SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q

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

For the quarterly period ended September 30, 1997


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


Commission File Number 0-22970


                           NETWORK IMAGING CORPORATION
             (Exact name of registrant as specified in its charter)

          Delaware                                      54-1590649
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

                 500 Huntmar Park Drive, Herndon, Virginia 20170
                    (Address of principal executive offices)


                                 (703) 478-2260
                           (Issuer's telephone number)


         Check whether the issuer (1) filed all reports  required to be filed by
Section 13 or 15(d) of the  Securities  Exchange  Act of 1934 during the past 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] [ ]

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of outstanding shares of the issuer's Common Stock, $.0001 par value,
as of November 4, 1997 was 25,959,101.


<PAGE>




                           NETWORK IMAGING CORPORATION

                                    Form 10-Q


                                Table of Contents



PART I   FINANCIAL INFORMATION

Item 1.  Financial Statements

           Consolidated Balance Sheets at September 30, 1997
           (unaudited) and December 31, 1996                               2

           Consolidated Statements of Operations (unaudited)
           for the three months ended September 30, 1997 and 1996          3

           Consolidated Statements of Operations (unaudited)
           for the nine months ended September 30, 1997 and 1996           4

           Consolidated Statement of Changes in Stockholders' Equity
           (unaudited) for the nine months ended September 30, 1997        5

           Consolidated Statements of Cash Flows (unaudited)
           for the nine months ended September 30, 1997 and 1996           6

           Notes to Consolidated Financial Statements                      7

Item 2. Management's Discussion and Analysis of Financial
           Condition and Results of Operations                             11


PART II. OTHER INFORMATION

Item 1.  Legal Proceedings                                                 15

Item 2.  Changes in Securities                                             15

Item 3.  Change upon Senior Securities                                     16

Item 4.  Submission of Matters to a Vote of Security Holders               16

Item 6.  Exhibits and Reports on Form 8-K                                  16



<PAGE>

                 NETWORK IMAGING CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts)



                                                      September 30, December 31,
                                                          1997         1996
                                                       -----------  -----------
                                                       (Unaudited)
                                ASSETS

Current assets:
 Cash and cash equivalents                               $   3,782    $   7,601
 Accounts and notes receivable, net                         14,451       13,243
 Inventories                                                 1,404        1,503
 Prepaid expenses and other                                  2,214        2,362
                                                         ---------    ---------
    Total current assets                                    21,851       24,709
Fixed assets, net                                            2,096        2,887
Long-term notes receivable, net                              1,648        1,979
Software development costs and
 purchased technology, net                                   3,347        3,813
Goodwill, net                                                2,228        3,237
Other assets                                                   310          153
                                                         ---------    ---------
    Total assets                                         $  31,480    $  36,778
                                                         =========    =========


                  LIABILITIES & STOCKHOLDERS' EQUITY

Current liabilities:
 Current debt maturities and
  obligations under capital leases                       $   1,238    $   2,063
 Accounts payable                                            3,890        3,185
 Accrued compensation and related
  expenses                                                   1,983        1,891
 Deferred revenue                                            3,599        3,789
 Other accrued expenses                                      4,895        3,888
                                                         ---------    ---------
    Total current liabilities                               15,605       14,816
Long-term debt and obligations
 under capital leases                                        7,318           88
Deferred income taxes                                          191          300
                                                         ---------    ---------
    Total liabilities                                       23,114       15,204
Commitments
Redeemable Series F preferred
 stock, 792,186 and 1,792,186
 shares issued and outstanding                               6,357        9,857
Stockholders' equity:
 Preferred stock, $.0001 par
  value,  20,000,000 shares
  authorized;  1,608,335 and
  1,605,675 shares issued and
  outstanding
 Common stock, $.0001 par value,
  50,000,000 shares authorized;
  25,865,809 and 22,896,612
  shares issued and outstanding                                  3            2
 Additional paid-in-capital                                124,808      124,429
 Accumulated deficit                                      (122,233)    (113,098)
 Translation adjustment                                       (569)         384
                                                         ---------    ---------
    Total stockholders' equity                               2,009       11,717
                                                         ---------    ---------
    Total liabilities and stockholders' equity           $  31,480    $  36,778
                                                         =========    =========









   The accompanying notes are an integral part of these financial statements.

                                      -2-
<PAGE>
                  NETWORK IMAGING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (In thousands, except share and per share amounts)
                                   (Unaudited)


                                                Three Months Ended September 30,
                                                     1997              1996
                                                  -----------       -----------

Revenue:
  Products                                        $     5,225       $     4,107
  Services                                              4,719             5,272
                                                  -----------       -----------
                                                        9,944             9,379
                                                  -----------       -----------
Costs and expenses:
  Cost of products sold                                 2,585             2,169
  Cost of services provided                             3,865             3,700
  Sales and marketing                                   3,649             3,332
  General and administrative                            1,649             1,995
  Product development                                   1,142             1,129
  Loss on sale of subsidiary                             --                 921
                                                  -----------       -----------
                                                       12,890            13,246
                                                  -----------       -----------
Loss before investment and
 interest income and income taxes                      (2,946)           (3,867)
  Investment and interest income
  (expense), net                                         (130)               41
                                                  -----------       -----------
Loss before income taxes                               (3,076)           (3,826)
  Income tax benefit                                     (142)              (77)
                                                  -----------       -----------
Net loss                                               (2,934)           (3,749)
                                                  -----------       -----------

Preferred stock preferences
  Accrued dividends                                      (930)             (865)
  Imputed dividends                                      (774)             --
                                                  -----------       -----------
Net loss applicable to
 common shares                                    $    (4,638)      $    (4,614)
                                                  ===========       ===========

Net loss per common share                         $     (0.18)      $     (0.22)
                                                  ===========       ===========

Weighted average shares outstanding                25,436,748        21,112,811
                                                  ===========       ===========












   The accompanying notes are an integral part of these financial statements.

                                      -3-
<PAGE>
                  NETWORK IMAGING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
               (In thousands, except share and per share amounts)
                                   (Unaudited)


                                                 Nine Months Ended September 30,
                                                     1997              1996
                                                 ------------      ------------

Revenue:
  Products                                       $     13,591      $     13,497
  Services                                             14,805            15,552
                                                 ------------      ------------
                                                       28,396            29,049
                                                 ------------      ------------
Costs and expenses:
  Cost of products sold                                 6,740             7,976
  Cost of services provided                            11,681            11,975
  Sales and marketing                                  10,901            11,652
  General and administrative                            4,949             7,522
  Product development                                   3,451             4,190
  Gain from extinguishment of debt                       (267)             --
  Loss on sale of subsidiary                             --                 921
  Exchange fee and gain on
   sale of asset, net                                    --                 619
  Restructuring costs                                    --                (175)
                                                 ------------      ------------
                                                       37,455            44,680
                                                 ------------      ------------
Loss before investment and
 interest income and income taxes                      (9,059)          (15,631)
  Investment and interest income
  (expense), net                                         (163)              188
                                                 ------------      ------------
Loss before income taxes                               (9,222)          (15,443)
  Income tax benefit                                      (87)              (89)
                                                 ------------      ------------
Net loss                                               (9,135)          (15,354)
                                                 ------------      ------------

Preferred stock preferences
  Accrued dividends                                    (2,836)           (2,749)
  Imputed dividends                                      (774)             --
                                                 ------------      ------------
Net loss applicable to
 common shares                                   $    (12,745)     $    (18,103)
                                                 ============      ============

Net loss per common share                        $      (0.51)     $      (0.90)
                                                 ============      ============

Weighted average shares outstanding                24,957,354        20,081,412
                                                 ============      ============












   The accompanying notes are an integral part of these financial statements.

                                      -4-
<PAGE>
                  NETWORK IMAGING CORPORATION AND SUBSIDIARIES
            CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                  For the nine months ended September 30, 1997
                      (In thousands, except share amounts)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                                                          Additional
                                                 Preferred Stock                 Common Stock              paid-in      Accumulated 
                                                  Shares        Amt.          Shares            Amt.       capital         Deficit 
                                              -----------------------      --------------------------     ----------     ----------
<S>                                           <C>            <C>           <C>            <C>             <C>            <C>        

Balance December 31, 1996                     1,605,675      $     --       22,896,612     $        2     $  124,429     ($ 113,098)

Issuance of common stock
 upon exercise of warrants                                                      23,331                            23

Conversion of preferred
 stock                                             (640)                     2,926,818              1

Offering costs on issuance
 of preferred stock                                                                                              (25)

Issuance of Series K preferred
 stock, net of offering costs
 of $566                                          3,300                                                        3,700

Issuance of common stock                                                        19,048                            27

Issuance of warrants and
 extension                                                                                                       264

Accrued dividends on preferred
 stock                                                                                                        (2,836)

Imputed dividends on preferred
 stock                                                                                                          (774)

Translation adjustment

Net loss                                                                                                                     (9,135)
                                             ------------------------      --------------------------     ----------     ----------

Balance September 30, 1997                    1,608,335            --       25,865,809     $        3        124,808       (122,233)
                                             ========================      ==========================     ==========     ==========
</TABLE>

                                            Translation
                                             Adjustment               Total
                                            ------------          -------------

Balance December 31, 1996                       $    384               $ 11,717

Issuance of common stock
 upon exercise of warrants                                                   23

Conversion of preferred
 stock                                                                        1

Offering costs on issuance
 of preferred stock                                                         (25)

Issuance of Series K preferred
 stock, net of offering costs
 of $566                                                                  3,700

Issuance of common stock                                                     27

Issuance of warrants and
 extension                                                                  264

Accrued dividends on preferred
 stock                                                                   (2,836)

Imputed dividends on preferred
 stock                                                                     (774)

Translation adjustment                              (953)                  (953)

Net loss                                                                 (9,135)
                                                --------               --------

Balance September 30, 1997                          (569)              $  2,009
                                                ========               ========








   The accompanying notes are an integral part of these financial statements.

                                      -5-
<PAGE>
                  NETWORK IMAGING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

                                                              Nine Months
                                                           Ended September 30,
                                                           1997          1996
                                                        ----------    ----------
                                                             (In thousands)

Cash flows from operating activities:
 Net loss                                                $ (9,135)     $(15,354)
 Adjustments to reconcile net loss
  to net cash used in operating
  activities:
   Depreciation and amortization                            3,752         4,465
   Gain on sale of asset                                     --            (111)
   Restructuring costs                                       --            (175)
   Loss on sale of subsidiary                                --             921
   Other non-cash items                                        15          --
   Changes in assets and
    liabilities:
     Accounts and notes receivable                         (1,837)        3,147
     Inventories                                               (6)          358
     Prepaid expenses and other                               145        (1,103)
     Accounts payable                                       1,698        (1,421)
     Accrued compensation and
      related expenses                                        242          (494)
     Accrued expenses, other                                  161        (1,656)
     Deferred revenues                                        (81)        1,707
     Deferred income taxes                                    (71)         (235)
                                                         --------      --------
Net cash used in operating activities                      (5,117)       (9,951)
                                                         --------      --------

Cash flows from investing activities:
 Sale of short-term investments                              --             111
 Capitalized software development
  and license costs                                        (1,059)       (1,513)
 Purchases of fixed assets                                   (557)         (748)
 Net cash provided in business
  divestiture                                                --            (401)
                                                         --------      --------
Net cash used in investing activities                      (1,616)       (2,551)
                                                         --------      --------

Cash flows from financing activities:
 Proceeds from issuance of common
  and preferred stocks, net                                    (2)       16,937
 Proceeds from issuance of Series
  K preferred stock, net                                    2,926          --
 Cash dividends paid on Series A
  preferred stock                                          (1,605)       (2,408)
 Cash dividends paid on Series F
  preferred stock                                            (174)         --
 Payments on Mandatory Redeemable
  Preferred Stock                                          (3,500)         --
 Proceeds from borrowings                                   5,000          --
 Proceeds from issuance of
  long-term debt                                            2,000
 Proceeds from sale and leaseback
  of fixed assets                                            --             196
 Proceeds from Notes Receivable
  related to business divestitures                             60          --
 Principal payments on capital
  lease obligations                                          (800)         (667)
 Principal payments on debt                                  (843)         (271)
                                                         --------      --------
Net cash provided by financing
 activities                                                 3,062        13,787
                                                         --------      --------

Effect of exchange rate changes on
 cash and cash equivalents                                   (148)          (77)
Net decrease in cash and cash
 equivalents                                               (3,819)        1,208
Cash and cash equivalents at
 beginning of year                                          7,601         9,359
                                                         --------      --------
Cash and cash equivalents at September 30,               $  3,782      $ 10,567
                                                         ========      ========

Supplemental Cash Flow Information:
     Interest paid                                       $    478      $    231
     Income taxes paid                                   $    261      $    170




   The accompanying notes are an integral part of these financial statements.

                                      -6-
<PAGE>

                  NETWORK IMAGING CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           September 30, 1997 and 1996

1.  BASIS OF PRESENTATION

The  unaudited  financial  statements  presented  herein  have been  prepared in
accordance with the  instructions to Form 10-Q and should be read in conjunction
with the financial statements and notes thereto included in the Company's Annual
Report  on Form  10-K  for the year  ended  December  31,  1996,  which  include
information  and  note  disclosures  not  included  herein.  In the  opinion  of
management  all  adjustments,  which  include  only those of a normal  recurring
nature, necessary to fairly present the Company's financial position, results of
operations  and  cash  flows  have  been  made  to  the  accompanying  financial
statements.  The results of operations for the nine month period ended September
30, 1997 may not be  indicative of the results that may be expected for the year
ending December 31, 1997.

Certain   reclassifications  have  been  made  to  the  prior  period  financial
statements to conform to the current period presentation.

2.  NEW ACCOUNTING PRONOUNCEMENT

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128,  Earnings per Share,  which is required to be adopted on December 31, 1997.
At that time,  the Company will be required to change the method  currently used
to compute  earnings per share and to restate all prior  periods.  Under the new
requirements for calculating  primary earnings per share, the dilutive effect of
stock options will be excluded.  The impact of Statement 128 on the  calculation
of the  primary  and fully  diluted  earnings  per share is not  expected  to be
material.

The Company  intends to adopt  Statement of Financial  Accounting  Standards No.
131,  "Disclosure about Segments of an Enterprise and Related Information" (SFAS
No. 131),  in fiscal year 1998.  SFAS No. 131 changes the way  companies  report
segment  information  and  requires  segments  to be  determined  based  on  how
management measures performance and makes decisions about allocating  resources.
The adoption of SFAS No. 131 is not expected to materially  impact the Company's
financial position or results of operations.

3.  REDEEMABLE PREFERRED STOCK

During the first  quarter of 1997,  the  Company  redeemed  1,000,000  shares of
Series F Preferred  Stock for $3.5  million.  The Company used proceeds from its
line of credit to finance the Series F Preferred share buy back.

                                       -7-
<PAGE>

During  the  second  quarter  of 1997,  the  Company  was to have  redeemed  the
remaining 792,186 shares of Series F Preferred Stock for $2.8 million.  Under an
amendment to the December 1996 redemption agreement, the $2.8 million payment is
now due on January 31, 1998,  subject to certain  acceleration  terms related to
the occurrence of certain events that are under the control of the Company.

4.  LINE OF CREDIT

During the second  quarter of 1997,  the Company drew the remaining $1.5 million
from its $5.0  million  line of  credit  established  to  finance  the  Series F
Preferred  share  buy  back.  As part of the  additional  borrowing,  the use of
proceeds restriction was amended to allow its use for general corporate purposes
and the Company  entered  into an amendment  to the  security  agreement,  which
expanded the lender's  security interest to include all personal property of the
Company, including without limitation, (1) all personal property of the Company,
(2) all leases, licenses,  permits, (3) all 1View software products intellectual
property now owned or hereafter developed by the Company, (4) all inventory, (5)
all accounts, contract rights, chattel papers, instruments, general intangibles,
documents,  other obligations,  monies, revenues,  credits, claims, goodwill and
causes of action.  (6) all trade or service  names,  trademarks,  service marks,
logos and all patents, patent applications, copyrights, licensing agreements and
royalty  payments,  (7)  proceeds of the  foregoing,  and (8) all of the capital
stock of Dorotech, S.A.

5.  NASDAQ-NMS MAINTENANCE REQUIREMENTS

At June 30, and September 30, 1997,  the Company had not maintained net tangible
assets  of at least $4  million,  which is one of the  quantitative  maintenance
criteria for inclusion of the Company's securities on Nasdaq-NMS.  To remedy the
short-fall and offset any adverse impact, the Company issued,  during July 1997,
3,300  shares of Series K  Convertible  Preferred  Stock  ("Series K Stock") and
warrants and received net proceeds of $2.9 million. Pursuant to the terms of the
offering,  the  purchasers  are also  required to make  additional  purchases of
shares for $3.0 million upon the Company's  achievement  of certain  performance
milestones and the  satisfaction  of certain other  conditions and an additional
$4.7 million at their option (See Note 7). Although the Company believes that it
can maintain the  required  net tangible  assets of at least $4 million  through
additional  issuances  of its Series K Stock or other  additional  offerings  of
equity securities, there can be no assurance that the Company will complete such
offerings or that, if completed,  they will be on terms favorable to the Company
or in an amount  sufficient  to permit the Company to  continue to maintain  net
tangible assets of at least $4 million.

On August 21,  1997,  the  Company  received a letter  from the Nasdaq  National
Market  indicating that the Company may not have  sufficient  assets to continue
its listing on the Nasdaq  National  Market.  The Company has  responded to that
inquiry and after further  correspondence with Nasdaq requested a hearing before
the  Nasdaq  National  Market's  Hearing  Department  to  explain  its  plan for
achievement  and  maintenance  of the minimum net tangible  assets  requirement.
Following  a hearing  held on  Thursday,  October  30,  1997,  a Nasdaq  Listing
Qualifications  Panel  determined to grant the  Company's  request for continued
inclusion in the Nasdaq  National  Market pursuant to an exception to the Nasdaq
National Market's minimum net tangible asset requirement.

                                       -8-
<PAGE>

The Panel found that the Company had presented a reasonable plan for compliance.
Based  upon the plan  detailed  by the  Company,  the Panel  concluded  that the
Company could achieve compliance with the continued listed  requirements for the
long-term.

In order to fully comply with the  exception  granted by the Panel,  the Company
must complete its plan of compliance in accordance with a timetable set forth by
the Panel. The Company must demonstrate full compliance with the Nasdaq National
Market  continued  listing  requirements  by December 31,  1997.  The Panel also
required that the Company have a minimum of $6.0 million in net tangible  assets
to ensure long term compliance with the net tangible assets requirement.


6.  CONVERTIBLE NOTES

During July and August 1997, the Company issued, pursuant to a private placement
exemption under the Securities Act of 1933, as amended, 8% Convertible Notes due
July 8,  2002  and  August  20,  2002  totaling  $2.0  million.  The  notes  are
convertible  into the Company's  Common Stock beginning 45 days after issue at a
conversion price of $1.875 and $1.50 per share, the price on the issue dates.

On or after  October 30, and December  12,  1997,  the holders have the right to
redeem the convertible  notes plus accrued interest on one business days' notice
to the Company in cash or shares of Common Stock, at the Company's election.  On
or after October 30, and December 12, 1997,  the Company has the right to redeem
the convertible notes plus accrued interest on 30 days' notice to the holders in
cash or share of Common  Stock,  at the holders'  election.  If shares of Common
Stock  are used,  Common  Stock is  issued  at a rate of 90% of the  previous  5
trading  days average closing bid price. The interest is compounded semi-annual-
ly. The  warrants  issued to the investors have an exercise  price of $1.875 and
$1.50 per share and expire on July 8, and August 20, 2000, respectively.


7.  CONVERTIBLE PREFERRED STOCK OFFERINGS

During  July 1997,  the  Company  agreed to issue up to 11,000  units  ("Units")
consisting  of one share of Series K Stock and  warrants to acquire 75 shares of
Common Stock at an exercise  price of $2.40 per share at the price of $1,000 per
Unit. On July 28, 1997, the Company issued 3,300 Units and received net proceeds
of $2.9 million ("the  Offering").  The Company also issued warrants to purchase
162,462 shares of Common Stock at $1.625 per share to the placement agent in the
transaction.  Under the  requirements of a newly issued SEC staff position,  the
carrying value of the Series K Preferred Stock was increased by $774,000, or the
corresponding amount allocated to beneficial conversion feature described below.
The Company also recorded a related $774,000  non-cash charge to preferred stock
dividends.  In accordance  with the terms of the Offering,  the proceeds will be
used for working capital and general corporate  purposes.  Pursuant to the terms
of the Offering, the purchasers are required to make additional purchases of the
Units for

                                       -9-
<PAGE>

$3.0 million upon the Company's  achievement of certain  performance  milestones
and the satisfaction of certain other conditions.  The remaining $4.7 million is
to be offered to the  purchasers  and  the  purchasers,  at their election,  may
elect to make purchases of the Units.  In connection with the sale of the Units,
the Company  agreed to register the Common Stock issuable upon the conversion of
the preferred stock and the execution of the warrants.

The Series K Preferred Stock has a per share liquidation preference,  subject to
the  liquidation  preferences of the Series A Preferred  Stock,  the Series F-1,
F-2, F-3 and F-4 Preferred  and the Series H Preferred  Stock of an amount equal
to the sum of $1,000 plus 7% per annum  simple  interest  thereon for the period
since the date of  issuance.  Each  share is  convertible  at the  option of the
holder  into the number of shares of Common  Stock  determined  by  dividing  an
amount equal to the initial  purchase price of $1,000 by the lesser of (1) $2.00
and (2) the lowest  closing  sale price for the Common Stock for the ten trading
days  immediately   preceding  the  conversion  multiplied  by  the  "Conversion
Percentage."  The  "Conversion  Percentage"  is (a)  105%  prior to the 61st day
following  July 28,  1997 (the  "First  Closing  Date"),  (b) 96% for the period
between the 61st and the 90th day following the First Closing Date,  (c) 85% for
the period  between the 91st and the 180th day following the First Closing Date,
and (d) 81% for the period after the 180th day following the First Closing Date.
The Series K Stock has a dividend  rate of 7% per annum  which is payable at the
time of conversion  or redemption in cash or shares of Common Stock,  as elected
by the Company.


8.  PREFERRED STOCK DIVIDENDS

During July 1997,  the Company  announced  that it was  suspending  the dividend
payment to holders of Series A Cumulative Convertible Preferred Stock ("Series A
Stock").  Holders of Series A Stock did not  receive  dividends  payable for the
three months ended July 31, 1997 or October 31, 1997 in the amounts of $0.50 per
share or $802,512.50 in the aggregate, respectively.


9.  STOCK OPTION REPRICING

In August 1997, the Board of Directors  approved a plan to reprice the Company's
outstanding stock options. The plan allowed holders of out-of-the-money options,
excluding executives,  officers, and directors,  to receive a new exercise price
of $1.50 per option share,  the market price on the date of approved  plan.  The
plan allowed executives and officers of out-of-the-money options to also receive
a new exercise  price of $1.50 but for fewer  shares of Common Stock  determined
pursuant to the Black-Scholes formula intended to result in approximate economic
equivalence between old and new options.  As a result,  options for an aggregate
of 561,752 out of a total of 1,635,000 shares of Common Stock at exercise prices
ranging  from  $6.82  to $1.91  per  share  were  surrendered  pursuant  to this
repricing.  Stock  options held by the  Company's  Board of  Directors  were not
repriced.

                                      -10-
<PAGE>

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

         The Private Securities Litigation Reform Act of 1995 (the "Reform Act")
provides a "safe harbor" for  forward-looking  statements to encourage companies
to provide  prospective  information  about  their  companies,  so long as those
statements are identified as  forward-looking  and are accompanied by meaningful
cautionary  statements  identifying  important  factors  that could cause actual
results to differ materially from those discussed in the statement.  The Company
desires to take  advantage of the "safe  harbor"  provisions  of the Reform Act.
Except for the historical information contained herein, the matters discussed in
this Form 10-Q quarterly  report are  forward-looking  statements  which involve
certain  risks  and  uncertainties.  Although  the  Company  believes  that  the
expectations  reflected  in  such  forward-looking  statements  are  based  upon
reasonable  assumptions,  it can give no assurance that its expectations will be
achieved. Important factors that could cause actual results to differ materially
from  the  Company's   expectations   are  disclosed  in  conjunction  with  the
forward-looking statements or elsewhere herein.

         The  following  discussion  of the  financial  condition and results of
operations  of the  Company  should be read in  conjunction  with the  Company's
Consolidated Financial Statements and related notes included herein.


Results of Operations - Nine months ended September 30, 1997 and 1996

         Revenues.  Total  revenues were $28.4 million and $29.0 million for the
nine months  ended  September  30,  1997 and 1996,  respectively.  The  $700,000
decrease in revenue was the result of decreases in service  revenue of $700,000,
or 5%, offset by an increase in product revenue of $94,000,  or 1%. The decrease
in  service  revenue  was  attributable  to a  decrease  of $1.6  million in the
Company's French subsidiary's service revenues,  due in part to the weakening of
the U.S. dollar against the French franc and to a temporary slow down in a major
service contract, offset by a $1.1 million increase in domestic service revenue.
The disposition in 1996 of Symmetrical Technologies,  Inc. ("STI"), also reduced
the Company's  service revenues by $170,000.  The increase in product revenue of
$94,000 was the result of a $2.2 million  increase in  comparative  company U.S.
revenues offset by a decrease of $640,000 in the Company's  French  subsidiary's
product revenues and a decrease of $1.5 million due to the disposition of STI in
1996.

         Profit Margins. Profit margins for product sales increased 9 percentage
points for the first nine months of 1997 over the same period in 1996 as cost of
products  decreased  from 59% to 50% of sales.  The  increase  in product  sales
margins was due in part to the  disposition  during 1996 of STI, and an increase
in both domestic and French margins.  Profit margins for service sales decreased
2 percentage  points for the nine months ended September 30, 1997 as compared to
1996 as the cost of services increased from 77% to 79% of sales. The decrease in
service sales margins from 23% to 21% was  attributable to the Company's  French
subsidiary.
                                      -11- 
<PAGE>

         Sales and marketing. Sales and marketing expenses were $10.9 million or
38% of revenue for the nine months ended  September  30, 1997  compared to $11.7
million,  or 40% of  revenue  in 1996.  The  decrease  of  $800,000,  or 6%, was
primarily the result of the Company's disposition of STI during 1996.

         General and  administrative.  G&A expenses  were $4.9 million or 17% of
revenue for the nine months ended  September  30, 1997 compared to $7.5 million,
or 26% of revenue in 1996.  The decrease of $2.6 million,  or 34%, was primarily
the  result  of the  Company's  efforts  in  cost  reductions  in the  Company's
continuing operations.

         Product  development.  The Company's  expenditures on software research
and  development  activities  for the nine months ended  September 30, 1997 were
$4.5  million,  of which $1.1  million  was  capitalized  and $3.4  million  was
expensed.  Software  research and development  expenditures  for the 1996 period
were $5.7 million,  of which $1.5 million was  capitalized  and $4.2 million was
expensed. The $1.2 million decrease in research and development  expenditures is
attributable to the Company's 1996 plan to consolidate the various 1View product
development  groups into a common  product  development  organization  operating
under a single senior manager.  During 1996, the Company  consolidated  its COLD
product development groups from three separate locations to one, and vacated the
excess  office  space.  The  Company's  disposition  of STI also  resulted  in a
reduction of $208,000 in research and development expenditures.

         Gain on  extinguishement  of  debt.  The  Company's  French  subsidiary
realized a $267,000 gain in connection  with the partial  forgiveness of a grant
made by a French government agency.

         Income taxes.  The Company's income tax benefit  for  the  nine  months
ended September 30, 1997 and 1996 of $87,000 and $89,000, respectively, resulted
from taxable losses generated by the Company's French operations.

         Net loss.  The Company's  net loss for the nine months ended  September
30, 1997 was $9.1  million as  compared  to a net loss of $15.3  million for the
comparable  period of 1996.  The net loss decrease of $6.2 million for the first
nine months of 1997 as compared to the same period in 1996 is due  primarily  to
the $2.6 million  reduction  in G&A  expenses,  $800,000  reduction in sales and
marketing  expenses,   $700,000  reduction  in  product  development   expenses,
increased profit margins resulting in $880,000  additional gross margin, and the
loss on sale of subsidiary and exchange fee incurred in 1996.

         Net loss applicable to Common Stock.  The net loss applicable to common
shares includes  adjustments for dividends and accretion  amounts related to the
Company's  preferred  stock.  The net loss applicable to common shares was $12.7
million,  or ($.51) per share,  for the nine months ended  September 30, 1997 as
compared  to $18.1  million or ($.90) per share,  for the  comparable  period of
1996. The decrease is attributable to the decrease in net loss described above.

                                      -12-
<PAGE>

Results of Operations - Three months ended September 30, 1997 and 1996

         Revenues.  Total  revenues  were $9.9  million and $9.4 million for the
three  months  ended  September  30, 1997 and 1996,  respectively.  The $565,000
increase  in revenue  was the  result of  increases  in product  revenue of $1.1
million,  or 27%, offset by a decrease in service  revenue of $553,000,  or 10%.
The  increase in product  revenue  was  attributable  to a $790,000  increase in
domestic revenue and an increase of $327,000 in the Company's French  subsidiary
revenue.  The decrease in service sales of $550,000 was the result of a $800,000
decrease  in  sales  by the  Company's  French  operations,  due in  part to the
weakening  of the U.S.  dollar  against the French  franc,  offset by a $250,000
increase in domestic service revenues.

         Profit Margins. Profit margins for product sales increased 4 percentage
points in the  third  quarter  of 1997  over the same  period in 1996 as cost of
products  decreased  from 53% to 49% of sales.  The  increase  in product  sales
margins was primarily due to the increased sales mix of the Company's internally
developed  products.  Profit  margins for service sales  decreased 12 percentage
points for the three months ended  September 30, 1997 as compared to 1996 as the
cost of services  increased  from 70% to 82% of sales.  The  decrease in service
sales  margins  from 30% to 18% was  attributable  to declines at the  Company's
French subsidiary.

         Sales and marketing.  Sales and marketing expenses were $3.6 million or
37% of revenue,  for the three months ended  September 30, 1997 compared to $3.3
million,  or 36% of revenue in 1996.  The  increase  of  $317,000,  or 10%,  was
primarily the result of the Company's  increase marketing programs and additions
to the sales force.

         General and  administrative.  G&A expenses  were $1.6 million or 17% of
revenue, for the three months ended September 30, 1997 compared to $2.0 million,
or 21% of revenue in 1996.  The decrease of $346,000,  or 17%, was primarily the
result of the Company's  efforts in cost reductions in the Company's  continuing
operations.

         Product  development.  The Company's  expenditures on software research
and  development  activities  in the three months ended  September 30, 1997 were
$1.5 million,  of which $300,000 was  capitalized and $1.2 million was expensed.
Software  research and  development  expenditures  for the 1996 period were $1.5
million, of which $400,000 was capitalized and $1.1 million was expensed.

         Income  taxes.  The  Company's  income tax benefit for the three months
ended  September  30,  1997  and 1996 of  $142,000  and  $77,000,  respectively,
resulted from losses generated by the Company's French operations.

         Net loss.  The Company's net loss for the three months ended  September
30, 1997 was $2.9 million as compared to $3.7 million for the comparable  period
of 1996.  The net loss  decrease  of  $815,000  in the third  quarter of 1997 as
compared to the same period in 1996 is due  primarily to the $346,000  reduction
in G&A expenses and the loss on sale of subsidiary in 1996,  offset by increases
in sales and marketing expenses.

                                      -13-
<PAGE>

         Net loss applicable to Common Stock.  The net loss applicable to common
shares includes  adjustments for dividends and accretion  amounts related to the
Company's  preferred  stock.  The net loss  applicable to common shares was $4.6
million,  or ($.18) per share,  for the three months ended September 30, 1997 as
compared to $4.6 million or ($.22) per share, for the comparable period of 1996.
The decrease is attributable to the decrease in net loss described above.


Liquidity and Capital Resources

         As of September 30, 1997, the Company had $3.8 million in cash and cash
equivalents,  as  compared  to $7.6  million  in cash  and cash  equivalents  at
December 31, 1996.  Net working  capital was $6.2 million at September  30, 1997
and $9.9 million at December 31, 1996.

         During the first nine months of 1997,  the Company  redeemed  1,000,000
shares of Series F Preferred  Stock for $3.5 million by using  proceeds from its
domestic  line of credit,  and drew the  remaining  $1,500,000  from its line of
credit.  In addition,  the Company  issued  convertible  debentures and Series K
Preferred  Stock for which it received  net  proceeds  of $2.0  million and $2.9
million, respectively.

         For the nine months ended September 30, 1997, the $3.8 million decrease
in cash and cash  equivalents  resulted  from the use of $5.1 million in cash to
fund operating activities, $1.6 million to fund investing activities,  offset by
$3.1 million in cash generated by financing activities.

         The $5.1 million funding of operating  activities  arose primarily with
respect  to a net  loss in  operations.  The  $1.6  million  to  fund  investing
activities arose with respect to capitalized  software development costs and the
purchase  of fixed  assets.  The $3.1  million  in cash  provided  by  financing
activities arose primarily from the proceeds of $5.0 million from borrowing from
the line of credit, $2.0 million from the issuance of convertible debentures and
$2.9 million from the issuance of Series K Preferred  Stock,  offset by the $1.8
million  payment of  preferred  stock  dividends,  $3.5  million  payment on the
Company's  Mandatory  Redeemable  Preferred Stock and the principle  payments on
debt and capital lease obligations.

         The adverse  results of operations  that the Company has experienced is
expected to continue at least until part of 1998. The Company  believes that its
existing  cash,  together  with the  future  proceeds  from the sale of Series K
Preferred units and the anticipated cash flows from  operations,  should provide
sufficient  resources to fund its activities  through the next twelve months and
to maintain net tangible assets of at least $4.0 million,  which is required for
continued inclusion of the Company's  securities on Nasdaq-NMS.  However,  there
can be no  assurance  that the Company  will be able to satisfy  the  conditions
precedent to the issuance of additional  Units.  The second tranche of financing
of $3.0  million  pursuant  to the  Securities  Purchase  Agreement  between the
Company and

                                      -14-
<PAGE>

Zanett  Lombardier,  Ltd.  and Capital  Ventures  International  is scheduled to
close on or before  November 30, 1997.  In order for the closing to take place,
the Company has to achieve certain milestones. The Company has already satisfied
three out of the four milestones for the second tranche, and the Company expects
to fulfill the fourth  criterion  before the scheduled  second tranche  payment.
Anticipated cash flows from operations are largely  dependent upon the Company's
ability to achieve its sales and gross profit objectives for its 1View and other
products.  If the Company is unable to meet these  objectives,  it will consider
alternative  sources  of  liquidity,  such as  additional  offerings  of  equity
securities. Although the Company believes that it can successfully implement its
operating  plan and, if necessary,  raise  additional  capital,  there can be no
assurance that  implementation of the plan will be successful or that financing,
if sought, will be available.


PART II.           OTHER INFORMATION

Item 1.            Legal Proceedings

         The Company is not  involved in any legal  proceedings,  other than the
routine litigation incidental to the business.

Item 2.           Changes in Securities

         (c) On August 21, 1997, the Company entered into a transaction to raise
$200,000  through the issuance of a 8% convertible  note due August 20, 2002 and
warrants to purchase  4,000 shares of Common Stock at an exercise price of $1.50
per share to,  Gundyco in trust for RRSP 550 99119 12. The note and the warrants
were issued  pursuant to Rule 506 of  Regulation D under the  Securities  Act of
1933,  as  amended,  to an  accredited  investor.  Pursuant  to the terms of the
convertible  note, the Company is obligated to file a registration  statement by
December  12, 1997 to register the Common Stock  issuable on  conversion  of the
note.  The note and  warrants  were  sold  for  cash and no  placement  agent or
underwriter  was used. The warrants expire on August 20, 2002. The holder of the
convertible note has a security interest in accounts receivable,  inventory, the
intellectual property of the 1 View software and on the stock of Dorotech, S.A.

         The convertible note is convertible into shares of the Company's Common
Stock 45 days beginning after issue at a conversion price of $1.50 per share. On
or after December 12, 1997,  the holder has the right to redeem the  convertible
note plus accrued  interest on one business  days' notice to the Company in cash
or shares of Common Stock, at the Company's  election.  On or after December 12,
1997,  the Company  has the right to redeem the  convertible  note plus  accrued
interest on 30 days' notice to the holder in cash or share of Common  Stock,  at
the  holders'  election.  If shares of Common  Stock are used,  Common  Stock is
issued at a rate of 90% of the  previous  5 trading  days  average  closing  bid
price.


                                      -15-
<PAGE>

Item 3.   Changes Upon Senior Securities

          None


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

          None


Item 6.   Exhibits and Reports on Form 8-K

(a)       Exhibits

          10.34  Eight Percent (8%) Convertible  Notes between  Network  Imaging
          Corporation and  Gundyco  in  trust for RRSP 550 99119 12 as of August
          21, 1997 and attached Schedule. 

          10.35  Warrant to purchase 4,000  shares  of  Common  Stock  issued to
          Gundyco  in trust for RRSP 550 99119 12 dated  August  21, 1997.

          27.  Financial data schedule

(b)       Reports on Form 8-K

          None




















                                      -16-
<PAGE>




                                   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 hereunto duly authorized.


                                  NETWORK IMAGING CORPORATION
                                         (Registrant)


Date:  November 4, 1997                         By /s/ James Leto
                                                   ---------------------
                                                James J. Leto
                                                President and  Chief  Executive
                                                Officer


Date:  November 4, 1997                         By /s/ Jorge R. Forgues
                                                   --------------------
                                                Jorge R. Forgues
                                                Senior Vice President of Finance
                                                and Administration, Chief Finan-
                                                cial Officer and Treasurer