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 September 30, 1999


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

                         Commission File Number 0-28672

                                  OPTIKA INC.
             (Exact name of registrant as specified in its charter)

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

        7450 Campus Drive, 2nd Floor                           80920
            Colorado Springs, CO                            (Zip Code)
  (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 ____.

    7,202,188 shares of the Registrant's  Common Stock,  $.001 par value
          per share, were outstanding as of November 8, 1999


<PAGE>
                                     INDEX


                                                                            PAGE

PART I - FINANCIAL INFORMATION

Item 1 -  Condensed Consolidated Financial Statements

       Condensed Consolidated Balance Sheets as of December 31, 1998
       and September 30, 1999                                                 1

       Condensed  Consolidated  Statements of Operations for the three-
       month and nine-month periods ended September 30, 1998 and 1999
       (Unaudited)                                                            2

       Condensed Consolidated Statements of Cash Flows for the nine-
       month periods ended September 30, 1998 and 1999 (Unaudited)            3

       Notes to Condensed Consolidated Financial Statements (Unaudited)       4

Item 2 - Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                            5

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

                                                                             December 31,     September 30,
                                                                                 1998             1999
                                                                            ---------------- ----------------
                                                                                               (unaudited)
<S>                                                                             <C>              <C>
Assets
Current assets:
   Cash and cash equivalents                                                    $     6,811      $     3,931
   Short-term investments                                                             1,000            3,895
   Accounts receivable, net                                                           4,571            3,201
   Other current assets                                                                 511              537
                                                                            ---------------- ----------------
         Total current assets                                                        12,893           11,564
                                                                            ---------------- ----------------

Fixed assets, net                                                                     3,136            2,809
Deferred tax asset, net                                                               2,438            3,020
Other assets, net                                                                        70               10
                                                                            ---------------- ----------------
                                                                                $    18,537      $    17,403
                                                                            ================ ================

Liabilities and Stockholders' Equity Current liabilities:
   Accounts payable                                                             $       710      $       841
   Accrued expenses                                                                   1,446            1,355
   Accrued compensation expense                                                       1,206              603
   Deferred revenue                                                                   3,355            3,454
                                                                            ---------------- ----------------
          Total current liabilities                                                   6,717            6,253
                                                                            ---------------- ----------------

Commitments and contingencies

 Common stockholders' equity:
   Common stock; $.001 par value; 25,000,000 shares authorized;
      7,114,573 and 7,237,014 shares issued and outstanding
      at December 31, 1998 and September 30, 1999, respectively                           7                7
      Additional paid-in capital                                                     17,617           17,896
      Accumulated deficit                                                            (5,804)          (6,753)
                                                                            ---------------- ----------------
          Total common stockholders' equity                                          11,820           11,150
                                                                            ---------------- ----------------
                                                                                $    18,537      $    17,403
                                                                            ================ ================
<FN>
   The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                   OPTIKA INC.
                 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
                                  (Unaudited)
                    (In thousands, except per share amounts)


                                                             Three Months Ended              Nine Months Ended
                                                               September 30,                  September 30,
                                                       -----------------------------     ------------------------

                                                                  1998            1999          1998           1999

<S>                                                        <C>              <C>          <C>            <C>
Revenues:
 Licenses                                                  $     3,072      $    2,863   $     7,163    $     8,050
 Maintenance and other                                           2,105           2,721         5,210          7,669
                                                              ---------        --------     ---------      ---------
      Total revenues                                             5,177           5,584        12,373         15,719

Cost of revenues:
   Licenses                                                         97             345           307            635
   Maintenance and other                                           854           1,048         2,335          2,973
                                                              ---------        --------     ---------      ---------
      Total cost of revenues                                       951           1,393         2,642          3,608
                                                              ---------        --------     ---------      ---------

Gross profit                                                     4,226           4,191         9,731         12,111

Operating expenses:
   Sales and marketing                                           3,381           2,815         9,618          8,252
   Research and development                                      1,385           1,333         3,798          3,992
   General and administrative                                      754             493         1,929          1,473
   Restructuring charge                                            425               -           425              -
                                                              ---------        --------     ---------      ---------

      Total operating expenses                                   5,945           4,641        15,770         13,717
                                                              ---------        --------     ---------      ---------

Loss from operations                                            (1,719)           (450)       (6,039)        (1,606)

Other income, net                                                   50              79            63            146
                                                              ---------        --------     ---------      ---------

Loss before benefit from income taxes                           (1,669)           (371)       (5,976)        (1,460)
Benefit from income taxes                                         (333)           (130)       (1,194)          (511)
                                                              ---------        --------     ---------      ---------
Net loss                                                   $    (1,336)     $     (241)  $    (4,782)   $      (949)
                                                              =========        ========     =========      =========

Basic net loss per common share                            $     (0.19)     $    (0.03)  $     (0.69)   $     (0.13)
                                                              =========        ========     =========      =========

Basic weighted average number of common shares outstanding       6,985           7,205         6,956          7,177
                                                              =========        ========     =========      =========

Diluted net loss per common share                          $     (0.19)     $    (0.03)  $     (0.69)   $     (0.13)
                                                              =========        ========     =========      =========

Diluted weighted average number of common shares
outstanding                                                      6,985           7,205         6,956          7,177
                                                              =========        ========     =========      =========
<FN>
   The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                  OPTIKA INC.
                 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
                                  (Unaudited)
                                 (In thousands)

                                                                            Nine Months Ended September 30,
                                                                            ---------------------------------
                                                                                 1998              1999
<S>                                                                         <C>                <C>
Cash Flows From Operating Activities:
Net Loss                                                                    $       (4,782)    $        (949)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
   Depreciation and amortization                                                       770               742
   Deferred tax benefit                                                             (1,299)             (582)
   Loss on disposal of assets                                                           35                 -
   Change in assets and liabilities:
      Accounts receivable, net                                                       3,223             1,370
      Other assets                                                                     (78)               34
      Accounts payable                                                                 436               131
      Accrued expenses                                                                 354              (694)
      Deferred revenue                                                                 789                99
                                                                            ----------------  ---------------

          Net cash provided (used) by operations                                      (552)              151
                                                                            ----------------  ---------------

Cash Flows From Investing Activities:
Capital expenditures                                                                (1,082)             (415)
Sale (purchase) of short-term investments                                            4,104            (2,895)
                                                                            ----------------  ---------------

          Net cash provided (used) by investing activities                           3,022            (3,310)
                                                                            ----------------  ---------------

Cash Flows From Financing Activities:
Principal payments on long-term debt                                                   (15)                -
Proceeds from issuance of common stock                                                 201               279
                                                                            ----------------  ---------------

          Net cash provided by financing activities                                    186               279
                                                                            ----------------  ---------------

Net increase (decrease) in cash and cash equivalents                                 2,656            (2,880)
Cash and cash equivalents at beginning of period                                     3,202             6,811
                                                                            ----------------  ---------------
Cash and cash equivalents at end of period                                  $        5,858    $        3,931
                                                                            ================  ===============

<FN>
   The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
<PAGE>
                                  OPTIKA 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  September 30, 1999 are
not  necessarily  indicative  of the results to be expected  for any  subsequent
quarter or for the entire fiscal year ending December 31, 1999.  These condensed
consolidated  financial  statements  should  be read  in  conjunction  with  the
financial  statements  and notes  thereto for the year ended  December 31, 1998,
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.

 Net Loss Per Common Share
        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 nine months of 1998, 382,000 options
to purchase  common  stock of the Company  were  granted.  During the first nine
months of 1999,  744,200  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 share.

The following is the  reconciliation  of the numerators and  denominators of the
basic and diluted EPS computations  (unaudited,  in thousands,  except per share
data):
                                     Quarter Ended       Nine Months Ended
                                     September 30,          September 30,
                                     -------------       -----------------
                                    1998       1999        1998       1999
                                 -------------------    -------------------
Loss Per Share:
   Net loss                      $(1,336)   $  (241)    $(4,782)   $  (949)
   Weighted average common
     shares outstanding            6,985      7,205       6,956      7,177
   Net loss per common share     $ (0.19)   $ (0.03)    $ (0.69)   $ (0.13)
Effect of Dilutive Securities:
   Options and warrants               --         --          --         --
   Diluted weighted average
     common shares outstanding     6,985      7,205       6,956      7,177
   Diluted net loss per common
     share                       $ (0.19)   $ (0.03)    $ (0.69)   $ (0.13)


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
outcomes 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.

Overview

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

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

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

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

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

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


Revenues

        Total revenues  increased 27.0%,  from $12.4 million for the nine months
ended  September 30, 1998, to $15.7 million for the nine months ended  September
30, 1999. Total revenues increased 7.9%, from $5.2 million for the quarter ended
September 30, 1998, to $5.6 million for the quarter ended September 30, 1999.

        Licenses. License revenues increased 12.4%, from $7.2 million during the
nine months ended  September 30, 1998, to $8.1 million for the nine months ended
September 30, 1999,  and decreased  6.8%,  from $3.1 million  during the quarter
ended  September  30,  1998,  to $2.9  million  during the same  period in 1999.
License revenues  represented 57.9% and 51.2% of the total revenues for the nine
months ended September 30, 1998 and 1999,  respectively,  and 59.3% and 51.3% of
the  total  revenues  for the  quarters  ended  September  30,  1998  and  1999,
respectively.  The increase in license  revenues during the first nine months of
1999 is a result of the release of the Optika eMedia  product into  marketplace.
Total   revenues   generated   outside  of  the  United  States   accounted  for
approximately  22.5%  of the  Company's  revenues  for  the  nine  months  ended
September 30, 1998,  compared to 9.1% for the same period in 1999, and 25.4% and
17.1% for the quarters  ended  September  30, 1998 and 1999,  respectively.  The
difference in international revenues as a percentage of total revenues decreased
due to weaker Asian and Latin American sales for the three and nine months ended
September 30,1999, as compared to the same periods in 1998.

        Maintenance and Other. Maintenance revenues, exclusive of other revenue,
increased  41.2%,  from $3.7 million during the nine months ended  September 30,
1998,   to  $5.2  million  for  the  nine  months  ended   September  30,  1999.
Additionally, maintenance revenues increased 41.3%, from $1.3 million during the
quarter ended September 30, 1998 to $1.9 million during the same period in 1999.
Maintenance  revenue  represented  29.8% and 33.1% of the total revenues for the
nine months ended September 30, 1998 and 1999, respectively, and 26.0% and 34.1%
of the total  revenues  for the  quarters  ended  September  30,  1998 and 1999,
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 12.3% and 15.7%
of total  revenues  for the nine  months  ended  September  30,  1998 and  1999,
respectively,  and 14.7%  and 14.6% of total  revenues  for the  quarters  ended
September 30, 1998 and 1999, respectively.

Cost of Revenues

        Licenses.  Cost of licenses  consists  primarily of royalty  payments to
third-party  vendors  and costs of product  media,  duplication,  packaging  and
fulfillment.  Cost of licenses  increased in absolute dollars from $307,000,  or
4.3% of license revenues, to $635,000, or 7.9% of license revenues, for the nine
months ended  September  30, 1998 and 1999,  respectively,  and  increased  from
$97,000, or 3.2% of license revenues, to $345,000, or 12.1% of license revenues,
for the quarters ended September 30, 1998 and 1999,  respectively.  The increase
in the 1999 absolute  dollar cost of licenses over 1998 was  attributable  to an
unusually  high third  party  component  that is  expected to be lower in future
quarters.

        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 in absolute  dollars from $2.3 million,  or
44.8%  of  maintenance  and  other  revenues,  to  $3.0  million,  or  38.8%  of
maintenance and other revenues, for the nine months ended September 30, 1998 and
1999,  respectively.  Cost of maintenance and other decreased from $854,000,  or
40.6% of maintenance and other revenues, to $1,048,000,  or 38.5% of maintenance
and  other  revenues,  for the  quarters  ended  September  30,  1998 and  1999,
respectively. The increase in absolute dollars with a decrease in the percentage
of revenues  represents the continued  revenue  growth of maintenance  and other
revenue,  while the costs to  provide  these  services  is not  increasing  at a
corresponding rate.

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 decreased from $9.6 million,  or 77.7% of total revenues,  for the nine
months ended September 30, 1998 to $8.3 million, or 52.5% of total revenues, for
the nine months ended September 30, 1999. Sales and marketing expenses decreased
from $3.4 million,  or 65.3% of total revenues,  for the quarter ended September
30, 1998, to $2.8  million,  or 50.4% of total  revenues,  for the quarter ended
September 30, 1999.  The decrease in sales and  marketing  expenses is primarily
attributable  to the closure of several  Asian sales  offices in late 1998.  The
Company  anticipates that sales and marketing expenses will increase in absolute
dollars in future  quarters as it  continues to expand the  distribution  of its
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  increased from $3.8 million,  or 30.7% of total revenues,
for the nine months ended September 30, 1998 to $4.0 million,  or 25.4% of total
revenues, for the nine months ended September 30, 1999. Research and development
expenses  decreased  from  $1.4  million,  or 26.8% of total  revenues,  for the
quarter ended  September 30, 1998, to $1.3 million,  or 23.9% of total revenues,
for the  quarter  ended  September  30,  1999.  The nine month  absolute  dollar
increase in research and development is primarily a result of the continued cost
to further  enhance the Optika  eMedia  product.  The Company  anticipates  that
research and  development  expenses will increase in absolute  dollars in future
quarters  because of the expected  continued  enhancements  of the Optika eMedia
product.

        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 decreased from $1.9 million, or 15.6% of total revenues
for the nine months ended  September 30, 1998 to $1.5 million,  or 9.4% of total
revenues  for  the  nine  months   ended   September   30,  1999.   General  and
administrative  expenses decreased from $754,000, or 14.6% of total revenues for
the quarter ended September 30, 1998, to $493,000, or 8.8% of total revenues for
the quarter ended September 30, 1999. The decrease in general and administrative
costs in absolute dollars was primarily due to the write-off of certain accounts
receivable in Asia during the first nine 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 $63,000  during the nine months  ended  September  30, 1998
compared to net other income of $146,000  during the nine months ended September
30, 1999. The Company  recognized net other income of $50,000 during the quarter
ended  September  30, 1998  compared to net other income of $79,000 for the same
period in 1999.  The  increase in net other  income is  primarily  the result of
investment income and increased foreign currency translation gain.

        Benefit  for Income  Taxes.  The  Company's  effective  tax rate for the
periods ending September 30, 1999 was 35% which reflects the Company's estimated
annual effective tax rate.


Liquidity and Capital Resources

        Cash and short-term investments at September 30, 1999 were $7.8 million,
increasing by approximately $15,000 from December 31, 1998. The increase in cash
and  short-term  investments  is  primarily  due to the  collection  of accounts
receivable offset by 1999 losses and capital expenditures for equipment.

        For the nine months ended September 30, 1998, net cash used by operating
activities was $552,000 compared to net cash provided by operating activities of
$151,000 for the nine months ended September 30, 1999. The increase in cash used
by  operating  activities  for the  nine  months  ended  September  30,  1999 is
primarily due to improved accounts receivable collections offset by the 1999 net
operating losses.

        Cash  provided by  investing  activities  was $3.0  million for the nine
months ended September 30, 1998 compared to cash used by investing activities of
$3.3 million for the nine months ended September 30, 1999.  Investing activities
consisted  primarily of sales of  marketable  securities  offset by purchases of
property  and  equipment  in the first  nine  months of 1998,  while  marketable
securities and capital  equipment were purchased during the first nine months of
1999.

        Cash provided by financing  activities  was $186,000 for the nine months
ended September 30, 1998. Cash provided by financing activities was $279,000 for
the nine months ended September 30, 1999. 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 September  30, 1999,  the  Company's  principal  sources of liquidity
included  cash and  short-term  investments  of $7.8 million.  In addition,  the
Company has a secured credit facility for up to $3.0 million,  bearing  interest
at the bank's prime rate. As of September 30, 1999, 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

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

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

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

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

The Company's Products

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

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

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

Internal Systems

        The Company's  internal systems include both its information  technology
("IT") and non-IT systems.  The Company  conducted an assessment of its internal
IT systems including third-party software and hardware technology and its non-IT
systems (such as its security system,  building  equipment,  and phone systems).
The Company has  identified its Mission  Critical  Systems and has reviewed them
for Year 2000 compliance by contacting each vendor and requesting  documentation
on Year  2000  readiness.  Those  contacted  include,  but are not  limited  to,
Microsoft, financial software, customer database and phone system vendors. Based
on the results of these queries,  the Company has performed upgrades on numerous
systems to bring them into  compliance  according to their Year 2000  compliance
statements.  The Company did perform testing of its Mission  Critical Systems in
the third  quarter of 1999 with no major  discrepancies  noted.  It is estimated
that the  testing  of the  Mission  Critical  Systems  will  cost  approximately
$121,000 during 1999. The bringing of the Mission  Critical Systems to Year 2000
readiness will be covered under software/hardware  maintenance agreements and/or
normal product  upgrades.  However,  any failure of one or more of the Company's
mission  critical IT systems to become Year 2000 compliant due to  unanticipated
problems  could limit access of employees to critical  information,  require the
Company to process  information  manually or result in other  inconveniences  or
inefficiencies  for the Company and its customers  that may divert  management's
time and  attention,  as well as financial and personnel  resources  from normal
business activities.  The majority of the Company's IT software applications are
produced by  Microsoft.  Any failure by Microsoft to address the Year 2000 issue
will  have a  material  impact  on the  Company's  operations.  All  non-Mission
Critical  Systems are deemed to be  non-essential  to the  business  and will be
upgraded or replaced if a Year 2000 issue exists.  Year 2000  compliance  issues
relating to  non-Mission  Critical  Systems are not  expected to have a material
financial  impact  on  operations  or the  Company's  ability  to carry  out its
operations.

Third Parties

        The  Company  has  obtained  documentation  on the Year  2000-compliance
status of its key vendors. Key vendors to which the Company is concerned include
its investing,  banking, and payroll relationships.  If the Company's current or
future vendors,  including investing and banking relationships,  fail to achieve
Year 2000 compliance or if they divert  substantial  technology  expenditures to
address the Year 2000 issue,  thus impacting their ability to serve the Company,
the  Company  will move its  relationships  to another  vendor that is Year 2000
compliant.  Management  believes there will be no material adverse effect on the
Company of this potential action.

Disclaimer

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

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

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

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

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

     Product Concentration.  Optika eMedia accounts for substantially all of its
current and future software  revenues with a  proportionate  decline in revenues
from the Optika Filepower  product.  The Company's future financial  performance
will depend in general on the  continued  transition  from  imaging  software to
e-commerce,  and in particular on the successful  development,  introduction and
customer  acceptance  of new and  enhanced  versions  of its  existing  software
products such as Optika eMedia.  There can be no assurance that such market will
continue  to grow or that the  Company  will be  successful  in  developing  and
marketing  these or any  other  products,  or that any of  these  products  will
achieve widespread customer acceptance.  If the e-commerce software market grows
more slowly than the Company  currently  anticipates,  the  Company's  business,
results of operations, and financial condition would be materially and adversely
affected.

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

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

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

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

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

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

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

     International  Operations.  Sales outside the United  States  accounted for
approximately 29%, 23% and 24% of the Company's revenues in 1996, 1997 and 1998,
respectively.   An  element  of  the   Company's   strategy  is  to  expand  its
international  operations,  including  the  development  of certain  third-party
distributor  relationships  and the hiring of additional sales  representatives,
each of which involves a significant investment of time and resources. There can
be  no  assurance   that  the  Company  will  be  successful  in  expanding  its
international  operations.  In addition, the Company has only limited experience
in developing localized versions of its products. There can be no assurance that
the Company will be able to successfully localize,  market, sell and deliver its
products  internationally.  The inability of the Company to successfully  expand
its  international  operations in a timely manner could materially and adversely
affect the Company's business,  results of operations,  and financial condition.
The Company's  international  revenues may be denominated in foreign or the U.S.
dollar  currency.  The Company  does not  currently  engage in foreign  currency
hedging transactions; as a result, a decrease in the value of foreign currencies
relative to the U.S. dollar could result in losses from transactions denominated
in foreign currencies, could make the Company's software less price-competitive,
and could have a material adverse effect upon the Company's business, results of
operations,  and financial condition.  In addition, the Company's  international
business is, and will continue to be, subject to a variety of risks,  including:
delays in  establishing  international  distribution  channels;  difficulties in
collecting  international  accounts receivable;  increased costs associated with
maintaining  international  marketing and sales efforts;  unexpected  changes in
regulatory  requirements,  tariffs  and  other  trade  barriers;  political  and
economic  instability;  limited  protection for intellectual  property rights in
certain  countries;   lack  of  acceptance  of  localized  products  in  foreign
countries;  difficulties  in  managing  international  operations,   potentially
adverse  tax  consequences  including,   restrictions  on  the  repatriation  of
earnings;  and the burdens of  complying  with a wide  variety of foreign  laws.
There can be no assurance  that such  factors  will not have a material  adverse
effect on the Company's future  international  revenues and,  consequently,  the
Company's results of operations.  Although the Company's products are subject to
export  controls under United States laws, the Company  believes it has obtained
all necessary export approvals.  However, the inability of the Company to obtain
required  approvals under any applicable  regulations could adversely affect the
ability of the Company to make international sales.

     Product  Liability;   Risk  of  Product  Defects.   The  Company's  license
agreements with its customers typically contain provisions designed to limit the
Company's  exposure  to  potential  product  liability  claims.  However,  it is
possible that the limitation of liability  provisions contained in the Company's
license agreements may not be effective under the laws of certain jurisdictions.
Although the Company has not experienced any product  liability  claims to date,
the sale and  support of  products  by the  Company  may entail the risk of such
claims,  and there can be no  assurance  that the Company will not be subject to
such claims in the future. A successful  product liability claim brought against
the Company could have a material  adverse  effect upon the Company's  business,
results of operations, and financial condition.  Software products such as those
offered by the Company  frequently  contain errors or failures,  especially when
first  introduced  or when new  versions  are  released.  Although  the  Company
conducts  extensive  product  testing,  the  Company  has in the  past  released
products that contained defects,  and has discovered  software errors in certain
of its new products and enhancements  after  introduction.  The Company could in
the future lose or delay  recognition of revenues as a result of software errors
or defects,  the  failure of its  products to meet  customer  specifications  or
otherwise. The Company's products are typically intended for use in applications
that may be critical to a customer's business.  As a result, the Company expects
that its customers and potential customers have a greater sensitivity to product
defects than the market for general  software  products.  Although the Company's
business has not been materially and adversely  affected by any such errors,  or
by defects or failure to meet specifications, to date, there can be no assurance
that,  despite  testing by the Company and by current and  potential  customers,
errors  or  defects  will  not  be  found  in new  products  or  releases  after
commencement of commercial  shipments,  or that such products will meet customer
specifications,  resulting  in  loss  or  deferral  of  revenues,  diversion  of
resources, damage to the Company's reputation, or increased service and warranty
and other  costs,  any of which  could have a material  adverse  effect upon the
Company's business, operating results, and financial condition.

      Year 2000.  The Company is also subject to the risks  associated  with the
Year 2000  compatibility  of it's  products.  See  "Management's  Discussion and
Analysis of Financial Condition and Results of Operations - Year 2000".

     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, as of
November 8, 1999,  approximately 29.3% of the outstanding shares of Common Stock
of the Company. Accordingly,  these stockholders could, if acting in concert, be
able to  substantially  influence  the election of 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.

<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

        10.19  Loan Modification  Agreement dated as of October 15, 1999, by and
               between the registrant and Silicon Valley Bank.
        27     Financial  Data Schedule for the nine months ended  September 30,
               1999.

(b)     Reports on Form 8-K

               No reports on Form 8-K have been filed  during the quarter  ended
               September 30, 1999.



<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 INC.
                                                           (Registrant)




          November 12, 1999                       /s/   Mark K. Ruport
          -----------------              --------------------------------------
               (Date)                                Mark K. Ruport
                                          President, Chief Executive Officer
                                              and Chairman of the Board



          November 12, 1999                       /s/ Steven M. Johnson
          -----------------              --------------------------------------
               (Date)                               Steven M. Johnson
                                         Chief Financial Officer, Vice President
                                          Finance and Administration, Secretary
                                              and Chief Accounting Officer