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, 1998
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: 0-28132

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 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, 1998 and January 31, 1998 . . . . . . . . . . 3

Condensed Consolidated Statements of Operations for the three months ended
April 30, 1998 and 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Condensed Consolidated Statements of Cash Flows for the three months ended
April 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

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

LANVISION SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

Assets

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

Current assets:
Cash and cash equivalents $ 1,599,979 2,142,881
Investment securities 313,729 5,074,258
Accounts receivable, net of allowance for doubtful
accounts of $280,000 and $265,000, respectively 3,329,023 2,992,987
Unbilled receivables 1,786,325 1,135,365
Other 1,105,089 1,179,603
------------ -----------
Total current assets 8,134,145 12,525,094

Property and equipment:
Computer equipment 4,291,483 3,876,962
Computer software 517,549 487,841
Office furniture, fixtures and equipment 1,491,010 1,424,036
Leasehold improvements 997,141 931,020
------------ -----------
7,297,183 6,719,859
Accumulated depreciation and amortization (1,990,825) (1,563,202)
------------ -----------
5,306,358 5,156,657
Investment securities 4,445,492 3,834,908
Capitalized software development costs, net of accumulated
amortization of $711,896 and $661,896, respectively 661,034 612,033
Other 84,894 71,430
------------ -----------
$ 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,
1998 1998
---------- ------------

Current liabilities:
Accounts payable $ 1,159,541 $ 1,631,941
Accrued compensation 973,437 943,221
Accrued other expenses 1,784,049 1,746,883
Deferred revenues 1,076,224 1,061,996
------------ ------------
Total current liabilities 4,993,251 5,384,041

Convertible redeemable preferred stock, $.01 par value per share
5,000,000 shares authorized - -

Stockholders' equity:
Common stock, $.01 par value per share, 25,000,000 shares
authorized, 8,896,500 shares issued 88,965 88,965
Capital in excess of par value 35,110,817 35,110,817
Treasury stock, at cost, 90,500 shares (430,188) (430,188)
Accumulated other comprehensive income 33,878 75,203
Accumulated (deficit) (21,164,800) (18,028,716)
------------ ------------
Total stockholders' equity 13,638,672 16,816,081
============ ============
$ 18,631,923 $ 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
---- ----

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

Operating expenses:
Cost of systems sales 778,721 629,528
Cost of service, maintenance and support 1,526,676 1,107,086
Cost of service bureau operations 622,269 -
Selling, general and administrative 2,466,221 2,570,235
Product research and development 1,450,491 982,315
----------- -----------
Total operating expenses 6,844,378 5,289,164
----------- -----------
Operating (loss) (3,239,348) (3,175,971)
Interest income 103,263 330,264
----------- -----------
$(3,136,085) $(2,845,707)
=========== ===========

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

Number of shares used in per common share computations 8,806,000 8,886,388
=========== ===========

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
----------- ------------

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

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

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)
Capitalization of software development costs (99,000) (99,000)
Other (13,464) (31,048)
----------- ------------
Net cash provided by investing activities 3,418,832 3,230,037

Financing activities:
Purchase of treasury stock - (170,625)
----------- ------------
Net cash (used for) financing activities - (170,625)
----------- ------------

Increase (decrease) in cash (542,902) 330,560
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
=========== ============

Supplemental cash flow disclosures:
Income taxes paid $ - $ -
Interest paid $ - $ -

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 0-28132. Operating
results for the three months ended April 30, 1998, are not necessarily
indicative of the results that may be expected for the fiscal year ending
January 31, 1999.

Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A summary of the Company's significant accounting policies is presented on page
18 of 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 during
1998.

Note 3 - CHANGES IN ACCOUNT BALANCES

Other current assets consist primarily of prepaid insurance, prepaid
commissions, and acquired software and hardware awaiting installation. The
decrease at April 30, 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 sale 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 for resale and reduced levels of capital expenditures
in the first quarter compared with the prior quarter.

Note 4 - EARNINGS PER SHARE

The basic (loss) per common share is calculated using the weighted average
number of common shares outstanding during the 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.

Note 5 - COMPREHENSIVE INCOME

The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income. Accordingly, the Company has
accounted for the unrealized holding gains on available-for-sale securities in
accordance with this new accounting standard, as follows:

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

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

Unrealized holding (losses)
arising during the 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

LanVision(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 imaging/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 Systems are essential components
of the computer-based patient record.

The Company's revenues are derived from: the licensing and sale of systems
comprising LanVision software and third-party software and hardware components;
product support, maintenance and professional services; and service bureau
operations (outsourced data center operations). Professional services include
implementation and training, project management and custom software development
and currently are provided only to the Company'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 increase. The Company earns its
highest margins on proprietary 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. Revenues from the Company's service
bureau operation, which provides high quality, transaction-based document

imaging/management services from a central data center, commenced in the first
quarter of fiscal 1998 and 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
actively promote LanVision's products, the full impact of this 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 implement 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 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. Throughout
1996, 1997 and the first quarter of 1998, the Company has experienced extended
sales cycles. It is common for sales cycles to take six to eighteen

months from initial contact to the execution of an agreement. As a result, the
sales cycles can cause significant variations in quarter to quarter results.
Furthermore, 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 system and specify the implementation schedule, which
typically takes place in phases. The agreements generally provide for the
licensing of the Company's proprietary software and third-party software with a
one-time perpetual license fee that is adjusted depending on the number of
workstations using the software. Third-party hardware is sold outright, with a
one-time fee charged for installation and training. Site-specific customization,
interfaces with existing customer systems and other consulting services are sold
on a fixed fee or a time and materials basis.

Generally, 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 is
recognized ratably over the term of the agreements. Billings to customers
recorded prior to the recognition of the revenue 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 result of computer programs being written using two
digits rather than four digits to define the applicable year. Any of the
Company's internal 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 software 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 customers. However, if such modifications and
conversions are not made, or not completed timely, the Year 2000 issue could
have a material impact on the Company and its customers. The Company has
warranted, to certain customers, 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 Year 2000 project has currently not been determined, but will
be funded through existing cash resources and future operating cash flows. The
requirements for the correction of Year 2000 issues and the date 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 other factors. However, there can be no guarantee
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 area, the 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.

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 high purchase price
of 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, 1998, were $3,605,030
compared with $2,113,193 in the comparable quarter of 1997.

During the first quarter, the Company signed one contract with Christiana Care
Health Services, of which approximately $650,000 of revenue from this contract
was recognized in the first quarter. The remaining systems sales revenues during
the quarter 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 an 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 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.

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 of the systems 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 54%, 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 106% and 117%
for the first quarter of fiscal 1998 and 1997, respectively.

The LanVision 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 provides services on a time and
material or fixed fee basis. The Professional Services staff has experienced
some inefficiencies in the delivery of services, and certain projects have taken
longer to complete than originally estimated, thus adversely affecting operating
performances. Management believes the increase in experience of its Professional
Services staff and the increase in backlog should improve the overall efficiency
and operating performance of 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 marketing
expenses; and general corporate expenses, including occupancy costs. During the
first quarter of fiscal 1998, selling, general and administrative expenses
decreased to $2,466,221 compared with $2,570,235 in the comparable prior
quarter. The Company has continued to invest in sales and marketing activities,
ahead of revenues to ensure that LanVision develops a pipeline of qualified
prospects.

Product Research and Development

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

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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
projects have been completed, the Company believes it will be able to reduce its
product development expenses in the coming quarters. The Company capitalized, in
accordance with Statement of Financial Accounting Standards No. 86, $99,000 of
product research and development costs in the first three months of fiscal 1998
and 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 1998 was $3,136,085 ($.36) compared
with a net loss of $2,845,707 ($.32) in the first quarter of 1997. The increased
loss is primarily due to: start-up operating expenses of the new 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 past year, management continues to believe that the healthcare document
imaging and 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 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

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

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, 1998, the Company's customers had entered into agreements for
systems and related services (excluding support and 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 $8,240,000. 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.

The Company's 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.

In 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
18

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 5, 1998 By: /s/ J. BRIAN PATSY
-------------------------- ---------------------------------------
J. Brian Patsy
Chief Executive Officer and
President

DATE: June 5, 1998 By: /s/ THOMAS E. PERAZZO
-------------------------- ---------------------------------------
Thomas E. Perazzo
Vice President, Chief Operating
Officer, Chief Financial Officer and
Treasurer

INDEX TO EXHIBITS

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

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

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