<PAGE>
 
                      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 March 31, 1998

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

                        Commission File Number 0-28672

                         OPTIKA 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 _______.
                                                    -------          

           6,955,904 shares of the Registrant's Common Stock, $.001 
            par value per share, were outstanding as of May 1, 1998
<PAGE>
 
                                     INDEX

                                        
                                                                            PAGE
                                                                            ----

PART 1 - FINANCIAL INFORMATION

     Item 1 - Condensed Consolidated Financial Statements
 
                Condensed Consolidated Balance Sheets as of December 
                31, 1997 and March 31, 1998 (Unaudited)                      1
 
                Condensed Consolidated Statements of Operations for
                the three-month periods ended March 31, 1997 and 1998 
                (Unaudited)                                                  2
 
                Condensed Consolidated Statements of Cash Flows for
                the three-month periods ended March 31, 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                                              16
 
     Item 2 - Changes in Securities                                          16
 
     Item 3 - Defaults on Senior Securities                                  16
 
     Item 4 - Submission of Matters to a Vote of Security Holders            16
 
     Item 5 - Other Information                                              16
 
     Item 6 - Exhibits and Reports on Form 8-K                               16
 
     Signatures                                                              17
<PAGE>
 
                         OPTIKA IMAGING SYSTEMS, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEET
                     (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,       MARCH 31,
                                                                          1997             1998
                                                                      ------------     ------------
                                                                                        (unaudited)
<S>                                                                   <C>              <C>
ASSETS
Current Assets:
   Cash and cash equivalents.......................................   $      3,202      $     4,979
   Short-term investments..........................................          5,398            3,444
   Accounts receivable, net........................................          8,555            6,581
   Other current assets............................................            986            1,352
                                                                      ------------     ------------
         Total current assets......................................         18,141           16,356
                                                                      ------------     ------------
 
Fixed assets, net..................................................          2,721            2,982
Other assets, net..................................................          1,024            1,025
                                                                      ------------     ------------
                                                                      $     21,886     $     20,363
                                                                      ============     ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of long-term debt...............................   $         15     $          -
   Accounts payable................................................            742            1,072
   Accrued expenses................................................          1,901            1,386
   Restructuring reserve...........................................            291               87
   Deferred revenue................................................          2,445            2,632
                                                                      ------------     ------------
          Total current liabilities................................          5,394            5,177
                                                                      ------------     ------------
 
Commitments and contingencies
Common stockholders' equity:
   Common stock; $.001 par value; 25,000,000 shares authorized;
      6,890,724 and 6,952,404 shares issued and outstanding
      at December 31, 1997 and March 31, 1998, respectively........              7                7
      Additional paid-in capital...................................         17,179           17,219
      Accumulated deficit..........................................           (694)          (2,040)
                                                                      ------------     ------------ 
          Total common stockholders' equity........................         16,492           15,186
                                                                      ------------     ------------
                                                                      $     21,886     $     20,363
                                                                      ============     ============
</TABLE>

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

                                       1
<PAGE>
 
                         OPTIKA IMAGING SYSTEMS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (Unaudited)
                   (In thousands, except per share amounts)


<TABLE>
<CAPTION>
                                                                  THREE MONTHS ENDED
                                                                       MARCH 31,
                                                                  ------------------
                                                                    1997      1998  
                                                                  --------  --------
<S>                                                               <C>       <C>
Revenues:
  Licenses......................................................  $  3,195  $  2,248
  Maintenance and other.........................................     1,327     1,460
                                                                  --------  --------
     Total revenues.............................................     4,522     3,708
 
Cost of revenues:
  Licenses......................................................       160       126
  Maintenance and other.........................................       621       709
                                                                  --------  --------
     Total cost of revenues.....................................       781       835
                                                                  --------  --------
 
Gross profit....................................................     3,741     2,873
 
Operating expenses:
  Sales and marketing...........................................     2,154     2,927
  Research and development......................................     1,149     1,126
  General and administrative....................................       403       561
                                                                  --------  --------
 
     Total operating expenses...................................     3,706     4,614
                                                                  --------  --------
 
 
Income (loss) from operations...................................        35    (1,741)
Other income, net...............................................        81        59
                                                                  --------  --------
 
Income (loss) before provision (benefit) for income taxes.......       116    (1,682)
Provision (benefit) for income taxes............................        43      (336)
                                                                  --------  --------
 
Net income (loss)...............................................  $     73  $ (1,346)
                                                                  ========  ========
 
Net income (loss) per common share..............................  $   0.01  $  (0.19)
                                                                  ========  ========
 
Weighted average number of common shares outstanding............     6,714     6,927
                                                                  ========  ========
 
Diluted net income (loss) per common share......................  $   0.01  $  (0.19)
                                                                  ========  ========
 
Diluted weighted average number of common shares outstanding....     7,821     6,927
                                                                  ========  ========
</TABLE>

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

                                       2
<PAGE>
 
                         OPTIKA IMAGING SYSTEMS, INC.
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)
                                (In thousands)


<TABLE>
<CAPTION>
                                                                                                    THREE MONTHS ENDED MARCH 31,
                                                                                                    ----------------------------
                                                                                                       1997             1998
                                                                                                    -----------     ------------
<S>                                                                                                 <C>             <C>
Cash Flows From Operating Activities:
Net income (loss)...............................................................................    $        73     $     (1,346)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
   Depreciation and amortization................................................................            145              186
   Provision for losses on accounts receivable..................................................              -              170
   Loss on disposal of assets...................................................................             (1)               -
   Change in assets and liabilities:
      Accounts receivable.......................................................................             50            1,804
      Deferred tax asset........................................................................            (27)            (353)
      Other assets..............................................................................           (223)             (36)
      Accounts payable..........................................................................           (131)             330
      Accrued expenses..........................................................................            114             (719)
      Deferred revenue..........................................................................            194              187
                                                                                                    -----------     ------------
 
          Net cash provided by operations.......................................................            194              223
                                                                                                    -----------     ------------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................................................           (880)            (425)
Sale (purchase) of short-term investments.......................................................           (668)           1,954
                                                                                                    -----------     ------------
 
          Net cash provided (used) by investing activities......................................         (1,548)           1,529
                                                                                                    -----------     ------------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt............................................................           (105)             (15)
Proceeds from issuance of common stock..........................................................            253               40
                                                                                                    -----------     ------------
 
          Net cash provided by financing activities.............................................            148               25
                                                                                                    -----------     ------------
 
Net increase (decrease) in cash and cash equivalents............................................         (1,206)           1,777
Cash and cash equivalents at beginning of period................................................          3,474            3,202
                                                                                                    -----------     ------------
Cash and cash equivalents at end of period......................................................    $     2,268     $      4,979
                                                                                                    ===========     ============
</TABLE>

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

                                       3
<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 March 31, 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 quarter of 1998, 239,000 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):

                                                     QUARTER ENDED
                                                        MARCH 31,
                                                    ---------------
                                                     1997     1998
                                                    ------  -------
Earning Per Share:
      Net income (loss)...........................  $   73  $(1,346)
      Weighted average common shares outstanding..   6,714    6,927
      Net income (loss) per common share..........  $ 0.01  $ (0.19)
Effect of Dilutive Securities:
      Options and warrants........................   1,107       --
      Diluted weighted average common shares
       outstanding................................   7,821    6,927
      Diluted net income (loss) per common share..  $ 0.01  $ (0.19)

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 and asset dispositions are expected to be resolved within the second
quarter of 1998.

                                       4
<PAGE>
 
The following table summarizes the activity in the Company's restructuring
reserves during 1998:

<TABLE>
<CAPTION>
                                Employee   Asset Impairment   Other Exit    Total
                                Benefits   and Lease Costs       Costs
                                ---------------------------------------------------
<S>                             <C>        <C>                <C>          <C>
Balance at December 31, 1997    $136,000        $116,000        $39,000    $291,000
Cash payments                    107,000          97,000             --     204,000
                                ---------------------------------------------------
Balance at March 31, 1998       $ 29,000        $ 19,000        $39,000    $ 87,000
                                ===================================================
</TABLE>

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.

                                       5
<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 which are
comprised of one-time fees for the license of the Company's products, and
maintenance revenues, which are comprised of fees for upgrades and technical
support.  The Company's Advantage Partners ("APs"), changed from Business
Solutions Partners in 1998 to reflect a marketing and sales reorganization, 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 three months ended
March 31, 1998, approximately 60.6% of the Company's total revenues were derived
from software licenses and approximately 29.7% of the Company's total revenues
were derived from maintenance agreements.  Other revenues, which are comprised
of training, consulting and implementation services and third-party hardware and
software products, accounted for 9.7% 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. Optika eMedia is currently undergoing beta
testing and is currently scheduled to be commercially available by approximately
mid-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 powerful Internet
negotiation and resolution tools, availability of multiple client interfaces and
a scalable, 3-tier architecture.   (See Business Risks-Risks Associated with the
Introduction of Optika eMedia).

REVENUES

     Total revenues decreased 18.0% from $4.5 million for the quarter ended
March 31, 1997 to $3.7 million for the quarter ended March 31, 1998.

     Licenses.  License revenues decreased 29.6% from $3.2 million during the
quarter ended March 31, 1997 to $2.2 million for the quarter ended March 31,
1998.  License revenues represented 70.7% and 60.6% of the total revenues for
the quarter ended March 31, 1997 and 1998, respectively.  The decrease in
license revenues during the first quarter of 1998 is primarily a result of
customers choosing to delay purchase decisions of the Company's product until
the release of Optika 

                                       6
<PAGE>
 
eMedia. License revenues generated outside of the United States accounted for
approximately 18.3% of the Company's revenues for the quarter ended March 31,
1998, compared to 30.5% in the corresponding prior period.

     Maintenance and Other.  Maintenance revenues, exclusive of other revenue,
increased 37.2% from $803,000 during the quarter ended March 31, 1997, to $1.1
million for the quarter ended March 31, 1998.  Maintenance revenue represented
17.8% and 29.7% of the total revenues for the quarter ended March 31, 1997 and
1998, respectively.  This increase was primarily a result of an increase in the
number of installed systems and the Company's continued improvements in the
tracking and monitoring of expiring maintenance contracts.  Other revenue,
consisting primarily of consulting services, training and consulting fees
represented 11.6% and 9.7% of total revenues for the quarter ended March 31,
1997 and 1998, respectively.

COST OF REVENUES

     Licenses.  Cost of licenses consist 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 $160,000 or 5.0% of license
revenues to $126,000 or 5.6% of license revenues for the quarter ended March 31,
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, and
the cost of third-party software products. Cost of maintenance and other
increased from $621,000 or 46.8% of maintenance and other revenues to $709,000
or 48.6% of maintenance and other revenues for the quarters ended March 31, 1997
and 1998, respectively. The increase in cost of maintenance and other as a
percentage of maintenance and other revenues is primarily a result of the direct
costs associated with the increased number of service and consulting contracts.

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 $2.2 million, or 47.6% of total revenues, for the
quarter ended March 31, 1997 to $2.9 million, or  78.9% of total revenues, for
the quarter ended March 31, 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 and
additional costs resulting from a new sales office in Germany.  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 remained constant in absolute dollars in the quarter ended
March 31, 1997 and 1998 at $1.1 million.  The Company expects research and
development expenses to increase in absolute dollars in future quarters to fund
the development of Optika eMedia.

     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 $403,000, or 8.9% of total revenues, for
the quarter ended March 31, 1997 to $561,000, or 15.1% of total revenues, for
the quarter ended March 31, 1998.  The increase in general and administrative
expenses in absolute dollars was primarily due to the write-off of certain
accounts receivable in Asia during the first quarter of 1998.

     Other Income, net.  Other expenses consist primarily of interest expense on
the Company's capitalized lease obligations and other debt offset by interest
earned on the Company's financing activities.  The Company incurred a net other
income of $81,000 during the quarter ended March 31, 1997 compared to net other
income of $59,000 during the quarter ended March 31, 1998, primarily as a result
of interest income derived from the investment of the Company's initial public
offering proceeds.

                                       7
<PAGE>
 
     Provision (Benefit) for Income Taxes.  The Company's effective tax rates
decreased from 37% for the quarter ended March 31, 1997 to 20% for the quarter
ended March 31, 1998 primarily due to increased Research and Development
credits.

LIQUIDITY AND CAPITAL RESOURCES

     Cash and short-term investments at March 31, 1998 were $8.4 million,
decreasing by approximately $200,000 from December 31, 1997.  The decrease in
cash and short-term investments is primarily due to the 1998 first quarter loss
and capital expenditures associated with equipment offset by the collection of
accounts receivable.

     For the quarter ended March 31, 1997, net cash provided by operating
activities was $194,000 compared to net cash provided by operating activities of
$223,000 for the quarter ended March 31, 1998.  The increase in cash provided by
operating activities for the quarter ended March 31, 1998 was a result of
improved accounts receivable collections, which partially offset the net loss
for the period.

     Cash used in investing activities was $1.5 million for the quarter ended
March 31, 1997 compared to cash provided of $1.5 million for the quarter ended
March 31, 1998.  Uses of cash consisted primarily of purchases of marketable
securities and property and equipment in the first quarter of 1997, while
marketable securities were sold during the first quarter of 1998.

     Cash provided by financing activities was $148,000 for the quarter ended
March 31, 1997.  Cash provided by financing activities was $25,000 for the
quarter ended March 31, 1998.   Cash provided by financing activities resulted
primarily from proceeds from the sale of securities under the Company's employee
stock option plan and employee stock purchase plan, offset in part by repayments
of bank borrowings, capital leases and other debt.

     At March 31, 1998, the Company's principal sources of liquidity included
cash and short-term investments of $8.4 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 March 31, 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 financings or from other sources.  There can be no assurance that
additional financing will be available at all or that, if available, such
financing will be obtainable on terms favorable to the Company and would not be
dilutive.

                                       8
<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. Optika eMedia is
currently undergoing beta testing and is currently scheduled to be commercially
available by approximately mid-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 which 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

                                       9
<PAGE>
 
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, which was recently announced, is 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 in 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 relies, 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 65 APs/OEMs accounted for approximately 80%
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 currently 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's strategy of marketing its
products indirectly through APs and OEMs may result in distribution channel
conflicts.  To the extent that different 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.

                                       10
<PAGE>
 
     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 currently available to the public.  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.

                                       11
<PAGE>
 
     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.

                                       12
<PAGE>
 
     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 

                                       13
<PAGE>
 
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 would, 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

                                       14
<PAGE>
 
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.

     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. The Company utilizes off-the-shelf and custom
software developed internally and by third parties. To the extent that such
software and systems do not comply with Year 2000 requirements, there can be no
assurance that potential system interruptions or the cost necessary to update
such software will not have a material adverse effect on the Company's business,
financial condition and results of operations.

     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.

                                       15
<PAGE>
 
                          PART II - OTHER INFORMATION
                                        


Item 1 - Legal Proceedings.

         None.

Item 2 - Changes in Securities.

         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  Financial data schedule.

         (b)  Reports on Form 8-K

                No reports on Form 8-K have been filed during the quarter ended
                March 31, 1998.

                                       16
<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)



            5/14/98                              /s/   Mark K. Ruport
          -----------                         --------------------------------
            (Date)                                     Mark K. Ruport
                                              President, Chief Executive Officer
                                                  and Chairman of the Board


            5/14/98                              /s/   Steven M. Johnson
          -----------                         --------------------------------
            (Date)                                     Steven M. Johnson
                                                    Chief Financial Officer,
                                                   Vice President Finance and
                                                  administration, Secretary and
                                                    Chief Accounting Officer

                                       17