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

                                      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 September 30, 1998


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

                         Commission File Number 0-28672

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

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

              7450 Campus Drive                                80920
                  Suite 200                                 (Zip Code)
            Colorado Springs, CO
  (Address of principal executive offices)

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

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

            7,078,469 shares of the Registrant's  Common Stock,  $.001 par value
         per share, were outstanding as of November 13, 1998



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


<PAGE>
<TABLE>
<CAPTION>

                                            INDEX

                                                                                          PAGE
<S>                                                                                      <C>

PART I - FINANCIAL INFORMATION

        Item 1 -  Condensed Consolidated Financial Statements

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

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

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

                 Notes to Condensed Consolidated Financial Statements (Unaudited)           4

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

</TABLE>

<PAGE>


<TABLE>


<CAPTION>

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

                                                                            December 31,      September 30,
                                                                                1997              1998
                                                                           ----------------  ----------------
                                                                                               (unaudited)
<S>                                                                        <C>               <C>  
Assets
Current assets:
   Cash and cash equivalents...........................................    $         3,202   $         5,858
   Short-term investments..............................................              5,398             1,294
   Accounts receivable, net............................................              8,555             5,332
   Other current assets................................................                986               815
                                                                           ----------------  ----------------
         Total current assets..........................................             18,141            13,299
                                                                           ----------------  ----------------

Fixed assets, net......................................................              2,721             3,188
Other assets, net......................................................              1,024             2,382
                                                                           ---------------   ----------------
                                                                           $        21,886   $        18,869
                                                                           ================  ================
Liabilities and Stockholders' Equity 
Current liabilities:
   Current portion of long-term debt...................................    $            15   $            -
   Accounts payable ...................................................                742             1,178
   Accrued expenses....................................................              2,192             2,546
   Deferred revenue....................................................              2,445             3,234
                                                                           ----------------  ----------------
          Total current liabilities....................................              5,394             6,958
                                                                           ----------------  ----------------

Commitments and contingencies

Common stockholders' equity:
   Common stock; $.001 par value;  25,000,000 shares  authorized;  
      6,890,724 and 7,078,469 shares issued and outstanding
      at December 31, 1997 and September 30, 1998, respectively........                  7                 7
      Additional paid-in capital.......................................             17,179            17,380
      Accumulated deficit..............................................               (694)           (5,476)
                                                                           ----------------  ----------------
          Total common stockholders' equity............................             16,492            11,911
                                                                           ----------------  ----------------
                                                                           $        21,886   $        18,869
                                                                           ================  ================



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


<PAGE>
<TABLE>

<CAPTION>

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


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

                                                              1997            1998          1997           1998

<S>                                                    <C>              <C>          <C>            <C>   
Revenues:
   Licenses................................            $     4,273      $    3,072   $    11,213    $     7,163
   Maintenance and other...................                  1,533           2,105         4,285          5,210
                                                          ---------        --------     ---------      ---------
      Total revenues.......................                  5,806           5,177        15,498         12,373

Cost of revenues:
   Licenses................................                    172              97           470            307
   Maintenance and other...................                    764             854         2,066          2,335
                                                          ---------        --------     ---------      ---------
      Total cost of revenues...............                    936             951         2,536          2,642
                                                          ---------        --------     ---------      ---------

Gross profit...............................                  4,870           4,226        12,962          9,731

Operating expenses:
   Sales and marketing.....................                  2,649           3,381         7,364          9,618
   Research and development................                  1,360           1,385         3,902          3,798
   General and administrative..............                    474             754         1,315          1,929
   Restructuring charge....................                     --             425            --            425
                                                          ---------        --------     ---------      ---------

      Total operating expenses.............                  4,483           5,945        12,581         15,770
                                                          ---------        --------     ---------      ---------

Income (loss) from operations..............                    387          (1,719)          381         (6,039)

Other income, net..........................                    113              50           349             63
                                                          ---------        --------     ---------      ---------

Income (loss) before provision (benefit) for 
income taxes...............................                    500          (1,669)          730         (5,976)
Provision (benefit) for income taxes.......                    190            (333)          276         (1,194)
                                                          ---------        --------     ---------      ---------
Net income (loss)..........................            $       310      $   (1,336)   $      454     $   (4,782)
                                                          =========        ========     =========      =========

Net income (loss) per common share.........            $      0.05      $    (0.19)   $     0.07     $    (0.69)
                                                          =========        ========     =========      =========
Weighted average number of common shares 
outstanding................................                  6,803           6,985         6,760          6,956
                                                          =========        ========     =========      =========

Diluted net income (loss) per common share.            $      0.04       $   (0.19)   $     0.06     $    (0.69)
                                                          =========        ========     =========      =========
Diluted weighted average number of common
shares outstanding.........................                  7,624           6,985         7,725          6,956
                                                          =========        ========     =========      =========

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

<PAGE>
<TABLE>
<CAPTION>


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

                                                                            Nine Months Ended September 30,
                                                                           ----------------------------------
                                                                                1997              1998
<S>                                                                        <C>               <C>    
Cash Flows From Operating Activities:
Net income (loss)......................................................    $           454   $       (4,782)
Adjustments to reconcile net income (loss) to net cash used by
operating activities:                                                                  
   Depreciation and amortization.......................................                439              770
   Deferred tax asset (benefit)........................................                276           (1,299)
   Loss on disposal of assets..........................................                 18               35
   Change in assets and liabilities:
      Accounts receivable, net.........................................             (1,631)           3,223
      Other assets.....................................................               (454)             (78)
      Accounts payable.................................................               (325)             436
      Accrued expenses.................................................                517              354
      Deferred revenue.................................................                451              789
                                                                           ----------------  ----------------

          Net cash used by operations..................................               (255)            (552)
                                                                           ----------------  ----------------

Cash Flows From Investing Activities:
Capital expenditures...................................................             (2,107)          (1,082)
Sale of short-term investments.........................................                127            4,104
                                                                           ----------------  ----------------

          Net cash provided (used) by investing activities.............             (1,980)           3,022
                                                                           ----------------  ----------------

Cash Flows From Financing Activities:
Principal payments on long-term debt...................................               (324)             (15)
Proceeds from issuance of common stock.................................                460              201
                                                                           ----------------  ----------------

          Net cash provided by financing activities....................                136              186
                                                                           ----------------  ----------------

Net increase (decrease) in cash and cash equivalents...................             (2,099)           2,656
Cash and cash equivalents at beginning of period.......................              3,474            3,202
                                                                           ----------------  ----------------
Cash and cash equivalents at end of period.............................    $         1,375   $        5,858
                                                                           ================  ================



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


<PAGE>



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

1.       General

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

Net  Income  (Loss) Per  Common  Share 
     In 1997,  the Company  adopted the  guidelines  of  Statement  of Financial
Accounting  Standards No. 128, "Earnings Per Share".  Prior period EPS have been
restated to conform  with the new  statement.  Basic EPS is computed by dividing
net  income by the  weighted  average  number of shares  outstanding  during the
period.  Diluted EPS is computed  using the  weighted  average  number of shares
outstanding plus all dilutive  potential common shares  outstanding.  During the
first nine  months of 1998,  382,000  options to  purchase  common  stock of the
Company were granted.  Additionally,  during the first quarter of 1998,  264,500
options to purchase  common  stock of the Company  were  re-priced  at $3.18 per
option share.

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

<TABLE>
<CAPTION>
                                                          Quarter Ended        Nine Months Ended
                                                           September 30,         September 30,
                                                       1997          1998       1997         1998
<S>                                                 <C>         <C>          <C>          <C>   
Earning Per Share:
     Net income (loss).....................         $     310   $  (1,336)   $     454    $ (4,782)
     Weighted average common shares outstanding         6,803       6,985        6,760       6,956
     Net income (loss) per common share....         $    0.05   $   (0.19)   $    0.07    $  (0.69)
Effect of Dilutive Securities:
     Options and warrants..................               821          --          965          --
     Diluted weighted average common shares
      outstanding..........................             7,624       6,985        7,725       6,956
     Diluted net income (loss) per common share     $    0.04   $   (0.19)   $    0.06    $  (0.69)
</TABLE>

Restructuring  of Asian Operations 
     Due to the current  economic  status and  instability in the Asian markets,
the Company  made the decision to  consolidate  its Asian  Operations  from four
offices to two in the third quarter of 1998,  thus reducing  future  operational
risks and cash  outflows  into the  region.  This  restructuring  resulted  in a
$425,000  one-time  write-off  including  $125,000  of  goodwill,   $200,000  of
severance  costs  and  $100,000  of lease  termination  and other  costs.  As of
September 30, 1998 there is approximately  $112,000 of severance and lease costs
remaining to be paid.  All  severance  costs and the majority of the lease costs
are expected to be paid before the end of 1998.


2.      Contingencies

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


<PAGE>



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

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

Results of Operations

     The  Company's  revenues  consist  primarily of license  revenues  that are
comprised  of  one-time  fees for the  license of the  Company's  products,  and
maintenance  revenues,  which are  comprised  of fees for updates and  technical
support.  The Company's  Advantage  Partners  ("APs"),  formerly called Business
Solution Partners,  and Original  Equipment  Manufacturers  ("OEMs"),  which are
responsible for the  installation  and  integration of the software,  enter into
sales  agreements  with the  end-user and purchase  software  directly  from the
Company.  The  software  is  licensed  directly  to the  end-user by the Company
through  a  standard   shrink-wrapped  license  agreement.   Annual  maintenance
agreements are also entered into between the APs and OEMs and the end-user,  and
the APs and OEMs then purchase  maintenance  services directly from the Company.
For the  nine  months  ended  September  30,  1998,  approximately  57.9% of the
Company's total revenues were derived from software  licenses and  approximately
29.8% 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 12.3% of
the Company's total revenues.

     The Company adopted the provisions of Statement of Position 97-2,  Software
Revenue  Recognition (SOP 97-2), for transactions  entered into after January 1,
1998.  Under SOP 97-2, the Company  generally  recognizes  license  revenue upon
shipment when a non-cancelable  license  agreement has been signed or a purchase
order  has  been  received,   delivery  has  occurred,  the  fee  is  fixed  and
determinable  and  collectibility  is  probable.  Where  applicable,  fees  from
multiple  element  arrangements  are  unbundled  and  recorded as revenue as the
elements are delivered to the extent that vendor specific  objective evidence of
fair value exists. Maintenance revenues are deferred and recognized ratably over
the  maintenance  period,  which is  generally  one  year.  Other  revenues  are
recognized  as services  are  performed.  The Company  generally  does not grant
rights to return products, except for defects in the performance of the products
relative to  specifications  and  pursuant to standard  industry  shrink-wrapped
license agreements which provide for 30-day rights of return if an end-user does
not accept the terms of the software license, nor does it provide provisions for
price  adjustments  or rotation  rights.  Based on the  Company's  research  and
development  process,  costs incurred between the establishment of technological
feasibility and general release of the software  products have not been material
and  therefore  have  not been  capitalized  in  accordance  with  Statement  of
Financial  Accounting  Standards No. 86. All research and development costs have
been expensed as incurred.

     In  March   1998,   the   Company   introduced   Optika   eMedia(TM),   its
next-generation  software  solution for managing and automating  paper-intensive
business-to-business transactions. In July 1998, Optika announced the controlled
shipment  of Optika  eMedia to initial  user sites that  included  Fortune  1000
companies  and other large  organizations.  Optika  eMedia  became  commercially
available in late September 1998.  Optika eMedia manages  business  transactions
both  within an  enterprise  and  across the  Internet  with  multiple  business
partners.  Commerce-brokering  software and solutions enable large organizations
to  manage  the  high-volume  flow  of  documents  and  electronic   information
associated with business-to-business  transactions. Optika eMedia incorporates a
vast majority of the  imaging/COLD/workflow  functionality of Optika's FilePower
solution,  in  addition to  availability  of multiple  client  interfaces  and a
scalable,  3-tier architecture.  (See "Business Risks-Risks  Associated with the
Introduction of Optika eMedia").

Revenues

     Total  revenues  decreased  20.2%,  from $15.5  million for the nine months
ended  September 30, 1997, to $12.4 million for the nine months ended  September
30, 1998.  Total  revenues  decreased  10.8%,  from $5.8 million for the quarter
ended  September 30, 1997,  to $5.2 million for the quarter ended  September 30,
1998.

     Licenses.  License revenues  decreased 36.1%, from $11.2 million during the
nine months ended  September 30, 1997, to $7.2 million for the nine months ended
September 30, 1998,  and decreased  28.1%,  from $4.3 million during the quarter
ended  September  30,  1997,  to $3.1  million  during the same  period in 1998.
License revenues  represented 72.4% and 57.9% of the total revenues for the nine
months ended September 30, 1997 and 1998,  respectively,  and 73.6% and 59.3% of
the  total  revenues  for the  quarters  ended  September  30,  1997  and  1998,
respectively.  Management  believes that the decrease in license revenues during
the first nine  months of 1998 is  primarily a result of  customers  choosing to
delay purchase  decisions of the Company's  product until the general release of
Optika eMedia, which became commercially available in late September 1998. Total
revenues  generated  outside of the United States  accounted  for  approximately
24.1% of the  Company's  revenues for the nine months ended  September 30, 1997,
compared  to 22.5%  for the same  period  in 1998,  and  18.7% and 25.4% for the
quarters  ended  September  30,  1997  and  1998,  respectively.  The  quarterly
difference in international revenues as a percentage of total revenues increased
due to stronger Europe and Latin American sales during the third quarter of 1998
as compared to the third quarter of 1997.

     Maintenance and Other.  Maintenance  revenues,  exclusive of other revenue,
increased  40.0%,  from $2.6 million during the nine months ended  September 30,
1997,   to  $3.7  million  for  the  nine  months  ended   September  30,  1998.
Additionally,  maintenance  revenues  increased 41.5%,  from $952,000 during the
quarter ended September 30, 1997 to $1.3 million during the same period in 1998.
Maintenance  revenue  represented  17.0% and 29.8% of the total revenues for the
nine months ended September 30, 1997 and 1998, respectively, and 16.4% and 26.0%
of the total  revenues  for the  quarters  ended  September  30,  1997 and 1998,
respectively.  Through the  Company's  continued  improvements  in the tracking,
monitoring  and  notifying  of expiring  maintenance  contracts  and the general
increase in the number of  installed  systems,  the Company was able to increase
the number of maintenance contract renewals. Other revenue, consisting primarily
of consulting services, training and consulting fees represented 10.6% and 12.3%
of total  revenues  for the nine  months  ended  September  30,  1997 and  1998,
respectively,  and 10.0%  and 14.7% of total  revenues  for the  quarters  ended
September 30, 1997 and 1998, respectively.

Cost of Revenues

     Licenses.  Cost of  licenses  consists  primarily  of royalty  payments  to
third-party  vendors,  translation  fees,  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 in absolute dollars from $470,000,
or 4.2% of license revenues, to $307,000,  or 4.3% of license revenues,  for the
nine months ended September 30, 1997 and 1998, respectively,  and decreased from
$172,000,  or 4.0% of license revenues, to $97,000, or 3.2% of license revenues,
for the quarters ended September 30, 1997 and 1998,  respectively.  The decrease
in absolute dollar cost of licenses was  attributable  to the decreased  license
revenue.

     Maintenance and Other. Costs of maintenance and other consist of the direct
and indirect costs of providing software  maintenance and support,  training and
consulting  services  to  the  Company's  APs,  OEMs  and  end-users.   Cost  of
maintenance and other increased in absolute dollars from $2.1 million,  or 48.2%
of maintenance and other revenues,  to $2.3 million, or 44.8% of maintenance and
other  revenues,  for the  nine  months  ended  September  30,  1997  and  1998,
respectively. Cost of maintenance and other increased from $764,000, or 49.8% of
maintenance and other revenues,  to $854,000,  or 40.6% of maintenance and other
revenues, for the quarters ended September 30, 1997 and 1998, 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 does not increase 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 increased from $7.4 million,  or 47.5% of total revenues,  for the nine
months ended September 30, 1997 to $9.6 million, or 77.7% of total revenues, for
the nine months ended September 30, 1998. Sales and marketing expenses increased
from $2.6 million,  or 45.6% of total revenues,  for the quarter ended September
30, 1997, to $3.4  million,  or 65.3% of total  revenues,  for the quarter ended
September 30, 1998.  The increase in sales and  marketing  expenses is primarily
attributable to costs  associated with the continued  expansion of the Company's
product  launch  activities  associated  with Optika  eMedia,  expansion  of the
Company's  direct  sales  force as well as an  increase  in finders  fees on the
Company's  direct  sales.  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 and enters into more
direct sales opportunities.

     Research  and  Development.   Research  and  development  expenses  consist
primarily of salaries and other  related  expenses for research and  development
personnel,  as well as the  cost  of  facilities  and  equipment.  Research  and
development  expenses  decreased from $3.9 million,  or 25.2% of total revenues,
for the nine months ended September 30, 1997 to $3.8 million,  or 30.7% of total
revenues, for the nine months ended September 30, 1998. Research and development
expenses  remained  constant in absolute  dollars at $1.4 million,  or 23.4% and
26.8% of total  revenues,  for the quarters  ended  September 30, 1997 and 1998,
respectively.  Research and  development  costs  decreased  in absolute  dollars
between  the nine  month  periods  as a result  of the  Company's  exit from the
healthcare  market in late 1997.  Research and development on the Company's core
products,  Optika  eMedia and  FilePower  increased  significantly  in  absolute
dollars.  The Company expects  research and development  expenses to increase in
absolute  dollars in future quarters to fund the development of new products and
product enhancements.

     General and  Administrative.  General and  administrative  expenses consist
primarily of salaries and other related  expenses of  administrative,  executive
and   financial   personnel   and  outside   professional   fees.   General  and
administrative  expenses increased from $1.3 million,  or 8.5% of total revenues
for the nine months ended September 30, 1997 to $1.9 million,  or 15.6% of total
revenues  for  the  nine  months   ended   September   30,  1998.   General  and
administrative  expenses increased from $474,000,  or 8.2% of total revenues for
the quarter ended  September 30, 1997, to $754,000,  or 14.6% of total  revenues
for  the  quarter  ended  September  30,  1998.  The  increase  in  general  and
administrative  costs in absolute  dollars was primarily due to the write-off of
certain accounts receivable in Asia during the first 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 $349,000  during the nine months ended  September  30, 1997
compared to net other income of $63,000  during the nine months ended  September
30, 1998. The Company recognized net other income of $113,000 during the quarter
ended  September  30, 1997  compared to net other income of $50,000 for the same
period in 1998.  The  decrease in net other  income is  primarily  the result of
decreased  investment income due to lower cash balances to invest, and increased
foreign currency translation loss.

     Provision  (Benefit)  for Income Taxes.  The Company's  effective tax rates
decreased  from 38% for the  quarter  ended  September  30,  1997 to 20% for the
quarter  ended  September  30,  1998  primarily  due the  Company  revising  its
effective  tax rate to  provide a  valuation  allowance  against  certain of its
research and development tax credits during third quarter of 1998.

Liquidity and Capital Resources

     Cash and  short-term  investments  at September 30, 1998 were $7.2 million,
decreasing by approximately $1.4 million from December 31, 1997. The decrease in
cash and short-term  investments is primarily due to the 1998 losses and capital
expenditures  for computer  equipment and software  offset by the  collection of
accounts receivable.

     For the nine months ended  September  30, 1997,  net cash used by operating
activities  was $255,000  compared to net cash used by operating  activities  of
$552,000 for the nine months ended September 30, 1998. The increase in cash used
by  operating  activities  for the  nine  months  ended  September  30,  1998 is
primarily  due to  the  1998  losses  offset  by  improved  accounts  receivable
collections.

     Cash used by  investing  activities  was $2.0  million  for the nine months
ended  September 30, 1997  compared to cash provided by investing  activities of
$3.0  million  for the  nine  months  ended  September  30,  1998.  Uses of cash
consisted  primarily  of  purchases of  marketable  securities  and property and
equipment in the first nine months of 1997,  while  marketable  securities  were
sold during the first nine months of 1998.

     Cash  provided by  financing  activities  was  $136,000 for the nine months
ended September 30, 1997. Cash provided by financing activities was $186,000 for
the nine months ended September 30, 1998. Cash provided by financing  activities
resulted  primarily  from proceeds from stock option  exercises and the sales of
securities under the Company's  employee stock purchase plan,  offset in part by
repayments of bank borrowings, capital leases and other debt.

     At  September  30,  1998,  the  Company's  principal  sources of  liquidity
included  cash and  short-term  investments  of $7.2 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, 1998, the Company had $2.8 million
available for borrowing and no other debt outstanding.

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


Year 2000

     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  and a half  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 products or
services  such as those offered by the Company.  Additionally,  Year 2000 issues
could cause a significant  number of companies,  including  current customers of
the Company; to reevaluate their current system needs, and as a result, consider
switching  to other  systems or  suppliers.  This could have a material  adverse
effect on the Company's business, financial condition and results of operations.

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

     1. The Company's products (including embedded software technology)

     2. Internal systems (includes information  technologies and non-information
        technologies)

     3. Readiness  of  third  parties  with  whom  the  Company  has  business
        relationships

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

The Company's Products

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

     Although the Company has designed its products and services to be Year 2000
capable and tests its products and services, including third-party software that
is  incorporated  into its products  and  services,  specifically  for Year 2000
compliance,  there can be no assurance that the Company's products and services,
particularly when such products and services incorporate  third-party  software,
contain  all  necessary  date code  changes.  To the extent  that the  Company's
software does not comply with Year 2000 requirements,  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 has  initiated  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 during
1998 it will assign each Mission Critical System to a responsible party to carry
out Year 2000 testing and vendor polling to ensure  compliance  during the first
half of 1999.  Initial  review  indicates  that  bringing  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  could 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 does not currently  have any  information  concerning  the Year
2000-compliance  status  of its  vendors.  The key  third  parties  to which the
Company is concerned are its investing  and banking  relationships.  The Company
will attempt to obtain Year 2000-compliance status from the key third parties by
the first half of 1999. If the Company's  current or future  vendors,  including
investing and banking relationships,  fail to achieve Year 2000 compliance or if
they divert substantial technology  expenditures to address the Year 2000 issue,
thus  impacting  their  ability to serve the Company,  the Company will move its
relationships to another vendor that is Year 2000 compliant. Management believes
there will be no material adverse affect on the Company of this 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.



<PAGE>


BUSINESS RISKS

     THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS THAT
INVOLVE  RISK  AND  UNCERTAINTIES.  THE  COMPANY'S  ACTUAL  RESULTS  MAY  DIFFER
MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT  CAUSE SUCH A  DIFFERENCE  INCLUDE,  BUT ARE NOT  LIMITED  TO,  THOSE
DISCUSSED BELOW.

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

     Risks Associated with the Introduction of Optika eMedia. In March 1998, the
Company announced plans to introduce Optika eMedia, a software solution designed
to manage and automate  paper-intensive  business processes within an enterprise
through the Internet and across the value chain. In July 1998,  Optika announced
the  controlled  shipment of Optika  eMedia to initial user sites that  included
Fortune 1000  companies  and other large  organizations.  Optika  eMedia  became
commercially  available in late  September  1998.  Because the market for Optika
eMedia is new and  evolving,  it is  difficult  to assess  or  predict  with any
assurance the growth rate, if any, and size of this market. There also can be no
assurance  that the market for Optika eMedia will develop,  or that the solution
will be adopted or  utilized.  If the market  fails to  develop,  develops  more
slowly than expected or becomes  saturated with  competitors,  or if the product
does  not  achieve  market  acceptance,   the  Company's  business,  results  of
operations  and  financial  condition  may  be  materially  adversely  affected.
Software  companies  that are in the process of  announcing  and  releasing  new
versions or products  frequently  experience an adverse effect on revenue during
the period  between  the date the new release is  announced  and when it becomes
generally  available.  This  negative  effect  is a result  of  customer  buying
patterns whereby they have a tendency to wait until the new version is generally
available to actually make a purchase.  The Company has  experienced and expects
that it will  continue to  experience  this adverse  effect until Optika  eMedia
gains full market acceptance.  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".

     Although  sales of Optika eMedia are not expected to be  significant  until
the fourth quarter of 1998, the Company is directing a significant amount of its
product development expenditures to the ongoing development of Optika eMedia and
a significant amount of its sales and marketing resources to the full commercial
introduction  of Optika eMedia and believes that its  acceptance by customers is
critical to the future  success of the Company.  There can be no assurance  that
Optika eMedia will gain significant market acceptance,  if at all. Optika eMedia
has not been fully implemented in customers' environments and as a result, there
can be no assurance  that Optika  eMedia will not require  substantial  software
enhancements or modifications to satisfy  performance  requirements of customers
or to fix design defects or previously undetected errors.  Further, it is common
for complex software programs such as Optika eMedia to contain undetected errors
when first  released,  which are discovered only after the product has been used
over time with  different  computer  systems  and in  varying  applications  and
environments.  While  the  Company  is not  aware of any  significant  technical
problems with Optika  eMedia,  there can be no assurance that errors will not be
discovered,  or if  discovered,  that they will be  successfully  corrected on a
timely basis, if at all. The Company's  future business growth is  substantially
dependent on the continued  development,  introduction and market  acceptance of
Optika eMedia. If customers experience  significant problems with implementation
of  Optika  eMedia  or are  otherwise  dissatisfied  with the  functionality  or
performance  of Optika eMedia,  or if it fails to achieve market  acceptance for
any other reason,  the Company's  business,  results of operations and financial
condition may be materially adversely affected.


     Reliance on Indirect Distribution Channels; Potential for Channel Conflict.
The Company's  future  results of  operations  will depend on the success of its
marketing and distribution strategy,  which has relied, to a significant degree,
upon  APs and OEMs to sell and  install  the  Company's  software,  and  provide
post-sales  support.  In 1997,  the  Company's  top 70  APs/OEMs  accounted  for
approximately  75%  of  its  license  revenues,  and  substantially  all  of the
Company's  license  revenues  were  derived  from  sales by APs and OEMs.  These
relationships are usually  established  through formal agreements that generally
do not grant exclusivity, do not prevent the distributor from carrying competing
product lines and do not require the  distributor to purchase any minimum dollar
amount of the Company's  software.  There can be no assurance  that any APs will
continue to represent the Company or sell its products.  Furthermore,  there can
be no  assurance  that  other  APs,  some of which  have  significantly  greater
financial  marketing and other  resources than the Company,  will not develop or
market software  products which compete with the Company's  products or will not
otherwise  discontinue their relationship with, or support of, the Company. Some
of the Company's APs are small  companies that have limited  financial and other
resources  which could impair their  ability to pay the  Company.  To date,  the
Company's  inability  to receive  payments  from such APs has not had a material
adverse  effect on the  Company's  business,  results of operations or financial
condition. The Company's OEMs occasionally compete with the Company and its APs.
Selling  through  indirect  channels  may also hinder the  Company's  ability to
forecast sales  accurately,  evaluate  customer  satisfaction,  provide  quality
service and support or recognize emerging customer requirements.

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

     Rapid  Technological  Change:  Dependence on New Product  Development.  The
market  for  imaging,  workflow  and COLD  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 products  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.  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. As of late September 1998, Optika eMedia was
generally  available.  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.  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
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 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 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,  and  potential
acquisitions,  significant  increases  in research  and  development  to support
product  development,  and the  hiring  of  additional  personnel  in sales  and
marketing.  The  increased  scale of  operations  has resulted in  significantly
higher  operating   expenses,   which  are  expected  to  continue  to  increase
significantly in the future.  If the Company's  revenues do not  correspondingly
increase,  the Company's results of operations would be materially and adversely
affected. Expansion of the Company's operations has caused, and is continuing to
impose, a significant  strain on the Company's  management,  financial and other
resources.  The  Company's  ability to manage its recent,  and any future growth
(should it occur) will  depend  upon a  significant  expansion  of its  internal
management  systems  and the  implementation  and  subsequent  improvement  of a
variety of systems,  procedures and controls.  Any failure to expand these areas
and implement and improve such systems,  procedures and controls in an efficient
manner at a pace consistent with the Company's  business,  could have a material
adverse effect on the Company's business,  financial  condition,  and results of
operations.  In this regard, any significant revenue growth will be dependent in
significant  part upon the Company's  expansion of its  marketing,  sales and AP
support  capabilities.  This  expansion  will  continue  to require  significant
expenditures  to build the necessary  infrastructure.  There can be no assurance
that the Company's  efforts to expand its marketing,  sales and customer support
efforts  will  be  successful   or  will  result  in   additional   revenues  or
profitability in any future period.

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

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

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

     International  Operations.  Sales outside the United  States  accounted for
approximately 15%, 29% and 23% of the Company's revenues in 1995, 1996 and 1997,
respectively.  An important  element of the Company's  strategy is to expand its
international  operations,  including  the  development  of certain  third-party
distributor  relationships  and the hiring of additional sales  representatives,
each of which involves a significant investment of time and resources. There can
be  no  assurance   that  the  Company  will  be  successful  in  expanding  its
international  operations.  In addition, the Company has only limited experience
in developing  localized versions of its products and marketing and distributing
its products internationally. There can be no assurance that the Company will be
able  to  successfully   localize,   market,   sell  and  deliver  its  products
internationally.  The  inability  of the  Company  to  successfully  expand  its
international  operations  in a timely  manner could  materially  and  adversely
affect the Company's business,  results of operations,  and financial condition.
The Company's  international  revenues may be denominated in foreign or the U.S.
dollar  currency.  The Company  does not  currently  engage in foreign  currency
hedging transactions; as a result, a decrease in the value of foreign currencies
relative to the U.S. dollar could result in losses from transactions denominated
in foreign currencies, could make the Company's software less price-competitive,
and could have a material adverse effect upon the Company's business, results of
operations,  and financial condition.  In addition, the Company's  international
business is, and will continue to be, subject to a variety of risks,  including:
delays in  establishing  international  distribution  channels;  difficulties in
collecting  international  accounts receivable;  increased costs associated with
maintaining  international  marketing and sales efforts;  unexpected  changes in
regulatory  requirements,  tariffs  and  other  trade  barriers;  political  and
economic  instability;  limited  protection for intellectual  property rights in
certain  countries;   lack  of  acceptance  of  localized  products  in  foreign
countries;  difficulties  in  managing  international  operations,   potentially
adverse  tax  consequences  including,   restrictions  on  the  repatriation  of
earnings;  and the burdens of  complying  with a wide  variety of foreign  laws.
There can be no assurance  that such  factors  will not have a material  adverse
effect on the Company's future  international  revenues and,  consequently,  the
Company's results of operations.  Although the Company's products are subject to
export  controls under United States laws, the Company  believes it has obtained
all necessary export approvals.  However, the inability of the Company to obtain
required  approvals under any applicable  regulations could adversely affect the
ability of the Company to make international sales.

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

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

     Control  by  Existing   Stockholders;   Effects  of  Certain  Anti-Takeover
Provisions. Members of the Board of Directors, and the executive officers of the
Company, together with members of their families and entities that may be deemed
affiliates  of, or related  to,  such  persons  or  entities,  beneficially  own
approximately  39% of the  outstanding  shares of Common  Stock of the  Company.
Accordingly,  these stockholders  could, if acting in concert,  be able to elect
all members of the  Company's  Board of Directors  and  determine the outcome of
corporate  actions  requiring   stockholder   approval,   such  as  mergers  and
acquisitions.  Certain provisions of the Company's Certificate of Incorporation,
equity incentive  plans,  Bylaws,  and Delaware law may also discourage  certain
transactions  involving  a change  in  control  of the  Company.  This  level of
ownership  by such  persons  and  entities,  when  combined  with the  Company's
classified Board of Directors and the ability of the Board of Directors to issue
"blank check" preferred stock without further stockholder approval, may have the
effect of delaying,  deferring or  preventing a change in control of the Company
and may adversely  affect the voting and other rights of other holders of Common
Stock.

     Restructuring Charges. In order to reduce future risk in Asian markets, the
Company made the decision to consolidate its Asian  Operations from four offices
to two in the  third  quarter  of 1998,  resulting  in  one-time  write-offs  of
goodwill, severance costs and lease termination costs. There can be no assurance
that the Company will not incur additional  expenses as a result of the decision
to consolidate its Asian operations. The decision to consolidate operations 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,  customer loss or customer  dissatisfaction with the
decision.  There  can be no  assurance  that the  Company  will  not  experience
unforeseen   costs  associated  with  the  decision  to  consolidate  its  Asian
operations,  and such unforeseen  costs could have a material  adverse effect on
the Company's business, financial condition and results of operations.





<PAGE>



                              PART II - OTHER INFORMATION



Item 1 - Legal Proceedings.

        None.

Item 2 - Changes in Securities and Use of Proceeds.

        None.

Item 3 - Defaults upon Senior Securities.

        None.

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

        None.

Item 5 - Other Information.

        None.

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

    10.18     Loan and Security  Agreement  dated as of October 15, 1998, by and
              between the registrant and Silicon Valley Bank.
    27.1      Financial  Data Schedule for the nine months ended September 30,
              1998.
    27.2      Restated Financial Data Schedule for the nine months ended 
              September 30, 1997.


        (b)     Reports on Form 8-K

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



<PAGE>


                                          SIGNATURES


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

                                                   OPTIKA IMAGING SYSTEMS, INC.
                                                           (Registrant)




              11/13/98                    /s/   Mark K. Ruport
              --------                    -----------------------
               (Date)                           Mark K. Ruport
                                       President, Chief Executive Officer
                                           and Chairman of the Board



              11/13/98                    /s/ Steven M. Johnson
              --------                    -----------------------
               (Date)                         Steven M. Johnson
                                 Chief Financial Officer, Vice President Finance
                                         and Administration, Secretary and
                                            Chief Accounting Officer