<PAGE>   1
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                    FORM 10-Q


           [X]    QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
                  OF THE SECURITIES EXCHANGE ACT OF 1934
                  FOR QUARTERLY PERIOD ENDED DECEMBER 31, 1998

           [ ]    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 000-23119

                           KOFAX IMAGE PRODUCTS, INC.
             (Exact name of registrant as specified in its charter)

                DELAWARE                                         33-0114967
    (State or other jurisdiction of                          (I.R.S. Employer
     incorporation or organization)                          Identification No.)

  3 Jenner Street, Irvine, California                              92618
(Address of principal executive offices)                         (Zip Code)

                                 (949) 727-1733
              (Registrant's telephone number, including area code)

                                      NONE
                     (Former name, former address and former
                   fiscal year, if changed since last report)


        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 the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practical date.

             Class                             Outstanding at January 29, 1999
  -----------------------------                -------------------------------
  Common Stock, $.001 par value                        5,304,937 shares

<PAGE>   2

                    KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
                                      INDEX
<TABLE>
<CAPTION>

ITEM                                                                                   PAGE
NUMBER                                                                                NUMBER
<S>          <C>                                                                      <C>
PART I.      FINANCIAL INFORMATION

ITEM 1.      Condensed Consolidated Financial Statements

             Balance Sheets - December 31, 1998
                 (unaudited) and June 30, 1998.....................................      3

             Statements of Operations (unaudited) - Three Months Ended December
                 31, 1998 and 1997 and Six Months Ended December 31, 1998
                 and 1997..........................................................      4

             Statements of Cash Flows (unaudited) - Six
                 Months Ended December 31, 1998 and 1997...........................      5

             Notes to Condensed Consolidated Financial
                 Statements (unaudited)............................................      6

ITEM 2.      Management's Discussion and Analysis of Financial
                 Condition and Results of Operations...............................      8


PART II.     OTHER INFORMATION

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

             Signatures............................................................     17
</TABLE>


                                       2

<PAGE>   3

                         PART I - FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                    KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
                      Condensed Consolidated Balance Sheets
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                             December 31,          June 30,
                                                                1998                1998
                                                             -----------           -------
                                                             (unaudited)
<S>                                                          <C>                   <C>
                         ASSETS
Current assets
      Cash and cash equivalents                                 $17,946            $16,522
      Short-term investments                                      5,541              4,343
      Accounts receivable, net                                    5,297              5,261
      Inventory (Note 2)                                          1,510              1,565
      Prepaid expenses and other current assets                   1,070                948
                                                                -------            -------
Total current assets                                             31,364             28,639
Property and equipment, net                                       1,576              1,740
Deferred income taxes                                             1,343              1,343
Other assets                                                        136                393
                                                                -------            -------
Total assets                                                     34,419             32,115
                                                                =======            =======
          LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
      Accounts payable                                            1,021              1,207
      Accrued liabilities:
         Compensation                                             1,181              1,237
         Deferred revenue                                           706                588
         Other                                                    2,285              1,458
                                                                -------            -------
Total current liabilities                                         5,193              4,490
Stockholders' equity
      Common stock, $.001 par value, 40,000,000
      shares authorized; 5,284,277 and 5,307,416 
      shares outstanding at December 31, 1998
      and June 30, 1998, respectively                            17,153             17,125
      Retained earnings                                          12,955             11,136
      Treasury stock, 136,464 and 100,000 shares
      at cost at December 31, and June 30, 1998, 
      respectively                                                 (882)              (636)
                                                                -------            -------
Total stockholders' equity                                       29,226             27,625
                                                                -------            -------
Total liabilities and stockholders' equity                      $34,419            $32,115
                                                                =======            =======
</TABLE>


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


                                       3

<PAGE>   4



                    KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
                 Condensed Consolidated Statement of Operations
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                          Three Months Ended               Six Months Ended
                                             December 31,                    December 31,
                                     ---------------------------     ---------------------------
                                         1998            1997            1998            1997
                                     -----------     -----------     -----------     -----------
                                     (unaudited)     (unaudited)     (unaudited)     (unaudited)
<S>                                     <C>             <C>            <C>             <C>    
   Net sales                            $9,615          $8,074         $18,268         $15,925
   Cost of sales                         2,256           1,975           4,212           3,836
                                        ------          ------         -------         -------
   Gross profit                          7,359           6,099          14,056          12,089
   Operating expenses:
      Sales and marketing                2,811           2,627           5,543           5,118
      Research and development           2,189           1,811           4,286           3,690
      General and administrative           779             620           1,528           1,222
                                        ------          ------         -------         -------
         Total operating expenses        5,779           5,058          11,357          10,030
                                        ------          ------         -------         -------

   Income from operations                1,580           1,041           2,699           2,059
   Other income, net                       271             195             561             245
                                        ------          ------         -------         -------
   Income before provision for
      income taxes                       1,851           1,236           3,260           2,304
   Provision for income taxes              629             476           1,172             887
                                        ------          ------         -------         -------
   Net income                           $1,222          $  760         $ 2,088         $ 1,417
                                        ======          ======         =======         =======

   Basic net income per share
      (Note 3)                           $0.23           $0.15           $0.40           $0.46
                                         =====           =====           =====           =====

   Basic weighted average common
      shares (Note 3)                    5,245           4,913           5,212           3,099
                                         =====           =====           =====           =====

   Diluted net income per share
      (Note 3)                           $0.23           $0.14           $0.39           $0.30
                                         =====           =====           =====           =====

   Diluted weighted average common
      shares (Note 3)                    5,357           5,403           5,322           4,734
                                         =====           =====           =====           =====
</TABLE>


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

                                       4


<PAGE>   5

                    KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
                 Condensed Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                               Six Months Ended December 31,
                                                                1998                  1997
                                                            --------------       ---------------
                                                             (unaudited)          (unaudited)
<S>                                                            <C>                  <C>    
Cash flows from operating activities:
   Net income                                                  $ 2,088              $ 1,417
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Depreciation and amortization                             722                  770
         Changes in operating assets and liabilities:
           Accounts receivable                                     (36)                 (40)
           Inventory                                                55                  (23)
           Other current assets                                   (122)                 (87)
           Accounts payable                                       (186)                 124
           Other current liabilities                               889                  529
                                                               -------              -------
              Net cash provided by operating activities          3,410                2,690
                                                               -------              -------

Cash flows from investing activities:
   Purchases of property and equipment                            (442)                (608)
   Decrease in other assets                                        141                   55
   Increase in short-term investments                           (1,198)                (287)
                                                               -------              -------
              Net cash used in investing activities             (1,499)                (840)
                                                               -------              -------

Cash flows from financing activities:
   Principal payments on notes payable                               0                 (821)
   Net proceeds from issuance of common stock                      488               12,556
   Repurchase of common stock                                     (975)                   0
                                                               -------              -------
              Net cash provided by (used in) financing
               activities                                         (487)              11,735
                                                               -------              -------

Net increase in cash and cash equivalents                        1,424               13,585
Cash and cash equivalents, beginning of period                  16,522                  801
                                                               -------              -------
Cash and cash equivalents, end of period                       $17,946              $14,386
                                                               =======              =======
Supplemental disclosure of cash flow information:
   Interest paid                                                $    0               $   27
                                                                ======               ======
   Income taxes paid                                            $  652               $  419
                                                                ======               ======
</TABLE>

Noncash Activity - During the quarter ended December 31, 1997, the Company
converted 2,667,002 shares of outstanding convertible redeemable preferred stock
into common stock which resulted in a $4,090 increase in common stock and the
reversal of $3,140 of previously accreted cumulative dividends in arrears.

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


                                       5

<PAGE>   6

                    KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

1.   BASIS OF PRESENTATION

The condensed consolidated financial statements of Kofax Image Products, Inc.
and subsidiary (the "Company") presented herein have been prepared pursuant to
the rules of the Securities and Exchange Commission for quarterly reports on
Form 10-Q and do not include all of the information and note disclosures
required by generally accepted accounting principles. These statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the year ended June 30, 1998, included in the Company's Annual
Report on Form 10-K for the year ended June 30, 1998.

The condensed consolidated financial statements and notes herein are unaudited,
but in the opinion of management, include all the adjustments (consisting only
of normal, recurring adjustments) necessary to present fairly the consolidated
financial position, results of operations and cash flows of the Company and its
subsidiary. The results of operations for the interim periods shown herein are
not necessarily indicative of the results to be expected for any future interim
period or for the entire year.

2.   INVENTORIES

Inventories, which include material, labor and manufacturing overhead, are
stated at the lower of cost (first-in, first-out) or market and consist of the
following:

<TABLE>
<CAPTION>
                                      DECEMBER 31, 1998                 JUNE 30, 1998
                                      -----------------                 -------------
<S>                                        <C>                             <C>   
Raw materials                              $  704                          $  827
Work-in-process                               556                             511
Finished goods                                250                             227
                                           ------                          ------
                                           $1,510                          $1,565
                                           ======                          ======
</TABLE>

3.   NET INCOME PER SHARE AND DILUTED NET INCOME PER SHARE

Effective December 27, 1997, the Company adopted SFAS No. 128, "Earnings per
Share," which changed the method used to calculate earnings per share. The new
requirements include a calculation of basic earnings per share, from which the
dilutive effect of stock options is excluded, and a calculation of diluted
earnings per share. Prior period quarterly earnings per share have been restated
in accordance with SFAS No. 128.

The Company believes that diluted net income per share provides the most
meaningful comparison between periods.


                                       6

<PAGE>   7

                    KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (unaudited)

4.   CHANGES IN ACCOUNTING PRINCIPLES

Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income". This statement requires
that all items recognized under accounting standards as components of
comprehensive earnings be reported in an annual financial statement that is
displayed with the same prominence as other annual financial statements. This
statement also requires that an entity classify items of other comprehensive
earnings by their nature in an annual financial statement. Annual financial
statements for prior periods will be restated, as required. The only item of
comprehensive income for the quarter and six months ended December 31, 1998, is
a loss on reissuance of treasury stock of $155,700 and $257,000, respectively.

Effective July 1, 1998, the Company adopted Statement of Position 97-2,
"Software Revenue Recognition". In prior periods the Company recognized software
revenue in accordance with AICPA Statement of Position 91-1. Statement of
Position 97-2 has not had a material effect on the Company's revenue recognition
policies.

5.   RECENT ACCOUNTING PRONOUNCEMENT

For the years beginning after July 1, 1998, the Company will adopt SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
Company is reviewing the impact of this statement on its financial statements,
and does not believe this statement will have a material adverse effect on its
financial statements.


                                       7

<PAGE>   8

                    KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY

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

The discussion in this Form 10-Q contains trend analysis and other
forward-looking statements regarding the Company, its business, prospects and
results of operations that are subject to certain risks and uncertainties posed
by many factors and events that could cause the Company's actual business,
prospects and results of operations to differ materially from those that may be
anticipated by such forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, (i) uncertainty
of future operating results, (ii) fluctuations in quarterly operating results,
(iii) dependence on a limited number of products for current and future
operating results, (iv) dependence on imaging, workflow and document management
market and component software strategy, (v) rapid technological change, (vi) the
impact of competition, (vii) dependence on intellectual property and proprietary
rights, (viii) risks associated with international sales, (ix) dependence on
scanner manufacturers, (x) risks associated with acquisitions, and (xi) the
ability to recruit and retain qualified personnel, as well as those discussed
under the caption "Factors That May Affect Future Operating Results" in the
Company's Annual Report on Form 10-K for the year ended June 30, 1998. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date of this report. Readers are urged to carefully
review and consider the various disclosures made by the Company in this report
and in the Company's other reports filed with the Securities and Exchange
Commission that attempt to advise interested parties of the risks and factors
that may affect the Company's business.

OVERVIEW

Kofax Image Products was founded in 1985 to develop image processing accelerator
boards that could be added to PCs and other desktop workstations to facilitate
high-speed scanning, compression, manipulation and printing of document images.
The products were targeted at the emerging market of document image processing.

Today Kofax develops, markets and supports three product lines for imaging,
workflow and document management applications. The fastest growing products are
software applications that manage the capture and long-term storage of documents
for production level workflow and document management systems. Substantially all
of the Company's revenue growth in fiscal years 1998 and 1997 was generated from
the Company's Ascent software business. The Company has signed and trained over
450 Ascent resellers focused on workflow and document management solutions. The
original image processing hardware and development tools business, which is in
its fourth generation,


                                       8


<PAGE>   9

currently generates gross margins of approximately 70% and continues to generate
a significant portion of the Company's profits. Revenue from the Company's
family of image processing boards and development tools has grown modestly over
the past two years, and the Company expects that to continue for the foreseeable
future. The Company believes that the accelerator board and development tools
business will continue to account for a majority of the Company's net sales for
the next two to three years. The Company also expects that its Ascent software
products will contribute an increasing share of the Company's net sales in the
future.

The Company sells its products primarily through a two-tier channel of stocking
distributors and solution providers, such as system integrators and value-added
resellers (VARs). The Company typically ships its products within a short period
after acceptance of purchase orders from distributors and other customers.
Accordingly, the Company typically does not have a material backlog of unfilled
orders at the end of any quarter. Revenues from hardware and software sales are
currently recognized at the time of shipment in accordance with AICPA Statement
of Position 97-2, Software Revenue Recognition. Distributors have certain rights
of return and exchange privileges. The Company's distributors generally do not
stock significant amounts of inventory of the Company's products, as these
products are typically incorporated by resellers into complete imaging and
document management systems which are configured shortly before scheduled
delivery to end-user customers. The Company records estimates for such rights of
return and exchange privileges based on historical experience. The Company
provides a warranty for its products against defects in materials and
workmanship. A provision for estimated warranty costs is recorded at the time of
sale. Payments under maintenance contracts are due at the beginning of the
contract; however, revenue is recognized ratably over the term of the contract
which is typically twelve months.


                                       9

<PAGE>   10

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997, AND
THE SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997

The following table sets forth certain income and expense items as a percentage
of net sales for the periods indicated.

<TABLE>
<CAPTION>
                                             Three Months Ended           Six Months Ended
                                                December 31,                December 31,
                                           ------------------------    ------------------------
                                             1998          1997          1998          1997
                                           ----------    ----------    ----------   -----------
<S>                                          <C>           <C>           <C>           <C>   
Net sales                                   100.0%        100.0%        100.0%        100.0%
Cost of sales                                23.5          24.5          23.1          24.1
                                           ------        ------        ------        ------
Gross profit                                 76.5          75.5          76.9          75.9
Operating expenses:
   Sales and marketing                       29.2          32.5          30.3          32.1
   Research and development                  22.8          22.4          23.5          23.2
   General and administrative                 8.1           7.7           8.4           7.7
                                           ------        ------        ------        ------
      Total operating expenses               60.1          62.6          62.2          63.0
                                           ------        ------        ------        ------
Income from operations                       16.4          12.9          14.7          12.9
Other income, net                             2.8           2.4           3.1           1.6
                                           ------        ------        ------        ------
Income before provision for income taxes     19.2          15.3          17.8          14.5
Provision for income taxes                    6.5           5.9           6.4           5.6
                                           ------        ------        ------        ------
Net income                                   12.7%          9.4%         11.4%          8.9%
                                           ======        ======        ======        ======
</TABLE>

        NET SALES. Net sales represent gross sales less discounts, returns and
adjustments. Net sales were $9.6 million and $8.1 million in the quarters ended
December 31, 1998 and 1997, respectively, an increase of 19.1%. This revenue
increase was primarily attributable to increased sales of the Company's Ascent
application software products and increased sales of the SCSI versions of the
Company's new family of image processing accelerator boards. Revenues from
Ascent software increased 45% in the December quarter over the same period last
year. As a result, total software revenue in the second quarter grew 33% and
increased to 33% of total revenues compared to 30% in the same period last year.
For the six months ended December 31, 1998 and 1997, net sales were $18.3
million and $15.9 million, respectively, representing an increase of 14.7%. The
year-to-date revenue increase was also attributable to increased sales of the
Company's Ascent application software products and increased sales of the SCSI
versions of the Company's Adrenaline image processing boards.

        International sales (primarily to Western European countries) accounted
for 33.7% and 35.5% of net sales in the quarters ended December 31, 1998 and
1997, respectively, and 32.6% and 34.0% in the six months ended December 31,
1998 and 1997, respectively. International sales increased 13.1% and 9.9%, in
absolute dollars, over the same quarter and six-month periods last year,
respectively. Management expects that the Company's international operations
will continue to provide a significant portion of total net sales; however,
international sales could be adversely affected if the U.S. dollar continues to
strengthen against international currencies. To date the Company has not had any
exposure to


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<PAGE>   11

foreign currency fluctuations. The adoption of the "Euro" by the European
community in 1999 may lead the Company to transact its European sales in
"Euros", which may result in the realization of foreign exchange gains or losses
in the future.

        GROSS PROFIT. Cost of sales primarily consist of the costs of components
and subassemblies, labor and manufacturing overhead and, with respect to the
Company's software products, software duplication and royalty expenses. The
Company believes that its gross margins reflect the increasing percentage of
total software revenue in the Company's product mix as well as the high content
of proprietary firmware in the Company's hardware accelerator boards. Gross
profit was 76.5% and 75.5% of net sales in the quarters ended December 31, 1998
and 1997, respectively, and 76.9% and 75.9% of net sales in the six months ended
December 31, 1998 and 1997, respectively. Substantially all of the increase in
gross profit percentage in the December quarter was attributable to the
Company's increased software revenues which have higher gross margins. For the
six months ended December 31, 1998, most of the increase in gross profit
percentage was attributable to increased sales of the Company's Ascent software
products, and to a lesser extent, the declining costs of components used in the
Company's accelerator boards.

        SALES AND MARKETING. Sales and marketing expenses, which consist
primarily of salaries and commissions, customer support, trade shows,
advertising and other promotional expenses, were $2.8 million and $2.6 million,
and 29.2% and 32.5% of net sales, in the quarters ended December 31, 1998 and
1997, respectively. Sales and marketing expenses were $5.5 million and $5.1
million, and 30.3%, and 32.1% of net sales, in the six months ended December 31,
1998 and 1997, respectively. The increases in absolute dollar amounts in fiscal
1999 were primarily attributable to increased marketing personnel, and increased
marketing expenses related to the launch of the Version 4 release of Ascent
Storage. The Company expects that sales and marketing expenses will continue to
increase in absolute dollar amounts and will fluctuate as a percentage of net
sales.

        RESEARCH AND DEVELOPMENT. Research and development expenses, which
consist primarily of personnel costs and related occupancy expenses, were $2.2
million and $1.8 million, and 22.8% and 22.4% of net sales, in the quarters
ended December 31, 1998 and 1997, respectively. Research and development
expenses were $4.3 million and $3.7 million, and 23.5% and 23.2% of net sales,
in the six months ended December 31, 1998 and 1997, respectively. The increase
in both periods of fiscal 1999 was primarily attributable to increased
engineering staffing, the increased use of temporary consultants and contract
labor required for specific engineering projects, and related compensation
expense. The Company expects that research and development expenses will
continue to increase in absolute dollar amounts and will fluctuate as a
percentage of net


                                       11


<PAGE>   12

sales, depending upon the timing of material research and product development
projects.

Despite the fact that the Company's net sales have increased, research and
development expenses as a percentage of net sales have continued to increase
because of ongoing research and development and the continued development of its
Ascent application software products.

        GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
of personnel costs for administration, finance, information systems, human
resources and general management, as well as professional services. General and
administrative expenses were $0.8 million and $0.6 million, and 8.1% and 7.7% of
net sales, in the quarters ended December 31, 1998 and 1997, respectively.
General and administrative expenses were $1.5 million and $1.2 million, and 8.4%
and 7.7% of net sales, in the six months ended December 31, 1998 and 1997,
respectively. The increase in both periods of fiscal 1999 was primarily
attributable to increased staffing and related compensation expenses and the
increased expenses related to the administrative requirements of being a public
company. The Company anticipates that it will incur increased general and
administrative costs in the future related to the additional insurance and
administrative requirements of a public company.

        OTHER INCOME, NET. Other Income, net consists primarily of interest
income earned on the Company's cash and cash equivalents and short-term
investments less interest expense on the Company's note payable. As a result of
the initial public offering of the Company's stock in the December 1997 quarter,
interest expense on bank borrowing was eliminated due to repayment of the
previously outstanding bank term loan. Interest income increased compared to the
same periods last year, as a result of investing the net proceeds from the
offering and investing the net cash flows generated from the Company's
operations.

        PROVISION FOR INCOME TAXES. The Company's effective tax rate was 34% for
the quarter ended December 31, 1998 compared to 38.5% for the same quarter in
1997. The decline in the effective tax rate results from the recent extension of
the federal R&D tax credit through June 30, 1999. The Company expects the
effective tax rate to approximate 35% for the fiscal year June 30, 1999. The
Company also expects the effective tax rate to return to historical levels of
approximately 38% in fiscal year 2000, unless the current R&D tax credit is
extended in its current form.

        YEAR 2000 ISSUES. It is possible that the currently installed computer
systems, software products or other business systems of the Company's
distributors, resellers, suppliers, manufacturers or customers, working either
alone or in conjunction with other software systems, will not accept input of,
store, manipulate and


                                       12


<PAGE>   13

output dates in the Year 2000 or thereafter without error or interruption (the
"Year 2000 Problem"). The Company's software products do not have any material
Year 2000 Problems. In addition, the Company has completed a review of its
business systems, including its computer systems, and based on information
gathered to date, has determined that such systems are also not subject to any
material Year 2000 Problems. The Company's expenditures for Year 2000 review and
testing have not been significant to date, and the Company does not believe it
will incur any material expenses related to future review, testing, or
remediation of Year 2000 problems. The Company is querying its distributors,
resellers, suppliers, manufacturers and customers as to their progress in
identifying and addressing Year 2000 Problems. The failure of the Company or its
distributors, resellers, suppliers, manufacturers and customers to complete the
conversions or upgrades necessary to fully address the Year 2000 Problem in a
timely manner could have material adverse effect on the Company's business,
results of operations, cash flows and financial condition.

The Company's past operating results have been, and its future operating results
will be, subject to fluctuations due to a number of factors, including the
timing of orders from, and shipments to, major customers; the timing of new
product introductions by the Company or its competitors; variations in the mix
of products sold by the Company; changes in pricing policies by the Company, its
competitors or suppliers, including possible decreases in average selling prices
of the Company's products in response to competitive pressures; product returns
or price protection charges from customers; market acceptance of new and
enhanced versions of the Company's products; the availability and cost of key
components; the availability of manufacturing capacity; delays in the
introduction of new products or product enhancements by the Company, the
Company's competitors or other providers of hardware, software and components
for the imaging, workflow and document management market; dependence upon
capital spending budgets; and fluctuations in general economic conditions. As a
result, the Company believes that period-to-period comparisons of its results of
operations should not be relied upon as indications of future performance.

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 1998, combined cash, cash equivalents, and short-term
investments totaled $23.5 million, an increase of $2.6 million from June 30,
1998. Net cash provided by operating activities was $3.4 million, and was
generated primarily from net income, depreciation and amortization, and an
increase in other current liabilities. Net cash used in investing activities was
$1.5 million for capital expenditures and additions to short term investments.
Net cash used in financing activities was $0.5 million, primarily as a result of
the repurchase of 150,000 shares of the Company's common stock.


                                       13


<PAGE>   14

The Company financed its operations and capital requirements from 1986 through
1989 from the sale of approximately $4.0 million of preferred stock and,
thereafter, through cash flow from operations. In October 1997, the Company
completed its initial public offering selling 1,300,000 shares of its common
stock, and received net proceeds, after subtracting expenses incurred in the
offering, of approximately $12.6 million, $0.7 million of which was used to
repay outstanding indebtedness.

The Company has an unsecured $2.0 million revolving credit line with Silicon
Valley Bank (the "Bank") and as of December 31, 1998 had no outstanding balance
under the revolving line of credit. In January 1999, the Company entered into an
agreement with the Bank to extend the line of credit through January, 2000. The
line of credit agreement requires the Company to maintain its primary banking
relationship with the Bank while any obligations to the Bank remain outstanding,
prohibits the incurrence of additional debt from sources other than the Bank,
except for purchases or leases of equipment up to $700,000, requires the Company
to maintain certain tangible net worth levels, and profitability levels, and
restricts the payment of dividends without the Bank's prior approval.

On April 24, 1998, the Company's board of directors authorized a program for
repurchase of up to 500,000 shares, or approximately 9.5%, of Kofax's
outstanding common stock, to be used to fund stock option exercises, employer
equity compensation plans, and an employee stock purchase plan. As of December
31, 1998, the Company has repurchased 250,000 shares of its common stock to
date, for approximately $1.6 million. Aside from this program, the Company
currently has no significant capital spending or purchase commitments other than
normal purchase commitments and commitments under facilities leases.

The Company believes that its existing cash balances, its available bank
financing and the cash flows generated from operations, if any, will be
sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. A portion of the Company's cash
could be used to acquire or invest in complementary businesses or products or
obtain the right to use complementary technologies. The Company is currently
evaluating, in the ordinary course of business, potential investments such as
businesses, products or technologies.

Quantitative and Qualitative Disclosures about Market Risk

At December 31, 1998, the Company had an investment portfolio of fixed income
securities, including those classified as cash equivalents, of approximately
$22.6 million. These securities are subject to interest


                                       14


<PAGE>   15

rate fluctuations. An increase in interest rates could adversely affect the
market value of the Company's fixed income securities.

As of December 31, 1998, the weighted average maturity of the Company's
portfolio was 123 days. The market value changes for increases in short-term
treasury security yields are not material due to the overall short-term maturity
of the Company's portfolio.

The Company limits its exposure to interest rate and credit risk by establishing
and strictly monitoring clear policies and guidelines for its fixed income
portfolios. At the present time, the maximum average maturity of the Company's
overall investment portfolio is limited by policy to 36 months. The guidelines
also establish credit quality standards, limits on exposure to one issue,
issuer, as well as the type of instrument. Due to the limited duration and
credit risk criteria established in the Company's guidelines, the exposure to
market and credit risk is not expected to be material. The Company does not use
derivative financial instruments in its investment portfolio to manage interest
rate risk.




                                       15

<PAGE>   16

                           PART II - OTHER INFORMATION


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         (a) Exhibits


11.1     Computation of diluted net income per share

27.1     Financial Data Schedule

         (b) Reports on Form 8-K

             None.

Items 1, 2, 3, 4, and 5 are not applicable and have been omitted.



                                       16

<PAGE>   17

                                   SIGNATURES

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


                                          KOFAX IMAGE PRODUCTS, INC.


Dated: February 12, 1999                  /s/ Ronald J. Fikert
                                          --------------------------------------
                                          Ronald J. Fikert
                                          Chief Financial Officer
                                          (principal financial and accounting
                                          officer and duly authorized officer)



                                       17
<PAGE>   18
                                 EXHIBIT INDEX

        EXHIBIT
        NUMBER             DESCRIPTION
        -------            -----------

         11.1              Computation of diluted net income per share

         27.1              Financial Data Schedule