the outcome of this uncertainty. The basis of accounting will change from the

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going concernbasis to that of the liquidation basis of accounting upon the approval by theBoard of Directors of a liquidation plan or conversion to Chapter 7 of theBankruptcy Code. Under the liquidation basis of accounting, assets are statedat their estimated net realizable value and liabilities are stated at theirestimated settlement amounts, which estimates will be periodically reviewed andadjusted as appropriate. The valuation of assets at their net realizable valueand liabilities at their anticipated settlement amounts represent estimates,based on present facts and circumstances, of the net realizable value of assetsand the costs associated with carrying out a plan of liquidation anddissolution based on certain assumptions. Other than the write-off of approximately $0.9 million of prepaidinsurance and a potential accrual for the costs associated with carrying out aplan of liquidation, management currently estimates there would be no furthermaterial adjustments needed under the liquidation basis.

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

**Stock Based Compensation**

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

The adoption of SFAS 123Rhad no impact on the consolidated financial position, results of operations andcash flows.  As a result of a reductionin work force, unvested options outstanding as of December 31, 2005 were notexpected to and did not vest.  Stockoptions were automatically granted under the Amended and Restated 2004 StockIncentive Plan (the “Plan”) in January 2006, and compensation expense relatedto this annual grant was recognized over the prior year of service.  The Plan was terminated by Fischer’s Board onNovember 7, 2006 and no further stock options will be granted.

The following table setsforth the pro forma amounts of net income and net income per share, for thethree and nine-months ended September 30, 2005, that would have resulted ifFischer had accounted for the option grants under employee stock plans underthe fair value recognition provisions of SFAS 123 (in thousands, except pershare amounts).
|                                                | ** ** | **Three-months ended  September 30, 2005** | ** ** | **Nine-months ended  September 30, 2005** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------|------------|
|                                           |       |                                                      |       |                                                     |       |
| Net income as  reported                        |       | $                                                         | 19,948     |                                                     | $          | 4,264 |   |
| Fair value-based compensation cost, net of tax |       | 681                                                       |       | (470                                                     | )          |
| Pro forma net income                           |       | $                                                         | 20,629     |                                                     | $          | 3,794 |   |
|                                           |       |                                                      |       |                                                     |       |
| Basic and  Diluted income per share:           |       |                                                      |       |                                                     |       |
| As reported                                    |       | $                                                         | 2.12       |                                                     | $          | 0.45 |   |
| Pro forma                                      |       | $                                                         | 2.19       |                                                     | $          | 0.40 |   |

 

The stock basedcompensation benefit in the three-months ended September 30, 2005 relates tosignificant forfeitures occurring during the quarter and a lack of optionsgranted.

**Recently Issued AccountingPronouncement**

The Financial Accounting Standards Board (“FASB”)has issued interpretation No. 48, “Accounting for Uncertainty in IncomeTaxes—An Interpretation of FASB Statement No. 109” (“FIN 48”), regardingaccounting for, and disclosure of, uncertain

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tax positions. FIN 48 clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN48 prescribes a recognition threshold and measurement attribute for thefinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. FIN 48 is effective for fiscal yearsbeginning after December 15, 2006. Management is currently evaluating theimpact, if any, FIN 48 will have on the results of operations and financialposition.

**(2)  REORGANIZATION UNDER CHAPTER 11 OFTHE UNITED STATES BANKRUPTCY CODE**

On March 15, 2006, Fischerstarted an auction process to sell its RE&S business.  Fischer signed the Byers Purchase Agreementwith Byers on August 21, 2006.* *Under Delaware law, any sale ofall or substantially all of Fischer’s assets requires approval by Fischer’sstockholders.  The Board determined thatthe sale of the assets related to the RE&S Agreement was considered a saleof all or substantially all of Fischer’s remaining assets.  In order to avoid the expense and time delayinvolved in securing stockholder approval and in light of Fischer’sdeteriorating financial position, the Board elected to file a petition underChapter 11 of the Bankruptcy Code in the Bankruptcy Court, and such petitionwas filed on August 22, 2006. Fischer immediately moved to have the sale underthe RE&S Agreement approved pursuant to §363(b) and (f) of the BankruptcyCode.

Following the filing of thevoluntary Chapter 11 petitions on August 22, 2006, Fischer has been operatingas a debtor-in-possession subject to the Bankruptcy Court.  On August 25, 2006, the Bankruptcy Courtapproved the plan to honor certain prepetition debt related to obligations tocustomers, including warranties.  Fischeris currently paying the postpetition claims of its vendors in the ordinarycourse of business.

As discussed in Note 11, theBankruptcy Court approved the sale of the RE&S business to JN Propertiesand the sale was completed on November 1, 2006.

 The Board of Directors intends to either filea liquidating plan of reorganization (“Liquidation Plan”) or convert theChapter 11 case to a liquidating case under Chapter 7 of the Bankruptcy Codesometime after the closing of the RE&S Agreement, the sale of miscellaneousminor assets and the review of any claims filed by creditors.  If a Liquidation Plan is filed, theLiquidation Plan must be approved by creditors and the Bankruptcy Court afternotice and a hearing.  It is contemplatedthat the Liquidation Plan will provide for the liquidation or sale of all ofFischer’s assets and the distribution of the proceeds pursuant to the priorityscheme allowed under the Bankruptcy Code. It is anticipated that in either a Chapter 11 or Chapter 7 liquidation,the liquidation process would occur over a one to two year period. Managementis unable to predict whether any amounts will be available for distribution tostockholders.

Under the Bankruptcy Code,certain claims against Fischer in existence prior to the filing date are stayedwhile Fischer continues operations as debtor-in-possession.  These claims are reflected in the September30, 2006 accompanying consolidated balance sheet as Total current liabilitiessubject to compromise.  AdditionalChapter 11 claims have arisen and may continue to arise subsequent to thefiling date resulting from the rejection of executory contracts and from thedetermination by the Bankruptcy Court of allowed claims for contingencies andother disputed amounts.  All claims mustbe filed with the Bankruptcy Court by November 20, 2006.  If the amount of new claims is greater thanmanagement’s estimates, liabilities that have already been paid or settledprepetition could be considered preferential payments and subject to potentialavoidance and recovery by the bankruptcy estate.  It is possible that the avoidance ofpreferential payments could ultimately increase the total claims, which couldresult in additional expenses not currently recorded.

The principal categories andbalances of Chapter 11 claims accrued in the accompanying consolidated balancesheets and included in Total current liabilities subject to compromise atSeptember 30, 2006 are summarized as follows (in thousands):
| Accounts payable                           |   | $   | 353    |   |
|--------------------------------------------|--------|-----|--------|--------|
| Accrued salaries  and wages (Note 6)       |   | 18  |   |
| Accrued  warranties (Note 11)              |   | 77  |   |
| Deferred service  revenue (Note 11)        |   | 49  |   |
| Deferred revenue  — Philips (Note 10) |   | 330 |   |
| Restructuring  accrual (Note 6)            |   | 112 |   |
| Other current  liabilities                 |   | 388 |   |
|                                       |   | $   | 1,327  |   |

 

Reorganization expensesare items of expense or income that are incurred or realized by the Company asa result of the reorganization.  Theseitems include, but are not limited to, professional fees, United States Trusteefees and other expenditures incurred relating to the Chapter 11 case.

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** (3)  REVENUE RECOGNITION**

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

**(4)   INVENTORIES**

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

Inventoriesconsisted of the following components (in thousands): 
|                                              | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials                                |       | $                            | 1,212      |                        | $          | 5,120 |   |
| Work in process  and finished goods          |       | 638                          |       | 6,340                       |       |
| Reserve for  excess and obsolete inventories |       | (916                         | )          | (7,131                      | )          |
| Inventories, net                             |       | $                            | 934        |                        | $          | 4,329 |   |

 

The following provides anexplanation of the change in the reserve for excess and obsolete inventories:
| Balance at beginning of year                          |   | $      | 7,131 |   |
|-------------------------------------------------------|--------|--------|-------|--------|
| Reversal of  provision due to results of actual sales |   | (909   | )     |
| Removal of  Europe balances at time of liquidation    |   | (500   | )     |
| Write-offs  charged to reserve                        |   | (4,806 | )     |
| Balance at September  30, 2006                        |   | $      | 916   |   |

 

During the three-monthsended September 30, 2006, management reversed approximately $0.5 million of itsprovision due to the change in pricing paid for the RE&S business, asfurther discussed in Note 11.  Thisreversal is the cause of the credit in Cost of sales – Products for thethree-months ended September 30, 2006 in the accompanying consolidatedstatements of operations.

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

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

Since the future estimatedcash inflows were estimated to be near zero, the carrying amounts of the assetsexceeded the estimated undiscounted cash flows. Management estimated the fair value of the assets by reviewing the valueof the remaining businesses and other long-lived assets and determined animpairment had occurred.  Fair value ofthe long-lived assets was determined through inquiry of advisors and comparisonto other sales of fixed assets. Therefore, an impairment of long-lived assets of $0.2 million wasrecognized during the three-months ended March 31, 2006.

A recoverability test wasalso completed on September 30, 2005.  Asa result of the analysis prepared, an impairment of long-lived assets of $0.8million was recognized during the three-months ended September 30, 2005.

During the three-monthsended June 30, 2006, the Board authorized and completed the sale of themajority of the remaining fixed assets in the United States.  As a result, cash proceeds of approximately$214,000 were generated.

**(6)    LEASE TERMINATION FEE ANDRESTRUCTURING EXPENSE**

The Company entered intotermination and retention arrangements from June 2005 through March 2006 withapproximately 102 employees in the U.S. and Europe.  All areas of the Company were impacted.   Retention payments under these agreementsearned over the period July 1, 2005 through December 31, 2005 were $0.7million, of which $0.3 million were paid in January 2006 and the remainder waspaid in July 2006.  Termination payments,earned upon involuntary termination, are estimated to be $1.2 million.  Retention payments were recognized as expenseover the period earned, and termination payments were expensed over the periodbeginning with the date of signing agreements through the earlier of thecommunicated involuntary termination dates or October 31, 2006.

The Company recognizedadditional restructuring expense in the amount of $0.1 million and $1.5 millionrelated to these arrangements during the three-months and nine-months endedSeptember 30, 2006, respectively.  The restructuringexpense was recognized in the consolidated statements of operations as Generaland administrative expense for the three-months ended September 30, 2006.  Restructuring expense was recognized in theconsolidated statements of operations as $0.6 million in products cost ofsales, $0.7 million in Cost of sales – Services and $0.2 million in General andadministrative expense for the nine-months ended September 30, 2006.

A portion of the paymentsto be made under the termination and retention arrangements will be paid fromthe irrevocable Fischer Imaging Employee Trust (the “Trust”).  During the three-months and nine-months endedSeptember 30, 2006, the Trust paid $253,000 and $479,000, respectively, ofamounts due under the termination and retention arrangements.  This Trust was established in 2006 for thespecific purpose of paying amounts owed under termination and retentionarrangements or general wages to employees. The Trust was funded by the Companyon January 2, 2006 with $600,000 of cash as authorized by the Board ofDirectors.

On September 27, 2005,Fischer entered into an Amendment to Lease Agreement (the “Lease Amendment”)with JN Properties.  The Lease Amendmentprovided for the amendment of the Lease dated July 31, 1992 between Fischer andJN Properties (the “Lease”) to allow for the early termination of the Lease onMay 31, 2006.  In exchange for the above,Fischer agreed to pay to JN Properties $4.0 million plus certain accrued 2005property taxes immediately following the closing of the Hologictransaction.  In the Lease Amendment, JNProperties granted its consent to the transactions contemplated by the AssetSale Agreement.  The $4.0 million paymenthas been recognized as Lease termination fee in the accompanying consolidatedstatements of operations in accordance with FASB Statement No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities.”  See Note 11 for subsequent events involvingJN Properties.

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The following is a rollforward of the restructuring accrual (in thousands):
| Balance at December 31, 2005                              |   | $      | 539    |   |
|-----------------------------------------------------------|--------|--------|--------|--------|
| Expense                                                   |   | 1,534  |   |
| Removal of  unpaid Europe balances at time of liquidation |   | (44    | )      |
| Payments                                                  |   | (1,917 | )      |
| Balance at September  30, 2006                            |   | $      | 112    |   |

 

The restructuringaccrual is included in Total current liabilities subject to compromise in theaccompanying consolidated balance sheet as of September 30, 2006.   The restructuring accrual is included inOther current liabilities in the accompanying consolidated balance sheet as ofDecember 31, 2005.

**(7)  NET EARNINGS PER SHARE**

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

A reconciliation betweenthe number of securities used to calculate basic and diluted net loss per shareis as follows (in thousands):
|                                                 | ** ** | **Three-Months Ended**  | ** ** | **Nine-Months Ended**   | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                      | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| Weighted average  of common shares outstanding: |       |                         |       |                         |       |   |   |   |   |
| Basic                                           |       | 9,399                        |       | 9,399                        |       | 9,399 |   | 9,389 |   |
| Dilutive effect  of stock options               |       | —                       |       | —                       |       | — |   | 46 |   |
| Diluted                                         |       | 9,399                        |       | 9,399                        |       | 9,399 |   | 9,435 |   |

 

For the three andnine-months ended September 30, 2006, 387,000 of options to purchase shares ofcommon stock were outstanding but not included in the computation of dilutedearnings per share because the effect would have been anti-dilutive. For thethree and nine-months ended September 30, 2005, 922,750 and 876,402, respectively,of options to purchase shares of common stock were outstanding but not includedin the computation of diluted earnings per share because the effect would havebeen anti-dilutive.

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

Comprehensive(loss) income is defined as the change in equity of an enterprise other thanthe change resulting from investments by, or distributions to, its owners. Forthe Company, comprehensive (loss) income includes only net loss and foreigncurrency translation adjustments as follows (in thousands):
|                                           | ** ** | **Three-months Ended**  | ** ** | **Nine-months Ended**   | ** ** |
|-------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|                                      |       |                         |       |                         |       |   |   |   |   |
| Net (loss)  income                        |       | $                            | 355        |                         | $          | 19,948 |   | $ | (2,950 | ) | $ | 4,264 |   |
| Foreign currency  translation adjustments |       | —                       |       | (48                          | )          | 297 |   | (76 | ) |
| Comprehensive (loss)  income              |       | $                            | 355        |                         | $          | 19,900 |   | $ | (2,653 | ) | $ | 4,188 |   |

 

**(9)   SEGMENT AND CUSTOMERINFORMATION**

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

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

Internationally, theCompany marketed and supported its products primarily through its subsidiariesand various dealers.  Revenues areattributed to geographic areas based on the location of the customer.  International long-lived assets were locatedin Switzerland.  The following tablerepresents a summary of revenues and long-lived assets (in thousands):
|                     | ** ** | **Three-months Ended** | ** ** | **Nine-months Ended** | ** ** |
|---------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **          | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **          | ** ** | **2006**                    | ** ** | **2005**                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:           | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States       |       | $                           | 452        |                       | $          | 12,520 |   | $ | 8,870 |   | $ | 34,383 |   |
| Other International |       | 3                           |       | 919                        |       | 4,129 |   | 4,699 |   |
| Total               |       | $                           | 455        |                       | $          | 13,439 |   | $ | 12,999 |   | $ | 39,082 |   |

 
|                          | ** ** | **As of**               | ** ** |
|--------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
| Long-lived  assets, net: |       |                         |       |   |   |
| United States            |       | $                            | 22         |   | $ | 469 |   |
| International            |       | —                       |       | 70 |   |
| Total                    |       | $                            | 22         |   | $ | 539 |   |

 

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

Customers representinggreater than 10% of the Company’s revenue during any of the reporting periods:
|                             | ** ** | **Three-months Ended**  | ** ** | **Nine-months Ended**   | ** ** |
|-----------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| Ethicon-Endo  Surgery, Inc  |       | —                       | %          | 2.4                          | %          | 41.2 | % | 8.3 | % |
| Eastman Kodak  Company      |       | —                       | %          | 11.8                         | %          | 21.7 | % | 9.1 | % |
| Vail Valley Medical  Center |       | 18.7                         | %          | —                       |       | — |   | — |   |
| Ohio State University       |       | 11.3                         | %          | —                       |       | — |   | — |   |

 

Revenue grouped bysimilar products and services (in thousands):
|                            | ** ** | **Three-months Ended**  | ** ** | **Nine-months Ended**   | ** ** |
|----------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                 | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| Product Revenue:           |       |                         |       |                         |       |   |   |   |   |
| Digital Mammography        |       | $                            | 85         |                         | $          | 3,152 |   | $ | 405 |   | $ | 7,092 |   |
| Stereotactic Breast Biopsy |       | —                       |       | 3,915                        |       | 2,681 |   | 14,616 |   |
| RE&S Products          |       | 224                          |       | 2,377                        |       | 5,064 |   | 6,144 |   |
|  Service Revenue      |       | 146                          |       | 3,995                        |       | 4,849 |   | 11,230 |   |
| Total                      |       | $                            | 455        |                         | $          | 13,439 |   | $ | 12,999 |   | $ | 39,082 |   |

 

**(10)   COMMITMENTS AND CONTINGENCIES**

**Regulatory Actions**

The Company is subject to periodic inspections by theFood and Drug Administration (“FDA” or the “agency”).  In 2006, the FDA indicated that the 5.2.Xversions of the software currently running on Fischer’s SenoScan systems shouldbe recalled for a known archiving issue. After consultation with the Company’s Notified Body, it was determinedthat this issue and its correction did not meet the criteria for a recall inthe EU.  Fischer developed and releasedto the general market a version 5.2.2

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software release to correct the known archiving issue as well asincrease functions for servicing the SenoScan unit.  Fischer submitted an initial recall plan tothe FDA that indicated the target completion date of the software upgrades tobe September 30, 2006 in the U.S.  Due toscheduling conflicts with customers to complete the action required to installthe new software version, a revised plan has been submitted with a targetcompletion date of December 31, 2006. Management estimates that the costs related to this recall will beminimal.

**Philips**

Fischer received notification on September 2, 2005 by Philips that it hadceased sales activities with respect to the SenoScan product and that itintended to terminate the Philips Agreement should the Asset Sale be approvedby the Company’s stockholders and consummated. Fischer met with Philips inNovember 2005 to communicate that Fischer had retained the right perform itsobligations under the Philips Agreement but that, absent additional fundingfrom Philips, it did not have the financial ability to perform the PhilipsAgreement.  Philips subsequently offeredto settle the matter without litigation. However, in view of the financialsettlement proposed by Philips, Fischer declined Philips’ offer of settlementand referred Philips to the dispute resolution provisions of the PhilipsAgreement.  Fischer is unable to predictwhether Philips may file a suit or file a proof of claim with the BankruptcyCourt or the amount, if any, that may be demanded by Philips, or the expenserelated to defending any claim.  Fischerhas recognized a deferred liability for a customer deposit made by Philips inadvance of shipping two SenoScan products in the amount of $0.3 million.  Philips received one SenoScan unit that didnot meet the purchase order specifications and therefore, revenue recognitioncould not occur.  This finished goodsitem has been fully reserved since September 30, 2005 as the unit cannot beresold under the Asset Sale agreement. Any payments made by Fischer to or in connection with a claim by Philipsmay materially reduce amounts, if any, that may be available for satisfactionof creditor claims and distribution to Fischer’s stockholders.

**Contingent Claim**

 On June 7, 2005, the Securities and ExchangeCommission (“SEC”) filed a complaint in the United States District Court forthe District of Colorado (“SEC Lawsuit”) and asserted claims for variousviolations of the Securities Acts, including fraud, falsified books andrecords, deceit of auditors and false SEC filings against six former officersand directors of the Company (“Defendants”). Some or all of the Defendants have notified the Company of potentialclaims or may assert claims for advancement and/or indemnification relating to,without limitation: attorneys’ fees and costs (if any) incurred in the defenseof the SEC Lawsuit that have not been or will not be reimbursed pursuant toinsurance policies; any settlement of the claims asserted in the Lawsuit; orany judgment obtained in the SEC Lawsuit. The amount of such potential liabilities cannot be estimated at thistime and may materially reduce amounts,if any, that may be available for satisfaction of creditor claims anddistribution to Fischer’s stockholders.

**(11)   SUBSEQUENT EVENT**

Fischer sold its RE&S business to JN Propertieson November 1, 2006 pursuant to the RE&S Agreement and approval of theBankruptcy Court.  The assets sold were all of Fischer’s right,title and interest in and to the RE&S Assets.  Under the RE&S Agreement, JN Propertiesagreed, subject to the fulfillment of certain conditions, to purchase theRE&S Assets, and assume service contract and warranty repair obligations,for a minimum purchase price of $750,000, of which $590,000 has been receivedby November 1, 2006, and the remainder is to be paid over a period ending nolater than November 1, 2007.  Inaddition, JN Properties agreed to pay Fischer up to another $80,000 dependingon the number of Bloom units sold by JN Properties through November 1,2007.  Fischer will not recognize a gainon disposition of the assets as a result of the sale of its RE&S businessas the amount received equaled the book value of the asset sold and liabilitiesassumed.

 

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

**Cautionary Language**

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

·                  statementsregarding various estimates we have made in preparing our financial statements,

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

·                  our abilityto make distributions to stockholders; and

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

Theseforward-looking statements are subject to known and unknown risks anduncertainties that could cause actual results to differ materially from thoseanticipated.  Factors that could causeactual results to materially differ include, without limitation, our plans withrespect to a Liquidation Plan or conversion of the Chapter 11 case to Chapter 7case; the anticipated time it will take to complete the liquidation process,the likelihood that additional claims of which management is not aware mayarise, potential product defects or related performance resulting in productrecalls and significant liability and legal costs; and our ability to makedistributions to stockholders.  Otherfactors that could adversely affect our business are described in our RiskFactors described in our Annual Report on Form 10-K for the year ended December31, 2005 as revised by Part II, Item 1A Risk Factors of this Form 10-Q.  Except as otherwise required by law, weexpressly disclaim any obligation or undertaking to release publicly anyupdates or revisions to any such statements to reflect any change in ourexpectations or any change in events, conditions or circumstances on which anysuch statement is based.

**Critical Accounting Policies**

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

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

Our policy is to evaluatewhether there has been a permanent impairment in the value of long-lived assetswhen certain events have taken place that indicate that the remaining balancemay not be recoverable.  We evaluate thecarrying value of our property and equipment at the consolidated level since webelieve that is the lowest identifiable level of cash flows for these assets.  As a result of further declines in the stockprice and a decision to liquidate the remaining long-lived assets in ourbuilding, management determined a recoverability test should be completed as ofMarch 31, 2006.  Management has continuedto monitor whether additional tests were necessary during the nine-months endedSeptember 30, 2006.

Since the futureestimated cash outflows are currently estimated to be near zero, the carryingamounts of the assets exceeded the estimated undiscounted cash flows.  Management estimated the fair value of theassets by reviewing the value of the remaining businesses and other long-livedassets and determined an impairment had occurred.  Fair value of the long-lived assets wasdetermined through inquiry of advisors and comparison to other sales of fixedassets.  Therefore, an impairment oflong-lived assets of $0.2 million was recognized during the three-months endedMarch 31, 2006.  No changes in estimateshave occurred subsequent to March 31, 2006; thus no additional impairments havebeen required.

**Overview**

We service and sell products thatmeet selected needs of the radiology, electrophysiology and surgical markets(the “RE&S business”).  Our primaryfocus prior to the consummation of the Hologic Asset Sale on September 29, 2005(as discussed below) was designing, manufacturing and selling mammography anddigital imaging products and using our digital imaging technology in screeningand diagnostic mammograms and minimally invasive breast biopsy to aid in theearly

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identification of breast cancer. Prior to signing the KodakAgreements (as discussed below) on January 23, 2006, we also servicedmammography and digital imaging products used in the diagnosis of breast cancerand other diseases (the “Service” business”) as discussed in Note 1 of theaccompanying consolidated financial statements.

In September 2005, we consummatedthe sale (the “Asset Sale”) of all of our intellectual property rights relatedto our mammography business and products, including rights to our SenoScandigital mammography and MammoTest stereotactic breast biopsy systems (“MammographyAssets”) to Hologic, Inc. (“Hologic”). Hologic granted us a non-exclusive limited license to use certainMammography Assets necessary for us to continue our Service business; tofulfill contractual obligations to provide MammoTest and SenoScan systems toEthicon Endo-Surgery Europe (a subsidiary of Johnson & Johnson, Inc., “EES”)and Philips Medical Systems DMC GmbH (“Philips”), respectively; and to carryout certain activities with respect to our RE&S business.  As of May 31, 2006, no further revenue willbe generated from the intellectual property sold to Hologic.

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

*Service business. *On January 23, 2006, we entered into an Intellectual PropertyLicense Agreement and Services Agreement (together, the “Kodak Agreements”)with Eastman Kodak Company (“Kodak).  Asdiscussed further in Note 1 of the accompanying consolidated financialstatements, the Kodak Agreements allow Kodak to act as an authorized serviceprovider and provide service and support to the world-wide, excluding Mexico,installed base of Fischer’s mammography products.

*Sale of RE&S Business, Liquidation Planand Bankruptcy. * Asdiscussed in Note 2, on August 21, 2006, after the completion of an auctionprocess, we signed an Asset Purchase Agreement with Byers (the “Byers PurchaseAgreement”) for the purchase of all of our right, title and interest in and tothe RE&S business.  Under Delaware law, any saleof all or substantially all of our assets requires approval by ourstockholders.  The Board determined thatthe sale of the RE&S business and the signing of the Byers PurchaseAgreement were considered a sale of all or substantially all of our remainingassets.  In order to avoid the expense and time delay involved in securing thestockholder approval required to consummate the transaction under the ByersPurchase Agreement, we filed a petition under Chapter 11 of title 11 of theBankruptcy Code on August 22, 2006 as described in more detail in Note 2.  We immediately moved to have the saleapproved pursuant to Section 363(b) and (f) of the Bankruptcy Code.  In connection with this approval process, anauction was held in October 2006 in which another party submitted the winningbid.  As discussed more fully in Note 11,we signed an agreement to sell the RE&S business (“RE&S Agreement”) toJN Properties, LLC (“JN Properties”) and closed the transaction on November 1,2006.  JN Properties is a company whosemembers are Morgan Nields and Kinney Johnson. Morgan Nields is a substantial stockholder and former director, chairmanof the Board and chief executive officer of Fischer.  Kinney Johnson is a former director andpresident of Fischer.

The following adjustments will be recorded upon the sale of the RE&Sbusiness:

·                  Receipt of cash $590,000;

·                  Recognition of a current accounts receivablefor the minimum consideration of $160,000. The remaining contingent consideration will be recognized when, and if,additional deferred payments become due;

·                  Recognition of sale of Manufacturingequipment of $14,000;

·                  Recognition of sale of Inventories $836,000;

·                  Write-off of Deferred service revenue of$33,000, due to assumption of service contracts by JN Properties; and

·                  Write-off of Accrued warranties of $67,000assumed by JN Properties.

The factors listed above, amongothers, raise substantial doubt about our ability to continue as a goingconcern. The consolidated financial statements presented in this Form 10-Q, andthe accompanying discussion, do not include any adjustments that might resultfrom the outcome of this uncertainty.  Asa result of filing a petition under Chapter 11 of title 11 of the BankruptcyCode, our basis of accounting will change from the going concern basis to thatof the liquidation basis of accounting upon the approval by the Board ofDirectors of a liquidation plan or conversation to Chapter 7 of the BankruptcyCode. Under the liquidation basis of accounting, assets are stated at theirestimated net realizable value and liabilities are stated at their estimatedsettlement amounts, which estimates will be periodically reviewed and adjustedas appropriate. The valuation of assets at their net realizable value andliabilities at their anticipated settlement amounts represent estimates, basedon present facts and circumstances, of the net realizable value of assets andthe costs associated with carrying out our liquidation plan and dissolutionbased on certain assumptions.  Other thanthe write-down of approximately $0.9 million of prepaid insurance, managementcurrently estimates there would be no further material adjustments needed underthe liquidation basis.

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**Results of Operations**

       Thefollowing table sets forth the percentage of revenues represented by certaindata included in our statements of operations for the periods indicated:
|                                     | ** ** | **Three-months Ended** | ** ** | **Nine-months Ended** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                          | ** ** | **2006**                    | ** ** | **2005**                   | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                           |       |                        |       |                       |       |   |   |   |   |
| Product revenues                    |       | 68.0                        | %          | 70.3                       | %          | 62.7 | % | 71.3 | % |
| Service revenues                    |       | 32.0                        |       | 29.7                       |       | 37.3 |   | 28.7 |   |
| Total revenues                      |       | 100.0                       |       | 100.0                      |       | 100.0 |   | 100.0 |   |
| Cost of sales:                      |       |                        |       |                       |       |   |   |   |   |
| Products                            |       | (92.6                       | )          | 71.0                       |       | 51.9 |   | 71.9 |   |
| Services                            |       | 19.3                        |       | 26.9                       |       | 39.8 |   | 31.4 |   |
| Research and  development           |       | —                      |       | 5.8                        |       | — |   | 12.2 |   |
| Selling and  marketing              |       | —                      |       | 10.2                       |       | — |   | 13.9 |   |
| General and  administrative         |       | 95.2                        |       | 24.8                       |       | 25.8 |   | 20.8 |   |
| Impairment of  long-lived assets    |       | —                      |       | 6.0                        |       | 1.8 |   | 2.0 |   |
| Lease  termination fee              |       | —                      |       | 29.8                       |       | — |   | 10.2 |   |
| Gain on sale of  Mammography Assets |       | —                      |       | (238.1                     | )          | — |   | (81.9 | ) |
| Income (loss)  from operations      |       | 78.1                        |       | 163.6                      |       | (19.3 | ) | 19.5 |   |
| Other income  (expense), net        |       | —                      |       | (13.7                      | )          | (3.4 | ) | (8.0 | ) |
| Provision for  income taxes         |       | —                      |       | (1.5                       | )          | — |   | (0.5 | ) |
| Net income(loss)                    |       | 78.1                        | %          | 148.4                      | %          | (22.7 | )% | 11.0 | % |

 

**Product Revenues**

Total revenues decreased 96.6% to $0.5 million for thethree-months ended September 30, 2006 from $13.4 million for the three-monthsended September 30, 2005.  Productrevenues decreased 96.7% to $0.3 million in the three-months ended September30, 2006 from $9.4 million in the three-months ended September 30, 2005.

·                  SenoScandigital mammography product revenue during the three-months ended September 30,2005 was $3.2 million.  As a result ofthe Asset Sale, there was only one sale of a rental unit for $0.1 million inthe three-months ended September 30, 2006 and there will be no further sales ofSenoScan.

·                  Revenuesfrom our MammoTest breast biopsy products were $3.9 million in thethree-months ended September 30, 2005. The decrease in MammoTest productrevenue is a direct result of the Asset Sale. There will be no further sales of MammoTest.

·                  The RE&Sproducts revenues decreased $2.2 million to $0.2 million in the three-monthsended September 30, 2006 from $2.4 million in the three-months ended September30, 2005.  The sales decrease on RE&Sproducts in the three-months ended September 30, 2006, as compared to thethree-months ended September 30, 2005, was primarily due to a decrease in Bloomrevenues of $0.4 million and a $1.8 million volume decrease in VersaRad x-rayproducts as a result of the last time buy purchase order from Kodak which wascompleted in May 2006.  We expectrevenues for the three-months ending December 31, 2006 will be approximately $0.1 million, all of which occurred prior tothe November 1, 2006 sale of the RE&S Business.

Total revenues decreased 66.7% to $13.0 million forthe nine-months ended September 30, 2006 from $39.1 million for the nine-monthsended September 30, 2005.  Productrevenues decreased 70.7% to $8.2 million in the nine-months endedSeptember 30, 2006 from $27.9 million in the nine-months ended June 30,2005.

·                  SenoScandigital mammography product revenue during the nine-months ended September 30,2005 was $7.1 million.  As a result ofthe Asset Sale, there was only one sale of a rental unit and one new unit for atotal of $0.4 million in the nine-months ended September 30, 2006 and therewill be no further sales of SenoScan.

·                  Revenuesfrom our MammoTest breast biopsy products decreased 81.7% or $11.9 million to$2.7 million in the nine-months ended September 30, 2006 from$14.6 million in the nine-months ended September 30, 2005. The decrease inMammoTest product revenue is a direct result of the Asset Sale and a slightdecrease in average sales price as we completed the last time purchase orderfrom EES at prices lower than prior year. There will be no further sales of MammoTest.

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·                  The RE&Sproducts revenues decreased $1.1 million to $5.1 million in the nine-monthsended September 30, 2006 from $6.1 million in the nine-months ended September30, 2005.  The sales decrease on RE&Sproducts in the nine-months ended September 30, 2006, as compared to thenine-months ended September 30, 2005 was primarily due to volume decreases inEPX/SPX and Bloom of $1.7 million offset by a $0.7 million volume increase inVersaRad x-ray products as a result of the last time buy purchase order from Kodak...

**Service Revenues**

Our service revenues forthe three-months ended September 30, 2006 decreased 96.3% to $0.1 million from$4.0 million during the three-months ended September 30, 2005. The decreases inthe three-month period ended September 30, 2006 in relation to the comparableperiod in 2005 is primarily due to the cancellation of MammoTest and SenoScanservice contracts in both the U.S. and Europe and the lack of revenue fromEurope for the quarter due to the substantial completion of the liquidation ofour European subsidiaries in May 2006. In addition, all disposables revenue and time and material revenue from the Servicebusiness ceased as of January 23, 2006 in the U.S.  The entire service revenue in the thirdquarter of 2006 was generated from the RE&S product lines.  There will be no further revenue fromRE&S service contracts as a result of the sale of the RE&S business.

Our service revenues forthe nine-months ended September 30, 2006 decreased 56.8% to $4.8 million from$11.2 million during the comparable period in 2005. The decrease in thenine-month period ended September 30, 2006 in relation to the comparableperiods in 2005 is primarily due to a reduction of MammoTest and SenoScan unitson service contracts in both the U.S. and Europe, a result of cancellation ofservice contracts in the U.S. as customers purchased service contracts fromKodak and the lack of revenue from Europe for the period since May 4,2006.  In addition, all disposables revenueand time and material revenue from the Service business was ended as of January23, 2006 in the U.S.  RE&Sservice revenue in the nine-months ended September 30, 2006 was approximately$663,000.

**Cost of Sales—Products**

Cost of sales forproducts in the three-months ended September 30, 2006 was ($0.4) million,or 136.2% of product revenues, compared to $9.5 million, or 101.0% ofproduct revenues, in the three-months ended September 30, 2005. Cost of salesfor products in the three-months ended September 30, 2006 includes a reversalof excess and obsolete inventory reserves of approximately $0.1 million as aresult of the receipt of a purchase order from Siemens for the remainder of theexcess MammoTest service inventory and the increase in sales price for theRE&S assets of $0.5 million.  Thecost of sales for products in the three-months ended September 30, 2006excluding the charges related to the reserves would have been $0.2 million or35.4% of product revenues.  As a resultof additional analysis of remaining finished goods inventory related to theMammography Assets on hand at September 30, 2005, including loaners andrentals, an additional $0.7 million in a provision for excess and obsoleteinventories and $0.3 million related to customer commitment obligations wererecorded in the three-months ended September 30, 2005.  The cost of sales for products in thethree-months ended September 30, 2005 excluding the charges related to thereserves would have been $8.5 million or 90.2% of product revenues.  The overall remaining decrease in cost ofproduct sales as a percentage of product revenues is primarily due to change inmix.

Cost of sales forproducts in the nine-months ended September 30, 2006 was $6.7 million, or82.8% of product revenues compared to $28.1 million, or 100.8% of productrevenues, in the nine-months ended September 30, 2005. Cost of sales forproducts in the nine-months ended September 30, 2006 includes $0.6 million inrestructuring expense related to termination and retention arrangements, areversal of excess and obsolete inventory reserves of approximately $0.9million as a result of higher than expected revenues and the increase in salesprice for the RE&S assets and reversals of certain accruals for customercommitments of $0.4 million.  The cost ofsales for products in the nine-months ended September 30, 2006 excluding theseitems would have been $7.5 million or 92.0% of product revenues.  The reserve for excess and obsoleteinventories increased by $5.1 million in the nine-months ended September 30,2005.  In addition, cost of salesincluded $0.8 million in the nine-months ended September 30, 2005 for purchasecommitments that management estimated it was contractually liable to payrelated to excess inventories.  The costof sales for products in the nine-months ended September 30, 2005 excluding thecharges related to these reserves would have been $21.6 million, or 77.5% ofproduct revenues.  The overall remainingincrease in cost of product sales as a percentage of product revenues is primarilydue to lower than average sales price of the MammoTest product and higherwarranty costs due to outsourcing of service.

**Cost of Sales—Service**

Cost of sales forservices for the three-months ended September 30, 2006 decreased 97.6% to$0.1 million from $3.6 million in the three-months ended September30, 2005.  As a percent of servicerevenues, cost of service sales decreased to 60.3% in the three-months endedSeptember 30, 2006 from 90.6% in the three-months ended September 30, 2005.

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Approximately $2.5 million of the decrease in cost ofsales is due to reductions in headcount and related employee benefits. Fischerterminated the majority of its service employees on April 7, 2006 in the U.S.and April 30, 2006 in Europe.

Cost of sales forservices for the nine-months ended September 30, 2006 decreased 57.8% to$5.2 million from $12.3 million in the nine-months ended September30, 2005.  Approximately $6.0 million ofthe decrease in cost of sales is due to reductions in headcount and relatedemployee benefits and reimbursement from Kodak for a portion of service costsoffset by $0.7 million in restructuring expense related to termination andretention arrangements.

**Research and Development Expenses**

Research anddevelopment expenses decreased to zero in the three-months and nine-monthsended September 30, 2006 from $0.8 million and $4.8 million in thethree-months and nine-months ended September 30, 2005, respectively. Ourefforts prior to the Asset Sale were focused on redesigning older products forimproved reliability and serviceability and enhancing the features,functionality and reliability of the SenoScan product.

**Selling and Marketing Expenses**

Selling and marketingexpenses decreased to zero in the three-months and nine-months ended September30, 2006 from $1.4 million and $5.4 million in the three-months and nine-monthsended September 30, 2005, respectively. Effective June 30, 2005, we terminatedmarketing activity and associated personnel. Shortly before closing the Asset Sale, all sales personnel wereterminated as part of the restructuring plan, which accounts for the remainingreduction.

**General and Administrative Expenses**

General andadministrative expenses decreased 87.1% to $0.4 million in thethree-months ended September 30, 2006 from $3.4 million in thethree-months ended September 30, 2005. Our spending for legal costs and financial advisory services was $0.5million lower in the three-months ended September 30, 2006 as compared to thethree-months ended September 30, 2005 due the reduction of work related to theAsset Sale.  In addition, we experienced$0.3 million bad debt expense during the three-months ended September 30, 2005as a result of an inability to collect on certain accounts receivable, whichdid not reoccur in 2006.  Severanceaccruals related to terminations were recognized in the three-months endedSeptember 30, 2005 for approximately $0.3 million.  In addition, $0.2 million of expense relatedto retention agreements were recognized in the three-months ended September 30,2005.  The remaining change is due to headcountreductions which occurred in the last half of 2005 and during 2006.  Management estimates that general andadministrative costs for the three-months ending December 31, 2006 will be lessthan $0.3 million.

General andadministrative expenses decreased 59.0% to $3.3 million in the nine-monthsended September 30, 2006 from $8.1 million in the nine-months endedSeptember 30, 2005.  Our spending forlegal costs and financial advisory services was $1.4 million lower in thenine-months ended September 30, 2006 as compared to the nine-months endedSeptember 30, 2005 due the reduction of expenditures related to the Asset Saleoffset slightly by additional work related to the FTC and the settlement of alawsuit for less than the original accrual. In addition, we experienced $0.1 million and $0.6 million bad debtexpense during the nine-months ended September 30, 2006 and 2005, respectively,as a result of an inability to collect on certain accounts receivable.  The remaining change is due to headcountreductions which occurred in the last half of 2005 and during 2006.

**Impairment of Long-Lived Assets**

As discussed in Note 5 ofthe accompanying consolidated financial statements and Critical AccountingPolicies,****we recognized $0.2 million and $0.8million of impairment of long-lived assets in the nine-months ended September30, 2006 and 2005, respectively.

**Lease Termination Fee**

As discussed in Note 6 ofthe accompanying consolidated financial statements, we recognized the $4.0million payment as Lease termination fee in the three and nine-months endedSeptember 30, 2005.

**Gain on Sale of Mammography Assets**

On September 29, 2005 weclosed on the Asset Sale.  Upon closingof the transaction, we recognized a $32.0 million gain from the cash sale toHologic of our Mammography Assets.

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**Interest Expense/Interest Income**

Interest expense for thethree-months ended September 30, 2005 was $1.8 million and was related tointerest on the secured promissory notes entered into in the first quarter of2005 with ComVest, junior secured promissory note with Hologic and amortizationof the related debt issue costs.   Thesecured and junior promissory notes were paid off upon closing of the AssetSale.

Interest expense for thenine-months ended September 30, 2006 decreased to $69,000 from $3.1 million forthe nine-months ended September 30, 2005. The interest expense in the nine-months ended September 30, 2005 wasrelated to interest on the secured promissory notes entered into in the firstquarter of 2005 with ComVest, junior secured promissory note with Hologic andamortization of the related debt issue costs. Interest expense in thenine-months ended September 30, 2006 is related to interest payments made as aresult of settling certain state and local sales tax audits.

**Other Expense, Net**

Other expense, net forthe nine-months ended September 30, 2006 includes approximately $259,000 paidto or on behalf of our European subsidiaries to settle obligations related toour contract with EES for which our European subsidiary owed approximately$349,000.  In addition, we recognizedapproximately $75,000 of loss from substantial completion of the liquidation ofthe European subsidiaries in the nine-months ended September 30, 2006.

**Income Taxes**

We estimated that wewould not owe taxes for 2006. Accordingly, no income tax benefit or provisionwas recorded. This was determined based upon the anticipated 2006 results ofoperations and an available domestic net operating loss carry-forward of$32.4 million and $0.7 million of foreign net operating losscarry-forwards at December 31, 2005. As of September 30, 2006 we had a 100%valuation allowance against our deferred tax asset that resulted in a netdeferred tax asset of $0. In the prior year, we estimated that we would oweapproximately $0.2 million as a result of the Asset Sale.  During the fourth quarter of 2006, managementdetermined that no taxes would be owed and reversed the $0.2 million of incometax provision.

**Liquidity and Capital Resources**

As of September 30, 2006,we had $1.4 million in unrestricted cash and $1.6 million in working capitalcompared to $4.5 million in cash and $4.5 million in working capital atDecember 31, 2005.  The $2.9 million netdecrease in working capital is mainly the result of funding our operatinglosses, $1.5 million of which were due to restructuring expense recognizedduring the period, with the remainder due to funding operations.  In addition, we spent $1.0 million in cash topurchase directors and officer liability insurance run-off coverage during thefirst quarter of 2006.

A portion of the paymentsto be made under the termination and retention arrangements will be paid fromthe irrevocable Fischer Imaging Employee Trust (the “Trust”).  This Trust was established in 2006 for thespecific purpose of paying amounts owed under termination and retentionarrangements or general wages to employees. The Trust was funded on January 2,2006 with $600,000 of cash as authorized by the Board of Directors.  The Trust has funded $0.5 million intermination and retention arrangements through September 30, 2006.

Operations have beensignificantly reduced since May 31, 2006, when we completed production andexited our main operating facility.  Wecurrently have three employees.  Inaddition, we currently lease temporary office and warehouse space on amonth-to-month basis.

As of October 31, 2006,we had $1.4 million in unrestricted cash. On November 1, 2006, $590,000 of the $750,000 minimum cash expected fromthe sale of the RE&S Business to JN Properties was received.  We expect that the $2.1 million in cash will bespent on the following:

·                  settling currentliabilities subject to compromise,

·                  funding legalcosts to proceed through the bankruptcy process, and supporting the liquidationprocess,

·                  payment of othercosts related to bankruptcy such as liquidation fees, and

·                  paying administrative costs to windup operations.

Stockholders would onlyreceive a distribution after all assets have been liquidated and all creditorshave been paid in full.  Any distributionwill be made pursuant to the priorities set forth in the Bankruptcy Code.  Under the Bankruptcy Code, the distributionpriority generally is as follows: (i) secured creditors to the extent of thevalue of such creditor’s collateral;

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(ii) postpetition administrative creditors (e.g.,creditors who do business with the debtor after the filing of the bankruptcypetition and provide necessary goods and services), (iii) priority claims suchas unpaid prepetition wages and certain tax claims, (iv) unsecured creditorsincluding trade creditors and (v) stockholders. Under the Bankruptcy Code, noclass of claimants is entitled to a distribution unless the classes withgreater priority have been paid in full or have agreed to a differenttreatment.  We do not have secured creditors.

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

·                  approval of theLiquidation Plan under the Bankruptcy Code or convert the Chapter 11 case to aliquidating case under Chapter 7 of the Bankruptcy Code,

·                  determination ofany additional unknown or contingent claims through the bankruptcy process, and

·                  the impact of Philips’ actions withrespect to the Philips Agreement.

**Contractual Obligations**

As ofSeptember 30, 2006, we had no material contractual obligations.

**Backlog**

As of September 30, 2006,we had backlog of near zero consistent with the backlog as of December 31,2005.

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

**Interest Rate Risk**

At September 30,2006, we had approximately $1.2 million in certificate of deposits that earninterest at variable interest rates and are therefore subject to interest ratefluctuations.

**Item4.    Controls and Procedures**

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

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**PART II.OTHER INFORMATION**

**Item 1. Legal Proceedings:**

None.

**Item 1A. Risk Factors**

The following risks are no longer considered significant:

·                  We may be unable to fulfill last timepurchase orders from Kodak and EES at all or in a timely manner.

·                  Our vendors and suppliers may fail to delivercomponents for our products.

·                  Regulatory agencies could take adverse actionwhich could have an adverse impact on our ability to continue in operation.

·                  Our plans to liquidate and wind-up ourEuropean subsidiaries may require additional cash or may prevent us frommeeting our EES obligations.

·                  We may be unable to retain key employees.

·                  Failure to collect accounts receivable on atimely basis would materially adversely affect us.

·                  The RE&S auction process may not besuccessful.

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

All other risks remain unchanged.

The following are new risks:

**Lackof Segregation of Duties.**

During the three-monthsended June 30, 2006, a lack of segregation of duties was introduced due to thesignificant downsizing of staff in the organization in conjunction with thedownsizing of the Company.  In addition,the roles of Chief Executive Officer, Chief Financial Officer and Presidentwere granted to one individual effective October 1, 2006.  Certain duties are still segregated butothers cannot be segregated while the organization has three employees dealingwith general administrative and financial matters.  This normally constitutes a significantdeficiency in internal controls; however, management has determined thatconsidering the employees involved, the nature of the business operations beingconducted and the control procedures in place, the risks associated with suchlack of segregation of duties are insignificant and the potential benefits ofadding additional employees to clearly segregate duties do not justify theexpenses associated with such increases. The existence of this weakness and deficiency potentially subjects us toadditional risk that there may be material misstatements in the future as aresult of the misapplication of United States generally accepted accountingprinciples or the improper recording of our accounts from the lack ofsegregation of duties.

**Potentialclass action lawsuit.**

Historically, extraordinary corporate actions, such as the filing of apetition under the Bankruptcy Code and the related liquidation of the Company,often lead to securities class action lawsuits being filed against a company. Inthe event such litigation should occur, it is likely to be expensive and, evenif we ultimately prevail, the process will be time consuming and will requiresignificant management attention. If we do not prevail in any such lawsuit, wemay be liable for damages or we may be unable to complete some transactionsthat we contemplate as part of our liquidation plan. We cannot predict theoutcome or the amount of expenses and damages but the amounts could have amaterial adverse effect on our business, results of operations and financialcondition and the timing and amount of liquidating distributions to ourstockholders, if any.

**Contingent Claims**

On June 7, 2005,the Securities and Exchange Commission (“SEC”) filed a complaint in the UnitedStates District Court for the District of Colorado (“SEC Lawsuit”) and assertedclaims for various violations of the Securities Acts, including fraud,falsified books and records, deceit of auditors and false SEC filings againstsix former officers and directors of the Company (“Defendants”).  Some or all of the Defendants have notifiedus of potential claims or may assert claims for advancement and/orindemnification relating to, without limitation: attorneys’ fees and costs (ifany) incurred in the defense of the SEC Lawsuit that have not been or will notbe reimbursed pursuant to insurance policies; any settlement of the claimsasserted in the Lawsuit; or any judgment obtained in the SEC Lawsuit.  The amount of such potential liabilitiescannot be

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estimated at thistime and may materially reduce amounts, if any, that may be available forsatisfaction of creditor claims and distribution to our stockholders.

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

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

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

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

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

**Item 6. Exhibits:**

**(a)   Exhibits:**

The following is a listof exhibits filed as part of this Report on Form 10-Q.
| 10.1   | Asset Purchase Agreement by and between Fischer and  JN Properties dated November 1, 2006.                                                       |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1   | Certification of Paula L. Rosson, Chief Executive  Officer and President, 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.                         |
|   |                                                                                                                                             |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Date: November 9, 2006 | FISCHER IMAGING CORPORATION                                       |
|------------------------|-------------------------------------------------------------------|
|                   | /s/    Paula L. Rosson                                  |   |
|                   | Paula L. Rosson                                                   |
| * *               | *Chief  Executive Officer,Chief Financial Officer and  President* |

 

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EXHIBIT INDEX
| 10.1   | Asset Purchase Agreement by and between Fischer and  JN Properties dated November 1, 2006.                                                       |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1   | Certification of Paula L. Rosson, Chief Executive  Officer and President, 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.                         |

 

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