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                SECURITIES AND EXCHANGE COMMISSION
                      Washington, D.C. 20549


                            Form 10-Q

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

           For the quarterly period ended June 30, 1998


                                OR
[ ]   TRANSITION  REPORT  PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES
      EXCHANGE ACT OF 1934 For the transition period from _______________ to
      --------------

                  Commission File Number 0-28672

                   OPTIKA IMAGING SYSTEMS, 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                         80920
              Suite 200                          (Zip Code)
        Colorado Springs, CO
(Address of principal executive offices)

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

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

   6,996,570  shares of the  Registrant's  Common  Stock,  $.001 par value per
   share, were outstanding as of August 12, 1998



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<PAGE>



                                    INDEX


                                                                            PAGE

PART I - FINANCIAL INFORMATION

      Item 1 -  Condensed Consolidated Financial Statements

          Condensed Consolidated Balance Sheets as of December 31, 1997
          and June 30, 1998                                                   1

          Condensed Consolidated Statements of Operations for the
          three-month and six-month periods ended June 30, 1997 
          and 1998 (Unaudited)                                                2

          Condensed Consolidated Statements of Cash Flows for the
          six-month periods ended June 30, 1997 and 1998 (Unaudited)          3

          Notes to Condensed Consolidated Financial Statements (Unaudited)    4

      Item 2 - Management's  Discussion and Analysis of Financial 
          Condition and Results of Operations                                 6

PART II - OTHER INFORMATION

      Item 1 - Legal Proceedings                                             17

      Item 2 - Changes in Securities and Use of Proceeds                     17

      Item 3 - Defaults on Senior Securities                                 17

      Item 4 - Submission of Matters to a Vote of Security Holders           17

      Item 5 - Other Information                                             17

      Item 6 - Exhibits and Reports on Form 8-K                              17

      Signatures                                                             18


<PAGE>
<TABLE>
<CAPTION>



                          OPTIKA IMAGING SYSTEMS, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
               (In thousands, except share and per share amounts)

                                                                December 31,     June 30,
                                                                   1997           1998
                                                               -------------  -------------
                                                                               (unaudited)
<S>                                                            <C>            <C>    
ASSETS
Current assets:
   Cash and cash equivalents...............................    $      3,202   $      5,576
   Short-term investments..................................           5,398          1,986
   Accounts receivable, net................................           8,555          5,567
   Other current assets....................................             986            948
                                                               -------------  -------------
         Total current assets..............................          18,141         14,077
                                                               -------------  -------------

Fixed assets, net..........................................           2,721          3,217
Other assets, net..........................................           1,024          2,242
                                                               -------------  -------------
                                                               $     21,886   $     19,536
                                                               =============  =============
LIABILITIES AND STOCKHOLDERS' EQUITY 
Current liabilities:
   Current portion of long-term debt.......................    $         15   $          -
   Accounts payable .......................................             742            908
   Accrued expenses........................................           1,901          2,278
   Restructuring reserve...................................             291             27
   Deferred revenue........................................           2,445          3,223
                                                               -------------  -------------
          Total current liabilities........................           5,394          6,436
                                                               -------------  -------------

Commitments and contingencies

Common stockholders' equity:
   Common stock; $.001 par value;25,000,000 shares authorized;
      6,890,724 and 6,960,604 shares issued and outstanding                      
      at December 31, 1997 and June 30, 1998, respectively.               7              7
      Additional paid-in capital...........................          17,179         17,233
      Accumulated deficit..................................            (694)        (4,140)
                                                               -------------  -------------
          Total common stockholders' equity................          16,492         13,100
                                                               -------------  -------------
                                                               $     21,886   $     19,536
                                                               =============  =============


<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>


<PAGE>
<TABLE>
<CAPTION>


                          OPTIKA IMAGING SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                   (Unaudited)
                    (In thousands, except per share amounts)


                                                    Three Months             Six Months Ended
                                                   Ended June 30,                June 30,
                                            --------------------------   ---------------------

                                                   1997          1998       1997         1998
                                                   ----          ----       ----         ----
<S>                                           <C>           <C>        <C>         <C>   
Revenues:
   Licenses................................   $   3,745     $   1,843  $   6,940   $    4,091
   Maintenance and other...................       1,425         1,645      2,752        3,105
                                                --------      --------   --------    ---------
      Total revenues.......................       5,170         3,488      9,692        7,196

Cost of revenues:
   Licenses................................         138            84        298          210
   Maintenance and other...................         681           772      1,302        1,481
                                                --------      --------   --------    ---------
      Total cost of revenues...............         819           856      1,600        1,691
                                                --------      --------   --------    ---------

Gross profit...............................       4,351         2,632      8,092        5,505

Operating expenses:
   Sales and marketing.....................       2,561         3,310      4,715        6,237
   Research and development................       1,393         1,287      2,542        2,413
   General and administrative..............         438           614        841        1,175
                                                --------      --------   --------    ---------
      Total operating expenses.............       4,392         5,211      8,098        9,825
                                                --------      --------   --------    ---------

Loss from operations.......................         (41)       (2,579)        (6)      (4,320)

Other income (expense), net................         155           (46)       236           13
                                                --------      --------   --------    ---------

Income (loss) before provision (benefit)
  for income taxes.........................         114        (2,625)       230       (4,307)
Provision (benefit) for income taxes.......          43          (525)        86         (861)
                                                --------      --------   --------    ---------
                                                
Net income (loss)..........................   $      71     $  (2,100)  $    144   $   (3,446)
                                                ========      ========   ========    =========

Net income (loss) per common share.........   $    0.01     $   (0.30)  $   0.02   $    (0.50)
                                                ========     =========   ========    =========

Weighted average number of common shares
  outstanding..............................       6,763         6,956      6,737        6,942
                                                ========     =========   ========     ========

Diluted net income (loss) per common share.   $    0.01     $   (0.30)  $   0.02   $    (0.50)
                                                ========      ========   ========    =========

Diluted weighted average number of common
  shares outstanding.......................       7,731         6,956      7,726        6,942
                                                ========      ========   ========    =========

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                          OPTIKA IMAGING SYSTEMS, INC.
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                   (Unaudited)
                                 (In thousands)

                                                                Six Months Ended June 30,
                                                               ----------------------------
                                                                   1997           1998
                                                                   ----           ----
<S>                                                            <C>            <C>    
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..........................................    $        144   $     (3,446)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:                                
   Depreciation and amortization...........................             267            405
   Deferred tax benefit....................................             (30)          (962)
   Loss on disposal of assets..............................              18              -
   Change in assets and liabilities:
      Accounts receivable, net.............................            (760)         2,988
      Other assets.........................................            (296)          (261)
      Accounts payable.....................................              30            166
      Accrued expenses.....................................             444            113
      Deferred revenue.....................................             257            778
                                                               -------------  -------------

   Net cash provided (used) by operations.................               74           (219)
                                                               -------------  -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................          (1,690)          (858)
Sale (purchase) of short-term investments..................            (928)         3,412
                                                               -------------  -------------

   Net cash provided (used) by investing activities........          (2,618)         2,554
                                                               -------------  -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt.......................            (223)           (15)
Proceeds from issuance of common stock.....................             288             54
                                                               -------------  -------------

   Net cash provided by financing activities...............              65             39
                                                               -------------  -------------

Net increase (decrease) in cash and cash equivalents.......          (2,479)         2,374
Cash and cash equivalents at beginning of period...........           3,474          3,202
                                                               -------------  -------------
Cash and cash equivalents at end of period.................    $        995   $      5,576
                                                               =============  =============

<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>

<PAGE>


                                         
                            OPTIKA IMAGING SYSTEMS, INC.
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                    (Unaudited)

1.     GENERAL

Basis of Presentation
      The unaudited condensed  consolidated financial statements included herein
reflect all adjustments,  consisting only of normal recurring adjustments, which
in the opinion of  management  are  necessary  to fairly  present the  Company's
consolidated financial position,  results of operations,  and cash flows for the
periods  presented.   Certain  information  and  footnote  disclosures  normally
included in audited financial  information prepared in accordance with generally
accepted  accounting  principles have been condensed or omitted  pursuant to the
Securities  and  Exchange  Commission's  (SEC's)  rules  and  regulations.   The
consolidated  results of  operations  for the period ended June 30, 1998 are not
necessarily  indicative of the results to be expected for any subsequent quarter
or for the  entire  fiscal  year  ending  December  31,  1998.  These  condensed
consolidated  financial  statements  should  be read  in  conjunction  with  the
financial  statements  and notes  thereto for the year ended  December 31, 1997,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997.

Net Income (Loss) Per Common Share
      In 1997,  the Company  adopted the  guidelines  of  Statement of Financial
Accounting  Standards No. 128, "Earnings Per Share".  Prior period EPS have been
restated to conform  with the new  statement.  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.  During the
first half of 1998, 285,000 options to purchase common stock of the Company were
granted.  Additionally,  during the first  quarter of 1998,  264,500  options to
purchase common stock of the Company were re-priced at $3.18 per option share.

The following is the  reconciliation  of the numerators and  denominators of the
basic and diluted EPS computations (in thousands except per share data):

<TABLE>
<CAPTION>

                                                                     Quarter Ended                Six Months Ended
                                                                        June 30,                      June 30,
                                                                  1997            1998          1997            1998          
                                                                  --------------------          -------------------- 
<S>                                                               <C>        <C>                <C>        <C>    
Earning Per Share:
           Net income (loss)..............................        $    71    $  (2,100)         $    144   $  (3,446)
           Weighted average common shares outstanding.....          6,763        6,956             6,737       6,942
           Net income (loss) per common share.............        $  0.01    $   (0.30)         $   0.02   $   (0.50)
Effect of Dilutive Securities:
           Options and warrants...........................            968           --               989          --
           Diluted weighted average common shares
              outstanding.................................          7,731        6,956             7,726       6,942
           Diluted net income (loss) per common share.....        $  0.01    $   (0.30)         $   0.02   $   (0.50)
</TABLE>


Restructuring and Sale of FPhealthcare Suite
    During the fourth quarter of 1997, the Company made the decision to exit the
vertical  healthcare  market and sold the rights to the majority of the software
products that  previously  comprised  the  FPhealthcare  suite of products.  The
FPhealthcare  suite  was being  developed  to offer a  product  tailored  to the
healthcare  industry however,  there have been a limited number of customers who
have licensed the software.  The  restructuring  plan involved the  FPhealthcare
suite  product  sale,  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
severance and benefits for employees to be terminated, write-downs of assets and
leased facility  executory costs,  and other costs related to the  restructuring
consisting  principally of legal and other  miscellaneous  costs.  The remaining
costs are expected to be resolved within the third quarter of 1998.


<PAGE>


The  following  table  summarizes  the activity in the  Company's  restructuring
reserves during 1998:

                                             Asset                
                                           Impairment      Other
                                Employee    and Lease      Exit
                                Benefits      Costs        Costs    Total
                               -------------------------------------------
Balance at December 31, 1997   $ 136,000     $ 116,000  $ 39,000 $ 291,000 
Cash payments                    136,000       116,000    12,000   264,000
                               ===========================================
Balance at June 30, 1998       $       -     $       -  $ 27,000 $  27,000
                               ===========================================



2.    Contingencies

      The Company is, from time to time,  subject to certain claims,  assertions
or litigation by outside parties as part of its ongoing business operations. The
outcome of any such  contingencies  are not expected to have a material  adverse
effect on the financial condition,  operations or cash flows of the Company. The
Company is not currently a party to any material legal proceedings.


<PAGE>



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

      THIS  QUARTERLY  REPORT ON FORM 10-Q 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.

RESULTS OF OPERATIONS

      The  Company's  revenues  consist  primarily of license  revenues that are
comprised  of  one-time  fees for the  license of the  Company's  products,  and
maintenance  revenues,  which are  comprised  of fees for updates and  technical
support.  The Company's  Advantage  Partners  ("APs"),  formerly called Business
Solution Partners,  and Original  Equipment  Manufacturers  ("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 the six months ended June 30,  1998,  approximately  56.9% of the  Company's
total revenues were derived from software  licenses and  approximately  32.5% 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 10.6% 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.  The Company's  terms of sales generally
range from 30 to 60 days from date of  shipment  for APs and OEMs.  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.

      In  March   1998,   the  Company   introduced   Optika   eMedia(TM),   its
next-generation  software  solution for managing and automating  paper-intensive
business-to-business transactions. 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 is  scheduled  to be
commercially  available by approximately  September 1998.  Optika eMedia manages
business  transactions  both within an  enterprise  and across the Internet with
multiple  business  partners.  Commerce-brokering  software and solutions enable
large  organizations  to manage the high-volume flow of documents and electronic
information  associated with  business-to-business  transactions.  Optika eMedia
incorporates  all  of  the   imaging/COLD/workflow   functionality  of  Optika's
FilePower  solution,  in addition to availability of multiple client  interfaces
and a scalable,  3-tier  architecture  and will  incorporate  powerful  Internet
negotiation and resolution tools. (See Business Risks-Risks  Associated with the
Introduction of Optika eMedia).

REVENUES

      Total revenues decreased 25.8% from $9.7 million, for the six months ended
June 30, 1997,  to $7.2 million,  for the six months ended June 30, 1998.  Total
revenues decreased 32.5% from $5.2 million, for the quarter ended June 30, 1997,
to $3.5 million, for the quarter ended June 30, 1998.

      Licenses.  License revenues decreased 41.1% from $6.9 million,  during the
six months ended June 30, 1997, to $4.1  million,  for the six months ended June
30, 1998, and decreased  50.8% from $3.7 million,  during the quarter ended June
30, 1997,  to $1.8  million,  during the same period in 1998.  License  revenues
represented  71.6% and 56.9% of the total revenues for the six months ended June
30, 1997 and 1998,  respectively  and 72.4% and 52.8% of the total  revenues for
the quarter ended June 30, 1997 and 1998, respectively. Management believes that
the  decrease in license  revenues  during the first half of 1998 is primarily a
result of  customers  choosing  to delay  purchase  decisions  of the  Company's
product until the general release of Optika eMedia.  License revenues  generated
outside of the United States accounted for approximately  27.4% of the Company's
revenues for the six months ended June 30, 1997,  compared to 23.9% for the same
period in 1998,  and 24.5% and 29.6% for the  quarter  ended  June 30,  1997 and
1998, respectively.

      Maintenance and Other.  Maintenance revenues,  exclusive of other revenue,
increased  35.3% from $1.7 million during the six months ended June 30, 1997, to
$2.3  million for the six months  ended June 30, 1998 and  increased  41.1% from
$878,000  during the quarter ended June 30, 1997 compared to $1.2 million during
the same period in 1998.  Maintenance revenue represented 17.3% and 32.5% of the
total revenues for the six months ended June 30, 1997 and 1998, respectively and
17.0% and 35.5% of the total  revenues  for the quarter  ended June 30, 1997 and
1998,  respectively.   Through  the  Company's  continued  improvements  in  the
tracking,  monitoring  and notifying of expiring  maintenance  contracts and the
general  increase in the number of  installed  systems,  the Company was able to
increase the number of maintenance contract renewals. Other revenue,  consisting
primarily of consulting services, training and consulting fees represented 11.1%
and 10.6% of total  revenues  for the six months  ended June 30,  1997 and 1998,
respectively,  and 10.6% and 11.7% of total revenues for the quarters ended June
30, 1997 and 1998, respectively.

COST OF REVENUES

      Licenses.  Cost of  licenses  consists  primarily  of royalty  payments to
third-party  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  decreased  from  $298,000,  or 4.3% of  license
revenues,  to $210,000,  or 5.1% of license  revenues,  for the six months ended
June 30, 1997 and 1998,  respectively,  and decreased from $138,000,  or 3.7% of
license  revenues,  to $84,000,  or 4.6% of license  revenues,  for the quarters
ended June 30, 1997 and 1998, respectively. The decrease in absolute dollar cost
of licenses was attributable to the decreased license revenue.

      Maintenance  and  Other.  Costs of  maintenance  and other  consist 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.  Cost
of maintenance and other increased from $1.3 million or 47.3% of maintenance and
other  revenues to $1.5 million or 47.7% of  maintenance  and other revenues for
the six months ended June 30, 1997 and 1998,  respectively.  Cost of maintenance
and other increased from $681,000, or 47.8% of maintenance and other revenues to
$772,000,  or 46.9% of maintenance  and other  revenues,  for the quarters ended
June 30, 1997 and 1998,  respectively.  Cost as a percentage of revenue for both
periods remained constant as revenues increased.

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 $4.7 million,  or 48.7% of total revenues,  for the six
months ended June 30, 1997 to $6.2 million, or 86.7% of total revenues,  for the
six months ended June 30, 1998. Sales and marketing expenses increased from $2.6
million or 49.5% of total  revenues for the quarter  ended June 30, 1997 to $3.3
million or 94.9% of total  revenues  for the quarter  ended June 30,  1998.  The
increase in sales and  marketing  expenses is  primarily  attributable  to costs
associated  with  the  continued  expansion  of  the  Company's  product  launch
activities associated with Optika eMedia. The Company anticipates that sales and
marketing  expenses  will  continue to  increase  in absolute  dollars in future
quarters as the Company continues the launch of the Optika eMedia product.

      Research  and  Development.  Research  and  development  expenses  consist
primarily of salaries and other  related  expenses for research and  development
personnel,  as well as the  cost  of  facilities  and  equipment.  Research  and
development  expenses  decreased from $2.5 million,  or 26.2% of total revenues,
for the six  months  ended  June  30,  1997 to $2.4  million,  or 33.5% of total
revenues,  for the six months  ended June 30, 1998,  respectively.  Research and
development expenses decreased from $1.4 million, or 26.9% of total revenues, to
$1.3 million,  or 36.9% of total revenues,  for the quarters ended June 30, 1997
and 1998,  respectively.  Research and  development  costs decreased in absolute
dollars  between  both  periods  as a  result  of the  Company's  exit  from the
healthcare  market in late 1997. The Company  expects  research and  development
expenses  to  increase  in  absolute  dollars  in  future  quarters  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 $841,000 or 8.7% of total revenues,  for
the six months ended June 30, 1997 to $1.2 million,  or 16.3% of total  revenues
for the six months  ended June 30,  1998.  General and  administrative  expenses
increased  from  $438,000,  or 8.5% of total revenues for the quarter ended June
30, 1997, to $614,000, or 17.6% of total revenues for the quarter ended June 30,
1998. The increase in general and  administrative  costs in absolute dollars was
primarily due to the write-off of certain accounts receivable in Asia during the
first six months of 1998.

      Other income, net. Other income, net consists primarily of interest earned
on  the  Company's  financing  activities  offset  by  interest  expense  on the
Company's  capitalized lease obligations and other debt. The Company  recognized
net other income of $236,000  during the six months ended June 30, 1997 compared
to net other income of $13,000  during the six months  ended June 30, 1998.  The
Company  recognized  net other income of $155,000  during the quarter ended June
30, 1997  compared to net other  expense of $46,000 for the same period in 1998,
primarily as a result of decreased  investment income and an increase in foreign
currency translation loss.

      Provision  (Benefit) for Income Taxes.  The Company's  effective tax rates
decreased  from 38% for the  quarter  ended June 30, 1997 to 20% for the quarter
ended June 30, 1998  primarily  due to increased  research and  development  tax
credits.

LIQUIDITY AND CAPITAL RESOURCES

      Cash and  short-term  investments  at June 30,  1998  were  $7.6  million,
decreasing by approximately $1.0 million from December 31, 1997. The decrease in
cash and  short-term  investments  is primarily due to the 1998 first and second
quarter  losses and capital  expenditures  offset by the  collection of accounts
receivable.

      For the six months  ended June 30,  1997,  net cash  provided by operating
activities  was $74,000  compared to net cash used by  operating  activities  of
$219,000 for the six months ended June 30, 1998.  The decrease in cash  provided
by operating  activities for the six months ended June 30, 1998 is primarily due
to the first and second  quarter losses offset by improved  accounts  receivable
collections.

      Cash used in  investing  activities  was $2.6  million  for the six months
ended June 30, 1997 compared to cash provided of $2.6 million for the six months
ended June 30, 1998. Uses of cash consisted primarily of purchases of marketable
securities  and  property and  equipment in the first six months of 1997,  while
marketable securities were sold during the first six months of 1998.

      Cash provided by financing activities was $65,000 for the six months ended
June 30, 1997.  Cash  provided by financing  activities  was $39,000 for the six
months  ended June 30, 1998.  Cash  provided by  financing  activities  resulted
primarily from proceeds from stock option  exercises and the sales of securities
under the Company's  employee stock purchase plan,  offset in part by repayments
of bank borrowings, capital leases and other debt.

      At June 30, 1998, the Company's  principal  sources of liquidity  included
cash and short-term  investments of $7.6 million. In addition, the Company has a
secured credit facility for up to $3.0 million,  bearing  interest at the bank's
prime  rate  plus  .75%.  As of June 30,  1998,  the  Company  had $2.8  million
available for borrowing and no other debt outstanding.

      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  financing  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

      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 two years, 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. 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   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 currently offers products and services that are designed to be
Year 2000  compatible.  Although  the  Company has  designed  its  products  and
services  to be  Year  2000  capable  and  tests  third-party  software  that is
incorporated with the Company's products and services, 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, 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.

      The Company uses third-party  software and computer technology  internally
which may materially impact the Company if not Year 2000 compliant. Further, the
Company's  operations  may be at risk if its suppliers  and other  third-parties
fail to  adequately  address the Year 2000  problem or if  software  conversions
result in system  incompatibilities  with these third-parties.  This issue could
result in system  failures or  generation  of  erroneous  information  and could
significantly disrupt business activities. The Company is in initial discussions
with its major  suppliers  and is  continuing  to review  what  actions  will be
required to make all software  systems used  internally  Year 2000  compliant as
well as to mitigate its  vulnerability  to problems with the systems used by its
suppliers and other third parties.  The total cost and time  associated with the
impact of Year 2000  compliance  cannot  presently be determined.  To the extent
that third-party software does not comply with Year 2000 requirements, there can
be no assurance  that  potential  system  interruptions  for the Company and its
major  suppliers 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.

<PAGE>

BUSINESS RISKS

    THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING  STATEMENTS THAT
INVOLVE  RISK  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 BELOW.

    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; the level
of international  expansion;  and seasonal trends.  In addition,  the commercial
introduction of Optika eMedia,  the timing of revenue  therefrom and any adverse
impact on the Company's sales of the Filepower Suite associated  therewith could
cause the Company's sales and operating results to vary  significantly  over the
next several quarters. 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, a software solution designed
to manage and automate  paper-intensive  business processes within an enterprise
through the Internet and across the value chain. 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 is scheduled
to be commercially available by approximately 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, if any, and size of this market.  There also can
be no  assurance  that the market for Optika  eMedia will  develop,  or that the
solution will be adopted or utilized.  If the market fails to develop,  develops
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.
Software  companies  that are in the process of  announcing  and  releasing  new
versions or products  frequently  experience an adverse effect on revenue during
the period  between  the date the new release is  announced  and when it becomes
generally  available.  This  negative  effect  is a result  of  customer  buying
patterns whereby they have a tendency to wait until the new version is generally
available to actually make a purchase.  The Company has  experienced and expects
that it will continue to experience this adverse effect until Optika eMedia,  is
commercially  available.  Further, if customers  purchasing current products are
granted discounts or upgrade rights to future releases,  significant  amounts of
revenue may be deferred from sales of currently  shipped products because of the
Company's   adoption  of  the  recently  released  SOP  97-2  "Software  Revenue
Recognition".  The effect of these two potential  adverse  factors  coupled with
anticipated  significant research and development spending will likely result in
operating losses being incurred in several quarters in 1998.

    Although sales of Optika eMedia are not expected to be significant until the
fourth  quarter of 1998,  the Company is directing a  significant  amount of its
product development expenditures to the ongoing development of Optika eMedia and
a significant amount of its sales and marketing resources to the full commercial
introduction  of Optika eMedia and believes that its  acceptance by customers is
critical to the future  success of the Company.  There can be no assurance  that
Optika eMedia will gain significant market acceptance,  if at all. 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 or 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.  Should the Company fail to release a fully commercial version of
Optika eMedia, if the Company is unable to ship Optika eMedia on a timely basis,
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.  In 1997,  the  Company's  top 70  APs/OEMs  accounted  for
approximately  75%  of  its  license  revenues,  and  substantially  all  of the
Company's  license  revenues  were  derived  from  sales by APs and OEMs.  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.

    The Company  recently  altered its sales strategy with the introduction of a
direct sales team. 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
allocate certain territories for its products among its distribution channels in
a manner 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 imaging  software 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 product  embodying new  technologies and the
emergence of new  industry  standards  can render  existing  products  obsolete,
unmarketable  or  noncompetitive.  For  example,  new  operating  systems  being
introduced by Microsoft this year, such as Microsoft  Windows NT 5.0 and Windows
98,  could  alter  generally   accepted   conventions  for  document   creation,
distribution and management.  However, a new product architecture that leverages
these operating systems and the structure of the World Wide Web are presently in
the developmental  stage, and 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;  Dependence on Emerging Market for Integrated Imaging
Systems.  To  date,  substantially  all  of the  Company's  revenues  have  been
attributable  to sales of the FilePower  Suite and individual  software  modules
which comprise the FilePower  Suite.  Although Optika eMedia is not currently in
commercial  production,  the Company  expects Optika eMedia,  in the event it is
successfully introduced in the marketplace and produces future revenues, and the
FilePower Suite to account for substantially all of its future revenues.  Optika
eMedia is not generally available.  As a result, factors adversely affecting the
pricing of, or demand for, such products,  such as competition or  technological
change, could have a material adverse effect on the Company's business,  results
of  operations,   and  financial  condition.   The  Company's  future  financial
performance  will  depend  in  general  on growth  in the  relatively  small and
emerging  market  for  imaging  software  products,  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 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 document imaging
software  market  fails to grow or 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 imaging 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
imaging software  solutions.  The Company's principal direct competitors include
FileNet  Corporation,   International  Business  Machines  Corporation,   Unisys
Corporation,  Mosaix,  Inc. and Eastman Kodak  Company.  Numerous other software
vendors  also  compete  in each  product  area.  Potential  competitors  include
providers  of document  management  software,  providers  of document  archiving
products and relational  database  management systems vendors.  The Company also
faces competition from VARs, OEMs, distributors and systems integrators, some of
which  are APs or OEMs  for the  Company.  In  addition,  the  Company  may face
competition from other established and emerging companies in new market segments
following the introduction 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 imaging software market, the Company expects additional competition
from established and emerging  companies,  as the market for integrated  imaging
products 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
three 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,  and  potential
acquisitions,  significant  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 has caused, and is continuing to
impose, a significant  strain on the Company's  management,  financial and other
resources.  The  Company's  ability to manage its recent,  and any future growth
(should it occur) will  depend  upon a  significant  expansion  of its  internal
management  systems  and the  implementation  and  subsequent  improvement  of a
variety of systems,  procedures and controls.  Any failure to expand these areas
and implement and improve such systems,  procedures and controls in an efficient
manner at a pace consistent with the Company's  business,  could have a material
adverse effect on the Company's business,  financial  condition,  and results of
operations.  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 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.  The Company is not aware that it is  infringing  any  proprietary
rights of third parties.  However,  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 15%, 29% and 23% of the Company's revenues in 1995, 1996 and 1997,
respectively.  An important  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 and marketing and distributing
its products internationally. 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.

    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  39% 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.

    Restructuring  Charges  and Sale of  FPhealthcare  Suite.  During the fourth
quarter of 1997,  the Company made the decision to exit the vertical  healthcare
market  and sold the  rights  to the  majority  of the  software  products  that
previously comprised the FPhealthcare suite of products.  The FPhealthcare suite
was being  developed  to offer a product  tailored to the  healthcare  industry;
however,  there have been a limited  number of customers  who have  licensed the
software.  The restructuring  plan involved the FPhealthcare suite product sale,
closure of the Company's Boston  facility,  and the termination of approximately
14  employees.  There  can be no  assurance  that the  Company  will  not  incur
additional  expenses as a result of the decision to exit the vertical healthcare
market and the sale of the healthcare division.  The decision to exit a business
also  involves  special  risks  and  uncertainties,  some  of  which  may not be
foreseeable or within the Company's control, such as unforeseen severance costs,
disputes with terminated  employees,  disputes with customers who have purchased
the FPhealthcare suite or disputes with the buyer of the division.  There can be
no assurance that the Company will not experience  unforeseen  costs  associated
with the decision to exit the healthcare  division,  and such  unforeseen  costs
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.


<PAGE>



                      PART II - OTHER INFORMATION



Item 1 - Legal Proceedings.

      None.

Item 2 - Changes in Securities and Use of Proceeds.

      None.

Item 3 - Defaults upon Senior Securities.

      None.

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

      None.

Item 5 - Other Information.

      None.

Item 6 - Exhibits and Reports on Form 8-K
 .
      (a)    Exhibits

27.1        Financial  Data  Schedule  for the six months ended June 30, 1998
27.2        Restated  Financial  Data  Schedule for the six months ended
                  June 30, 1997
27.3        Restated  Financial Data Schedule for the three months ended
                  March 31, 1997
27.4        Restated  Financial Data Schedule for the years ended December 31,
                  1996 and 1995.

      (b)    Reports on Form 8-K

            No reports on Form 8-K have been filed during the quarter ended 
                  June 30, 1998.



<PAGE>


                                  SIGNATURES


Pursuant to the requirements 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.

                                        OPTIKA IMAGING SYSTEMS, INC.
                                                (Registrant)




            8/14/98                         /s/   Mark K. Ruport
            (Date)                             Mark K. Ruport
                                     President, Chief Executive Officer
                                          and Chairman of the Board



            8/14/98                         /s/ Steven M. Johnson
            (Date)                            Steven M. Johnson
                                 Chief Financial Officer, Vice President Finance
                                     and Administration, Secretary and
                                          Chief Accounting Officer