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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

(Mark one)

For the quarterly period ended March 31, 2003

OR

For the transition period from _______________ to _______________

Commission File Number 0-28672

             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.

             Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

8,369,024 shares of the Registrant’s Common Stock, $.001
par value per share, were outstanding as of May 9, 2003

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INDEX

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

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

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OPTIKA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)

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

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OPTIKA INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

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

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OPTIKA INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.          Basis of Presentations

             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 our consolidated financial position, results of operations, and cash flows for the periods presented.  Certain information and footnote disclosures normally included in audited financial information prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the Securities and Exchange Commission’s (SEC’s) rules and regulations. The consolidated results of operations for the period ended March 31, 2003 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire fiscal year ending December 31, 2003.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 2002, included in the Annual Report on Form 10-K of Optika Inc. (the “Company”).

2.          Net Loss Per Common Share and Stock Based Compensation

Net Loss Per Common Share

             Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is computed using the weighted average number of common shares outstanding plus all dilutive potential common shares outstanding.  During the first three months of 2003, 177,500 options to purchase our common stock were granted.  During the first three months of 2002, 150,500 options to purchase our common stock were granted.  

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

In the first quarter of 2003 and 2002, all options and warrants were excluded from the dilutive stock calculation because of their antidilutive effect on net loss per share.

Stock Based Compensation

             We apply the intrinsic value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25”, to account for our fixed plan stock options.  Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. SFAS No. 123, “Accounting for Stock-Based Compensation,” establishes accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans, as amended by SFAS

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No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure – an Amendment to SFAS 123.”  As allowed by SFAS No. 123, we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS No. 123, as amended by SFAS 148.  Had compensation cost for our stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, our pro-forma net loss and pro-forma net loss per share would have been as follows:

             (In thousands, except per share data)

We estimate the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in the first quarter of 2003 and 2002, respectively; no estimated dividends; expected volatility of 121% for 2003 and 122% for 2002; risk-free interest rates between 2.78% and 3.05% in 2003 and between 4.30% and 4.74% in 2002; and expected option terms of 5 years for all years.

3.          Contingencies

             We are, from time to time, subject to certain claims, assertions or litigation by outside parties as part of our ongoing business operations.  The outcome of any such contingencies are not expected to have a material adverse effect upon our business, results of operations and financial condition.   We are currently not a party to any material legal proceedings.

4.          New Accounting Pronouncements

             In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which is effective for fiscal years beginning after June 15, 2002.  SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made.  The adoption of this standard did not have a material impact on our consolidated financial position, results of operations, or cash flows.

             In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities.” This statement addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities. SFAS No. 146 is applicable to restructuring activities and costs related to terminating a contract that is not a capital lease and one time benefit arrangements received by employees who are involuntarily terminated. SFAS 146 supersedes EITF 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” Under SFAS No. 146 the cost associated with an exit or disposal activity is recognized in the periods in which it is incurred rather than at the date committed to the exit plan. This statement is effective for exit or disposal activities initiated after December 31, 2002 with earlier adoption encouraged. Previously issued financial statements will not be restated. The provisions of EITF 94-3 shall continue to apply for exit plans initiated prior to the adoption of SFAS No. 146. Accordingly, the adoption of SFAS No. 146 will not have a material impact on our financial position, results of operations, or cash flows.  The provisions of SFAS No. 146 could impact the accounting for any future exit and disposal activities, including the period in which exit costs are recorded.

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             In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation—Transition and Disclosure—as Amendment to FAS 123.” SFAS No. 148 provides two additional transition methods for entities that adopt the preferable method of accounting for stock based compensation. Further, the statement requires disclosure of comparable information for all companies regardless of whether, when or how an entity adopts the preferable, fair value based method of accounting. As we continued to disclose the fair value of stock option compensation only, SFAS No. 148 did not have any impact on our financial position or results of operations. The transition and annual disclosures of SFAS No. 148 have been disclosed in Notes 2 to the Consolidated Financial Statements.

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

             This management’s discussion and analysis of financial condition and results of operations includes a number of forward-looking statements which reflect our current views with respect to future events and financial performance.  These forward-looking statements are subject to risks and uncertainties, including those discussed below under the caption “Business Risks”, that could cause actual results to differ materially from historical results or those anticipated.

Overview

             Optika® Inc. is a leading enterprise content management (ECM) provider of imaging, workflow, collaboration and records management software.  Optika’s Acorde family of ECM software solutions, including Acorde Context™, Acorde Process™, Acorde Resolve™, Acorde Application Link and Acorde Records Manager™, allows companies to manage complex business processes and transactions efficiently and effectively leverage their enterprise resource planning (ERP) and line-of-business (LOB) systems. Acorde provides the ability to access and store multiple formats of business content, both digital and non-digital; automate processes across the organization and externally with partners and customers; and enable online collaboration around these paper-intensive or complex processes in real and near time. Built on a three-tier, scalable and extensible platform, Acorde delivers a variety of client desktops, including Windows and Web and easily integrates with third-party applications such as ERP systems. The Acorde product family allows organizations to improve processing efficiency, reduce operating costs and increase customer and partner service and satisfaction, resulting in significant return on investment. 

             The license of our software products is typically an executive-level decision by prospective end-users and generally requires our sales staff and/or our Advantage Partners (APs) to engage in a lengthy and complex sales cycle (typically between six and twelve months from the initial contact date). We distribute our products through a direct sales force and a network of APs.  For 2002, approximately 48% of our license revenues were derived from our APs and the remaining license fees were derived from direct sales. However, no individual customer accounted for more than 10% of our total revenues. For the years ended December 31, 2002, 2001 and 2000, we generated approximately 9%, 12% and 15%, respectively, of our total revenues from international sales.  Our revenues consist primarily of license revenues, which are comprised of one-time fees for the license of our products, service revenues, and maintenance revenues, which are comprised of fees for upgrades and technical support. Our APs, which are responsible for the installation and integration of the software for their customers, enter into sales agreements with the end-user, and license software directly from us.  We license software directly to the end-user through software license agreements. Annual maintenance agreements are also entered into between the APs and the end-user, and the APs then purchase maintenance services directly from us. For 2002 and 2001, approximately 32% and 38%, respectively, of our total revenues were derived from software licenses and approximately 43% of our total revenues were derived from maintenance agreements. For 2002 and 2001, other revenues, which are comprised of training, consulting and implementation services, and third-party hardware and software products, accounted for 25% and 19%, respectively, of our total revenues.

Critical Accounting Policies

             Our significant accounting policies are described in Note 1 in the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2002.  The accounting policies used in preparing our interim consolidated financial statements for the quarter ended March 31, 2003 are the same as those described in our Annual Report on Form 10-K.

             Our critical accounting policies are those having the most impact to the reporting of our financial condition and results and those requiring significant judgments and estimates.  These policies include those related to (1) revenue recognition, (2) accounting for income taxes and (3) accounting for preferred stock,.  Our critical accounting policies are described in more detail in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2002.  With respect to these critical accounting policies, our management believes that the application of judgments and

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assessments is consistently applied and produces financial information which fairly depicts the results of operations for all periods presented.

Revenues

             Total revenues increased to $4.3 million for the quarter ended March 31, 2003 from $3.9 million for the quarter ended March 31, 2002. 

             Licenses.    License revenues increased 17% to $1.2 million during the quarter ended March 31, 2003 from  $994,000 for the quarter ended March 31, 2002.  License revenues represented 28% and 26% of the total revenues for the quarters ended March 31, 2003 and 2002, respectively.  The increase in license revenues during the first quarter of 2003 was primarily due to strong AP sales for the quarter ended March 31, 2003. License revenues generated outside of the United States accounted for approximately 21% of our license revenues for the quarter ended March 31, 2003, compared to 14% in the corresponding prior period.  

             Maintenance and Other.     Maintenance revenues, exclusive of other revenue, increased 21% to $2.2 million for the quarter ended March 31, 2003 from $1.8 million for the quarter ending March 31, 2002.  This increase was primarily a result of the maintenance revenues received from new customers and the impact of an overall pricing increase implemented at the beginning of 2002.   Maintenance revenue represented 51% and 47% of the total revenues for the quarter ended March 31, 2003 and 2002, respectively.  Other revenue, consisting primarily of consulting services, training and consulting fees represented 21% and 27% of total revenues for the quarter ended March 31, 2003 and 2002, respectively.  The decrease in other revenue as a percentage of total revenue was primarily due to decreased consulting, project management and implementation services resulting from decreased direct sales for the quarter ended March 31, 2003.

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 to $180,000 or 15% of license revenues from $92,000 or 9% of license revenues for the quarter ended March 31, 2003 and 2002, respectively.  The increase in absolute dollar cost of licenses was attributable to the increased third party royalty costs primarily for the cost related to our Acorde Records Manager product offering for the quarter ended March 31, 2003. 

             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 our APs and end-users, and the cost of third-party services. Cost of maintenance and other increased in absolute dollars to $925,000 or 30% of maintenance and other revenues from  $859,000 or 30% of maintenance and other revenues for the quarters ended March 31, 2003 and 2002, respectively.  The increase in cost of maintenance and other is primarily a result of the increased direct third party contracting costs and general personnel cost increases.

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 to  $2.2 million, or 51% of total revenues, for the quarter ended March 31, 2003 from $1.8 million, or 47% of total revenues, for the quarter ended March 31, 2002. The increase in sales and marketing expenses is the result of planned headcount increases in our sales organization.  We expect sales and marketing expenses to increase throughout the year as we continue to increase our efforts in selling and marketing our products.

             Research and Development.    Research and development expenses consist primarily of salaries and other related expenses for research and development personnel, contractors, as well as the cost of facilities and equipment. Research and development expenses decreased to $1.2 million, or 27% of total revenues, for the quarter ended March 31, 2003 from $1.3 million, or 33% of total revenues, for the quarter ended March 31, 2002.  The decrease in research and development expenses is primarily the result of our planned effeciencies in our development

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organization.  We expect research and development expenses should remain relatively flat throughout the rest of fiscal 2003.

             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 to $399,000, or 9% of total revenues, for the quarter ended March 31, 2003 from $376,000, or 10% of total revenues, for the quarter ended March 31, 2002.  The slight absolute dollar increase in general and administrative expenses is primarily due to overall increased insurance costs for the quarter ended March 31, 2003 over the quarter ended March 31, 2002.  General and administrative expenses are expected to remain relatively flat throughout the rest of fiscal 2003.

             Other Income.  Other income consists primarily of interest earned on our cash and investments.  Net other income was $18,000 during the quarter ended March 31, 2003 compared to net other income of $34,000 during the quarter ended March 31, 2002, primarily as a result of interest income on our cash, cash equivalent and investment balances.

             Income Tax Expense. During the quarter ended March 31, 2003, we recorded a full valuation allowance against our carryforward tax benefits that were generated in 2003, to the extent that we believe it is more likely than not that all of such benefits will not be realized in the near term.  Our assessment of this valuation allowance was made using all available evidence, both positive and negative.  In particular we considered both our historical results and our projections of profitability for only reasonably foreseeable future periods. 

Liquidity and Capital Resources

             Cash and cash equivalents and short-term investments at March 31, 2003 were $8.5 million, increasing by approximately $63,000 from December 31, 2002.  The increase in cash and cash equivalents is primarily due to the first quarter net loss offset by strong accounts receivable collections.

             For the quarter ended March 31, 2003, net cash provided by operating activities was $84,000 compared to net cash provided by operating activities of $56,000 for the quarter ended March 31, 2002.  The cash provided by operating activities for the quarter ended March 31, 2003 was a direct result of the first quarter net loss offset primarily by strong accounts receivables collections.

             Cash used in investing activities was $54,000 for the quarter ended March 31, 2003 compared to cash used of $12,000 for the quarter ended March 31, 2002.  Cash used in investing activities for the quarter ended March 31, 2003 was for capital expenditures.

             Cash provided by financing activities was $33,000 for the quarter ended March 31, 2003.  Cash provided by financing activities was $50,000 for the quarter ended March 31, 2002.   Cash provided by financing activities are a result of common stock sales through our employee stock purchase plan and stock option exercises within the quarter.

             At March 31, 2003, our principal sources of liquidity included cash and short-term investments of $8.5 million.  In addition, we have a secured credit facility for up to $3.0 million, bearing interest at the bank’s prime rate.  As of March 31, 2003, we had $2.5 million available for borrowing and no other debt outstanding.

             We believe that our current cash and short-term investments, together with anticipated cash flows from our operations and the availability of our bank credit facility, will be sufficient to meet our working capital and capital expenditure requirements for at least the next 12 months.

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Business Risks

             In evaluating our business, you should carefully consider the business risks discussed in this section.

             Operating Result Fluctuations.  Our sales and other operating results have varied significantly in the past and may vary significantly in the future as a result of potential factors such as:

             A significant portion of our revenues have been, and we believe 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 our operating results.  Revenues are also difficult to forecast because the markets for our products are rapidly evolving, and our sales cycle and the sales cycle of our APs is lengthy and varies substantially from end-user to end-user.  To achieve our quarterly revenue objectives, we depend 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, we have often recognized most of our 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 our expectations and may materially adversely affect our 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.  We also have recorded generally lower sales in the first quarter than in the immediately preceding fourth quarter, as a result of, among other factors, end-users’ purchasing and budgeting practices and our sales commission practices.  To the extent that future international operations constitute a higher percentage of total revenues, we anticipate that we may also experience relatively weaker demand in the third quarter as a result of reduced sales in Europe during the summer months.  Significant portions of our 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, we believe that our quarterly operating results will vary in the future, and that period-to-period comparisons of our 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 our operating results will be below the expectations of public market analysts and investors.  In such event, the price of our common stock would likely decline and such decline could be significant.

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             Product Offerings. The Optika Acorde family of products account for substantially all of our current license revenue.  Our future financial performance will depend in general on the acceptance of our product offerings, and in particular on the successful development, introduction and customer acceptance of new and enhanced versions of our products. 

             Capital Requirements. We believe that our existing cash balances and liquid resources will be sufficient to fund our operating activities, capital expenditures and other obligations through at least the next twelve months. Recently capital market conditions have materially and adversely affected the ability of many technology companies to raise additional capital in both private and public markets.  If market conditions do not improve and we are not successful in generating sufficient cash flow from operations or in raising additional capital when required in sufficient amounts and on terms acceptable to us, we may be required to reduce our planned expenditures and scale back the scope of our business plan. 

             Key Employees.  Most of our senior management team has joined us within the last five years.   These individuals may not be able to achieve and manage growth, if any, or build an infrastructure necessary for us to operate.  Our ability to compete effectively and to manage any future growth will require that we continue to assimilate new personnel and to train and manage our work force. Our future performance depends to a significant degree upon the continuing contributions of our key management, sales, marketing, customer support, and product development personnel.  We have at times experienced, and continue to experience, difficulty in recruiting qualified personnel, particularly in sales, software development and customer support.  We believe 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 our employees.  We have from time to time experienced turnover of key management, sales and technical personnel.  The loss of key management, sales or technical personnel, or the failure to attract and retain key personnel, could harm our business.

             Sales and Distribution Channels. Our future results of operations will depend on the success of our marketing and distribution strategy, which relies, to a significant degree, upon APs to sell and install our 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 our software.  Some APs may not continue to represent Optika or sell our products.  Other APs, some of which have significantly greater financial, marketing and other resources than we have, may develop or market software products that compete with our products or may otherwise discontinue their relationship with, or support of, us.  Some of our APs are small companies that have limited financial and other resources that could impair their ability to pay us.  Selling through indirect channels may hinder our ability to forecast sales accurately, evaluate customer satisfaction or recognize emerging customer requirements.  Our future results of operations also depend on the success of our efforts to build a direct sales force. 

             Product Updates and Releases. The markets for our products are characterized by rapid technological change, changes in customer requirements, frequent new product introductions and enhancements, and emerging industry standards. Our future performance will depend in significant part upon our 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. We are unable to predict the future impact of such technology changes on our products.  Moreover, the life cycles of our products are difficult to estimate. Our future performance will depend in significant part upon our ability to enhance current products, and to develop and introduce new products and enhancements that respond to evolving customer requirements.  The inability, 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 our business and results of operations.

             Third Party Software.  We license software from third parties, which is incorporated into our products.  These licenses expire from time to time.  These third-party software licenses may not continue to be available to us on commercially reasonable terms.  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,

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which in turn could materially and adversely affect our business and financial condition.  In addition, we generally do 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, we may be forced to expend significant time and development resources to replace the licensed software. 

             Sales Cycle.  The license of our software products is typically an executive-level decision by prospective end-users, and generally requires our APs and us 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 our products 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 we have little or no control.  Our future performance also depends upon the capital expenditure budgets of our customers and the demand by such customers for our products.  Certain industries to which we sell our products, such as the financial services industry, are highly cyclical.  Our 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.  Such factors may have a material adverse effect on our business and results of operations.

             Competition.  The market for our product offerings is intensely competitive and can be significantly affected by new product introductions and other market activities of industry participants.  We anticipate that the collaborative commerce market will also be highly competitive and subject to competitive forces that do not currently exist.  Our competitors offer a variety of products and services to address the document management market and the emerging market for e-business solutions. Because our products are designed to operate in non-proprietary computing environments and because of low barriers to entry in the marketplace, we expect additional competition from established and emerging companies, as the market for our products continues to evolve.  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 our prospective customers.  In addition, several competitors have recently made, or attempted to make, acquisitions to enter the market or increase their market presence.  Accordingly, new competitors or alliances among competitors may emerge and rapidly acquire significant market share.  Increased competition may result in price reductions, reduced gross margins and loss of market share.

             Many of our current and potential competitors are substantially larger than we are, 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 we can. We expect our 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.  Our failure to keep pace with our competitors through new product introductions or enhancements could cause a significant decline in our sales or loss of market acceptance of our products and services, result in continued intense price competition, or make our products and services or technologies obsolete or noncompetitive.  To be competitive, we will be required to continue to invest significant resources in research and development, and in sales and marketing.

             Intellectual Property.  Our performance depends in part on our ability to protect our proprietary rights to the technologies used in our principal products.  We rely on a combination of copyright and trademark laws, trade secrets, confidentiality provisions and other contractual provisions to protect our proprietary rights, which are measures that afford only limited protection.  Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products, or to obtain and use information that we regard as proprietary.  In addition, the laws of some foreign countries do not protect our proprietary rights as fully as do the laws of the United States.  Our means of protecting our proprietary rights in the United States or abroad may not be adequate, and competitors may independently develop similar technologies. Third parties may claim infringement by our products of their intellectual property rights.  We expect that software product developers will increasingly be subject to infringement claims if the number of products and competitors in our 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 us to enter into royalty or licensing

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agreements.  Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, if at all.  A successful claim of infringement against our products and failure or inability to license the infringed or similar technology may adversely affect our business and results of operations.

             International Operations.  Sales outside the United States accounted for approximately 9%, 12% and 15% of our revenues in 2002, 2001 and 2000, respectively.  We have only limited experience in developing localized versions of our products and we may not be able to successfully localize, market, sell and deliver our products internationally.  Our inability to successfully expand our international operations in a timely manner, or at all, could materially and adversely affect our business and results of operations.  Our international revenues may be denominated in foreign currencies or the U.S. dollar.  We do 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 and could make our software less price-competitive.

             Product Liability.  Our license agreements typically contain provisions designed to limit our exposure to potential product liability claims.  These limitations of liability provisions may not be effective under the laws of certain jurisdictions.  The sale and support of our products may entail the risk of such claims, and we could  be subject to such claims in the future.  A successful product liability claim against us could have a material adverse effect upon our business and results of operations.  Software products such as those we offer frequently contain errors or failures, especially when first introduced or when new versions are released. We have in the past released products that contained defects, and have discovered software errors in certain of our new products and enhancements after introduction.  We could in the future lose or delay recognition of revenues as a result of software errors or defects, the failure of our products to meet customer specifications or otherwise.  Our products are typically intended for use in applications that may be critical to a customer’s business.  As a result, we expect that our customers and potential customers have a greater sensitivity to product defects than the market for general software products. Despite our testing and testing by current and potential customers, errors or defects may be found in new products or releases after commencement of commercial shipments, and our products may not meet customer specifications, resulting in loss or deferral of revenues, diversion of resources, damage to our reputation, or increased service and warranty and other costs. 

             Common Stock Price Volatility.   Effective February 4, 2003 our common stock began trading on the NASDAQ Small Cap Market under the symbol “OPTK.”  Previously, our stock was traded on the NASDAQ National Market under the same symbol.  The market price of our shares of common stock has been, and is likely to continue to be, highly volatile and may be significantly affected by factors such as:

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 our common stock.  In the past, following periods of volatility

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in the market price of a particular company’s securities, securities class action litigation has often been brought against such company.  Such litigation may be brought against us in the future.  Such litigation, regardless of its outcome, would result in substantial costs and a diversion of management’s attention and resources that could have a material adverse effect upon our business and results of operations.

             Change In Company Control.  Certain provisions of our certificate of incorporation, equity incentive plans, bylaws, and Delaware law may discourage certain transactions involving a change in control of our company, even if such a transaction would be in the best interest of our stockholders.  Our 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 our control and may also affect the market price of our stock.  We also have a stockholders rights plan under which all stockholders of record as of July 18, 2001 received one right for each share of common stock then owned by them to purchase, upon the occurrence of certain triggering events, one one-hundredth of a share of Series B Preferred Stock at a price of $30, subject to adjustment. The rights are exercisable only if a person or group acquires 15% or more of our common stock in a transaction not approved by our Board of Directors. These provisions and certain other provisions of our Amended and Restated Certificate of Incorporation and certain provisions of our Amended and Restated Bylaws and of Delaware law, could delay or make more difficult a merger, tender offer or proxy contest. 

ITEM 3.          QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

             As of March 31, 2003 we had $6 million in short-term investments that are sensitive to market risks.  Our investment portfolio is used to preserve our capital until it is required to fund operations.  We do not own any derivative financial instruments.  Due to the nature of our investment portfolio we are primarily subject to interest rate risk.

             Our investment portfolio includes fixed rate debt instruments that are primarily municipal bonds with maturity periods within one-year.  The market value of these bonds is subject to interest rate risk, and could decline in value if interest rates increase.  A hypothetical increase or decrease in market interest rates by 10% from March 31, 2003 would cause the fair market value of these short-term investments to change by an insignificant amount. 

ITEM 4.          CONTROLS AND PROCEDURES

             Within the 90 days prior to the filing of this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures.   Our disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.  Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. 

             There have been no significant changes in our internal controls or in other factors which could significantly affect internal controls subsequent to the date of our most recent evaluation.

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PART II - OTHER INFORMATION

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SIGNATURES

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

CERTIFICATIONS

I, Mark K. Ruport, President and Chief Executive Officer of Optika Inc., certify that:

1.          I have reviewed this quarterly report on Form 10-Q of Optika Inc.;

2.          Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.          Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.          The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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5.          The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

6.          The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date:  May 13, 2003

I, Steven M. Johnson, Executive Vice President and Chief Financial Officer of Optika Inc., certify that:

1.          I have reviewed this quarterly report on Form 10-Q of Optika Inc.;

2.          Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.          Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.          The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

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5.          The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

6.          The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 13, 2003

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Exhibit Index

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