SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  Form 10-K
(Mark one)
[X]   ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR 15 (d)  OF  THE  SECURITIES
      EXCHANGE ACT OF 1934

                 For the fiscal year ended December 31, 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 0-28672

                                 Optika Inc.
            (Exact name of registrant as specified in its charter)

              Delaware                           95-4154552
   (State or other jurisdiction of            (I.R.S. Employer
   incorporation or organization)            Identification No.)

    7450 Campus Drive, 2nd Floor                    80920
     Colorado Springs, Colorado                  (Zip Code)
      (Address of principal executive offices)

Registrant's telephone number, including area code:  (719) 548-9800

Securities registered pursuant to Section 12(b) of the Act:

                                 None

Securities registered pursuant to Section 12(g) of the Act:

                   Common Stock, par value $.001 per share.
                               (Title of Class)

    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 ____

    Indicate by check mark if disclosure of delinquent  filers  pursuant to Item
405 of Registration S-K is not contained herein,  and will not be contained,  to
the  best  of  Registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. ___

    The aggregate market value of the voting stock held by non-affiliates of the
Registrant,  based upon the closing  sale price of the Common  Stock on February
10,  1999  as  reported  on  the  NASDAQ  National  Market,   was  approximately
$21,950,930.  Shares of Common  Stock held by each  officer and  director and by
each  person  who owns 5% or more of the  outstanding  Common  Stock  have  been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate  status is not  necessarily  a conclusive  determination  for other
purposes.  As of February 10, 1999,  Registrant had outstanding 7,168,795 shares
of Common Stock.


                     DOCUMENTS INCORPORATED BY REFERENCE

1. Portions  of the  Registrant's  definitive  Proxy  Statement  for the  Annual
   Meeting  of  Stockholders  to be  held on May 20,  1999  is  incorporated  by
   reference in Part III of this Form 10-K to the extent stated herein.

<PAGE>

==============================================================================


                                 OPTIKA INC.
                       1998 ANNUAL REPORT ON FORM 10-K
                              TABLE OF CONTENTS


                                                                           PAGE
PART I
   Item 1.  Business..........................................................1
   Item 2.  Properties.......................................................14
   Item 3.  Legal Proceedings................................................15
   Item 4.  Submission of Matters to a Vote of Security Holders..............15

PART II
   Item 5.  Market for Registrant's Common Equity and Related 
             Stockholder Matters.............................................16
   Item 6.  Selected Financial Data..........................................17
   Item 7.  Management's Discussion and Analysis of Financial 
             Condition and Results of Operations.............................18
   Item 8.  Financial Statements and Supplementary Data......................25
   Item 9.  Changes In and Disagreements with Accountants on 
             Accounting and Financial Disclosure.............................25

PART III
   Item 10. Directors and Executive Officers of Registrant...................26
   Item 11. Executive Compensation...........................................26
   Item 12. Security Ownership of Certain Beneficial Owners and Management...26
   Item 13. Certain Relationships and Related Transactions...................26

PART IV
   Item 14. Exhibits, Financial Statement Schedules and Reports
             on Form 8-K.....................................................27
            Signatures.......................................................43


<PAGE>

                                    PART I

      THIS ANNUAL REPORT ON FORM 10-K CONTAINS  FORWARD-LOOKING  STATEMENTS THAT
INVOLVE  RISKS AND  UNCERTAINTIES.  THE  COMPANY'S  ACTUAL  RESULTS  MAY  DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT  CAUSE SUCH A  DIFFERENCE  INCLUDE,  BUT ARE NOT  LIMITED  TO,  THOSE
DISCUSSED UNDER THE CAPTION "BUSINESS RISKS" CONTAINED HEREIN.

ITEM 1.  BUSINESS

INTRODUCTION

    Optika(R)  Inc.  ("Optika"  or  the  "Company")  is a  leading  provider  of
business-to-business electronic commerce ("e-commerce") solutions. By leveraging
the  technology  of the World Wide Web, the Company's  software  bridges the gap
between paper and e-commerce across the enterprise and throughout supply chains.
In March 1998, the Company  introduced Optika  eMedia(TM),  its 32-bit Web-based
software solution that enables  organizations  with high transaction  volumes to
efficiently  and  inexpensively   manage  the  high-volume  flow  of  paper  and
electronic  data  associated  with running  today's  businesses.  Optika  eMedia
provides a solution  beyond  traditional  imaging/computer  output to laser disc
("COLD")/workflow  functionality by also offering multiple client interfaces and
a scalable, extensible 3-tier architecture.

    Prior to its introduction of Optika eMedia, Optika developed and distributed
FilePower(R),  the  first  truly  integrated  client/server  imaging,  COLD  and
workflow software. In the high-performance imaging market, Optika offered server
software that provided core imaging functions, application software for document
image management, COLD, automated workflow transaction processing and associated
development  tools. The FilePower  software suite was designed for deployment at
the departmental or workgroup level, with scalability throughout the enterprise.

INDUSTRY BACKGROUND

    The Company believes the migration of business to e-commerce is being driven
by two  trends.  First,  is the advent of the World Wide Web,  which  provides a
widely-used  established  infrastructure  for the transactions of communications
and data to customers, suppliers and business partners. According to META Group,
"the  applications  and  business  opportunities  that  fall  under  the  broad,
embryonic  heading  of  e-commerce  will  fundamentally   change  the  way  many
businesses and  organizations  operate"  (META Group,  "Electronic  Commerce:  A
Practical Business Guide" 1998).

    The second trend driving  e-commerce is the increasing  focus on integrating
an organization's  business  partners,  such as vendors and customers,  into its
traditional  business  processes.  An organization's set of business partners is
normally referred to as its "value chain" or "supply chain." Although e-commerce
was initially  thought of as a  revolutionary  way to market,  sell and purchase
goods and services,  the industry is now realizing the even greater potential of
e-commerce in changing the way  businesses  manage their supply chain  partners.
The  ubiquitous  access  and low  costs  associated  with the  Internet  make it
possible  for  businesses  to leverage it as an  infrastructure  to develop more
efficient methods of interacting with each other.

    E-commerce  offers a way for  businesses  to eliminate  paper at its source,
making it  particularly  important for customers in  paper-intensive  industries
such as financial services,  insurance and retail.  However, the high volumes of
paper  associated  with  business  transactions  will not be replaced  easily or
immediately.   The  transition  from  paper-based   transactions  to  electronic
transactions  over the Internet will likely be gradual and sometimes  difficult,
varying  greatly from company to company.  For this reason the Company  believes
that  companies  will need to  maintain  dual  systems to handle  both paper and
electronic transactions over the next few years.

    Therefore,  the transition to e-commerce will require  solutions that manage
the  new   e-commerce-based   business  processes,   as  well  as  the  on-going
paper-intensive  processes.  One method of accomplishing this objective is using
products that offer both  e-commerce and image  processing  capabilities.  Image
processing  systems allow documents to be electronically  stored,  retrieved and
routed,  and generally include the following five basic functions:  (i) document
capture,  (ii) optical  storage,  (iii)  retrieval  and display,  (iv)  document
management and (v) automated transaction processing (workflow).

OPTIKA EMEDIA

    The Company believes that Optika eMedia,  Optika's recent product entry into
the  e-commerce  market,   addresses  organizational  needs  for  managing  both
paper-based  and  electronic  business-to-business  transactions.  Optika eMedia
became commercially available in September 1998.

    Optika  eMedia is a 32-bit  Internet-based  software  suite that manages the
full range of documents supporting business transactions within an organization,
across the Internet and  throughout  the supply chain.  Optika  eMedia  provides
businesses with a Web-based  electronic  infrastructure for conducting  business
with  its  suppliers  and  customers.  The  Optika  software  solution  supplies
on-demand  access to the entire context of  business-to-business  relationships,
including the ability to find and view all  electronic  data (such as electronic
data interchange or "EDI" and XML-based electronic forms), documents, images and
electronic   communications   and   negotiations   associated  with  a  business
transaction.  With Optika eMedia,  a company can manage all of its  interactions
within its supply chain in an efficient and context-rich manner.

    Optika eMedia consists of the following:

o      A scalable,  extensible 3-tier  architecture  built on industry standards
       that combines image management,  document management,  workflow and COLD,
       deployed and maintained over the Internet;

o      Multiple,  user-configurable clients for retrieving and viewing documents
       of virtually any type as well as processing  work in a workflow.  Clients
       include an Optika production interface,  a standard browser interface and
       Optika eMedia tools integrated with a line-of-business application;

o      A new concept called  "Galleries"  which allows  business  analysts,  not
       programmers, to customize user interfaces specific to business functions;

o      Tools that enable organizations to collaborate on business  transactions
       and settle differences in out-of-tolerance transactions;

o      Inter-company  visual workflow software to manage value chain processes;
       and

o      Technology  adoption  methodology  to  successfully  implement the paper
       automation and paper elimination processes.

    With Optika eMedia's  component-based  architecture,  end-user solutions are
constructed from a set of modular components.  Because Optika eMedia is designed
to work with  industry-standard  technologies and platforms,  such as Windows NT
and Web  browsers,  the Company  believes that Optika eMedia lowers the cost for
businesses to implement information  management solutions and enables businesses
to achieve the highest  possible  return on investment by extending the benefits
of technology to their partners. Optika eMedia uses standard TCP/IP protocols to
deliver a fully functional 32-bit product accessible to any Web user.

FILEPOWER SUITE

    Prior to its introduction of Optika eMedia, Optika historically  developed a
fully integrated  client/server  imaging software suite called FilePower,  which
provided the following components:  server software with core imaging functions;
application  software for document image management;  COLD;  automated  workflow
transaction  processing;  and associated development tools. The Company believes
that the FilePower suite enabled end-users to reduce costs,  improve operational
productivity  and enhance  customer  service.  For the first time, the Company's
FilePower  suite  combined  image  management  (FPmulti),  COLD  (FPreport)  and
advanced  workflow  processing   (PowerFlow)  into  a  single,   component-based
application.  The FilePower  suite was designed to provide  rapid  installation,
ease of use, enterprise-wide scalability and ease of customization.

SALES & MARKETING

Sales

    Optika employs a blended sales model,  consisting of a worldwide  network of
approximately   170  Advantage   Partners  ("APs")  and  5  Original   Equipment
Manufacturers ("OEMs"), in addition to a direct sales force that covers 16 North
American territories and territories in South America,  Asia and Europe.  Optika
also uses a Solution  Services team of system architects and program managers to
support its account  executives and APs in enterprise  system design,  planning,
implementation,  and rollout.  License  revenues from APs and OEMs accounted for
69% and 10%, respectively,  of the Company's license revenues for the year ended
December 31, 1998.

    Advantage  Partners.  APs are Value Added Resellers  (VARs)  responsible for
identifying potential end-users, selling the Company's products to the end-users
as  part  of  a  complete  hardware  and  software  solution,   customizing  and
integrating the Company's products at the end-users sites, and providing support
and maintenance to the end-users following the sale. The Company's APs currently
include  large  organizations  selling  a  wide  variety  of  products,  smaller
organizations  focused  on  imaging,   application-oriented   organizations  and
geographically-focused organizations. The Company establishes relationships with
APs through written agreements.  These agreements establish a price at which the
AP is eligible to purchase the Company's  software for resale to end-users,  the
maintenance  fee revenues which must be remitted back to the Company,  and other
material  terms  and  conditions.   Such  agreements   generally  do  not  grant
exclusivity to APs, do not prevent APs from carrying competing product lines and
do not  require  APs to sell  any  particular  dollar  amount  of the  Company's
software. However, contracts may be terminated at the election of the Company if
specified sales targets and end-user satisfaction goals are not attained. Actual
sales  contracts  are between the APs and the  end-users,  although the end-user
directly licenses the software from the Company through acceptance of a standard
shrink-wrapped license agreement. The Company supports its APs through dedicated
personnel at its headquarters in Colorado Springs and a network of fifteen field
offices.  Services range from joint marketing efforts to assistance with pricing
and proposals to technical product support.

    The Company's strategy is to target its marketing activities toward its most
productive APs, and to recruit  additional APs in key  geographical and vertical
markets.  The Company's  Advantage  Partner program is a crucial element of this
strategy.  The Eye on  Partnership  program is  designed  to  promote  long-term
relationships  between  the Company  and its APs by  awarding  silver,  gold and
platinum  status to APs,  based on their sales,  training  and customer  service
achievements.  This program includes extended support and free training, as well
as marketing assistance with seminars, programs and co-op marketing funds.

    OEMs. The Company has also established  relationships  with certain OEMs who
resell the Company's  software under their names to their end-user  customers as
part  of  their  own  imaging  software   solution.   Unlike  the  Company's  AP
relationships,  the OEMs actively compete with the Company and its APs. Optika's
OEM  agreements  establish a price at which the OEM is eligible to purchase  the
Company's  software  for  resale  to its  customers,  and the  maintenance  fees
received by the OEM to be remitted back to Optika.  OEMs generally have a higher
sales volume and require  considerably less post-sale support than the Company's
APs.  The  Company's  strategy is to continue  to recruit  OEMs in key  vertical
markets such as healthcare, transportation and financial services.

    Solution   Services.   The  Company's  Solution  Services  team  focuses  on
developing relationships with large corporate end-users with multiple geographic
locations.  The Solution  Services  team  initiates  contact  directly  with the
end-user,  but relies heavily on the Company's APs to provide  installation  and
integration  services at the end-user's  site and provide  end-user  support and
maintenance following sales.

International Sales

    For  the  years  ended  December  31,  1997  and  1998,   Optika   generated
approximately   23%  and  24%,   respectively,   of  its  total   revenues  from
international  sales.  The  Company  currently  maintains  offices in London and
Munich to support  its 33  European  APs,  an office in Brazil to support its 22
Latin  American  APs,  and offices in  Singapore  and Malaysia to support its 32
Asian APs. The Company is actively  seeking to expand and strengthen its network
of foreign APs.

Marketing

    The Company has an  integrated  marketing  program  that  supports its sales
strategy.   The  Company's   marketing  efforts  are  organized  into  marketing
communications,  product marketing,  strategic  alliances,  marketing  programs,
channel marketing and Web service  programs.  The Company supports these efforts
by  issuing  frequent  announcements  to  the  press,  advertising  in  industry
periodicals   and   magazines,   communicating   with  key  industry   analysts,
participating  in trade shows,  telemarketing  and direct mailing to prospective
customers and developing and maintaining  Web services.  The Company also unites
with channel  partners in joint  marketing  efforts.  The  targeted  audience is
Fortune  1000 and  Global  2000  companies  in the  retail,  financial  services
(mortgage lending and banking) and insurance sectors.


<PAGE>

CUSTOMERS

     The Company has already established,  as of December 31, 1998, a base of
over 40 Optika  eMedia  customers  through  its  blended  sales model of APs and
direct  sales force.  Set forth below is a partial  list of end-users  that have
generated revenues for the Company by purchasing Optika eMedia:

AmeriTrade                            National Bank Commerce
ARVEST Bank Group                     Promea Ausgleichakasse
Australian Passport Office            Pulte Mortgage Corporation
Automatic Data Processing             ReliaStar
Boston Edison                         TCI of Pennsylvania
Clear Channel Communications          The Home Depot
Coram Prescriptions                   University of Colorado
Greenlee Textron                      Veterans Administration - Philadelphia
JDEdwards                             Warner-Lambert Company
Kuwait Stock Exchange                 Washington State University
Lawrence Livermore National Lab       


    As of December 31,  1998,  the Company had  licensed  approximately  105,000
clients of its products to over 1,500 end-users worldwide.  Set forth below is a
partial list of FilePower end-users that have generated revenues for the Company
and have  acquired  licenses for a minimum of five users.  The Company  believes
that  these  end-users  are  currently  using  the  Company's  products  and are
representative of the Company's overall end-user base.

Banco Nacional de Costa Rica              Lillian Vernon
Banco Safra                               Lloyds Bank StockBrokers
Bank of Scotland                          MCI/WorldCom
BankBoston                                Michelin
Blue Cross/Blue Shield                    Navistar
British Railways                          Packard-Bell
Casio                                     Payless Cashways
Chase Manhattan Bank                      PharMor
Children's Hospital                       Phillips-Van Heusen
Citibank                                  Smith Barney
Coca-Cola Company                         Sony
Deutsche Bank                             Speigel
Diners Club International                 Standard & Poor's
Eddie Bauer                               State of New Mexico
Ernst & Young                             State of Washington
Far East Bank                             Subaru
Federal Reserve Bank                      Texas Woman's University
Fidelity Brokerage                        The Walt Disney Company
Georgia-Pacific Corporation               Tokyo Mitsubishi International
GMAC Commercial Mortgage                  Turner Broadcasting
Guardian Life Insurance Company           Union Bank of Switzerland
Indiana Department of Motor Vehicles      University of Notre Dame
J. Crew                                   Volvo Car UK Limited


     No AP, OEM or  end-user  accounted  for more than 10% of the  Company's
total revenues for the year ended December 31, 1998.

<PAGE>

SERVICE & SUPPORT

    The Company  believes  that a high level of customer  service and support is
critical to the Company's  performance.  The Company provides technical support,
maintenance,  training and  consulting to its APs,  which are in turn  primarily
responsible for providing technical support services directly to end-users.  The
Company also  provides  such support  directly to its  end-users on an as-needed
basis.  These services are designed to increase end-user  satisfaction,  provide
feedback to the Company as to end-users' demands and requirements,  and generate
recurring  revenue.  The Company  plans to continue to expand its  services  and
support programs as the depth and breadth of the products offered by the Company
increases.

AP Support

    The  Company  maintains  pre-sales  technical  support  personnel  who  work
directly with the APs to provide  technical  responses to sales  inquiries.  The
Company  offers  educational  and  training  programs,  as  well  as  customized
consulting  services,  to its APs. Fees for training and consulting services are
generally  charged  on a per diem  basis.  The  Company  also  provides  product
information  bulletins on an ongoing basis,  including  bulletins  posted on its
Internet web site and through periodic  informational updates about the products
installed.  These  bulletins  generally  answer  frequently  asked questions and
provide information about new product features.

Technical Support & Software Maintenance

    The  Company,  in  conjunction  with its APs,  offers  end-users  a software
maintenance  program. The maintenance program includes software updates provided
by the  Company to the  end-user,  and  technical  support  provided  by the AP.
Telephone consultation services are provided by the Company to the AP to respond
to end-user  technical  questions  that the AP is unable to answer.  Web Support
services  are also now  available  that provide  access to  important  technical
support  information,  streamline  the process of  interacting  with the support
organization and provide access to the Technical  Support  Knowledge Base. An AP
typically  charges the end-user a fee for  maintenance and support of the entire
system,  including  software and hardware.  In turn,  the Company,  on an annual
basis,  charges  the AP a fee of  between  8% and 12% of the  then-current  list
prices of the licensed software.

Warranty

    The Company  generally  includes a 90-day limited warranty with the software
license. During the warranty period, the end-user is entitled to corrections for
documented program errors.

RESEARCH & DEVELOPMENT

    The Company has  committed,  and expects to continue to commit,  substantial
resources  to  research  and  development.  Optika's  research  and  development
organization is organized along the product team concept.  Each product team has
an engineering team leader, a product manager, development engineers and quality
assurance   engineers.   The  team  is  entirely  responsible  for  the  design,
implementation  and quality of its  products.  Product  development  efforts are
directed at increasing product functionality, improving product performance, and
expanding the  capabilities  of the products to  interoperate  with  third-party
software  and  hardware.  In  particular,  the Company is  devoting  substantial
development resources to develop additional  functionality for its products, and
the  capability  to support  additional  platforms,  databases,  graphical  user
interfaces,  toolsets and emerging  technologies.  The Company believes that the
modular  architecture  of Optika eMedia will provide the  foundation  for future
enhancements to the Company's e-commerce solution.

    As of December 31, 1998, the Company's research and development organization
consisted of 51 full-time employees in Colorado Springs,  Colorado. During 1998,
research and  development  expenses were $5.3 million.  As of December 31, 1998,
the Company had expensed all of its software development costs as incurred.

COMPETITION

    The market for the Company's  products is intensely  competitive  and can be
significantly  affected by new product introductions and other market activities
of industry  participants.  The Company believes that the principal  competitive
factors  affecting its market  include  product  features such as  adaptability,
scalability, ability to integrate with third-party products, functionality, ease
of use, product reputation,  quality,  performance,  price, customer service and
support,  effectiveness of sales and marketing efforts,  and company reputation.
Although the Company believes that it currently  competes favorably with respect
to such  factors,  there can be no  assurance  that the Company can maintain its
competitive  position against current and potential  competitors.  The Company's
principal  direct  competitors  for its  product  include  FileNet  Corporation,
International  Business Machines Corporation,  and Eastman Software. The Company
also  competes  with  industry-specific   application  vendors.  Numerous  other
software  vendors  also  compete in each  product  area.  Potential  competitors
include, without limitation, providers of document management software products,
providers  of  document  archiving  products,  and RDBMS  ("Relational  Database
Management System") vendors. In addition,  the Company may face competition from
other  established  and  emerging  companies  in new  market  segments,  such as
e-commerce, resulting from the introduction of Optika eMedia.

    Many  of  the  Company's  current  and  potential  competitors  have  longer
operating  histories,  greater  resources  and  name  recognition,  and a larger
installed base of customers than the Company. As a result, these competitors may
be able to respond more quickly to new or emerging  technologies  and changes in
customer  requirements,  or to  devote  greater  resources  to the  development,
promotion  and sale of their  products,  than can the Company.  The Company also
faces indirect competition from VARs, OEMs, distributors and system integrators.
The Company relies on a number of these resellers for  implementation  and other
customer support services, as well as recommendations of its products during the
evaluation stage of the purchase process. Although the Company seeks to maintain
close  relationships  with these  resellers,  many of these third  parties  have
similar, and often more established,  relationships with the Company's principal
competitors.

PROPRIETARY RIGHTS

    The Company relies on a combination of trade secret, copyright and trademark
laws, software licenses and nondisclosure  agreements,  to establish and protect
its proprietary rights in its products.  The Company enters into confidentiality
and/or license agreements with all of its employees and distributors, as well as
with its customers and potential customers seeking proprietary information,  and
limits  access to and  distribution  of, its software,  documentation  and other
proprietary  information.  Despite  these  precautions,  it may be possible  for
unauthorized  third  parties to copy  aspects of the  Company's  products  or to
obtain and use information that the Company regards as proprietary.  The Company
has certain  registered  and other  trademarks.  The Company  believes  that its
products,   trademarks  and  other  proprietary   rights  do  not  infringe  the
proprietary rights of third parties.  There can be no assurance,  however,  that
third parties will not assert infringement claims in the future.

EMPLOYEES

    At December 31, 1998, the Company had 173 full-time  employees in 21 cities.
Of these employees,  51 were involved in research and  development,  77 in sales
and marketing,  27 in technical  support and training,  and 18 in administration
and finance. No employees are covered by any collective  bargaining  agreements.
The Company believes that its relationship with its employees is good.

EXECUTIVE OFFICERS

    The Company's  executive  officers and key  employees,  and their ages as of
February 10, 1999 are:

       Name                      Age                   Position
      ---------------------      ---        ------------------------------------
      Mark K. Ruport.......      46         President, Chief Executive Officer &
                                            Chairman of the Board of Directors
      Steven M. Johnson....      37         Vice President- Finance &
                                            Administration, Chief Financial
                                            Officer & Secretary
      Marc R. Fey..........      43         Senior  Vice President - Engineering
                                            & Customer Support Services
      Jeanne Logozzo.......      35         Vice President- Marketing
      Greg D. Cooke........      35         Vice President- North American Sales
      Paul Carter..........      44         Chief Product Architect, Co-Founder 
                                            & Director

    Mark K. Ruport has been President and Chief Executive Officer and a Director
of the Company  since  February  1995. He has served as Chairman of the Board of
Directors  since May 1996. From June 1990 to July 1994, Mr. Ruport was President
and Chief  Operating  Officer,  and most recently Chief  Executive  Officer,  of
Interleaf, Inc., a publicly-held software and services company that develops and
markets solutions for content and document  management and high-end  publishing.
From July 1994 to February  1995, Mr. Ruport pursued  personal  interests.  From
1989 to 1990,  Mr.  Ruport was  Senior  Vice  President  of  Worldwide  Sales of
Informix Software, where he had responsibility for direct and indirect sales and
OEMs.

    Steven M. Johnson has served as Vice  President--Finance  and Administration
and Chief  Financial  Officer of the Company since  September  1992,  and as its
Secretary since May 1996. He also served as interim Chief  Executive  Officer of
the Company from October 1994 to February 1995 and as interim Vice  President of
North  American  Channel Sales from July 1998 through  December  1998.  Prior to
joining the Company,  from February 1988 to September 1992, Mr. Johnson was Vice
President-Finance,  and Chief  Financial  Officer,  of Insurance  Auto Auctions,
Inc., a publicly held company.

    Marc R. Fey has served as the Company's  Senior Vice  President--Engineering
and Customer  Support  Services since February 1996. Mr. Fey previously held the
position of Vice  President--Development  from July 1994 to February 1996. Prior
to joining the Company,  from September 1991 to June 1994, Mr. Fey was President
of The Fey Company,  which provided  consulting  services for software companies
and venture  investors  on  technology,  acquisitions,  strategic  planning  and
general operations.  Mr. Fey co-founded XA Systems Corporation,  where from 1982
to 1991 he served in various capacities, including President, and most recently,
Chairman and Chief Technology Officer. Prior to 1982, Mr. Fey was a manager with
Andersen Consulting.

     Jeanne Logozzo has served as Vice President--Marketing  since October 1997.
Prior to joining  Optika,  Ms. Logozzo served as an independent  consultant from
May 1997 to October 1997. Ms.  Logozzo was Senior  Director of Marketing at Open
Text  Corporation  from May 1996 to May  1997,  where  she was  responsible  for
marketing that company's intranet collaborative product suite. From June 1994 to
May 1996,  Ms.  Logozzo  was Manager of  Strategic  Marketing  for Ciros,  a new
subsidiary  of R.R.  Donnelley  &  Sons.  Ms.  Logozzo  held  various  marketing
positions at Interleaf Corporation from 1986 to 1994.

    Greg D. Cooke has served as Vice  President  of North  American  Sales since
February  1999 . While at  Optika,  Mr.  Cooke has held a  variety  of sales and
business development  positions.  Prior to joining Optika in 1991, Mr. Cooke was
the Vice  President  of Sales  and  Marketing  for FSE  Corporation,  a  leading
financial  services systems  integration  company and Optika business partner in
Dallas,  Texas.  He also held a sales  management  position  at The  Synergistic
Group,  where he was  responsible  for the sales of business  planning  software
packages to leading manufacturers, wholesale distributors and retailers.

    Paul  Carter is a  co-founder  of the  Company  and has served as a Director
since its inception.  Since July 1994, he has served as Chief Product Architect,
and he served as the Company's  Secretary from 1988 to May 1996.  From July 1990
to June 1994,  Mr.  Carter was  Director  of  Research  and  Development  of the
Company, and from January 1988 to June 1990 he was its Vice  President--Research
and Development.
<PAGE>
                                BUSINESS RISKS

    IN EVALUATING THE COMPANY'S BUSINESS,  READERS SHOULD CAREFULLY CONSIDER THE
BUSINESS RISKS DISCUSSED IN THIS SECTION,  IN ADDITION TO THE OTHER  INFORMATION
PRESENTED IN THIS ANNUAL REPORT ON FORM 10-K.

    Significant Fluctuations in Operating Results. The Company's sales and other
operating  results  have  varied   significantly  in  the  past  and  will  vary
significantly  in the future as a result of factors such as: the size and timing
of significant orders and their fulfillment;  demand for the Company's products;
changes in pricing  policies  by the  Company or its  competitors;  the  number,
timing and significance of product enhancements and new product announcements by
the Company and its  competitors;  changes in the level of  operating  expenses;
customer order deferrals in  anticipation of new products or otherwise;  foreign
currency exchange rates; warranty and customer support expenses;  changes in its
end-users' financial condition and budgetary processes; changes in the Company's
sales,  marketing  and  distribution  channels;  delays or deferrals of customer
implementation;  product life cycles;  software bugs and other  product  quality
problems;  discounts; the cancellation of licenses during the warranty period or
nonrenewal of maintenance  agreements;  customization  and integration  problems
with the end-user's legacy system; changes in the Company's strategy; changes in
accounting  pronouncements;  potential acquisitions;  changes in customer buying
patterns  as a  result  of  Year  2000  concerns;  the  level  of  international
expansion;  and seasonal trends. A significant portion of the Company's revenues
has been,  and the Company  believes will continue to be, derived from a limited
number of orders,  and the  timing of such  orders  and their  fulfillment  have
caused,  and are  expected to continue to cause,  material  fluctuations  in the
Company's operating results. Revenues are also difficult to forecast because the
markets for the Company's products are rapidly evolving,  and the sales cycle of
the Company and of its APs and OEMs,  from initial  evaluation  to purchase,  is
lengthy  and varies  substantially  from  end-user to  end-user.  To achieve its
quarterly revenue  objectives,  the Company depends upon obtaining orders in any
given quarter for shipment in that quarter. Product orders are typically shipped
shortly  after  receipt;  consequently,  order  backlog at the  beginning of any
quarter  has in the past  represented  only a small  portion  of that  quarter's
revenues.  Furthermore, the Company has often recognized most of its revenues in
the last month, or even in the last weeks or days, of a quarter.  Accordingly, a
delay in shipment near the end of a particular  quarter may cause  revenues in a
particular  quarter to fall significantly  below the Company's  expectations and
may  materially  adversely  affect  the  Company's  operating  results  for such
quarter.  Conversely, to the extent that significant revenues occur earlier than
expected,  operating results for subsequent  quarters may fail to keep pace with
results of previous  quarters or even  decline.  The Company  also has  recorded
generally  lower sales in the first  quarter than in the  immediately  preceding
quarter,  as a  result  of,  among  other  factors,  end-users'  purchasing  and
budgeting  practices  and the  Company's  sales  commission  practices,  and the
Company  expects  this pattern to continue in future  years.  To the extent that
future  international   operations  constitute  a  higher  percentage  of  total
revenues,  the Company anticipates that it may also experience relatively weaker
demand in the third  quarter as a result of reduced  sales in Europe  during the
summer months.  A significant  portion of the Company's  expenses are relatively
fixed in the short term. Accordingly, if revenue levels fall below expectations,
operating results are likely to be disproportionately and adversely affected. As
a result of these and other  factors,  the Company  believes  that its quarterly
operating results will vary in the future, and that period-to-period comparisons
of its results of operations  are not  necessarily  meaningful and should not be
relied upon as indications of future performance. Furthermore, due to all of the
foregoing  factors,  it is likely  that in some  future  quarter  the  Company's
operating  results will be below the  expectations of public market analysts and
investors.  In such event,  the price of the Company's Common Stock would likely
be materially adversely affected.

    Risks Associated with the Introduction of Optika eMedia.  In March 1998, the
Company  announced  plans to  introduce  Optika  eMedia,  its  32-bit  Web-based
software solution that enables  organizations  with high transaction  volumes to
efficiently  and  inexpensively   manage  the  high-volume  flow  of  paper  and
electronic data associated with running today's businesses. In July 1998, Optika
announced  the  controlled  shipment of Optika eMedia to initial user sites that
included  Fortune 1000  companies and other large  organizations.  Optika eMedia
became  commercially  available in late September  1998.  Because the market for
Optika eMedia is new and evolving, it is difficult to assess or predict with any
assurance  the  growth  rate  and  size of this  market.  There  also  can be no
assurance  that the market for Optika  eMedia will  continue to develop.  If the
market continues to develop more slowly than expected or becomes  saturated with
competitors, or if the product does not achieve market acceptance, the Company's
business,  results of  operations  and  financial  condition  may be  materially
adversely affected.

    Optika eMedia has not been fully implemented in customers'  environments and
as a result,  there can be no  assurance  that  Optika  eMedia  will not require
substantial  software  enhancements  or  modifications  to  satisfy  performance
requirements  of customers  or to fix design  defects of  previously  undetected
errors.  Further,  it is common for  complex  software  programs  such as Optika
eMedia to contain  undetected  errors when first released,  which are discovered
only after the product has been used over time with different  computer  systems
and in varying applications and environments.  While the Company is not aware of
any significant technical problems with Optika eMedia, there can be no assurance
that  errors  will  not be  discovered,  or if  discovered,  that  they  will be
successfully  corrected  on a timely  basis,  if at all.  The  Company's  future
business  growth  is  substantially  dependent  on  the  continued  development,
introduction  and market  acceptance of Optika eMedia.  If customers  experience
significant  problems  with  implementation  of Optika  eMedia or are  otherwise
dissatisfied  with the  functionality or performance of Optika eMedia,  or if it
fails to achieve market acceptance for any other reason, the Company's business,
results of  operations  and  financial  condition  may be  materially  adversely
affected.

    Reliance on Indirect Distribution Channels;  Potential for Channel Conflict.
The Company's  future  results of  operations  will depend on the success of its
marketing and distribution strategy,  which has relied, to a significant degree,
upon  APs and OEMs to sell and  install  the  Company's  software,  and  provide
post-sales  support.  These relationships are usually established through formal
agreements  that  generally  do  not  grant  exclusivity,  do  not  prevent  the
distributor  from  carrying  competing  product  lines  and do not  require  the
distributor  to purchase any minimum  dollar amount of the  Company's  software.
There can be no assurance that any APs will continue to represent the Company or
sell its products.  Furthermore,  there can be no assurance that other APs, some
of which have significantly greater financial marketing and other resources than
the Company, will not develop or market software products which compete with the
Company's products or will not otherwise discontinue their relationship with, or
support of, the Company. Some of the Company's APs are small companies that have
limited  financial and other  resources  which could impair their ability to pay
the Company.  To date, the Company's inability to receive payments from such APs
has not had a material  adverse  effect on the  Company's  business,  results of
operations or financial condition.  The Company's OEMs occasionally compete with
the Company and its APs. Selling through  indirect  channels may also hinder the
Company's ability to forecast sales accurately,  evaluate customer satisfaction,
provide quality service and support or recognize emerging customer requirements.

    During 1998, the Company altered its sales strategy with the introduction of
a direct sales team.  Although  the Company has  recruited a direct sales staff,
the Company has limited  experience  in marketing  and selling its products on a
direct sales basis. Consequently,  there can be no assurance the Company will be
successful in achieving a  significant  level of direct sales on a timely basis,
or at all.  The  Company's  strategy of  marketing  its  products  directly  and
indirectly (through APs and OEMs) may result in distribution  channel conflicts.
To the extent that the Company, APs and OEMs target the same customers, they may
come into conflict with each other.  Although the Company has attempted to avoid
potential  conflicts,  there can be no assurance that channel  conflict will not
materially and adversely affect its relationship  with existing APs and OEMs, or
adversely  affect  its  ability  to  attract  new APs and OEMs.  The loss by the
Company of a number of its more  significant  APs or OEMs,  the inability of the
Company to obtain qualified new APs or OEMs, or to obtain access to the channels
of distribution offering software products to the Company's targeted markets, or
the  failure of APs or OEMs to pay the Company  for its  software,  could have a
material  adverse effect on the Company's  business,  results of operations,  or
financial condition.

    Rapid  Technological  Change:  Dependence  on New Product  Development.  The
market  for the  Company's  products  is  characterized  by rapid  technological
change, changes in customer requirements, frequent new product introductions and
enhancements,  and emerging industry standards. The Company's future performance
will depend in significant part upon its ability to respond effectively to these
developments.  The  introduction of products  embodying new technologies and the
emergence of new  industry  standards  can render  existing  products  obsolete,
unmarketable  or  noncompetitive.  The  Company is unable to predict  the future
impact of such technology changes on the Company's products.  Moreover, the life
cycles of the Company's products are difficult to estimate. The Company's future
performance  will depend in significant part upon its ability to enhance current
products,  and to develop and  introduce  new  products  and  enhancements  that
respond to evolving  customer  requirements.  The Company has in the recent past
experienced  delays in the development and commencement of commercial  shipments
of new products and enhancements, resulting in customer frustration and delay or
loss of  revenues.  The  inability of the Company,  for  technological  or other
reasons,  to develop and  introduce  new  products or  enhancements  in a timely
manner in response to changing customer  requirements,  technological  change or
emerging  industry  standards,  or  maintain  compatibility  with  heterogeneous
computing  environments,  would have a material  adverse effect on the Company's
business, results of operations and financial condition.

    Product Concentration.  To date, the majority of the Company's revenues have
been  attributable  to sales of the  FilePower  Suite  and  individual  software
modules which  comprise the  FilePower  Suite.  Optika  eMedia became  generally
available in September 1998. The Company expects Optika eMedia and the FilePower
Suite to account for  substantially  all of its future  revenues.  The Company's
future financial  performance will depend in general on the continued transition
from  imaging  software  to  e-commerce,  and in  particular  on the  successful
development,  introduction and customer  acceptance of new and enhanced versions
of its  existing  software  products  such as  Optika  eMedia.  There  can be no
assurance  that such  market will  continue to grow or that the Company  will be
successful in developing and marketing these or any other products,  or that any
of these products will achieve widespread customer acceptance. If the e-commerce
software market grows more slowly than the Company  currently  anticipates,  the
Company's  business,  results of operations,  and financial  condition  would be
materially and adversely affected.

    Lengthy and Complex Sales and Implementation  Cycles;  Dependence on Capital
Spending.  The  license of the  Company's  software  products  is  typically  an
executive-level  decision by prospective  end-users,  and generally requires for
the Company and its APs and OEMs to engage in a lengthy and complex  sales cycle
(typically  between six and twelve  months from the initial  contact  date).  In
addition, the implementation by customers of the products offered by the Company
may involve a  significant  commitment  of resources by such  customers  over an
extended  period of time.  For these and other  reasons,  the sales and customer
implementation  cycles are subject to a number of significant  delays over which
the Company has little or no control.  The  Company's  future  performance  also
depends upon the capital  expenditure budgets of its customers and the demand by
such  customers  for the  Company's  products.  Certain  industries to which the
Company sells its products,  such as the financial services industry, are highly
cyclical.  The Company's  operations may in the future be subject to substantial
period-to-period  fluctuations  as a  consequence  of  such  industry  patterns,
domestic and foreign economic and other conditions,  and other factors affecting
capital  spending.  There can be no assurance  that such factors will not have a
material adverse effect on the Company's  business,  results of operations,  and
financial condition.

    Intense  Competition.  The market for the  Company's  products is  intensely
competitive and can be significantly  affected by new product  introductions and
other market  activities of industry  participants.  The  Company's  competitors
offer a variety of products  and  services to address  the  emerging  market for
e-commerce solutions. The Company's principal direct competitors for its product
include FileNet  Corporation,  International  Business Machines  Corporation and
Eastman  Kodak  Company.  The  Company  also  competes  with   industry-specific
application  vendors.  Numerous  other  software  vendors  also  compete in each
product area.  Potential  competitors  include providers of document  management
software,  providers  of document  archiving  products,  and RDBMS  ("Relational
Database  Management  Systems")  vendors.  In  addition,  the  Company  may face
competition from other established and emerging companies in new market segments
created by the release of Optika eMedia.

    Many of the Company's  current and potential  competitors are  substantially
larger than the Company,  have significantly  greater  financial,  technical and
marketing   resources  and  have   established   more   extensive   channels  of
distribution.  As a result, such competitors may be able to respond more rapidly
to new or emerging  technologies  and changes in  customer  requirements,  or to
devote  greater  resources  to the  development,  promotion  and  sale of  their
products  than the  Company.  Because the  Company's  products  are  designed to
operate in non-proprietary computing environments and because of low barriers to
entry in the e-commerce market, the Company expects additional  competition from
established and emerging  companies,  as the market for e-commerce  continues to
evolve.  The  Company  expects  its  competitors  to  continue  to  improve  the
performance  of their  current  products  and to  introduce  new products or new
technologies that provide added functionality and other features. Successful new
product introductions or enhancements by the Company's competitors could cause a
significant  decline  in sales or loss of  market  acceptance  of the  Company's
products and services,  result in continued intense price  competition,  or make
the Company's products and services or technologies  obsolete or noncompetitive.
To  be  competitive,  the  Company  will  be  required  to  continue  to  invest
significant  resources in research and development,  and in sales and marketing.
There can be no  assurance  that the Company will have  sufficient  resources to
make such investments or that the Company will be able to make the technological
advances  necessary  to be  competitive.  In  addition,  current  and  potential
competitors have established or may establish  cooperative  relationships  among
themselves or with third  parties,  to increase the ability of their products to
address the needs of the Company's prospective customers.  In addition,  several
competitors have recently made, or attempted to make,  acquisitions to enter the
market or increase their market presence.  Accordingly,  it is possible that new
competitors  or  alliances  among  competitors  may emerge and  rapidly  acquire
significant  market share.  Increased  competition  is likely to result in price
reductions,  reduced gross margins and loss of market share,  any of which would
have a material adverse effect on the Company's business,  results of operations
and financial condition. There can be no assurance that the Company will be able
to  compete  successfully  against  current  or  future  competitors,   or  that
competitive  pressures will not have a material  adverse effect on the Company's
business, results of operations, and financial condition.

    Management Changes; No Assurance of Successful Expansion of Operations. Most
of the Company's senior  management team have joined the Company within the last
five years.  There can be no assurance  that these  individuals  will be able to
achieve and manage  growth,  if any,  or build an  infrastructure  necessary  to
operate the Company.  The Company's ability to compete effectively and to manage
any future  growth will  require  that the Company  continue to  assimilate  new
personnel and to expand, train and manage its work force. The Company intends to
continue  to  increase  the scale of its  operations  significantly  to  support
anticipated  increases in revenues,  and to address critical  infrastructure and
other  requirements.  These increases have included and will include the leasing
of new space, the opening of additional foreign offices, potential acquisitions,
increases in research and  development to support product  development,  and the
hiring of additional  personnel in sales and marketing.  The increased  scale of
operations has resulted in significantly  higher operating  expenses,  which are
expected to continue to increase  significantly in the future.  If the Company's
revenues do not  correspondingly  increase,  the Company's results of operations
would  be  materially  and  adversely  affected.   Expansion  of  the  Company's
operations  may  impose  a  significant  strain  on  the  Company's  management,
financial and other resources.  In this regard,  any significant  revenue growth
will be  dependent  in  significant  part upon the  Company's  expansion  of its
marketing,  sales and AP support  capabilities.  This expansion will continue to
require significant  expenditures to build the necessary  infrastructure.  There
can be no assurance that the Company's  efforts to expand its  marketing,  sales
and customer  support  efforts will be  successful  or will result in additional
revenues or profitability in any future period.

    Dependence on Key Personnel.  The Company's future performance  depends to a
significant  degree upon the  continuing  contributions  of its key  management,
sales,  marketing,  customer support,  and product  development  personnel.  The
Company has at times  experienced,  and continues to  experience,  difficulty in
recruiting  qualified  personnel,   particularly  in  software  development  and
customer  support.  The Company believes that there may be only a limited number
of persons with the requisite  skills to serve in those  positions,  and that it
may become increasingly  difficult to hire such persons.  Competitors and others
have in the past,  and may in the  future,  attempt  to  recruit  the  Company's
employees.  The  Company  has  from  time to time  experienced  turnover  of key
management  and  technical  personnel.  The loss of key  management or technical
personnel,  or the  failure to attract  and retain key  personnel,  could have a
material adverse effect on the Company's  business,  results of operations,  and
financial condition.

    Dependence on Proprietary Technologies;  Risk of Infringement. The Company's
performance  depends in part on its ability to protect its proprietary rights to
the  technologies  used in its  principal  products.  The  Company  relies  on a
combination  of copyright and trademark  laws,  trade  secrets,  confidentiality
provisions and other contractual  provisions to protect its proprietary  rights,
which are measures  that afford only limited  protection.  Despite the Company's
efforts to protect its proprietary rights,  unauthorized  parties may attempt to
copy aspects of the Company's  products,  or to obtain and use information  that
the  Company  regards as  proprietary.  In  addition,  the laws of some  foreign
countries  do not protect the  Company's  proprietary  rights as fully as do the
laws of the United States. There can be no assurance that the Company's means of
protecting  its  proprietary  rights in the  United  States  or  abroad  will be
adequate,   or  that   competitors  will  not   independently   develop  similar
technologies.  There  can be no  assurance  that  third  parties  will not claim
infringement by the Company's  products of their  intellectual  property rights.
The Company  expects that  software  product  developers  will  increasingly  be
subject to infringement  claims if the number of products and competitors in the
Company's  industry segment grows and the functionality of products in different
industry  segments  overlaps.  Any  such  claims,  with or  without  merit,  and
regardless of the outcome of any  litigation,  will be time consuming to defend,
result in costly litigation,  divert management's attention and resources, cause
product  shipment  delays,  or require  the  Company  to enter  into  royalty or
licensing agreements. Such royalty or licensing agreements, if required, may not
be available on terms  acceptable  to the Company,  if at all. In the event of a
successful claim of infringement  against the Company's products and the failure
or inability of the Company to license the infringed or similar technology,  the
Company's  business,  results of operations,  and financial  condition  would be
materially and adversely affected.

    The Company also licenses software from third parties, which is incorporated
into its  products,  including  software  incorporated  into its  viewer,  image
decompression software and optical character recognition, and full-text engines.
These  licenses  expire from time to time.  There can be no assurance that these
third-party  software  licenses  will continue to be available to the Company on
commercially  reasonable  terms.  While the  Company  believes  that all of such
third-party  software  is  available  from  alternate  vendors,  and the Company
maintains  standard  software  escrow  agreements  with  each of  such  parties,
agreements which provide the Company with access to the source code in the event
of their  bankruptcy or insolvency,  the loss of, or inability to maintain,  any
such  software  licenses  could result in shipment  delays or  reductions  until
equivalent  software could be developed,  identified,  licensed and  integrated,
which in turn could  materially  and adversely  affect the  Company's  business,
results of  operations,  and  financial  condition.  In  addition,  the  Company
generally does not have access to source code for the software supplied by these
third  parties.  Certain of these third parties are small  companies that do not
have extensive financial and technical resources.  If any of these relationships
were  terminated or if any of these third parties were to cease doing  business,
the Company may be forced to expend  significant time and development  resources
to replace the licensed  software.  Such an event would have a material  adverse
effect  upon the  Company's  business,  results  of  operations,  and  financial
condition.  The Company has entered  into source code escrow  agreements  with a
limited number of its customers and resellers,  requiring release of source code
in certain  circumstances.  Such agreements  generally provide that such parties
will have a  limited,  non-exclusive  right to use such  code in the event  that
there is a  bankruptcy  proceeding  by or against  the  Company,  if the Company
ceases to do business,  or if the Company fails to provide  timely  responses to
identified product defects.

    International  Operations.  Sales  outside the United  States  accounted for
approximately 29%, 23% and 24% of the Company's revenues in 1996, 1997 and 1998,
respectively.   An  element  of  the   Company's   strategy  is  to  expand  its
international  operations,  including  the  development  of certain  third-party
distributor  relationships  and the hiring of additional sales  representatives,
each of which involves a significant investment of time and resources. There can
be  no  assurance   that  the  Company  will  be  successful  in  expanding  its
international  operations.  In addition, the Company has only limited experience
in developing localized versions of its products. There can be no assurance that
the Company will be able to successfully localize,  market, sell and deliver its
products  internationally.  The inability of the Company to successfully  expand
its  international  operations in a timely manner could materially and adversely
affect the Company's business,  results of operations,  and financial condition.
The Company's  international  revenues may be denominated in foreign or the U.S.
dollar  currency.  The Company  does not  currently  engage in foreign  currency
hedging transactions; as a result, a decrease in the value of foreign currencies
relative to the U.S. dollar could result in losses from transactions denominated
in foreign currencies, could make the Company's software less price-competitive,
and could have a material adverse effect upon the Company's business, results of
operations,  and financial condition.  In addition, the Company's  international
business is, and will continue to be, subject to a variety of risks,  including:
delays in  establishing  international  distribution  channels;  difficulties in
collecting  international  accounts receivable;  increased costs associated with
maintaining  international  marketing and sales efforts;  unexpected  changes in
regulatory  requirements,  tariffs  and  other  trade  barriers;  political  and
economic  instability;  limited  protection for intellectual  property rights in
certain  countries;   lack  of  acceptance  of  localized  products  in  foreign
countries;  difficulties  in  managing  international  operations,   potentially
adverse  tax  consequences  including,   restrictions  on  the  repatriation  of
earnings;  and the burdens of  complying  with a wide  variety of foreign  laws.
There can be no assurance  that such  factors  will not have a material  adverse
effect on the Company's future  international  revenues and,  consequently,  the
Company's results of operations.  Although the Company's products are subject to
export  controls under United States laws, the Company  believes it has obtained
all necessary export approvals.  However, the inability of the Company to obtain
required  approvals under any applicable  regulations could adversely affect the
ability of the Company to make international sales.
    
     Product  Liability;   Risk  of  Product  Defects.   The  Company's  license
agreements with its customers typically contain provisions designed to limit the
Company's  exposure  to  potential  product  liability  claims.  However,  it is
possible that the limitation of liability  provisions contained in the Company's
license agreements may not be effective under the laws of certain jurisdictions.
Although the Company has not experienced any product  liability  claims to date,
the sale and  support of  products  by the  Company  may entail the risk of such
claims,  and there can be no  assurance  that the Company will not be subject to
such claims in the future. A successful  product liability claim brought against
the Company could have a material  adverse  effect upon the Company's  business,
results of operations, and financial condition.  Software products such as those
offered by the Company  frequently  contain errors or failures,  especially when
first  introduced  or when new  versions  are  released.  Although  the  Company
conducts  extensive  product  testing,  the  Company  has in the  past  released
products that contained defects,  and has discovered  software errors in certain
of its new products and enhancements  after  introduction.  The Company could in
the future lose or delay  recognition of revenues as a result of software errors
or defects,  the  failure of its  products to meet  customer  specifications  or
otherwise. The Company's products are typically intended for use in applications
that may be critical to a customer's business.  As a result, the Company expects
that its customers and potential customers have a greater sensitivity to product
defects than the market for general  software  products.  Although the Company's
business has not been materially and adversely  affected by any such errors,  or
by defects or failure to meet specifications, to date, there can be no assurance
that,  despite  testing by the Company and by current and  potential  customers,
errors  or  defects  will  not  be  found  in new  products  or  releases  after
commencement of commercial  shipments,  or that such products will meet customer
specifications,  resulting  in  loss  or  deferral  of  revenues,  diversion  of
resources, damage to the Company's reputation, or increased service and warranty
and other  costs,  any of which  could have a material  adverse  effect upon the
Company's business,  operating results, and financial condition.  (See Year 2000
discussion).

    Potential  Volatility  of Stock Price.  The market price of shares of Common
Stock is likely to be  highly  volatile  and may be  significantly  affected  by
factors such as: actual or anticipated  fluctuations in the Company's  operating
results;  announcements  of  technological  innovations;  new  products  or  new
contracts  by  the  Company  or  its  competitors;  sales  of  Common  Stock  by
management;  sales of  significant  amounts  of Common  Stock  into the  market;
developments  with respect to proprietary  rights;  conditions and trends in the
software and other technology  industries;  adoption of new accounting standards
affecting the software  industry;  changes in financial  estimates by securities
analysts and others;  general market  conditions;  and other factors that may be
unrelated to the Company or its performance.  In addition,  the stock market has
from time to time experienced  significant  price and volume  fluctuations  that
have particularly  affected the market prices for the common stock of technology
companies. These broad market fluctuations may adversely affect the market price
of the Company's Common Stock. In the past,  following  periods of volatility in
the market price of a particular company's  securities,  securities class action
litigation  has  often  been  brought  against  such  company.  There  can be no
assurance that such  litigation will not occur in the future with respect to the
Company. Such litigation, regardless of its outcome, would result in substantial
costs and a diversion of management's attention and resources which could have a
material adverse effect upon the Company's business,  results of operations, and
financial condition.

    Control  by  Existing   Stockholders;   Effects  of  Certain   Anti-Takeover
Provisions. Members of the Board of Directors, and the executive officers of the
Company, together with members of their families and entities that may be deemed
affiliates  of, or related  to,  such  persons  or  entities,  beneficially  own
approximately  38% of the  outstanding  shares of Common  Stock of the  Company.
Accordingly,  these stockholders  could, if acting in concert,  be able to elect
all members of the  Company's  Board of Directors  and  determine the outcome of
corporate  actions  requiring   stockholder   approval,   such  as  mergers  and
acquisitions.  Certain provisions of the Company's Certificate of Incorporation,
equity incentive  plans,  Bylaws,  and Delaware law may also discourage  certain
transactions  involving  a change  in  control  of the  Company.  This  level of
ownership  by such  persons  and  entities,  when  combined  with the  Company's
classified Board of Directors and the ability of the Board of Directors to issue
"blank check" preferred stock without further stockholder approval, may have the
effect of delaying,  deferring or  preventing a change in control of the Company
and may adversely  affect the voting and other rights of other holders of Common
Stock.

ITEM 2.  PROPERTIES

    The Company's principal  administrative,  sales and marketing,  research and
development and support facilities  consist of approximately  39,000 square feet
of office  space in  Colorado  Springs,  Colorado.  The Company  occupies  these
premises  under a lease  expiring  March 2007. In support of its field sales and
support organization, the Company also leases facilities and offices in 20 other
locations  in the  United  States,  and one  office  in  each  of the  following
locations: the United Kingdom, Germany, Brazil, Singapore, and Malaysia.

ITEM 3.  LEGAL PROCEEDINGS

    The Company is  currently  not a party to any  material  litigation,  and is
currently  not aware of any pending or threatened  litigation  that could have a
material  adverse  effect upon the Company's  business,  operating  results,  or
financial condition.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    None.


<PAGE>

                                   PART II

ITEM 5.  MARKET FOR THE  REGISTRANT'S  COMMON  EQUITY AND RELATED  STOCKHOLDER
         MATTERS

    The Company's Common Stock is traded over-the-counter on the NASDAQ National
Market  under the symbol  "OPTK"  The  Company  commenced  its  initial  public
offering of Common  Stock on July 25, 1996 at a price of $6 per share.  Prior to
such date,  there was no public market for the Common Stock. The following table
sets forth the high and low  closing  sale  prices for the Common  Stock for the
periods indicated, as reported on the NASDAQ National Market.

                                                         HIGH       LOW
Quarter ended December 31, 1998                        $ 3.88    $ 2.00
Quarter ended September 30, 1998                       $ 3.69    $ 2.50
Quarter ended June 30, 1998                            $ 3.88    $ 2.44
Quarter ended March 31, 1998                           $ 4.25    $ 2.81
Quarter ended December 31, 1997                        $ 5.75    $ 3.00
Quarter ended September 30, 1997                       $ 5.94    $ 3.63
Quarter ended June 30, 1997                            $ 5.75    $ 4.50        
Quarter ended March 31, 1997                           $ 7.13    $ 4.75 
Quarter ended December 31, 1996                        $ 8.25    $ 5.02
Quarter ended September 30, 1996 (from July           
  25,1996)                                             $ 9.00    $ 4.88


    The Company has not paid any cash  dividends on its capital  stock since its
inception,  and does not expect to pay cash dividends on its Common Stock in the
foreseeable  future.  The Company's bank line of credit currently  prohibits the
payment of cash dividends without the consent of the bank.  Certain  information
required by this item is included in the Company's  Proxy Statement for the 1999
Annual Meeting of Stockholders and is incorporated herein by reference.


<PAGE>


ITEM 6.   SELECTED FINANCIAL DATA

    The  following  selected  consolidated  financial  data  should  be  read in
conjunction  with the Company's  consolidated  financial  statements and related
notes thereto, and "Management's  Discussion and Analysis of Financial Condition
and Results of  Operations"  included in Item 7. The  consolidated  statement of
operations  data for each of the three years in the period  ended  December  31,
1998 and the consolidated  balance sheet data at December 31, 1997 and 1998, are
derived from the audited  consolidated  financial statements included in Item 8.
The  consolidated  statement of operations data for each of the two years in the
period ended  December  31, 1995,  and the  consolidated  balance  sheet data at
December  31,  1994,  1995 and  1996,  are  derived  from  audited  consolidated
financial statements not included in this Annual Report on Form 10-K.

                                              Year Ended December 31,
                                      -----------------------------------------
                                      1998     1997     1996     1995     1994
                                     ------- -------- -------- -------- --------
CONSOLIDATED STATEMENT OF              (in thousands, except per share amounts)
  OPERATIONS DATA:
Revenues:
  Licenses........................  $ 11,128 $ 15,912 $ 13,406 $  8,333 $ 7,562
  Maintenance and other...........     7,419    5,751    3,297    2,135   1,690
                                     ------- -------- -------- -------- -------
    Total revenues................    18,547   21,663   16,703   10,468   9,252
Cost of revenues:
  Licenses........................       434      737      585      316     413
  Maintenance and other...........     3,274    2,845    1,930    1,823   1,889
                                     ------- -------- -------- -------- -------
    Total cost of revenues........     3,708    3,582    2,515    2,139   2,302
                                     ------- -------- -------- -------- -------
Gross profit......................    14,839   18,081   14,188    8,329   6,950
Operating expenses:
  Sales and marketing.............    12,972   10,666    7,332    3,732   4,200
  Research and development........     5,332    4,978    4,624    3,658   3,112
  General and administrative......     2,714    1,829    1,367    1,461   1,513
  Restructuring charges (1).......       425      885       --       --      --
                                     ------- -------- -------- -------- -------
    Total operating expenses......    21,443   18,358   13,323    8,851   8,825
                                     ------- -------- -------- -------- -------
Income (loss) from operations.....    (6,604)    (277)     865     (522) (1,875)
Other (income) expense............      (218)    (442)    (229)     411      25
                                     ------- -------- -------- -------- -------
Income (loss) before provision 
 (benefit) for income taxes.......    (6,386)     165    1,094     (933) (1,900)
Provision (benefit) for 
 income taxes.....................    (1,276)      --     (813)      29    (168)
                                     ------- -------- -------- -------- -------
Net income (loss).................  $ (5,110) $   165 $  1,907 $   (962)$(1,732)
                                     ======= ======== ======== ======== ========
Net income (loss) per common 
 share (2)........................  $  (0.73) $  0.02 $   0.45 $  (0.37)$ (0.67)
Weighted average number of common
 shares outstanding (2)...........     6,989    6,782    4,246    2,620   2,581
Diluted net income (loss)per
 common share (2).................  $  (0.73) $  0.02 $   0.30 $  (0.37)$ (0.67)
Diluted  weighted  average number 
 of common shares outstanding (2).     6,989    7,661    6,349    2,620   2,581


                                                     December 31,
                                     ------- -------- -------- ------- --------
                                      1998     1997     1996     1995    1994
                                     ------- -------- -------- ------- --------
CONSOLIDATED BALANCE SHEET DATA:                   (in thousands)
Cash, cash equivalents and         
 short-term investments...........  $  7,811 $  8,600 $ 11,499 $ 1,415 $    771
Working capital...................     6,176   12,747   13,817   1,841    1,338
Total assets......................    18,537   21,886   20,258   6,182    4,450
Long-term debt, excluding  current      
 portion..........................        --       --      136     266      353
Convertible preferred stock.......        --       --       --   4,804    3,343
Total stockholders' equity 
 (deficit)........................    11,820   16,492   15,849  (1,967)  (1,497)

(1) See Note 8 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements.

<PAGE>



ITEM 7.  MANAGEMENT'S  DISCUSSION  AND ANALYSIS OF FINANCIAL  CONDITION AND
         RESULTS OF OPERATIONS

    THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDES A NUMBER OF FORWARD-LOOKING  STATEMENTS WHICH REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED BELOW AND THOSE UNDER THE CAPTION  "BUSINESS RISKS" IN
ITEM 1, THAT COULD CAUSE ACTUAL  RESULTS TO DIFFER  MATERIALLY  FROM  HISTORICAL
RESULTS OR THOSE ANTICIPATED.

OVERVIEW

    Optika(R)  Inc.  is a leading  provider of  business-to-business  electronic
commerce  ("e-commerce")  solutions.  By leveraging  the technology of the World
Wide Web, the Company's  software  bridges the gap between paper and  electronic
commerce across the enterprise and throughout supply chains.

    The  license  of  the   Company's   software   products  is   typically   an
executive-level  decision by  prospective  end-users and generally  requires the
Company  and its APs or OEMs to engage  in a lengthy  and  complex  sales  cycle
(typically  between six and twelve months from the initial  contact  date).  The
Company  distributes  its products  through a direct  sales force and  worldwide
network of approximately 170 APs and 5 OEMs. For 1998,  approximately 69% of the
Company's  license revenues were derived from its APs,  approximately 10% of its
license revenues were derived from sales by OEMs and the remaining  license fees
were derived from direct  sales.  However,  no  individual AP accounted for more
than 10% of the Company's total revenues. For the years ended December 31, 1996,
1997  and  1998,  the  Company  generated   approximately   29%,  23%  and  24%,
respectively, of its total revenues from international sales.

    The Company's  revenues  consist  primarily of license  revenues,  which are
comprised  of  one-time  fees for the  license of the  Company's  products;  and
maintenance  revenues,  which are  comprised of fees for upgrades and  technical
support.  The APs and  OEMs,  which are  responsible  for the  installation  and
integration of the software,  enter into sales agreements with the end-user, and
purchase software  directly from the Company.  The software is licensed directly
to the  end-user  by the  Company  through  a  standard  shrink-wrapped  license
agreement.  Annual maintenance  agreements are also entered into between the APs
and  OEMs  and the  end-user,  and the APs and OEMs  then  purchase  maintenance
services  directly from the Company.  For 1997 and 1998,  approximately  73% and
60%,  respectively  of the Company's  total  revenues were derived from software
licenses and  approximately  18% and 28%,  respectively,  of the Company's total
revenues were derived from  maintenance  agreements.  Other revenues,  which are
comprised of training,  consulting and implementation  services, and third-party
hardware and software products,  accounted for 9% and 12%, respectively,  of the
Company's total revenues.

    The Company  adopted the provisions of Statement of Position 97-2,  Software
Revenue  Recognition (SOP 97-2), for transactions  entered into after January 1,
1998.  Under SOP 97-2, the Company  generally  recognizes  license  revenue upon
shipment when a non-cancelable  license  agreement has been signed or a purchase
order  has  been  received,   delivery  has  occurred,  the  fee  is  fixed  and
determinable  and  collectibility  is  probable.  Where  applicable,  fees  from
multiple  element  arrangements  are  unbundled  and  recorded as revenue as the
elements are delivered to the extent that vendor specific  objective evidence of
fair value exists. Maintenance revenues are deferred and recognized ratably over
the  maintenance  period,  which is  generally  one  year.  Other  revenues  are
recognized as services are performed.

    The Company  generally does not grant rights to return products,  except for
defects in the  performance  of the  products  relative  to  specifications  and
pursuant to standard industry  shrink-wrapped  license  agreements which provide
for  30-day  rights of return if an  end-user  does not  accept the terms of the
software  license,  nor does it  provide  provisions  for price  adjustments  or
rotation rights.

    Based on the Company's  research and  development  process,  costs  incurred
between the  establishment of  technological  feasibility and general release of
the  software  products  have  not been  material  and  therefore  have not been
capitalized in accordance with Statement of Financial  Accounting  Standards No.
86. All research and development costs have been expensed as incurred.

RESULTS OF OPERATIONS

COMPARISON OF YEARS ENDED DECEMBER 31, 1998 TO DECEMBER 31, 1997

Revenues

    Total  revenues  decreased  14.4%  from  $21.7  million  for the year  ended
December 31, 1997 to $18.5 million for the year ended December 31, 1998.

    Licenses.  License revenues  decreased 30.1% from $15.9 million for the year
ended  December 31, 1997 to $11.1 million for the year ended  December 31, 1998,
representing  approximately 73% and 60%,  respectively of total revenues in both
periods.  Management  believes  that the  decrease  is  primarily  a  result  of
customers  choosing to delay purchase  decisions of the Company's  product until
the general  release of Optika eMedia,  which became  commercially  available in
late September 1998.  License  revenues  generated  outside of the United States
increased from approximately 23% of license revenues for the year ended December
31, 1997 to  approximately  32% of license  revenues for the year ended December
31, 1998.

    Maintenance and Other.  Maintenance  revenues,  exclusive of other revenues,
increased  40%, from  approximately  $3.7 million during the year ended December
31,  1997,  to $5.2 million for the year ended  December 31, 1998,  representing
approximately 18% of total revenues for the year ended December 31, 1997 and 28%
of total  revenues  for the year ended  December  31,  1998.  This  increase was
primarily  a result of an  increase in the number of  installed  systems.  Other
revenue,  consisting primarily of consulting services and training,  represented
9% and 12% of total  revenue  for the years  ended  December  31, 1997 and 1998,
respectively.  The increase in other  revenues as a percentage of total revenues
was primarily due to increased consulting, project management and implementation
services  resulting from the Company's  direct sales effort which began in April
1998.

Cost of Revenues

    Licenses.  Cost  of  licenses  consist  primarily  of  royalty  payments  to
third-party software vendors and costs of product media, duplication,  packaging
and  fulfillment.  Cost of licenses  decreased from  $737,000,  or 5% of license
revenues,  for the year ended  December 31, 1997, to $434,000,  or 4% of license
revenues,  for the year ended  December 31,  1998,  primarily as a result of the
decreased license revenue sold during the period.

    Maintenance and Other.  Cost of maintenance and other consists of the direct
and indirect costs of providing software  maintenance and support,  training and
consulting services,  to the Company's APs, OEMs and end-users,  and the cost of
third-party software products. Cost of maintenance and other increased from $2.8
million,  or 49% of maintenance and other revenues,  for the year ended December
31, 1997, to $3.3 million,  or 44% of maintenance  and other  revenues,  for the
year ended December 31, 1998.  The decrease as a percentage of  maintenance  and
other  revenues is primarily a result of the leverage  received  from  utilizing
existing resources to service the Company's increased maintenance base.

Operating Expenses

    Sales and  Marketing.  Sales and  marketing  expenses  consist  primarily of
salaries;  commissions  and other  related  expenses  for  sales  and  marketing
personnel; marketing; advertising; and promotional expenses. Sales and marketing
expenses  increased from $10.7 million,  or 49% of total revenues,  for the year
ended December 31, 1997, to $13.0  million,  or 70% of total  revenues,  for the
year ended  December  31, 1998.  This  increase was  primarily  attributable  to
additional costs resulting from the launch of eMedia, the expansion of the North
American sales staff and the further expansion of staff during the year in sales
offices in Brazil and Germany.  In  addition,  during  1998,  the Company  began
paying  commissions to AP's on direct sales. The Company  anticipates that sales
and marketing  expenses will continue to increase in absolute  dollars in future
quarters as the Company continues to expand its North American sales force.

    Research  and  Development.   Research  and  development   expenses  consist
primarily of salaries and other  related  expenses for research and  development
personnel, and of the cost of facilities and equipment. Research and development
expenses  increased from $5.0 million,  or 23% of total  revenues,  for the year
ended December 31, 1997, to $5.3 million, or 29% of total revenues, for the year
ended December 31, 1998. The Company expects  research and development  expenses
to  continue  to  increase  slightly  in  absolute  dollars  in 1999 to fund the
development of new products and product enhancements.

    General and  Administrative.  General and  administrative  expenses  consist
primarily of salaries and other related  expenses of  administrative,  executive
and  financial   personnel,   and  outside   professional   fees.   General  and
administrative  expenses  increased from $1.8 million,  or 8% of total revenues,
for the year ended December 31, 1997, to $2.7 million, or 15% of total revenues,
for the year ended  December 31, 1998.  The  increase was  primarily  due to the
Company writing off or reserving Asian accounts  receivable during 1998. General
and administrative expenses are expected to decrease in absolute dollars in 1999
as the Company does not anticipate the need for any further accounts  receivable
write-offs.

    Restructuring  of Asian  Operations.  Due to the current economic status and
instability in the Asian markets, the Company made the decision to shut down two
of its four Asian  offices in the third quarter of 1998,  thus  reducing  future
operational risks and cash outflows into the region. This restructuring resulted
in a $425,000 one-time  write-off  including  $125,000 of goodwill,  $200,000 of
severance costs and $100,000 of lease  termination and other costs.  All actions
relating  to  the   restructuring   plan  were  completed  during  1998  and  no
restructuring accruals remain as all cash payments have been made as of December
31, 1998.

    Restructuring of Healthcare  Operations.  During the fourth quarter of 1997,
the  Company  made the  decision to exit the  vertical  healthcare  market.  The
restructuring  plan involved the closure of the Company's Boston  facility,  and
the  termination  of  approximately  14 employees.  The Company  incurred a 1997
restructuring  charge of $885,000  related to this  restructuring  consisting of
$422,000 of severance and benefits for terminated  employees,  $312,000 of asset
write-downs and leased facility  executory  costs,  and $ 151,000 of other costs
related  to  the  restructuring   consisting  principally  of  legal  and  other
miscellaneous  costs.  All  actions  relating  to the  restructuring  plan  were
completed during 1998 and no restructuring  accruals remain as all cash payments
have been made as of December 31, 1998.

    Other income,  net. Other income,  net consists primarily of interest earned
on  the  Company's  investing  activities  offset  by  interest  expense  on the
Company's  capitalized lease  obligations,  and other debt, and foreign currency
translation  adjustments.  The Company  incurred a net other  income of $442,000
during the year ended  December  31,  1997,  compared  to a net other  income of
$218,000 during the year ended December 31, 1998. Other income for 1997 and 1998
was  primarily a result of interest  income  derived from the  investment of the
Company's   initial  public  offering   proceeds  offset  by  foreign   currency
translation losses.

    Benefit from Income  Taxes.  The Company has recorded a partial  valuation
allowance  against its  carryforward tax benefits to the extent that it believes
that it is more likely than not all of such benefits will not be realized in the
near term. The Company's  assessment of this valuation  allowance was made using
all available  evidence,  both positive and negative.  In particular the Company
considered both its historical  results and its projections of profitability for
only reasonably  foreseeable  future periods.  The Company's  realization of its
recorded  net deferred  tax assets is  dependent  on future  taxable  income and
therefore, the Company is not assured that such benefits will be realized.

COMPARISON OF YEARS ENDED DECEMBER 31, 1997 TO DECEMBER 31, 1996

Revenues

    Total revenues  increased 30% from $16.7 million for the year ended December
31, 1996 to $21.7 million for the year ended December 31, 1997.

    Licenses.  License  revenues  increased  19% from $13.4 million for the year
ended  December 31, 1996 to $15.9 million for the year ended  December 31, 1997,
representing  approximately 80% and 73%,  respectively of total revenues in both
periods. This increase was primarily the result of increased sales of components
of the  FilePower  Suite.  The increase in license  revenues was  primarily  the
result of  increased  sales in the United  States  compared  to the prior  year.
License  revenues   generated  outside  of  the  United  States  decreased  from
approximately  31% of license  revenues for the year ended  December 31, 1996 to
approximately 23% of license revenues for the year ended December 31, 1997.

    Maintenance and Other.  Maintenance  revenues,  exclusive of other revenues,
increased  55%, from  approximately  $2.4 million during the year ended December
31,  1996,  to $3.7 million for the year ended  December 31, 1997,  representing
approximately 14% of total revenues for the year ended December 31, 1996 and 18%
of total  revenues  for the year ended  December  31,  1997.  This  increase was
primarily  a result of an increase  in the number of  installed  systems and the
Company's  improved tracking and monitoring of expiring  maintenance  contracts.
Other  revenue,  consisting  primarily  of  consulting  services  and  training,
represented 6% and 9% of total revenue for the years ended December 31, 1996 and
1997,  respectively.  The  increase  in  other  revenues  was  primarily  due to
increased revenues from the Company's Solution Services group.

Cost of Revenues

    Licenses.  Cost  of  licenses  consist  primarily  of  royalty  payments  to
third-party software vendors; product author commissions, whereby certain of the
Company's software developers are entitled to receive a specified  percentage of
product  sales;  and  costs  of  product  media,   duplication,   packaging  and
fulfillment.  Cost  of  licenses  increased  from  $585,000,  or 4%  of  license
revenues,  for the year ended  December 31, 1996, to $737,000,  or 5% of license
revenues,  for the year ended  December 31,  1997,  primarily as a result of the
increased license revenue sold during the period.

    Maintenance and Other.  Cost of maintenance and other consists of the direct
and indirect costs of providing software  maintenance and support,  training and
consulting services,  to the Company's APs, OEMs and end-users,  and the cost of
third-party software products. Cost of maintenance and other increased from $1.9
million,  or 59% of maintenance and other revenues,  for the year ended December
31, 1996, to $2.8 million,  or 49% of maintenance  and other  revenues,  for the
year ended December 31, 1997.  The decrease as a percentage of  maintenance  and
other  revenues is primarily a result of the leverage  received  from  utilizing
existing resources to service the Company's increased maintenance base.

Operating Expenses

    Sales and  Marketing.  Sales and  marketing  expenses  consist  primarily of
salaries;  commissions  and other  related  expenses  for  sales  and  marketing
personnel; marketing; advertising; and promotional expenses. Sales and marketing
expenses  increased from $7.3 million,  or 44% of total  revenues,  for the year
ended December 31, 1996, to $10.7  million,  or 49% of total  revenues,  for the
year ended  December  31, 1997.  This  increase was  primarily  attributable  to
additional costs resulting from the establishment of sales offices in Australia,
Brazil, Germany and the expansion of the North American sales staff.

    Research  and  Development.   Research  and  development   expenses  consist
primarily of salaries and other  related  expenses for research and  development
personnel, and of the cost of facilities and equipment. Research and development
expenses  increased from $4.6 million,  or 28% of total  revenues,  for the year
ended December 31, 1996, to $5.0 million, or 23% of total revenues, for the year
ended December 31, 1997.

    General and  Administrative.  General and  administrative  expenses  consist
primarily of salaries and other related  expenses of  administrative,  executive
and  financial   personnel,   and  outside   professional   fees.   General  and
administrative  expenses  increased from $1.4 million,  or 8% of total revenues,
for the year ended December 31, 1996, to $1.8 million,  or 8% of total revenues,
for the year ended  December 31, 1997.  The  increase was  primarily  due to the
Company incurring  additional  expenses as a public company and costs to support
expanding worldwide operations.

    Other income,  net. Other expenses consist  primarily of interest expense on
the Company's capitalized lease obligations,  and other debt, offset by interest
earned on the Company's financing  activities.  The Company incurred a net other
income of $229,000  during the year ended  December 31, 1996,  compared to a net
other income of $442,000  during the year ended December 31, 1997.  Other income
for 1996 and 1997 was  primarily a result of interest  income  derived  from the
investment of the Company's initial public offering proceeds.

    Provision  (benefit)  for Income Taxes.  Due to the  Company's  history of
pre-tax  losses,  and to the  uncertainty  surrounding  the timing of  realizing
benefits of its favorable tax  attributes,  the Company had recorded a valuation
allowance  against all of its  favorable  tax assets as of December 31, 1995. As
required by Statement  of Financial  Accounting  Standards  No. 109,  management
concluded that a valuation  allowance  against deferred tax assets was no longer
appropriate  as of December 31,  1996.  Specifically,  during 1996,  the Company
generated  four straight  quarters of  profitability  and pre-tax income of $1.1
million.  and  consequently  released  the  valuation  allowance  resulting in a
favorable effective tax rate.



<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

     Cash and  short-term  investments  at December 31, 1998 were $7.8  million,
decreasing  $800,000 from December 31, 1997. The decrease in cash and short-term
investments  is primarily due to the  Company's  net loss for the year,  capital
expenditures  associated  with computer  equipment,  largely  offset by accounts
receivable collections.

    For the year ended December 31, 1997, net cash used in operating  activities
was  $733,000,  compared to net cash  provided  of  $106,000  for the year ended
December 31, 1998. The decrease in cash used from  operating  activities was due
to an increase in accounts receivable collections.

    Cash  provided  by  investing  activities  was  $384,000  for the year ended
December 31, 1997  compared to cash  provided of  $3,080,000  for the year ended
December  31,  1998.  The  increase  in cash  provided by  investing  activities
consisted  primarily of sales of  short-term  securities  offset by purchases of
property and equipment.

    Cash  provided  from  financing  activities  was  $77,000 for the year ended
December  31, 1997  compared  to cash  provided  from  financing  activities  of
$423,000 for the year ended  December 31, 1998.  Cash  provided  from  financing
activities  resulted primarily from proceeds of the Company's issuance of common
stock  under  the  Company's  employee  stock  purchase  plan and  stock  option
exercises.

    At December 31, 1998, the Company's  principal sources of liquidity included
cash and short-term  investments of $7.8 million. In addition, the Company has a
secured credit facility for up to $3.0 million,  bearing  interest at the bank's
prime rate. As of December 31, 1998, the Company had $2.8 million  available for
borrowing.

    The Company  believes  that its  current  cash and  short-term  investments,
together  with  anticipated  cash  flow  from  operations  and its  bank  credit
facility, will be sufficient to meet its working capital and capital expenditure
requirements  for at least  the next 12  months.  Thereafter,  the  Company  may
require  additional  funds to support such  activity  through  public or private
equity  financings  or  from  other  sources.  There  can be no  assurance  that
additional  financing  will be  available  at all or that,  if  available,  such
financing will be obtainable on terms  favorable to the Company and would not be
dilutive.

YEAR 2000

      The Company is aware of the issues associated with the programming code in
existing computer systems as the Year 2000 approaches.  Many currently installed
computer and software products are coded to accept only two digit entries in the
date code field.  These date code fields will need to accept four digit  entries
to distinguish 21st century dates from 20th century dates. As a result,  in less
than one year,  computer systems and/or software used by many companies may need
to be  upgraded  to  comply  with such  "Year  2000"  requirements.  Significant
uncertainty  exists in the software  industry  concerning the potential  effects
associated  with such  compliance.  The  Company  believes  that the  purchasing
patterns of customers and potential  customers may be significantly  affected by
Year 2000  issues.  Moreover,  the Company  believes  some  companies  may delay
software  purchasing  decisions  until after January 1, 2000, in hopes that Year
2000 issues will have been  identified  and corrected  prior to their  purchase.
Many  companies  are expending  significant  resources to correct or patch their
current software systems for Year 2000 compliance. These expenditures may result
in reduced  funds  available  to purchase  products  or  services  such as those
offered by the Company. Additionally, Year 2000 issues could cause a significant
number of companies,  including current customers of the Company;  to reevaluate
their current system needs, and as a result, consider switching to other systems
or  suppliers.  This  could  have a  material  adverse  effect on the  Company's
business, financial condition and results of operations.

      The Company is currently  taking steps to address its Year 2000  readiness
issues in the following areas:

1. The Company's products (including embedded software technology)  
2. Internal systems (includes information technologies and non-information
    technologies)  
3. Readiness of third parties with whom the Company has business relationships

      The Company has assigned two dedicated  Year 2000 cross  functional  teams
(CFT's),  one CFT to  address  the  Company's  products  and one CFT to  address
internal systems and third parties.  Each CFT has an executive sponsor and meets
regularly to carry out the process of  identifying  potential  Year 2000 issues,
assessing  their  impact on the  Company,  putting  in place an  action  plan to
address the problem  (which will include  contingency  planning)  and  following
through to ensure the plan was carried out and tested.

The Company's Products

      The Company designs its products and services to be Year 2000  compatible.
Nevertheless the Company has performed  initial Year 2000 compliance  testing on
both  Optika  eMedia and  FilePower  product  suites.  During the testing of the
FilePower product suite, a few minor deficiencies were found in the product. The
Company  is  currently  addressing  these  deficiencies  and a product  patch is
expected  to be  introduced  during  first  quarter of 1999.  This patch will be
available  electronically to customers who have maintenance  agreements with the
Company.  Costs to address  these  deficiencies  are  expected  to include  only
internal  development staff time, which has not been separately tracked,  and is
expected  to have no effect  on the  Company's  operating  results.  No  current
projects  have been delayed or are expected to be delayed due to using  internal
staff on this issue.

      The Company has developed the eMedia product with Year 2000  compliance in
mind. Testing of the product has been performed throughout the development cycle
for Year 2000 compliance.  In addition,  the Company is currently working with a
third-party to extensively  test the Year 2000  compliance of the product.  This
testing is currently  expected to be completed during the first quarter of 1999.
While the Company is not aware of any current  deficiencies that would result in
the  product  not being  compliant,  it is  possible  that  deficiencies  may be
discovered during the testing process or even subsequent to the testing process.
Costs to address  these  deficiencies  are  expected  to include  only  internal
development staff time, which will not be separately tracked, and is expected to
have no material effect on the Company's operating results.

      To help  ensure  Year  2000  compliance,  the  Company  plans  to  perform
additional  tests  on its  FilePower  and  Optika  eMedia  product  suites.  The
additional testing is expected to be completed during the first quarter of 1999.
Any issues  found  through the  additional  tests will be addressed in the first
half of 1999.

      Although  the Company has  designed  its  products and services to be Year
2000 capable and tests its products and services, including third-party software
that is incorporated into its products and services,  specifically for Year 2000
compliance,  there can be no assurance that the Company's products and services,
particularly when such products and services incorporate  third-party  software,
contain  all  necessary  date code  changes.  To the extent  that the  Company's
software does not comply with Year 2000  requirements,  it will be necessary for
the Company to commit the necessary resources to correct the software.  Although
the costs  cannot  be  reasonably  estimated,  there  can be no  assurance  that
potential system interruptions or the cost necessary to update the software will
not  have a  material  adverse  effect  on  the  Company's  business,  financial
condition and results of operations.

Internal Systems

      The Company's  internal  systems include both its  information  technology
("IT") and non-IT systems.  The Company  conducted an assessment of its internal
IT systems including third-party software and hardware technology and its non-IT
systems (such as its security system,  building  equipment,  and phone systems).
The Company has  identified its Mission  Critical  Systems and reviewed them for
Year 2000 compliance by contacting each vendor and requesting  documentation  on
Year 2000 readiness. The Company will do testing of its Mission Critical Systems
in the second  quarter of 1999. It is estimated  that the testing of the Mission
Critical Systems will cost  approximately  $121,000 during 1999. The bringing of
the  Mission  Critical  Systems to Year 2000  readiness  will be  covered  under
software/hardware   maintenance   agreements  and/or  normal  product  upgrades.
However, any failure of one or more of the Company's mission critical IT systems
to become Year 2000 compliant due to  unanticipated  problems could limit access
of employees to critical information, require the Company to process information
manually or result in other inconveniences or inefficiencies for the Company and
its  customers  that may  divert  management's  time and  attention,  as well as
financial and personnel resources from normal business activities.  The majority
of the Company's IT software applications are produced by Microsoft. Any failure
by Microsoft  to address the Year 2000 issue will have a material  impact on the
Company's  operations.  All  non-Mission  Critical  Systems  are  deemed  to  be
non-essential  to the  business  and will be upgraded or replaced if a Year 2000
issue exists.  Year 2000  compliance  issues  relating to  non-Mission  Critical
Systems are not expected to have a material  financial  impact on  operations or
the Company's ability to carry out its operations.

Third Parties

      The Company has  documentation on the Year  2000-compliance  status of its
key vendors.  The key third  parties to which the Company is  concerned  are its
investing, banking, and payroll vendors. The Company will attempt to obtain Year
2000-compliance status from certain other third parties by the second quarter of
1999.  If the  Company's  current or future  vendors,  including  investing  and
banking  relationships,  fail to achieve Year 2000  compliance or if they divert
substantial  technology  expenditures  to  address  the Year  2000  issue,  thus
impacting  their  ability  to serve  the  Company,  the  Company  will  move its
relationships to another vendor that is Year 2000 compliant. Management believes
there  will be no  material  adverse  affect on the  Company  of this  potential
action.

Disclaimer

      The discussion of the Company's  efforts,  and management's  expectations,
relating to Year 2000 compliance are forward-looking  statements.  The Company's
ability to  achieve  Year 2000  compliance  and the level of  incremental  costs
associated  therewith  could be adversely  impacted by, among other things,  the
availability and cost of programming and testing  resources,  vendors' abilities
to modify proprietary software, unanticipated problems in the ongoing compliance
review and failure by the Company to  identify a critical  Year 2000  compliance
problem.

RECENT ACCOUNTING PRONOUNCEMENTS

    The  Company  has  determined  that  the  adoption  of the  recently  issued
Statement  of  Financial  Accounting  Standards  ("SFAS")  No.  130,  "Reporting
Comprehensive Income," No. 131, "Disclosures about Segments of an Enterprise and
Related Information,", No. 132, "Employer's Disclosures about Pensions and Other
Postretirement  Benefits",  and No. 133, "Accounting for Derivative  Instruments
and  Hedging  Activities"  will  not have a  material  impact  on the  Company's
financial statements or footnote disclosures.

    The  Company  adopted   Statement  of  Position  97-2,   "Software   Revenue
Recognition"  (SOP 97-2) for transactions  entered into by the Company beginning
in 1998. On December 31, 1998 Statement of Position 98-9,  "Modification  of SOP
97-2, Software Revenue Recognition,  with respect to certain  transactions" (SOP
98-9), was issued superseding SOP 98-4 and is effective for transactions entered
into in fiscal years beginning after to March 15, 1999. If the Company's  future
business  practices  involve the granting of specified  upgrade rights to future
releases,  extended payment terms, rights to additional  products,  subscription
licensing  arrangements or other provisions  impacted by SOP 97-2, as amended by
SOP 98-4 and SOP 98-9,  the SOP may have a material  impact on the timing of the
Company's  revenue  recognition  and could result in the deferral of significant
amounts of revenues.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

    See Item 14(a) for an index to the financial  statements  and  supplementary
financial information which are attached hereto.

ITEM 9.  CHANGES IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE.

    Not applicable.



<PAGE>

                                   PART III

    Certain information  required by Part III is omitted from this Annual Report
on Form 10-K in that the  Registrant  will  file a  definitive  proxy  statement
pursuant  to  Regulation  14A no later than 120 days after the end of the fiscal
year  covered  by this  Report,  and  certain  information  included  therein is
incorporated  herein by reference.  Only those  sections of the Proxy  Statement
which  specifically  address  the items set forth  herein  are  incorporated  by
reference.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.

    The  information  required by this item relating to the Company's  directors
and nominees and  disclosure  relating to  compliance  with Section 16(a) of the
Securities  Exchange  Act of 1934 is included  under the  captions  "Election of
Directors" and "Compliance with Section 16(a) of the Securities  Exchange Act of
1934"  in  the  Company's  Proxy  Statement  for  the  1999  Annual  Meeting  of
Stockholders and is incorporated herein by reference.  The information  required
by this item relating to the Company's  executive  officers and key employees is
included under the caption "Executive  Officers" in Part I of the Report on Form
10-K.

ITEM 11. EXECUTIVE COMPENSATION.

    The  information  required  by  this  item is  included  under  the  caption
"Executive   Compensation  and  Related  Information"  in  the  Company's  Proxy
Statement for the 1999 Annual Meeting of the Stockholders and is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

    The  information  required by this item is included under the caption "Stock
Ownership of Certain  Beneficial  Owners and  Management" in the Company's Proxy
Statement for the 1999 Annual Meeting of Stockholders and is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

    The information required by this item is included under the caption "Certain
Transactions"  in the Company's  Proxy  Statement for the 1999 Annual Meeting of
Stockholders and is incorporated herein by reference.



<PAGE>


                                   PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) The  following  documents  are filed as part of this  Annual  Report on Form
10-K:

                                                                    Page
   1. Financial Statements:
      Report of Independent Accountants...............................28
      Consolidated Balance Sheet as of December 31, 1998 and 1997.....29
      Consolidated Statement of Operations for each of the three 
       years in the period ended December 31, 1998....................30
      Consolidated Statement of Stockholders' Equity (Deficit) for 
       each of the three years in the period ended December 31, 1998..31
      Consolidated Statement of Cash Flows for each of the three 
       years in the period ended December 31, 1998....................32
      Notes to Consolidated Financial Statements......................33

   2. Financial Statement Schedule:
      Schedule II - Valuation and  Qualifying  Accounts for the 
       three years in the period ended December 31, 1998..............42

      Schedules not listed above have been omitted because they are not
      required, not applicable, or the required information is shown in the
      financial statements and related notes thereto.

   3. Exhibits - See Item 14 (c) below.

(b)   Reports on Form 8-K

   Optika Inc.  filed a report on Form 8-K dated  December 8, 1998
announcing  under  Item 5 the  name  change  from  Optika  Imaging
Systems, Inc. to Optika Inc.

(c)   Exhibits

   See Exhibit Index on page 45



<PAGE>



                      REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and
 Stockholders of Optika Inc.

In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statements  of  operations,  of  changes in  stockholders'  equity
(deficit)  and of cash flows  present  fairly,  in all  material  respects,  the
financial  position of Optika Inc. and its subsidiaries at December 31, 1998 and
1997,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity  with generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which require that we plan and perform the audit to obtain  reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in  the  financial  statements,   assessing  the
accounting  principles  used and significant  estimates made by management,  and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.



PRICEWATERHOUSECOOPERS LLP

January 25, 1999
Broomfield, Colorado


<PAGE>
                                   OPTIKA INC.

                            CONSOLIDATED BALANCE SHEET
                                      
                (In thousands, except share and per share amounts)

                                                   December 31,     December 31,
                                                       1998             1997 
Assets                                             ------------     ------------
Current assets:
 Cash and cash equivalents......................... $    6,811       $    3,202
 Short-term investments............................      1,000            5,398
 Accounts receivable, net of allowance for 
  doubtful accounts of $443 and $212 at December 
  31, 1998 and 1997, respectively..................      4,571            8,555
 Other current assets..............................        511              986
                                                    ----------       ----------
    Total current assets ..........................     12,893           18,141
                                                    ----------       ----------
Fixed assets, net..................................      3,136            2,721
Deferred tax asset.................................      2,438              728
Other assets, net of accumulated amortization of 
 $0 and $317 at December 31, 1998 and 1997, 
 respectively......................................         70              296
                                                    ----------       ----------
                                                    $   18,537       $   21,886
                                                    ==========       ==========

Liabilities and Stockholders' Equity
Current liabilities:
 Current portion of long-term debt................. $       --       $       15
 Accounts payable .................................        710              742
 Accrued expenses..................................      1,446            1,166
 Accrued compensation expense......................      1,206              735
 Restructuring reserve.............................         --              291
 Deferred revenue .................................      3,355            2,445
                                                    ----------       ----------
    Total current liabilities .....................      6,717            5,394
                                                    ----------       ----------
Commitments and contingencies (Notes 4 and 9)

Common stockholders' equity:
 Common stock; $.001 par value; 25,000,000 shares  
  authorized; 7,114,573 and 6,890,724 shares issued 
  and outstanding at December 31, 1998 and 1997, 
  respectively.....................................          7                7
 Additional paid-in capital........................     17,617           17,179
 Accumulated deficit...............................     (5,804)            (694)
                                                    ----------       ----------
    Total stockholders' equity ....................     11,820           16,492
                                                    ----------       ----------
                                                    $   18,537       $   21,886
                                                    ==========       ==========
 
 The accompanying notes are an integral part of these financial statements.
<PAGE>
                                 OPTIKA INC.

                     CONSOLIDATED STATEMENT OF OPERATIONS

                   (In thousands, except per share amounts)

                                                 Year Ended December 31,
                                               1998        1997        1996    
                                            --------    --------    --------
Revenues:
 Licenses................................   $ 11,128    $ 15,912    $ 13,406
 Maintenance and other...................      7,419       5,751       3,297
                                            --------    --------    --------
   Total revenues........................     18,547      21,663      16,703
            
Cost of revenues:
 Licenses................................        434         737         585
 Maintenance and other...................      3,274       2,845       1,930
                                            --------    --------    --------
   Total cost of revenues................      3,708       3,582       2,515
                                            --------    --------    --------

Gross profit.............................     14,839      18,081      14,188

Operating expenses:
 Sales and marketing.....................     12,972      10,666       7,332
 Research and development................      5,332       4,978       4,624
 General and administrative..............      2,714       1,829       1,367
 Restructuring charges...................        425         885          --
                                            --------    --------    --------

    Total operating expenses.............     21,443      18,358      13,323
                                            --------    --------    --------

Income (loss) from operations............     (6,604)       (277)        865
Other income, net........................       (218)       (442)       (229)
                                            --------    --------    --------
Income (loss) before benefit from 
 income taxes............................     (6,386)        165       1,094
Benefit from income taxes................     (1,276)         --        (813)
                                            --------    --------    --------
Net income (loss)........................   $ (5,110)   $    165    $  1,907
                                            ========    ========    ========

Net income (loss) per share..............   $  (0.73)   $   0.02    $   0.45

Weighted average number of
 common shares outstanding...............      6,989       6,782       4,246

Diluted net income (loss) per share......   $  (0.73)   $   0.02    $   0.30

Diluted weighted average number 
 of common shares outstanding............      6,989       7,661       6,349
 
The accompanying notes are an integral part of these financial statements.

<PAGE>
<TABLE>
<CAPTION>

                                   OPTIKA INC.

        CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

                        (In thousands except share amounts)

                                                                                Total
                                                                               Common
                                   Common Stock    Additional               Stockholders'
                                                    Paid-in    Accumulated     Equity
                                 Shares    Amount   Capital      Deficit      (Deficit)
                               ---------- ------- ----------- -------------- ------------
<S>                             <C>        <C>     <C>        <C>            <C>           
Balance at December 31, 1995.   2,843,930  $  799  $     --   $    (2,766)   $     (1,967)
 Company reincorporation                     (796)      796
 Common  stock issued upon
  exercise of stock options..     125,925               102                           102
 Common  stock issued upon
  initial public offering....   2,200,000       2    11,001                        11,003
 Manditorily redeemable
  preferred stock converted                  
  to common stock............   1,500,464       2     4,802                         4,804
 Net income..................                                       1,907           1,907
                               ---------- ------- ----------- -------------- ------------
Balance at December 31, 1996.   6,670,319       7    16,701          (859)         15,849
 Common stock issued upon                                                              
  exercise of stock options..     115,445               172                           172
 Common stock issued pursuant
  to employee stock purchase
  plan.......................      70,760               306                           306
 Common stock issued upon 
  exercise of warrants.......      34,200
 Net income..................                                         165             165
                               ---------- ------- ----------- -------------- ------------
Balance at December 31, 1997.   6,890,724       7    17,179          (694)         16,492
 Common stock issued upon                                                              
  exercise of stock options..     151,961               266                           266
 Common stock issued pursuant
  to employee stock purchase          
  plan.......................      71,888               172                           172
 Net loss....................                                      (5,110)         (5,110)
                               ---------- ------- ----------- -------------- ------------
Balance at December 31, 1998.   7,114,573   $   7  $ 17,617   $    (5,804)   $     11,820
                               ========== ======= =========== ============== ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>
                                   OPTIKA INC.

                       CONSOLIDATED STATEMENT OF CASH FLOWS

                                  (In thousands)


                                                  Year Ended December 31,
                                             1998        1997        1996     
                                           ---------   ---------   ---------
Cash Flows From Operating Activities
Net income (loss)........................  $  (5,110)  $     165   $   1,907
Adjustments to reconcile net income (loss)
 to net cash provided by (used) in 
 operating activities:
 Depreciation and amortization...........      1,018         599         492
 Loss on disposal of assets..............         75          16           4
 Deferred tax benefit....................     (1,403)        (90)       (885)
 Change in assets and liabilities:
   Accounts receivable, net..............      3,984      (2,789)     (2,566)
   Other assets..........................        204         (20)       (453)
   Accounts payable......................        (32)        (66)        182
   Accrued expenses......................        460         866         597
   Deferred revenue......................        910         586         313
                                           ---------   ---------   --------- 
Net cash provided by (used) in operations        106        (733)       (409)
                                           ---------   ---------   ---------

Cash Flows From Investing Activities
Capital expenditures.....................     (1,318)     (2,243)       (585)
Sale (purchase) of short-term investments      4,398       2,627      (8,025)
                                           ---------   ---------   ---------    
Net cash provided by (used) in 
 investing activities....................      3,080         384      (8,610)
                                           ---------   ---------   ---------

Cash Flows From Financing Activities
Principal payments on long-term debt.....        (15)       (401)       (456)
Proceeds from issuance of long-term debt.         --          --         429
Proceeds from issuance of common stock...        438         478      11,105
                                           ---------   ---------   ---------
Net cash provided by financing activities        423          77      11,078
                                           ---------   ---------   ---------

Net increase (decrease) in cash and 
 cash equivalents........................      3,609        (272)      2,059
Cash and cash equivalents at beginning 
 of period...............................      3,202       3,474       1,415
                                           ---------   ---------   ---------
Cash and cash equivalents at 
 end of period...........................  $   6,811   $   3,202   $   3,474
                                           =========   =========   =========
Supplemental Disclosure of Non-cash
 Transactions
Interest paid............................  $      --   $    30     $      50
Income taxes paid........................         --        37            --

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


                                  Optika  Inc.

                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  Nature of Business and Summary of Significant Accounting Policies

    Optika Inc. (formerly Optika Imaging Systems, Inc.), a Delaware corporation,
and its  subsidiaries  ("Optika" or the  "Company")  was formed in 1988 and is a
leading  provider of  business-to-business  electronic  commerce  solutions.  By
leveraging the technology of the World Wide Web, the Company's  software bridges
the gap  between  paper  and  electronic  commerce  across  the  enterprise  and
throughout  supply  chains.  The Company  licenses  its software  under  license
agreements   and  provides   services   including   maintenance,   training  and
implementation.

Summary of Significant Accounting Policies

Principles of Consolidation

    The accompanying  consolidated  financial statements include the accounts of
Optika Inc. and its wholly owned  subsidiaries  Optika Imaging  Systems  Europe,
Ltd., Optika Information Systems,  LTDA, Optika Imaging Systems, GmbH and Optika
Asia,  Inc. All significant  intercompany  accounts and  transactions  have been
eliminated.

Revenue Recognition

    The Company  adopted the  provisions  of  Statement  of Position  97-2,
Software Revenue  Recognition  (SOP 97-2),  for transactions  entered into after
January  1, 1998.  Under SOP 97-2,  the  Company  generally  recognizes  license
revenue upon shipment when a non-cancelable license agreement has been signed or
a purchase order has been received,  delivery has occurred, the fee is fixed and
determinable  and  collectibility  is  probable.  Where  applicable,  fees  from
multiple  element  arrangements  are  unbundled  and  recorded as revenue as the
elements are delivered to the extent that vendor specific  objective evidence of
fair value exists. Maintenance revenues are deferred and recognized ratably over
the  maintenance  period,  which is  generally  one  year.  Other  revenues  are
recognized  as services  are  performed.  The Company  generally  does not grant
rights to return products, except for defects in the performance of the products
relative to  specifications  and  pursuant to standard  industry  shrink-wrapped
license agreements which provide for 30-day rights of return if an end-user does
not accept the terms of the software license, nor does it provide provisions for
price adjustments or rotation rights.

    For  transactions  entered  into prior to  January 1, 1998 the  Company
recognized  revenue in  accordance  with  Statement of Position  91-1,  Software
Revenue  Recognition.  The Company  recognized  license revenues  generally upon
shipment when no significant vendor obligations  remained and collectibility was
probable.  License revenues related to contracts with significant  post-delivery
performance  obligations were recognized when the Company's  obligations were no
longer significant or when the customer accepted the product, as applicable.

Cash Equivalents and Short-term Investments

    The Company classifies  short-term  investments with an original maturity of
three  months or less as cash  equivalents.  Short-term  investments  consist of
Corporate  and U.S.  Government  obligations  maturing  within  one  year.  Such
short-term   investments  are  classified  as  held-to-maturity  as  defined  by
Statement of Financial  Accounting  Standards  No. 115  "Accounting  for Certain
Investments in Debt and Equity Securities" and accordingly  carried at amortized
cost.

Depreciation and Amortization

    Computer equipment,  office equipment and furniture are recorded at cost and
depreciated using the  straight-line  method over estimated useful lives ranging
from three to five years.  Leasehold improvements are amortized over the life of
the improvement or lease term, whichever is shorter.



<PAGE>


Software Development Costs

    Research  and  development  costs are  expensed as  incurred.  Statement  of
Financial  Accounting Standards No. 86 (SFAS No. 86) requires the capitalization
of  certain  software  development  costs  once  technological   feasibility  is
established. To date, the period between achieving technological feasibility and
the general availability of such software has been short. Consequently, software
development  costs qualifying for  capitalization  have been  insignificant  and
therefore, the Company has not capitalized any software development costs.

Foreign Currency Translation

    The  U.S.  dollar  is  the  functional   currency  of  the  consolidated
corporation.  For  the  Company's  foreign  subsidiaries,  monetary  assets  and
liabilities are translated into U.S.  dollars using the exchange rates in effect
at the balance sheet date and  non-monetary  assets are translated at historical
rates.  Results of operations  are translated  using the average  exchange rates
during the period.  Foreign  currency  exchange gains or losses  included in the
consolidated statements of operations were not material in any period presented.

Estimates

    The  preparation  of  financial  statements  in  conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of contingent  liabilities as well as the reported amounts of revenue
and  expenses.  Significant  estimates  have been made by  management in several
areas,  including the  collectibility of accounts  receivable and the ability to
realize  deferred tax assets.  Actual results could differ from these estimates,
making it reasonably  possible that a change in these  estimates  could occur in
the near term.

Fair Value of Financial Instruments

    The carrying amounts of the Company's financial  instruments including cash,
short-term  investments,  trade  receivables  and payables and  long-term  debt,
approximate their fair values.

Stock Compensation Plans

    The Company  applies  APB Option No. 25,  Accounting  for Stock  Issued to
Employees,  in  accounting  for its stock option and employee  stock  purchase
plans.  The Company has adopted  the  disclosure  provisions  of SFAS No. 123,
Accounting for Stock-Based Compensation.

Net Income (Loss) Per Common Share

    The FASB  issued  SFAS No.  128 in  February  of 1997  and  subsequently  in
February  1998,  the SEC issued SAB 98 which  clarified the treatment of nominal
issuances of stock. This  pronouncement  establishes new standards for computing
and presenting  earnings per share ("EPS") on a basis that is more comparable to
international  standards and provides for the  presentation of basic and diluted
EPS. Basic EPS is computed by dividing net income by the weighted average number
of shares  outstanding  during the period.  Diluted  EPS is  computed  using the
weighted average number of shares outstanding plus all dilutive potential common
shares outstanding.  Prior period EPS have been restated to conform with the new
statement.

<PAGE>
     The following is the  reconciliation  of the numerators and denominators of
the basic and diluted EPS computations (in thousands, except per share data):
                                                  
                                                         Year Ended      
                                                         December 31,   
                                              ---------------------------------
                                                 1998        1997        1996
                                              ---------   ---------   ---------
      Earning Per Share:
        Net income (loss).................    $ (5,110)   $     165   $   1,907
        Weighted average common shares 
         outstanding......................       6,989        6,782       4,246
        Net income (loss) per common share    $   (.73)   $    0.02   $    0.45
      Effect of Dilutive Securities:
        Options and warrants..............          --          879       2,103
        Diluted weighted average common 
         shares outstanding...............       6,989        7,661       6,349
        Diluted net income (loss) per 
         common share.....................    $   (.73)   $    0.02   $    0.30

     In 1998,  all options were  excluded  from the dilutive  stock  calculation
because of their antidilutive  effect on net loss per share.  Options of 753,000
and 179,500 were excluded from dilutive stock option  calculations  for 1997 and
1996, respectively,  because their exercise prices were greater than the average
fair market value of the Company's stock for the period,  and as such they would
be antidilutive.


Concentration

    The Company has historically  relied on a limited number of products and has
concentrated  risk related to the continued and future market acceptance of such
products.  The Company currently has no major customers accounting for more than
10% of its consolidated revenues; however, the Company's accounts receivable are
heavily concentrated with resellers of the Company's products. One AP receivable
accounted  for greater than 10% of the accounts  receivable  balance at December
31, 1998.  Receivables  from end users are not  concentrated  in any  particular
industry.



2.  Property and Equipment

    Property and Equipment consisted of the following (in thousands):

                                                     December 31,
                                                   1998       1997
                                                 -------    -------
  Computer and office equipment..............    $ 3,779    $ 2,973
  Leasehold improvements.....................        898        754
  Furniture, fixtures and other..............        642        422
                                                 -------    -------
                                                   5,319      4,149
  Less accumulated depreciation and 
   amortization..............................     (2,183)    (1,428)
                                                 -------    -------
                                                 $ 3,136    $ 2,721
                                                 =======    =======

3.  Line of Credit

    The Company has a line of credit through October 1999, whereby it is able to
draw up to $3.0 million  bearing  interest at the bank's prime rate. At December
31, 1998, $2.8 million was available for borrowing  thereunder.  Pursuant to the
terms of the credit  facility,  any loans under said facility are secured by all
of the Company's assets,  with the exception of intellectual  property and would
be subject to certain  covenants.  The Company has no other debt  outstanding at
December 31, 1998.

4.  Lease Obligations

    The Company has non-cancelable operating lease arrangements for office space
and certain office equipment. Future minimum annual operating lease payments are
as follows (in thousands):

                                            Operating
                                              Lease
                                           Obligations
                                            ---------
      1999 ...............................  $     761
      2000 ...............................        610
      2001 ...............................        572
      2002 ...............................        580
      2003 ...............................        597
      Thereafter..........................      2,122
                                            ---------
                                            $   5,242
                                            =========

    Rent  expense  related  to these and  other  operating  leases  approximated
$1,103,000, $1,019,000, and $727,000 for the years ended December 31, 1998, 1997
and 1996.

5.  Income Taxes

    The  Company's  benefit from income taxes is comprised of the  following (in
thousands):

                                                    Year Ended     
                                                    December 31,   
                                          ----------------------------- 
                                             1998      1997       1996
                                          --------   -------   --------
      Current:
        Federal........................   $     --   $     6   $     --
        State..........................         --         8         --
        Foreign........................        127        76         72
      Deferred:
        Federal........................     (1,131)      (68)      (813)
        State..........................       (272)      (22)       (72)
                                          --------   -------   --------
        Total benefit from income taxes   $ (1,276)  $    --   $   (813)
                                          ========   =======   ========

    The  Company's  net  deferred  income tax assets  are  comprised  of the tax
effects of the following (in thousands):

                                            December 31,  December 31,
                                                1998         1997
                                             ---------     ---------
      Deferred Tax Assets       
      Net operating loss carryforwards....   $   2,520     $     190
      Depreciation and amortization.......         141            --
      Tax credit carryforwards ...........         945           455
      Accrued expenses....................         352           330
                                             ---------     ---------
      Deferred tax asset before valuation 
       allowance..........................       3,958           975
      Valuation allowance.................      (1,520)           --
                                             ---------     ---------
      Net deferred tax asset..............   $   2,438     $     975
                                             =========     =========

    The benefit from income taxes  differs from the amount  computed by applying
the U.S.  federal income tax rate of 34% to income (loss) before income taxes as
follows (in thousands):

                                                         Year Ended
                                                         December 31,      
                                                    1998     1997     1996
      U.S. federal income tax expense 
       (benefit) at statutory rate.........       $(2,171) $    56  $   372
      Increases (decreases) resulting from:
       State taxes, net of federal benefit           (224)       5       38
       Non-deductible items................            27       38       93
       Increase (decrease) in valuation 
        allowance..........................         1,520       --   (1,359)
       Foreign tax rate differentials......          (127)     (10)      20
       Tax credits.........................          (420)     (87)      --
       Other...............................           119       (2)      23
                                                  -------  -------  -------
      Benefit from income taxes............       $(1,276) $    --  $  (813)
                                                  =======  =======  =======

    At December 31, 1998,  the Company has net operating loss  carryforwards  of
approximately   $6,063,000   which  expire   beginning  in  2009  through  2019.
Additionally,  the  Company has  various  tax credit  carryforwards  aggregating
approximately $945,000 which expire beginning in 2005 through 2019.

    The  Company has  recorded a partial  valuation  allowance  against its
carryforward  tax benefits to the extent that it believes that it is more likely
than  not all of such  benefits  will not be  realized  in the  near  term.  The
Company's  assessment of this  valuation  allowance was made using all available
evidence,  both positive and negative. In particular the Company considered both
its historical  results and its projections of profitability for only reasonably
foreseeable  future  periods.  The  Company's  realization  of its  recorded net
deferred tax assets is dependent on future  taxable  income and  therefore,  the
Company is not assured that such benefits will be realized.


<PAGE>


6.  Capital Stock and Benefit Plans

    In July 1996 the Company effected a  reincorporation  from the State of
California  into the  State of  Delaware,  which  changed  the par  value of the
Company's stock.

Mandatorily Redeemable Convertible Preferred Stock

     Upon the closing of the Company's initial public offering,  all Series A, B
and C preferred stock automatically converted to shares of common stock at their
respective  conversion  rates.  Series A and Series C preferred  stock converted
into one  share of common  stock for each  share of  preferred  stock.  Series B
converted  into  approximately  1.011  shares of common  stock for each share of
preferred stock.

Stock Compensation Plans

    At December 31, 1998 the Company has two stock-based compensation plans. The
Company applies APB Opinion 25 and related Interpretations in accounting for its
plans. Accordingly, no compensation cost has been recognized for its fixed stock
option plan and its employee stock purchase plan. Had compensation  cost for the
Company's stock-based compensation plans been determined based on the fair value
at the grant dates for awards  under those plans  consistent  with the method of
FASB Statement 123, the Company's  pro-forma results of operations and pro-forma
net income (loss) per share would have been as follows:


(In thousands, except per share data)
                                                1998       1997       1996
                                             --------    -------   --------
      Net income (loss):
      As reported                            $ (5,110)   $   165   $  1,907
      SFAS No. 123 Pro-forma                   (5,997)      (727)     1,403

      Net income (loss) per share:
      As reported                            $   (.73)   $  0.02   $   0.45
      SFAS No. 123 Pro-forma                     (.86)     (0.11)      0.33

      Diluted net income (loss) per share:
      As reported                            $   (.73)   $  0.02   $   0.30
      SFAS No. 123 Pro-forma                     (.86)     (0.11)      0.22


Fixed Stock Option Plan

    Under the Company's  stock option plan, the Company may grant  incentive and
non-qualified  stock  options to its employees and directors for up to 2,790,000
shares of common stock. Under the plan, options are granted at an exercise price
not less  than the fair  market  value of the  stock on the date of  grant.  The
options  generally  vest  ratably over four years and expire ten years after the
date of grant. Certain options are subject to accelerated vesting provisions.

    The fair value of each option and warrant  grant is estimated on the date of
grant  using  the   Black-Scholes   option-pricing   model  with  the  following
assumptions used for grants in 1998, 1997 and 1996,  respectively;  no estimated
dividends;  expected  volatility  of 133%  for 1998 and 83% for 1997 and 77% for
1996;  risk-free interest rates between 4.23% and 5.64% in 1998, 5.70% and 6.75%
in 1997 and 5.36% and 6.69% in 1996;  and  expected  option terms of 5 years for
all years.

<PAGE>

    A summary  of the  status of the  Company's  listed  option  plan as of
December 31, 1998,  1997,  and 1996 and changes  during the years then ending is
presented  below.  Included in the summary below are 95,000  warrants  issued of
which  66,262 were  exercised  in 1997 in exchange  for 34,200  shares of common
stock.  At December  31, 1998 and 1997,  28,738  warrants  are  outstanding  and
exercisable.  For the year ended, December 31, 1998, 264,500 options to purchase
common stock of the Company were re-priced at $3.18 per option share.
                                    
                         1998                1997                1996
                   ------------------ ------------------- -------------------
                            Weighted            Weighted            Weighted
                            -Average            -Average            -Average
                    Shares  Exercise   Shares   Exercise   Shares   Exercise
                    (000's)   Price    (000's)    Price    (000's)    Price
                   ------------------ ------------------- -------------------
Outstanding at
 beginning of year    2,074  $  2.98     1,933  $   2.38    1,644  $   1.56
Granted                 723  $  3.21       604  $   4.65      492  $   4.72
Exercised              (152) $  1.75      (181) $   1.63     (126) $   0.80
Forfeited              (773) $  4.32      (282) $   3.53      (77) $   2.50
                   ------------------ ------------------- -------------------
Outstanding at   
 end of year          1,872  $  2.61     2,074  $   2.98    1,933  $   2.38
                   ================== =================== ===================

Options and warrants
 exercisable at            
 year end             1,259  $  2.28     1,385  $   2.34      729  $   1.39

Weighted average
 fair value of 
 options granted 
 during the year             $  2.82            $   3.27           $   3.16
 

    The following  table  summarizes  information  about fixed stock options and
warrants outstanding at December 31, 1998:

              Options and Warrants Outstanding       Options and Warrants
                                                         Exercisable
            -------------------------------------- -------------------------
              Number        Weighted      Weighted      Number     Weighted
 Range of   Outstanding     Average       Average     Exercisable   Average
 Exercise   at 12/31/98     Remaining     Exercise    at 12/31/98  Exercise
   Price      (000's)   Contractual Life  Price        (000's)      Price
            ----------  ---------------- ---------- ------------- -----------
$ 0.44- 1.87      915             4.7    $     1.53          906  $      1.52
$ 2.50- 4.00      833             8.8    $     3.32          238  $      3.42
$ 5.00- 7.50      124             7.5    $     5.90          115  $      5.86
            ---------- ----------------- ---------- ------------- -----------
                1,872             6.7    $     2.61        1,259  $      2.28
            ========== ================= ========== ============= ===========


Employee Stock Purchase Plan

    The Company's Employee Stock Purchase Plan (the "Purchase Plan") was adopted
by the Board of Directors in May 1996 and approved by the Company's stockholders
in June 1996.  Under the Purchase Plan, the Company is authorized to issue up to
250,000  shares of common  stock to eligible  employees.  Under the terms of the
Purchase  Plan,  employees  may  elect  to have up to 10% of  their  total  cash
earnings  withheld by payroll  deduction to purchase the Company's common stock.
The  purchase  price of the stock is 85% of the lower of the market price on the
participant's  entry date into the  Purchase  Plan or the  semi-annual  purchase
date.

    Under the Purchase Plan, the Company sold 71,888 shares to employees in 1998
and 70,760  shares to  employees  in 1997.  The fair market  value of each stock
purchase  plan grant is estimated  on the date of grant using the  Black-Scholes
model  with  the  following  assumptions  for 1998 and  1997,  respectively:  no
estimated  dividends for both years;  expected  volatility of 133% and 83%; risk
free  interest  rates of 5.19%  and 5.22% for 1998 and 5.37% and 5.46% for 1997;
and an expected  life of 0.5 years for both  years.  The  weighted-average  fair
values of those  purchase  rights granted in 1998 and 1997 were $1.35 and $2.19,
respectively.

401(k) Retirement Savings Plan

    Effective January 1, 1994, the Company adopted a qualified 401(k) retirement
savings plan for all employees.  Participants  may contribute up to 15% of their
gross pay. The Company  contributions are discretionary and vest at 20% per year
over five years. The Company contributed $163,000 in 1998 and did not contribute
to this plan in 1997 or 1996.

7.  Segment Information

    In 1998, the Company adopted Statement of Financial  Accounting  Standards
("SFAS") No. 131  "Disclosures  About  Segments of an  Enterprise  and Related
Information".  The  Company has only one  segment  under the  criteria of SFAS
No. 131. The table below  presents  information  by geographic  area as of and
for the respective fiscal periods:

(In thousands)
                                                1998         1997       1996
                                              --------     --------   --------
      TOTAL REVENUES ATTRIBUTABLE TO:
       United States                          $ 14,076     $ 16,670   $ 11,880
       International                             4,471        4,993      4,823
                                              --------     --------   --------
            Total                             $ 18,547     $ 21,663   $ 16,703
                                              ========     ========   ========


     Revenue is classified based on the country in which the Company's Advantage
Partner or customer is located.

8.  Restructuring Charges

Restructuring of Asian Operations

    Due to the current economic status and instability in the Asian markets, the
Company  made the  decision  to shut down two of its four  Asian  offices in the
third quarter of 1998, thus reducing future  operational risks and cash outflows
into the region.  This  restructuring  resulted in a $425,000 one-time write-off
including  $125,000 of  goodwill,  $200,000 of  severance  costs and $100,000 of
lease  termination and other costs.  All actions  relating to the  restructuring
plan were completed during 1998 and no restructuring accruals remain as all cash
payments have been made as of December 31, 1998.

Restructuring of Healthcare Operations

    During the fourth quarter of 1997, the Company made the decision to exit the
vertical  healthcare  market. The restructuring plan involved the closure of the
Company's  Boston  facility,  and the termination of approximately 14 employees.
The Company  incurred a 1997  restructuring  charge of $885,000  related to this
restructuring  consisting of $422,000 of severance  and benefits for  terminated
employees,  $312,000 of asset  write-downs and leased facility  executory costs,
and $151,000 of other costs related to the restructuring  consisting principally
of  legal  and  other   miscellaneous   costs.   All  actions  relating  to  the
restructuring  plan were  completed  during 1998 and no  restructuring  accruals
remain as all cash payments have been made as of December 31, 1998.

9.  Contingencies

    The Company is, from time to time,  subjected to certain claims,  assertions
or litigation by outside parties as part of its ongoing business operations. The
outcomes of any such  contingencies  are not expected to have a material adverse
effect on the financial condition or operations of the Company. In addition,  in
the  ordinary  course of business,  the Company has issued  letters of credit as
security for performance on certain  contracts and, as a result, is contingently
liable in the amount of approximately $220,000 at December 31, 1998.



<PAGE>


    SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS





(in thousands)
                                     Beginning Allowance            Ending
                                      Balance  Increase  Write-offs Balance
                                     --------- --------- ---------- -------
Deducted from asset account-
 allowance for doubtful accounts

Year ended
    December 31, 1998.............    $    212  $    746  $     515  $  443
Year ended
    December 31, 1997.............         112       167         67     212
Year ended
    December 31, 1996.............          90        35         13     112






<PAGE>


                                  SIGNATURES

    Pursuant  to the  requirements  of  Section  13 or 15(d)  of the  Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed  on its  behalf  by the  undersigned,  thereunto  duly  authorized  on
February 22, 1999.


                                    OPTIKA INC.


                                    By:   /s/    MARK K. RUPORT        
                                       -------------------------------- 
                                               Mark K. Ruport
                                     President, Chief Executive Officer
                                          and Chairman of the Board


                                    By:   /s/    STEVEN M. JOHNSON     
                                       -------------------------------- 
                                              Steven M. Johnson
                           Chief Financial Officer, Vice President, Finance and
                          Administration, Secretary and Chief Accounting Officer



<PAGE>


                              POWER OF ATTORNEY

     KNOW ALL  PERSONS  BY THESE  PRESENTS,  that each  person  whose  signature
appears below constitutes and appoints Mark K. Ruport and Steven M. Johnson, and
each of them,  as his true and lawful  attorneys-in-fact  and agents,  with full
power of substitution  and  resubstitution,  for him and in his name,  place and
stead, in any and all capacities,  to sign any and all amendments to this Report
on Form  10-K,  and to file the  same,  with all  exhibits  thereto,  and  other
documents in connection  therewith,  including all amendments thereto,  with the
Securities and Exchange  Commission,  granting unto said  attorneys-in-fact  and
agents,  and each of them,  full power and  authority to do and perform each and
every act and thing requisite and necessary to be done in connection  therewith,
as fully to all intents and  purposes as he might or could do in person,  hereby
ratifying and confirming all that said  attorneys-in-fact  and agents, or any of
them, or their or his substitute or substitutes,  may lawfully do or cause to be
done by virtue hereof.

    Pursuant to the  requirements  of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated on February 22, 1999:

        Signature                                         Title
        ---------                                         -----

By:  /s/  MARK  K. RUPORT                       Chief Executive Officer and
   ----------------------------                   Chairman of the Board
        Mark K. Ruport                            

By:  /s/  STEVEN M. JOHNSON                     Chief Financial Officer, Vice
   ----------------------------                   President, Finance &
        Steven M. Johnson                         Administration, Secretary and
                                                  Chief Accounting Officer

By:  /s/  PAUL CARTER                           Co-Founder and Director
   ----------------------------
          Paul Carter

By:  /s/  RICHARD A. BASS                       Director
   ----------------------------
        Richard A. Bass

By:  /s/  JAMES E. CRAWFORD                     Director
   ----------------------------
       James E. Crawford

By:  /s/  ROBERT L. GETT                        Director
   ----------------------------
        Robert L. Gett

By:  /s/  HARRY S. GRUNER                       Director
   ----------------------------
        Harry S. Gruner

By:  /s/  GRAHAM O. KING                        Director
   ----------------------------
        Graham O. King
<PAGE>

                                EXHIBIT INDEX
                                -------------
 Exhibit
   No.                                  Description
---------        -------------------------------------------------------------
3.1(1)           Certificate of Incorporation of the Registrant.
3.1.1            Certificate of Ownership and Merger
3.2(1)           Form  of  First  Amended  and  Restated   Certificate  of
                 Incorporation of the Registrant.
3.3(1)           Form  of  Second  Amended  and  Restated  Certificate  of
                 Incorporation of the Registrant.
3.4(1)           Bylaws of the Registrant.
4.1(1)           Specimen Common Stock certificate.
4.2(1)           Amended  and  Restated  Shareholders'  Agreement,   dated
                 November 25, 1995,  by and among the  Registrant  and the
                 entities named therein.
4.3(1)           Amended  and  Restated  Registration   Agreement,   dated
                 November 22, 1995,  by and among the  Registrant  and the
                 entities  named  therein,  including the First  Amendment
                 thereto.
4.4(1)           Form of Warrant to purchase  Common Stock dated  November
                 1, 1995.
10.1(1)          Form of  Indemnification  Agreement  between the Registrant and
                 each of its directors and officers.
10.2(1)          The  Registrant's  1994 Stock  Option/Stock  Issuance  Plan, as
                 restated and amended.
10.4(1)          The Registrant's Employee Stock Purchase Plan.
10.7(1)          Employment  Agreement by and between the  Registrant  and
                 Mr. Mark K. Ruport effective February 18, 1995.
10.8(1)          Employment  Agreement by and between the  Registrant  and
                 Mr. Steven M. Johnson, effective May 15, 1996.
10.9(1)          Employment  Agreement by and between the  Registrant  and
                 Mr. Marc Fey, effective May 4, 1994.
10.10(1)         Form of Business Solutions Partner (Reseller) Agreement.
10.11(1)         Form of FilePower Suite Software License Agreement.
10.12(1)         Technology Transfer  Agreement,  dated February 20, 1992,
                 by and  between the  Registrant,  Mr. Paul Carter and Mr.
                 Malcolm Thomson.
10.16(3)         Lease  Agreement  dated  October 11,  1996,  by and between the
                 Registrant and  Integrated  Property  Management,  Inc. LLP for
                 office space at 7450 Campus Drive, Suite 200, Colorado Springs,
                 Colorado.
10.17(5)         Amendment to Loan and Security  Agreement  dated as of March 2,
                 1998, by and between the Registrant and Silicon Valley Bank.
10.18(4)         Loan and Security  Agreement  dated as of October 15, 1998,  by
                 and between the registrant and Silicon Valley Bank.
21.1(1)          Subsidiaries of the Registrant.
23.1             Consent  of   PricewaterhouseCoopers   LLP,   Independent
                 Accountants
24.1             Power of Attorney.  (Included on Signature Page)
27.1             Financial Data Schedule.

(1)  Incorporated by reference to identically  numbered  exhibits  included in
     the Registrant's Registration Statement on Form S-1 (File No. 333-03637), 
     as amended.

(2)  Incorporated by reference to an exhibit to the Company's Quarterly Report
     on Form 10-Q (File No. 0-28672) for the quarter ended September 30, 1996.

(3)  Incorporated by reference to an exhibit to the Company's Annual Report on
     Form 10-K (File No. 001-11751) for the year ended December 31, 1996.

(4)  Incorporated by reference to an exhibit to the Company's Quarterly Report 
     on Form 10-Q (File No. 001-11751) for the quarter ended September 30, 1998.

(5)  Incorporate by reference to an exhibit to the Company's Annual Report on
     Form 10-K (File No. 001-11751) for the year ended December 31, 1997