1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended April 30, 19971998
or

[ ] 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: 0-014940-28132

LANVISION SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Delaware 31-1455414
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

One Financial Way, Suite 400
Cincinnati, Ohio 45242-5859
(Address of principal executive offices) (Zip Code)

(513) 794-7100
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____

Number of shares of Registrant's Common Stock ($.01 par value per
share) issued and outstanding, as of June 2, 1997: 8,896,500.5, 1998: 8,806,000.

This report consists of 24 pages, and the Exhibit Index appears on page
21.

TABLE OF CONTENTS

Page
----

Part I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets at April 30, 19971998 and January 31, 19971998 . . . . . . . . . . 3

Condensed Consolidated Statements of Operations for the three months ended
April 30, 19971998 and 19961997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Condensed Consolidated Statements of Cash Flows for the three months ended
April 30, 1998 and 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . 17

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15. . . . 18

Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 18

Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . .19

Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 15. . . 19

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15. . . . 20

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3

PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

Assets

(Unaudited) (Audited)
April 30, January 31,
1997 1997
------------------ -----------------1998 1998
------------ -----------

Current assets:
Cash and cash equivalents $ 994,783 $ 664,2231,599,979 2,142,881
Investment securities 11,121,375 16,407,270313,729 5,074,258
Accounts receivable, net of allowance for doubtful
accounts of $220,000$280,000 and $205,000,$265,000, respectively 2,046,212 2,934,2303,329,023 2,992,987
Unbilled receivables 1,000,272 663,6261,786,325 1,135,365
Other 908,119 572,968
--------------- ---------------1,105,089 1,179,603
------------ -----------
Total current assets 16,070,761 21,242,3178,134,145 12,525,094

Property and equipment:
Computer equipment 1,828,063 1,536,5134,291,483 3,876,962
Computer software 221,569 173,359517,549 487,841
Office furniture, fixtures and equipment 1,011,513 962,8801,491,010 1,424,036
Leasehold improvements 280,736 267,244
--------------- ---------------
3,341,881 2,939,996997,141 931,020
------------ -----------
7,297,183 6,719,859
Accumulated depreciation and amortization (880,995) (687,832)
--------------- ---------------
2,460,886 2,252,164(1,990,825) (1,563,202)
------------ -----------
5,306,358 5,156,657
Investment securities 11,019,795 9,520,2794,445,492 3,834,908
Capitalized software development costs, net of accumulated
amortization of $563,563$711,896 and $533,563,$661,896, respectively 313,366 244,366661,034 612,033
Other 71,566 40,519
--------------- ---------------84,894 71,430
------------ -----------
$ 29,936,374 $ 33,299,645
=============== ===============18,631,923 22,200,122
============ ===========

See Notes to Condensed Consolidated Financial Statements.

LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

Liabilities and Stockholders' Equity

(Unaudited) (Audited)
April 30, January 31,
1997 1997
------------------ -----------------1998 1998
---------- ------------

Current liabilities:
Accounts payable $ 1,215,9481,159,541 $ 1,249,3371,631,941
Accrued compensation 502,610 555,235973,437 943,221
Accrued other expenses 976,244 1,073,1671,784,049 1,746,883
Deferred revenues 361,190 500,783
--------------- ---------------1,076,224 1,061,996
------------ ------------
Total current liabilities 3,055,992 3,378,522

Stockholders' equity:
Preferred4,993,251 5,384,041

Convertible redeemable preferred stock, $.01 par value per share
5,000,000 shares authorized no shares issued and outstanding - -

Stockholders' equity:
Common stock, $.01 par value per share, 25,000,000 shares
authorized, 8,896,500 shares issued and outstanding 88,965 88,965
Capital in excess of par value 35,110,817 35,110,817
Accumulated (deficit) (8,204,972) (5,359,265)
Unrealized net gains on investment securities, net of taxes 56,197 80,606
Treasury stock, at cost, 35,00090,500 shares (170,625) -
--------------- ---------------(430,188) (430,188)
Accumulated other comprehensive income 33,878 75,203
Accumulated (deficit) (21,164,800) (18,028,716)
------------ ------------
Total stockholders' equity 26,880,382 29,921,123
--------------- ---------------13,638,672 16,816,081
============ ============
$ 29,936,37418,631,923 $ 33,299,645
=============== ===============22,200,122
============ ============

See Notes to Condensed Consolidated Financial Statements.

LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended April 30,

(Unaudited)

Three Months Ended
-----------------------

1998 1997
1996
------------------ ---------------------- ----

Revenues:
Systems sales $ 1,170,5612,106,930 $ 1,674,3171,170,561
Service, maintenance and support 1,435,600 942,632
439,176
--------------- ---------------Service bureau operations 62,500 -
----------- -----------
Total revenues 3,605,030 2,113,193 2,113,493
--------------- ---------------

Operating expenses:
Cost of systems sales 778,721 629,528 996,884
Cost of service, maintenance and support 1,526,676 1,107,086
481,197Cost of service bureau operations 622,269 -
Selling, general and administrative 2,466,221 2,570,235 1,056,213
Product research and development 1,450,491 982,315
279,736
--------------- -------------------------- -----------
Total operating expenses 6,844,378 5,289,164
2,814,030
--------------- -------------------------- -----------
Operating (loss) (3,239,348) (3,175,971)
(700,537)
OtherInterest income (expense), including interest expense
of $79,684 in 1996103,263 330,264
(79,645)
--------------- ---------------
Net (loss) $ (2,845,707) $ (780,182)
=============== ===============

(Loss)----------- -----------
$(3,136,085) $(2,845,707)
=========== ===========

Basic net(loss) per common share $ (0.36) $ (0.32)
=========== ===========
Diluted net(loss) per common share $ (.12)
=============== ===============(0.36) $ (0.32)
=========== ===========

Number of shares used in per common share computationcomputations 8,806,000 8,886,388
6,404,694
=============== ========================== ===========

See Notes to Condensed Consolidated Financial Statements.

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LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended April 30,

(Unaudited)

1998 1997
1996
------------------ ----------------------------- ------------

Operating activities:
Net (loss) $(3,136,085) $ (2,845,707) $ (780,182)
Adjustments to reconcile net (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 477,623 223,163 31,817

Cash provided by (used for) assets and liabilities:
Accounts and unbilled receivables (986,996) 551,372 (295,705)
Other assets 74,514 (335,151) (620,371)
Accounts payable and accrued expenses (405,018) (182,936) 1,590,785
Deferred revenues 14,228 (139,593)
459,350
--------------- -------------------------- ------------
Net cash provided by (used for) operating activities (3,961,734) (2,728,852) 385,694

Investing activities:
Purchases of investment securities (3,610,144) (11,838,463) --
Sales of investment securities 7,718,764 15,600,433 --
Purchases of property and equipment (577,324) (401,885) (110,825)
Capitalization of software development costs (99,000) (35,000)(99,000)
Other (13,464) (31,048)
-
--------------- -------------------------- ------------
Net cash provided by (used for) investing activities 3,418,832 3,230,037 (145,825)

Financing activities:
Payments on line of credit, net -- (600,000)
Issuance of common stock -- 34,404,782
Purchase of treasury stock - (170,625)
--
--------------- -------------------------- ------------
Net cash provided by(used for) financing activities - (170,625)
33,804,782
--------------- -------------------------- ------------

Increase (decrease) in cash (542,902) 330,560
34,044,651
Cash and short term cash equivalents at beginning of period 2,142,881 664,223
--
--------------- -------------------------- ------------
Cash and short term cash equivalents at end of period $ 1,599,979 $ 994,783
$ 34,044,651
=============== ========================== ============

Supplemental cash flow disclosures:
Income taxes paid $ --- $ ---
Interest paid $ --- $ 79,684-

See Notes to Condensed Consolidated Financial Statements.

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LANVISION SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 - BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements have been
prepared by the Company without audit, in accordance with generally accepted
accounting principles for interim financial information, pursuant to the rules
and regulations applicable to quarterly reports on Form 10-Q of the Securities
and Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the Condensed Consolidated Financial Statements have been included. These
Condensed Consolidated Financial Statements should be read in conjunction with
the financial statements and notes thereto included in the LanVision Systems,
Inc. Annual Report on Form 10-K, Commission File Number 0-01494.0-28132. Operating
results for the three months ended April 30, 1997,1998, are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 31, 1998.1999.

Note 2 - CASH EQUIVALENTS

Short-term cash equivalents at April 30, 1997, consist of investments in money
market funds (which invests in U.S. Treasury Securities). For purposesSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Condensed Consolidated StatementsCompany's significant accounting policies is presented on page
18 of Cash Flows,its 1997 Annual Report to Stockholders. Users of financial information for
interim periods are encouraged to refer to the footnotes contained in the Annual
Report to Stockholders when reviewing interim financial results. There has been
no material change in the accounting policies followed by the Company considers all
highly liquid debt instruments with original maturities of three months or less
to be cash equivalents.during
1998.

Note 3 - PUBLIC OFFERING OF COMMON STOCK

On April 18, 1996, the Company issued 2,912,500 Shares of Common Stock in an
Initial Public Offering. The net proceeds to the Company, before expenses, was
$35,211,147.

Note 4 - CHANGES IN ACCOUNT BALANCES

Other income (expense), net consists primarily of interest income on
investments during the first quarter of fiscal 1997, and interest expense on
outstanding indebtedness, prior to the initial public offering, in the first
quarter of fiscal 1996.

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8

Other current assets consist primarily of prepaid insurance, prepaid
commissions, and acquired software and hardware awaiting installation at customer sites.installation. The
increasedecrease at April 30, 1997,1998, results primarily from the delivery of third party
software acquired prior to installation.

The decrease in cash and cash equivalents and investment securities results from
the acquisitionsale of investments and use of cash to fund current operations and purchase
additional fixed assets.

Interest income consists primarily of interest on investment securities. The
decrease in interest income results from the sale of investment securities to
fund operations and acquire fixed assets.

The increase in accounts receivable is the result of higher sales volume during
the first quarter.

The increase in unbilled receivables results from the progress billing terms and
conditions of the sales agreements and the associated revenue recognized during
the recent quarter.

The decrease in accounts payable is due to a reduction in purchases of hardware
and third party software purchased, latefor resale and reduced levels of capital expenditures
in the first quarter for installation at customer sites and
increases in prepaid insurance.

The decrease in deferred revenue relates primarily tocompared with the recognition, as
revenue during the quarter, of a previously deferred software development
porting fee until the completion of the program.prior quarter.

Note 54 - EARNINGS PER SHARE

On April 18, 1996, the Company issued 2,912,500 shares of Common Stock in an
Initial Public Offering and issued 1,496,000 common shares upon conversion of
the Company's Convertible Redeemable Preferred Stock. (See Note 3.) Per share
data and numbers of common shares contained in these Condensed Consolidated
Financial Statements and in Management's Discussion and Analysis of Financial
Condition and Results of Operations reflect the 4,408,500 shares issued.

The basic (loss) per common share is calculated using the weighted average
number of common shares outstanding during the quarter. During the first quarter of
fiscal 1996, the common shares outstanding (6,404,694), assumes the conversion
of the Convertible Redeemable Preferred Stock to 1,496,000 shares of Common
Stock, on an if converted basis as of the beginning of the quarter, and the
issuance of 2,912,500 common shares on April 18, 1996, the date of the Initial
Public Offering.period.

The diluted (loss) per common share calculation, excludes the effect of the
common stock equivalents (stock options) as the inclusion thereof would be
antidilutive.

In February, 1997,Note 5 - COMPREHENSIVE INCOME

The Company has adopted the Financial Accounting Standards Board issuedprovisions of Statement of Financial Accounting
Standards No. 128, Earnings per Share. Currently management is
assessing130, Reporting Comprehensive Income. Accordingly, the effect ofCompany has
accounted for the unrealized holding gains on available-for-sale securities in
accordance with this pronouncement on its calculation of earnings per
share. However, it does not appearnew accounting standard, as follows:

Quarter ended April 30,
--------------------------
1998 1997
----------- -----------

Net (loss) $(3,136,085) $(2,845,707)

Unrealized holding (losses)
arising during the pronouncement will have any material
effect upon the previously reported earnings per share of the Company.period (3,811) (2,328)

Reclassification adjustment for
gains included in Net (loss) (37,514) (22,081)
=========== ===========
Comprehensive (loss) $(3,177,410) $(2,870,116)
=========== ===========

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

In addition to historical information contained herein, this Discussion and
Analysis contains forward-looking statements. The forward-looking statements
contained herein are subject to certain risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements, including those discussed below. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly release the results of any revision to these forward-looking statements
which may be made to reflect events or circumstances after the date hereof or to
reflect the occurrence of unanticipated events.

RESULTS OF OPERATIONS:

GENERAL

LanVisionLanVision(TM) is a leading provider of healthcare information access systems and
outsourced data center operations that enable hospitals and integrated
healthcare networks to capture, store, manage, route, retrieve and process vast
amounts of clinical and financial patient information. The Company's systems
deliver on-line enterprise-wide access to fully-updated patient information
which historically was maintained on a variety of media, including paper,
magnetic disk, optical disk, x-ray film, video, audio and microfilm. LanVision's
systems, which incorporate data management, document imagingimaging/management and
workflow technologies, consolidate patient information into a single repository
and provide fast and efficient access to patient information from universal
workstations located throughout the enterprise, including the point of patient
care. The systems are specifically designed to meet the needs of physicians and
other medical and administrative personnel and can accommodate multiple users
requiring simultaneous access to patient information, thereby eliminating file
contention. By providing access to all forms of patient information, the Company
believes that its healthcare
information access systemsHealthcare Information Access Systems are essential components
of the computer-based patient record.

The Company's revenues are derived fromfrom: the licensing and sale of systems
comprised of internally developedcomprising LanVision software third partyand third-party software and hardware and from professional services,components;
product support, maintenance and support services. The
professional services; and service bureau
operations (outsourced data center operations). Professional services include
consulting, implementation and training, project management and custom software development
and currently are provided only to the company'sCompany's customers with installed
systems or who are in the process of installing systems. Revenues from
professional services, maintenance and support services, typically are expected
to increase as the number of installed systems increases, although theincrease. The Company earns its
highest margins on theseproprietary LanVision software and the lowest margin is on
third-party hardware. Systems sales to customers may include differing
configurations of software and hardware, resulting in varying margins among
contracts. The margins on professional services revenues are expected to
fluctuate based upon the negotiated terms of the agreement with each customer
and the Company's ability to fully utilize its professional services,
maintenance and support services staff. The highest margin on systems sales is
on proprietary software with lower margins on thirdRevenues from the Company's service
bureau operation, which provides high quality, transaction-based document

party hardwareimaging/management services from a central data center, commenced in the first
quarter of fiscal 1998 and software.are expected to increase as the number of hospitals
outsource services to the Company's Virtual Healthware Services division (VHS).
Additionally, revenue from each VHS customer is expected to increase as the
volume of archived historical data increases and retrievals of data increases as
the systems are fully implemented within a healthcare facility.

Sales are made by the Company's direct sales force and through Healthcare
Information Access Systems distribution partners.

On February 23, 1998, the Company entered into a Remarketing Agreement with
Shared Medical Systems Corporation ("SMS"). Under the terms of the agreement,
SMS was granted an exclusive worldwide license to distribute ChartVision(R),
On-Line Chart Completion(TM) and Enterprisewide Correspondence(TM) to the SMS
customer base and prospect base, as defined in the agreement, and a
non-exclusive license to distribute all other LanVision products. If SMS
distributes any other electronic medical record product competing with
LanVision's products, the Company may terminate the SMS Remarketing Agreement.

SMS indicates it has over 1,800 customers in the United States and a total of
3,500 customers in 20 countries and territories in North America and Europe. The
large Healthcare Information Access Systems providers, such as SMS, are often
able to positively influence the buying decisions within their customer base.
LanVision management believes the distribution of its products by SMS will
shorten sales cycles and increase revenues. Although SMS has already begun to
any given customer may include
differing configurationsactively promote LanVision's products, the full impact of softwarethis distribution
agreement will likely not be realized until later in fiscal 1998 or early 1999
as more of the SMS organization is trained to sell and hardware, resultingimplement the LanVision
products.

In 1996, the Company entered into a non-exclusive Remarketing Agreement with
Lanier Worldwide, Inc. (Lanier). Under the terms of the Agreement, Lanier was
entitled to market and distribute ChartVision, On-Line Chart Completion and
related products throughout North America. Through April 30, 1998 Lanier had
licensed the Company's products to two customers. The original Agreement has
expired, and the terms of the SMS Agreement prohibit renewing the Agreement
under the previous terms. At this time, it does not appear the Company will
renew the Agreement with Lanier.

LanVision also maintains Joint Marketing Agreements with, among others, 3M
Health Information Systems, Daou Systems, Inc. and Olicon Imaging Systems, Inc.
To date, these marketing relationships have not contributed to the Company's
revenues. However, management expects these relationships will contribute to
revenue growth in varying margins
among contracts.the future.

The decision by a healthcare provider to replace, substantially modify or
upgrade its information systems is a strategic decision and often involves a
large capital commitment requiring an extended approval process. TheThroughout
1996, 1997 and the first quarter of 1998, the Company has experienced extended
sales cyclecycles. It is common for the Company's systems have typically takensales cycles to take six to eighteen

months or
sometimes longer, from initial contact to the execution of a salesan agreement. As a result, the
length of the sales cycle causescycles can cause significant variations in quarter to quarter results.
SalesFurthermore, healthcare organizations are assessing and implementing many new
technology solutions, and Year 2000 compliance, and although many of these
systems do not compete with the LanVision product suites, these systems do
compete for capital dollars and the available time of information system
personnel within the healthcare organizations. The agreements cover the entire
implementation of the systemssystem and specify the implementation schedule, which
typically takes place in
one or more phases. The agreements generally provide for the
licensing of the Company's proprietary software and third partythird-party software with a
one-time perpetual license fee that is adjusted depending on the number of
workstations using the software. Third partyThird-party hardware is usually sold outright, with a
one-time fee charged for installation and training. Specific softwareSite-specific customization,
development of interfaces towith existing customer systems and other professionalconsulting services are sold
on a fixed fee or a time and materialmaterials basis.

LanVision enters intoGenerally, revenues from systems sales is recognized when a purchase agreement
is signed and products are shipped. Revenues from the service elements of a
contract including: routine installation, integration, project management,
interface development, training, etc. are deferred until the work is performed.
If an agreement requires the Company to perform services and modifications that
are deemed significant to system acceptance, revenue is recorded either on the
percentage-of-completion method or revenue related to the delivered hardware and
software components is deferred until such obligations are completed, depending
on the contractual terms. Revenues from maintenance and support agreements with its customers to specify:is
recognized ratably over the scopeterm of the systemsagreements. Billings to be installed and services to be provided by LanVision, the
agreed upon aggregate price and the preliminary timetable for implementation.
The sales agreement typically provides that the Company will deliver the
systems in phases pursuantcustomers
recorded prior to the customer's purchase orders, thereby allowingrecognition of the customer flexibility inrevenue are classified as deferred
revenues. Revenue recognized prior to progress billings to customers is recorded
as unbilled receivables.

YEAR 2000 COMPLIANCE

The Year 2000 issue is the timingresult of its receipt of systems andcomputer programs being written using two
digits rather than four digits to make
adjustments that may arise upon changes in technology or changes in customer
needs. Somedefine the applicable year. Any of the
Company's sales agreements provedinternal use computer programs and its software products that are data
sensitive may recognize a date using "00" as the Year 1900 rather than the Year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or engage in normal business activities.

Based on a preliminary assessment, the Company has determined that it will be
required to modify or replace some of its internal use software as well as
modify certain existing products so that the customer may
terminatesoftware will function properly
with respect to dates in the Year 2000 and thereafter. The Company presently
believes that with modifications to these products and conversions to new
internal use software, the Year 2000 issue will not pose significant operational
problems for the Company or its agreement uponcustomers. However, if such modifications and
conversions are not made, or not completed timely, the Year 2000 issue could
have a material breach byimpact on the Company may delayand its customers. The Company has
warranted, to certain aspectscustomers, that its products will be Year 2000 compliant.

The Company has initiated formal communication with its vendors to determine the
extent to which the Company's software products are vulnerable to those third
parties' failure to correct their own Year 2000 issues. Generally, software
provided by third parties and included in the Company's systems is developed by
leading software suppliers with Year 2000 programs underway. There can be no
guarantee that the software of other companies, on which the Company's systems
rely, will be timely converted. However, management believes the Company has
alternative courses of action designed to ensure internal and customer
operations are not materially affected in an adverse manner.

The Company will utilize both internal and external resources to reprogram, or
replace and test its software products for the Year 2000 modifications. The
Company anticipates completing the Year 2000 project as soon as practical but
not later than January 1, 1999, which is prior to any anticipated impact. The
total cost of the installationYear 2000 project has currently not been determined, but will
be funded through existing cash resources and may terminatefuture operating cash flows. The
requirements for the agreement atcorrection of Year 2000 issues and the customer's discretion without penaltydate on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates which were derived utilizing numerous assumptions of
future events including the continued availability of certain resources, third
party modification plans and without regard to the Company's
performance. The sales agreements also allows the customer to request
additional components as the installation progresses, which additions are then
separately negotiated as to price and terms. Historically, customers have
ultimately purchased systems and services in addition to those originally
contemplated by the original sales agreement, althoughother factors. However, there can be no assuranceguarantee
that these estimates will be achieved and actual results could differ materially
from those anticipated. Specific factors that may cause such material
differences include, but are not limited to, the availability of personnel
trained in this trend will continue inarea, the future.ability to locate and collect all relevant computer
codes and similar uncertainties.

UNEVEN PATTERNS OF QUARTERLY OPERATING RESULTS

The Company's revenues from systems sales have varied, and may continue to vary,
significantly from quarter to quarter as a result of the volume and timing of
systems sales and delivery. Professional services revenues also fluctuate from
quarter to quarter as a result of the timing of the installation of software and
hardware, project management and customized programming. Revenues from
maintenance services do not fluctuate significantly from quarter to quarter, but
have been increasing as the number of customers increase. Revenues from VHS
services which commenced operations in the first quarter, are expected to
increase over time, as more hospitals outsource services to VHS, and existing
customers increase the volume of documents stored on the systems and the number
of retrievals increase from the ever increasing data base of stored documents.
Because a significant percentage of the Company's operating costs are expensed
as incurred, a variation in the usage of VHS services, the timing of systems
sales and installations and the resulting revenue recognition, can cause
significant variations in operating results from quarter to quarter. Accordingly, the Company believes that
quarter-to-quarter comparisons of its revenues and operating results from the
above factors and the significant

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11

expansion of operations, as discussed below, may not necessarily be meaningful
and should not be relied upon as indicators of future performance.

Generally, revenue from systems sales is recognized when a sales agreement
is signed and products are shipped. Revenue recognition related to routine
installation, integration and other insignificant obligations is deferred until
the work is performed. If an agreement requires the Company to perform services
and modifications that are deemed significant to system acceptance, revenue
related to the delivered hardware and software components is deferred until
such obligations are deemed insignificant. Revenue from consulting, training
and implementation services is recognized as the services are performed.
Revenue from short-term support and maintenance agreements is recognized
ratably over the term of the agreements. Because the progress billing terms and
conditions of the agreements often do not coincide with the revenue
recognition, billings to customers prior to the recognition of the revenue are
classified as deferred revenue. Revenue recognized prior to progress billings
to customers is recorded as unbilled receivables.

The Company's revenues and operating results may vary significantly from quarter
to quarter as a result of a number of other factors, many of which are outside
the Company's control. These factors include the relatively large sizehigh purchase price
of sales agreements,a LanVision document imaging and workflow

system, unpredictability in the number and timing of systems sales, length of
the sales cycle, delays in the installation process and changes in the
customer's financial condition or budget. As a result, period to period
comparisons may not be meaningful with respect to the past operations of the
Company nor are they necessarily indicative of the future operations of the
Company.

REVENUES:

Revenues for the first fiscal quarter ended April 30, 1997,1998, were $2,113,193$3,605,030
compared with $2,113,493$2,113,193 in the comparable quarter of 1996. There were two new sales
agreements executed with new customers during1997.

During the first quarter, of 1997
(Memorial Sloan-Kettering Cancer Center of New York City and Lakelandthe Company signed one contract with Christiana Care
Health Services, for its Highland Park Hospital,of which approximately $650,000 of revenue from this contract
was recognized in Highland Park, IL) which two new
agreements contributed approximately $900 thousand inthe first quarter. The remaining systems sales revenues during
the three
months ended April 30, 1997. Portions of these new agreements will be
implemented in future periods. The remaining revenuequarter came from implementation of previously signed agreements (backlog)
and from add-on sales to existing customers. During the first quarter the
Company's newly formed Virtual Healthware Services (VHS) division began
operations.

As previously discussed, after a salesan agreement is executed, LanVision does not
record revenues until it ships the hardware and software or performs the agreed
upon services. The commencement of revenue recognition varies depending on the
size and complexity of the system and the scheduling of the implementation,
training, interface development and other services requested by the customer.
Accordingly, significant variations in revenues can result as more fully
discussed under "Uneven Patterns of Quarterly Operating Results." Three
customers, including the two new customers
mentioned above,Christiana Care Health Services, accounted for
approximately 47% of the revenues for the first quarter of 1998 and three
customers accounted for 59% of the revenues for the first quarter of 1997 and three customers accounted for 90% of the revenues for the
first quarter of 1996.

11
121997.

OPERATING EXPENSES:

Cost of System Sales

The cost of systems sales includes amortization of capitalized software
development costs on a straight-line basis, royalties and the cost of third
party software and hardware. Cost of systems sales as a percentage of systems
sales may vary from period to period depending on the mix of hardware and
software configuration of the systems sold.or add-on sales delivered. The cost of systems sales as
a percentage of systems sales for the first quarter of 1998 and 1997 were 37%
and 1996 were 54% and 59%, respectively. The lower cost reflects the higher mix of LanVision
software with higher margins relative to the hardware and third party software
components with lower margins and higher costs.

Cost of Service, Maintenance and Support

The cost of service, maintenance and support includes compensation and benefits
for support and professional services personnel and the cost of third party
maintenance contracts. As a percentage of service, maintenance and support
revenues, the cost of such service, maintenance and support was 117%106% and 109%117%
for the first quarter of fiscal 19971998 and 1996,1997, respectively.

The service, maintenanceLanVision Customer Support existing staff, including management is necessary
and sufficient to support the existing customer base. However, increases in
customers will not require a proportioned increase in support staffing or total
support costs. Accordingly, margins are expected to improve as more customers
are added. Additionally, the Company's support margins are highest on
LanVision's proprietary software. Accordingly, margins are expected to improve
as the Company licenses more of its software.

The LanVision Professional Services staff consisted of thirty personsprovides services on a time and
material or fixed fee basis. The Professional Services staff has experienced
some inefficiencies in the first quarterdelivery of 1997 compared with fifteenservices, and certain projects have taken
longer to complete than originally estimated, thus adversely affecting operating
performances. Management believes the increase in the comparable prior quarter.
LanVision'sexperience of its Professional
Services staff and support staffs were expanded, subsequent
to the initial public offering,increase in anticipationbacklog should improve the overall efficiency
and operating performance of increases in systems sales.
The number of new systems sales has been less than expected, and accordingly,
the billable hours have been less than the Company's internal plan.this group.

Selling, General and Administrative

Selling, General and Administrative expenses consist primarily of: compensation
and related benefits and reimbursable travel and living expenses related to the
Company's sales, marketing and administrative personnel; advertising and
marketing expenses, including trade shows and similar type sales and marketmarketing
expenses; and general corporate expenses, including occupancy costs. During the
first quarter of fiscal 1997,1998, selling, general and administrative expenses
increaseddecreased to $2,570,235$2,466,221 compared with $1,056,213$2,570,235 in the comparable prior
quarter. During the second through fourth quarters of fiscal 1996, the company
significantly expanded its directThe Company has continued to invest in sales and marketing and indirect sales
operations, including the infrastructure necessaryactivities,
ahead of revenues to support its anticipated
future operations, in order to take advantageensure that LanVision develops a pipeline of the growth market
opportunities in the healthcare information systems market. At the end of the
first quarter of 1997, the selling, general and administrative staff consisted
of 51 persons compared with 16 persons at the end of the first quarter of 1996.
Additionally, expenses for advertising, trade shows and other marketing
programs for the first quarter of fiscal 1997, were approximately $ 180,000
greater than the first quarter of fiscal 1996. Selling, general and
administrative expenses includes $ 180,000 in the first quarter of fiscal 1997,
related to an employee severance agreement.qualified
prospects.

Product Research and Development

12
13

Product research and development expenses consist primarily of: compensation and
related benefits; the use of outsideindependent contractors for specific development
projects; and an allocated portion of general overhead costs, including
occupancy. At April 30, 1996,1998, the product research and development staff
consisted of twenty-five
personstwenty-nine employees compared with ten personstwenty-five employees at April
30, 1996. In addition,1997. However, the Company has increased substantiallysupplemented its development staff through
the use of independent contractors and software development firmsfirms. Research and
development expenses in the first quarter of fiscal 1998 increased by $468,176
to supplement$1,450,491 as a result of stepped-up development efforts related to the internalmany
new products recently released. Over the last

14
15

several months LanVision released upgrades to ChartVision and provided the
general release of On-Line Chart Completion, Enterprisewide Correspondence,
OmniVision(TM), WebView(TM), and our new Document Capture System(TM) modules.
These new releases have enabled LanVision to offer an expanded product portfolio
to new customers and allowed existing customers to expand their use of the
LanVision systems. Because the majority of the major research and development
staff. The
majority ofprojects have been completed, the Company believes it will be able to reduce its
product research and development expenses forin the current quarter
relate to: the continued enhancement and increased functionality of
ChartVision(R) and development of version 2 of AccountVision(TM); the
development of new products to expand the breadth of the product portfolio,
including VisionFlow(R) for electronic document routing and management tools to
support business process reengineering, On-Line Chart Completion(TM) which
automates the identification of deficiencies in patient charts and automatic
routing to appropriate personnel for on-line processing and completion,
MultiView(TM) , an add-on module to ChartVision to enable the display of
multiple documents and enable users to pre-define search criteria and tailor
data, Correspondence module to fulfill requests for information by allowing
electronic searches and distribution of patient information and OmniVision(TM),
an image enabling and workflow technology software that allows access to
information through existing hospital applications.coming quarters. The Company capitalized, in
accordance with Statement of Financial Accounting Standards No. 86, $99,000 and
$35,000 of
product research and development costs in the first quarterthree months of fiscal 19971998
and 1996, respectively.1997. It is also expected that Research and Development costs should decline
in future periods as major development projects are completed.

Net loss

The net loss for the first fiscal quarter of 19971998 was $2,845,707$3,136,085 ($.32).36) compared
with a net loss of $780,132$2,845,707 ($.12).32) in the first quarter of 1996.1997. The increased
operating loss is primarily due to the significant expansionto: start-up operating expenses of the Company
discussednew VHS Service
Bureau; increased Research and Development necessary to accelerate the
completion of new products; and lower interest income on investments which were
sold to fund operations and acquisition of fixed assets.

In spite of the less than anticipated number of new customer agreements signed
in the previous paragraphspast year, management continues to believe that the healthcare document
imaging and fewer new systems sales than expected.workflow market is going to be a significant market. Management
believes it has made the investments in the talent and technology necessary to
establish the Company as a leader in this marketplace, and continues to believe
the Company is well positioned to experience significant revenue growth.

Since commencing operations in 1989, the Company has from time to time incurred
operating losses. Although the Company achieved profitability in fiscal years
1992 and 1993, the Company incurred a net loss in fiscal years 1994, 1995, 1996
and 1996.1997. In view of the Company's prior operating history, there can be no
assurance that the Company will be able to achieve consistent profitability on a
quarterly or annual basis or that it will be able to sustain or increase its
revenue growth in future periods. Based upon the expenses associated with
current and planned staffing levels, profitability is dependent upon increasing
revenues.

LIQUIDITY AND CAPITAL RESOURCES

OnSince its inception in 1989, LanVision has funded its operations, working
capital needs and capital expenditures primarily from a combination of cash
generated by revenues from operations, borrowings, a 1994 private placement of
convertible redeemable preferred stock and an initial public offering which
raised approximately $34,000,000, net of the underwriting discount and expenses,
through the issuance of 2,912,500 shares of common stock on April 18, 1996, the Company, in its Initial Public Offering, issued
2,912,500 Shares of Common Stock, with net proceeds to the Company, before
expenses, of $35,211,147. The Company has no significant obligations for
capital resources other than operating leases for the existing facilities. It
is expected that existing cash and cash equivalents, and investment securities,

131996.

as well as cash provided from operations, will be sufficient to meet
anticipated cash requirements, including the planned expansion of staff and
office facilities.16

The Company's customers typically have been well-established hospitals or
medical facilities with good credit history,histories, and payments have been received
within normal time frames for the industry. Sales agreementsAgreements with customers often
involve significant amounts, and contract terms typically require customers to
make progress paymentspayments.

The Company has no significant obligations for capital resources, other than
noncancelable operating leases in the total amount of approximately $2,500,000,
payable over the next six years. However, the VHS service bureau operation will
need to acquire additional software and equipment as VHS adds additional
hospitals and clinics to its customer base. The centralized data center has been
originally configured to serve approximately fifty hospitals, with significant
expansion capabilities. However, for each customer, VHS establishes one or more
onsite document capture centers and provides the equipment. Each document
capture center is expected to require at least $125,000 of equipment. Also,
because VHS charges for its services on a per transaction basis, LanVision's
cash flow for capital and operating expenses will normally be greater than cash
inflows until customers begin to use the system at anticipated normal volumes
for a period of time.

In March, 1997, the Company's Board of Directors authorized management, at its
discretion, to repurchase shares of the Company's common stock of up to
$1,000,000 in value on the open market. To date, the Company has acquired 90,500
shares at a cost of $430,188.

Over the last nine quarters, the Company's revenues have been less than the
Company's internal plans. However, during the same time period, the Company has
expended significant amounts for capital expenditures, product research and
development, sales, support and consulting expenses as the Company expanded its
operations in anticipation of significant revenue growth. This has resulted in
significant net cash outlays over the last two years. Currently, management
intends to continue to maintain its operations, except for the reduction of
Research and Development expenses as previously discussed, at an expenditure
level similar to fiscal 1997, and may expand operations in connection with
increased revenue opportunities. Accordingly, to achieve profitability, and
positive cash flow, it is necessary for the Company to increase revenues.
Management believes that the recent general release of the products described
above under "Product Research and Development" has significantly strengthened
the product portfolio. Additionally, the SMS Remarketing Agreement has
significantly expanded the sales distribution capabilities, and management
believes that market opportunities are such that the Company should be able to
significantly increase its revenues in fiscal 1998. However, there can be no
assurance the Company will be successful in increasing its revenues. At April
30, 1998, the Company had cash and investments of $6,359,200. Investments
consist primarily of U.S. Government obligations with maturities ranging from
one month to thirty months.

At April 30, 1998, the Company has no outstanding borrowings. However, during
1998, management intends to secure between $5 million and $10 million of
borrowings or equity financing to help finance its operating and previous and
anticipated capital expenditures. The Company is currently negotiating terms of
financing with interested parties. Management believes

existing cash balances and investment securities, anticipated borrowings or
equity financing and revenues from operations will be sufficient to meet its
liquidity and capital spending requirements. However, in the event revenues do
not increase or financing is not secured over the next two quarters, management
may need to significantly reduce and/or defer operating and capital
expenditures, and which if required, these actions could have an adverse affect
on future operating performance.

To date, inflation has not had a material impact on the Company's revenues or
income.

SIGNED AGREEMENTS - BACKLOG

At April 30, 1997,1998, the Company's customers had entered into sales agreements for
systems and related services (excluding support and maintenance)maintenance, and transaction
based revenues for VHS) which had not yet been delivered, installed and accepted
which, if fully performed, would generate sales of approximately $8,163,000.$8,240,000. See
"Results of Operations: General" for a description of the Company's agreements
with customers. The systems and services related to the agreements are expected
to be delivered or performed, based upon customer implementation schedules, over
the next two to three years.

Of the backlog at
April 30, 1997, the Company has received purchase orders for approximately
$3,490,000 of systems and services (excluding maintenance).

In addition, theThe Company's sales agreements also generally provide for an initial maintenance
period and give the customer the right to subscribe for maintenance services on
a monthly, quarterly or annual basis.

14In addition, the VHS division has entered into two agreements which are expected
to generate revenues, starting in fiscal 1998, in excess of $7,000,000 over the
first three years of operations.

Item 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company invests its cash balances, in excess of its current needs, in U.S.
Government Securities. The Company does not invest for the purposes of trading
in securities, however, the portfolio is managed and invested for maximum return
on the investment. The marketable securities at April 30, 1998, which are
recorded at a fair value of $4,759,221 and include unrealized gains of $33,878,
have exposure to price risk. This risk is estimated, absent any economic
justification for the selection of a different amount, as the potential loss in
fair value resulting from a hypothetical 10% adverse change in price quoted by
dealers and amounts to $475,922.
Actual results may differ.

The fair market values of investment securities are based on the quoted market
prices at the reporting date for those investments. The estimated fair market
value of investment securities by contractual maturity at April 30, 1998 is as
follows: $313,729 in 1998, $2,394,476 in 1999, and $2,051,016 in 2000.

17
1518

Part II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

The Company is not currently engaged in any litigation.

Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(d) Use Of Proceeds from Public Offering

(1) Effective date of the Registration Statement (Commission File Number
2-01494) for which Use of Proceeds information is provided is April
17, 1996.

(2) The offering date of the Registration Statement was April 18, 1996.

(3) The Managing Underwriters were:

Jefferies & Company, Inc.
Unterberg Harris
McDonald & Company Securities, Inc.

(4) The Securities Registered was - Common Stock, $.01 Par Value.

(5) Aggregate offering price of securities registered and sold to date
for the account of:

Issuer -
Amount Registered 2,912,500 Shares
Aggregate Price of Offering Amount Registered $37,862,500
Amount Sold 2,912,500 Shares
Aggregate Offering Price of Amount Sold $37,862,500

Selling Security Holders -
Amount Registered 750,000 Shares
Aggregate Offering Price of Amount Registered $9,750,000
Amount Sold 750,000 Shares
Aggregate Offering Price of Amount Sold $9,750,000

(6) Amount of expenses incurred for the Registrant's account in
connection with the issuance and distribution of the Securities
Registered, all of which were made to "others" and none to directors,
officers, general partners or affiliates of the Registrant.

Underwriting Discount and Commission $2,651,353
Finders Fees -
Expenses paid to or for Underwriters -
Other Expenses, Estimated at $906,365

(7) Net offering proceeds to the Registrant after total expenses above
$34,304,782.

(8) From the effective date of the Registration Statement through the end
of the quarterly period of this Form 10-Q, the Registrant made direct
or indirect payments to "others" in the amounts listed below. No
payments direct or indirect were made to Directors, Officers, General
Partners, or Affiliates of the Registrant.

Construction of plant, building and facilities $ -
Purchase and installation of machinery and equipment $ 6,690,982
Purchase of real estate $ -
Acquisition of other business(es) - purchase of in process
research and development $ 400,000
Repayment of indebtedness $ 1,110,266
Working capital $ 1,890,332 *
Expanded Staff, facilities, advertising, and
software development $21,167,594 *
Repurchase of treasury stock $ 430,188
Temporary investment in U.S. Government Securities $ 2,615,420

*Represents estimates.

Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At the Annual Meeting of Stockholders held on May 27, 1998, the
following members were elected to the Board of Directors:

Votes For Votes Withheld
--------- --------------

J. Brian Patsy 7,788,976 68,177
Eric S. Lombardo 7,791,176 65,977
Z. David Patterson 7,788,486 68,667
George E. Castrucci 7,787,736 69,417

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

(11) Computation of Earnings (Loss) Per Common Share

(27) Financial Data Schedule

(b) Reports on Form 8-K

None

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

LANVISION SYSTEMS, INC.

DATE: June 2, 19975, 1998 By: /s/ J. BRIAN PATSY
------------ --------------------------------------------------------- ---------------------------------------
J. Brian Patsy
Chief Executive Officer and
President

DATE: June 2, 19975, 1998 By: /s/ THOMAS E. PERAZZO
------------ --------------------------------------------------------- ---------------------------------------
Thomas E. Perazzo
Vice President, Chief Operating
Officer, Chief Financial Officer and
Treasurer

1520

1621

INDEX TO EXHIBITS

Sequential
Exhibit No. Exhibit Page No.
- - ----------- ------- ----------

11 Computation of Earnings (Loss) Per Common Share . . . . 17

27 Financial Data Schedule . . . . . . . . . . . . . . . . 18

16Sequential
Exhibit No. Exhibit Page No.
----------- ------- --------

11 Computation of Earnings (Loss) Per Common Share. . . . 22

27 Financial Data Schedule . . . . . . . . . . . . . . . 23