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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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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 October 31, 2001                                        

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: 1-15529

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OPTIO SOFTWARE, INC.(Exact name of registrant as specified in its charter)

Georgia

58-1435435(State of other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)3015 Windward Plaza, Fairways II, Alpharetta, GA

30005(Address of principal executive offices)

(Zip Code)


Registrant's
telephone number, including area code:(770) 576-3500

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 / /

There
were 18,533,232 shares of the Registrant's common stock outstanding as of December 11, 2001.

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OPTIO SOFTWARE, INC.  FORM 10-Q

For the Quarterly Period Ended October 31, 2001

TABLE OF CONTENTS

|                             |  |                                                                                       |  | Page
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART IFINANCIAL INFORMATION
|Item 1.                      |  | Financial Statements                                                                  |  | 4   
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 14  
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 24  
|PART IIOTHER INFORMATION   
|Item 1.                      |  | Legal Proceedings                                                                     |  | 24  
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                             |  | 24  
|Item 3.                      |  | Defaults Upon Senior Securities                                                       |  | 25  
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                   |  | 25  
|Item 5.                      |  | Other Information                                                                     |  | 25  
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                      |  | 25  

2

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FORWARD-LOOKING STATEMENTS

In addition to historical information, this Form 10-Q contains forward-looking statements that involve risks and uncertainties. These
forward-looking statements include, among other things, statements regarding Optio Software, Inc.'s (the "Company") anticipated costs and expenses, capital needs and financing plans, product
and service development, growth strategies, market demand for the Company's products and services, relationships with the Company's strategic marketing alliances, and competition. These
forward-looking statements include, among others, those statements including the words "expects," "anticipates," "intends," "believes" and similar language. The Company's actual results may differ
significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, risks associated with the Company's
reliance on strategic marketing and reseller relationships, fluctuations in operating results because of acquisitions or divestitures, changes in competition, delays in developing new software,
disputes regarding the Company's intellectual property, risks associated with the Company's ability to generate cash flows sufficient to continue for twelve months, risks relating to the potential
delisting of the Company's stock, or risks associated with the Company's international operations. These and additional factors are set forth in "Safe Harbor Compliance Statement for Forward-Looking
Statements" included as Exhibit 99.1 to this Quarterly Report on Form10-Q. You should carefully review these risks and additional risks described in other documents the Company
files from time to time with the Securities and Exchange Commission, including the latest Annual Report on Form 10-K that the Company has filed. You are cautioned not to place undue
reliance on the forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

3

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PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Optio Software, Inc.  Consolidated Condensed Balance Sheets

|                                                       |                                                     | January 31,
2001 |            | October 31,
2001 |  
|------------------------------------------------------ | --------------------------------------------------- | ---------------- | ---------- | ---------------- | -
|
|ASSETS                                                 |                                                     |                  |            |                  |  
|Current assets:                                        |                                                     |                  |            |                  |  
|                                                       | Cash and cash equivalents                           |                  | $          | 8,748,000        |  
|                                                       | Marketable securities                               |                  |            | 339,000          |  
|                                                       | Accounts receivable, net                            |                  |            | 9,962,000        |  
|                                                       | Prepaid expenses and other current assets           |                  |            | 1,225,000        |  
|                                                       | Notes receivable from related party, net            |                  |            | 600,000          |  
|                                                       | Income taxes receivable                             |                  |            | 1,415,000        |  
|                                                       |                                                     |                  |            |                  |  
|Total current assets                                   |                                                     |                  | 22,289,000 |                  |  
|Property and equipment, net                            |                                                     |                  | 2,656,000  |                  |  
|Other assets:                                          |                                                     |                  |            |                  |  
|                                                       | Note receivable and advances to shareholders        |                  |            | 123,000          |  
|                                                       | Investment in ecIndX                                |                  |            | 2,209,000        |  
|                                                       | Intangible assets, net                              |                  |            | 28,436,000       |  
|                                                       | Other                                               |                  |            | 125,000          |  
|                                                       |                                                     |                  |            |                  |  
|Total assets                                           |                                                     | $                | 55,838,000 |                  | $
|                                                       |                                                     |                  |            |                  |  
|LIABILITIES AND SHAREHOLDERS' EQUITY                   |                                                     |                  |            |                  |  
|Current liabilities:                                   |                                                     |                  |            |                  |  
|                                                       | Accounts payable                                    |                  | $          | 2,682,000        |  
|                                                       | Accrued expenses                                    |                  |            | 2,623,000        |  
|                                                       | Income taxes payable                                |                  |            |                 |  
|                                                       | Current portion of notes payable to related parties |                  |            | 53,000           |  
|                                                       | Current portion of capital lease obligations        |                  |            | 125,000          |  
|                                                       | Line of credit                                      |                  |            |                 |  
|                                                       | Deferred revenue                                    |                  |            | 6,969,000        |  
|                                                       |                                                     |                  |            |                  |  
|Total current liabilities                              |                                                     |                  | 12,452,000 |                  |  
|Notes payable to related parties, less current portion |                                                     |                  | 8,000,000  |                  |  
|Capital lease obligations, less current portion        |                                                     |                  | 261,000    |                  |  
|Deferred revenue                                       |                                                     |                  | 78,000     |                  |  
|Shareholders' equity:                                  |                                                     |                  |            |                  |  
|                                                       | Common stock                                        |                  |            | 49,557,000       |  
|                                                       | Accumulated deficit                                 |                  |            | (14,187,000      | )
|                                                       | Accumulated other comprehensive loss                |                  |            | (266,000         | )
|                                                       | Unamortized stock compensation                      |                  |            | (57,000          | )
|                                                       |                                                     |                  |            |                  |  
|Total shareholders' equity                             |                                                     |                  | 35,047,000 |                  |  
|                                                       |                                                     |                  |            |                  |  
|Total liabilities and shareholders' equity             |                                                     | $                | 55,838,000 |                  | $
|                                                       |                                                     |                  |            |                  |  

See
accompanying notes.

4

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Optio Software, Inc.  Consolidated Condensed Statements of Operations  (Unaudited)

|                                              |                                                             | Three Months Ended
October 31, |           
|--------------------------------------------- | ----------------------------------------------------------- | ------------------------------ | ----------
|
|Revenue:                                      |                                                             |                                |           
|                                              | License fees                                                |                                | $         
|                                              | Services, maintenance, and other                            |                                |           
|                                              |                                                             |                                |           
|                                              |                                                             |                                | 8,351,000 
|Costs of revenue:                             |                                                             |                                |           
|                                              | License fees                                                |                                |           
|                                              | Services, maintenance, and other                            |                                |           
|                                              |                                                             |                                |           
|                                              |                                                             |                                | 3,813,000 
|                                              |                                                             |                                |           
|                                              |                                                             |                                | 4,538,000 
|Operating expenses:                           |                                                             |                                |           
|                                              | Sales and marketing                                         |                                |           
|                                              | Research and development                                    |                                |           
|                                              | General and administrative                                  |                                |           
|                                              | Impairment of intangibles                                   |                                |           
|                                              | Depreciation and amortization                               |                                |           
|                                              |                                                             |                                |           
|                                              |                                                             |                                | 9,682,000 
|                                              |                                                             |                                |           
|Loss from operations                          |                                                             |                                | (5,144,000
|Other income (expense):                       |                                                             |                                |           
|                                              | Interest income                                             |                                |           
|                                              | Interest expense                                            |                                |           
|                                              | Other                                                       |                                |           
|                                              |                                                             |                                |           
|                                              |                                                             |                                | 46,000    
|Loss before income taxes                      |                                                             |                                | (5,098,000
|Income tax expense                            |                                                             |                                | 35,000    
|                                              |                                                             |                                |           
|Net loss                                      |                                                             | $                              | (5,133,000
|                                              |                                                             |                                |           
|Net loss per share  basic                    |                                                             | $                              | (0.29     
|                                              |                                                             |                                |           
|Net loss per share  diluted                  |                                                             | $                              | (0.29     
|                                              |                                                             |                                |           
|Weighted average shares outstanding  basic   |                                                             |                                | 17,621,398
|                                              |                                                             |                                |           
|Weighted average shares outstanding  diluted |                                                             |                                | 17,621,398
|                                              |                                                             |                                |           
|Comprehensive loss:                           |                                                             |                                |           
|                                              | Net loss                                                    |                                | $         
|                                              | Foreign currency translation adjustment                     |                                |           
|                                              | Unrealized loss on marketable securities available for sale |                                |           
|                                              |                                                             |                                |           
|                                              | Comprehensive loss                                          |                                | $         
|                                              |                                                             |                                |           

See
accompanying notes.

5

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Optio Software, Inc.  Consolidated Condensed Statements of Operations  (Unaudited)

|                                              |                                                             | Nine Months Ended
October 31, |           
|--------------------------------------------- | ----------------------------------------------------------- | ----------------------------- | ----------
|
|Revenue:                                      |                                                             |                               |           
|                                              | License fees                                                |                               | $         
|                                              | Services, maintenance, and other                            |                               |           
|                                              |                                                             |                               |           
|                                              |                                                             |                               | 27,922,000
|Costs of revenue:                             |                                                             |                               |           
|                                              | License fees                                                |                               |           
|                                              | Services, maintenance, and other                            |                               |           
|                                              |                                                             |                               |           
|                                              |                                                             |                               | 10,773,000
|                                              |                                                             |                               |           
|                                              |                                                             |                               | 17,149,000
|Operating expenses:                           |                                                             |                               |           
|                                              | Sales and marketing                                         |                               |           
|                                              | Research and development                                    |                               |           
|                                              | General and administrative                                  |                               |           
|                                              | Impairment of intangibles                                   |                               |           
|                                              | Depreciation and amortization                               |                               |           
|                                              |                                                             |                               |           
|                                              |                                                             |                               | 25,967,000
|                                              |                                                             |                               |           
|Loss from operations                          |                                                             |                               | (8,818,000
|Other income (expense):                       |                                                             |                               |           
|                                              | Interest income                                             |                               |           
|                                              | Interest expense                                            |                               |           
|                                              | Other                                                       |                               |           
|                                              |                                                             |                               |           
|                                              |                                                             |                               | 548,000   
|Loss before income taxes                      |                                                             |                               | (8,270,000
|Income tax expense                            |                                                             |                               | 341,000   
|                                              |                                                             |                               |           
|Net loss                                      |                                                             | $                             | (8,611,000
|                                              |                                                             |                               |           
|Net loss per share  basic                    |                                                             | $                             | (0.49     
|                                              |                                                             |                               |           
|Net loss per share  diluted                  |                                                             | $                             | (0.49     
|                                              |                                                             |                               |           
|Weighted average shares outstanding  basic   |                                                             |                               | 17,424,562
|                                              |                                                             |                               |           
|Weighted average shares outstanding  diluted |                                                             |                               | 17,424,562
|                                              |                                                             |                               |           
|Comprehensive loss:                           |                                                             |                               |           
|                                              | Net loss                                                    |                               | $         
|                                              | Foreign currency translation adjustment                     |                               |           
|                                              | Unrealized loss on marketable securities available for sale |                               |           
|                                              |                                                             |                               |           
|                                              | Comprehensive loss                                          |                               | $         
|                                              |                                                             |                               |           

See
accompanying notes.

6

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Optio Software, Inc.  Consolidated Condensed Statement of Shareholders' Equity  (Unaudited)

|                            |                                                                      | Common Stock                                                |         |   |            |         |   |             |   |             |         
|--------------------------- | -------------------------------------------------------------------- | ----------------------------------------------------------- | ------- | - | ---------- | ------- | - | ----------- | - | ----------- | --------
|
|
|Balance at February 1, 2001 |                                                                      | 17,641,032                                                  |         | $ | 49,557,000 |         | $ | (14,187,000 | ) | $           | (266,000
|                            | Comprehensive loss, net of tax:                                      |                                                             |         |   |            |         |   |             |   |             |         
|                            |                                                                      | Net loss                                                    |         |  |            |         |  |             |   | (23,950,000 | )       
|                            |                                                                      | Foreign currency translation adjustment                     |         |  |            |         |  |             |   |            |         
|                            |                                                                      | Unrealized loss on marketable securities available for sale |         |  |            |         |  |             |   |            |         
|                            |                                                                      |                                                             |         |   |            |         |   |             |   |             |         
|                            | Comprehensive loss                                                   |                                                             |         |   |            |         |   |             |   |             |         
|                            | Change in deferred compensation related to stock option terminations |                                                             |        |   |            | (48,000 | ) |             |  |             |         
|                            | Amortization of deferred compensation                                |                                                             |        |   |            |        |   |             |  |             |         
|                            | Exercise of stock options                                            |                                                             | 892,200 |   |            | 558,000 |   |             |  |             |         
|                            |                                                                      |                                                             |         |   |            |         |   |             |   |             |         
|Balance at October 31, 2001 |                                                                      | 18,533,232                                                  |         | $ | 50,067,000 |         | $ | (38,137,000 | ) | $           | (382,000
|                            |                                                                      |                                                             |         |   |            |         |   |             |   |             |         

See accompanying notes.

7

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Optio Software, Inc.  Consolidated Condensed Statements of Cash Flows  (Unaudited)

|                                                     |                                                                             | Nine Months Ended
October 31, |                                                  
|---------------------------------------------------- | --------------------------------------------------------------------------- | ----------------------------- | -------------------------------------------------
|
|Cash flows from operating activities:                |                                                                             |                               |                                                  
|                                                     | Net loss                                                                    |                               | $                                                
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                               |                                                  
|                                                     |                                                                             |                               | Depreciation                                     
|                                                     |                                                                             |                               | Amortization of intangible assets                
|                                                     |                                                                             |                               | Impairment of intangible assets                  
|                                                     |                                                                             |                               | Provision for doubtful accounts                  
|                                                     |                                                                             |                               | Write-down of ecIndx investment                  
|                                                     |                                                                             |                               | Gain on sale of marketable securities            
|                                                     |                                                                             |                               | (Gain) loss on disposal of property and equipment
|                                                     |                                                                             |                               | Non-cash compensation and interest               
|                                                     |                                                                             |                               | Deferred income taxes                            
|                                                     |                                                                             |                               | Changes in operating assets and liabilities:     
|                                                     |                                                                             |                               |                                                  
|                                                     |                                                                             |                               |                                                  
|                                                     |                                                                             |                               |                                                  
|                                                     |                                                                             |                               |                                                  
|                                                     |                                                                             |                               |                                                  
|                                                     |                                                                             |                               |                                                  
|                                                     |                                                                             |                               |                                                  
|Net cash used in operating activities                |                                                                             |                               | (6,258,000                                       
|Cash flows from investing activities:                |                                                                             |                               |                                                  
|                                                     | Purchases of marketable securities                                          |                               |                                                  
|                                                     | Proceeds from the sale of marketable securities                             |                               |                                                  
|                                                     | Proceeds from the sale of property and equipment                            |                               |                                                  
|                                                     | Purchases of property and equipment                                         |                               |                                                  
|                                                     | Advances to related parties and shareholders                                |                               |                                                  
|                                                     | Investment in EcIndx                                                        |                               |                                                  
|                                                     | Acquisition of business, net of cash acquired                               |                               |                                                  
|                                                     |                                                                             |                               |                                                  
|Net cash used in investing activities                |                                                                             |                               | (28,367,000                                      
|Cash flows from financing activities:                |                                                                             |                               |                                                  
|                                                     | Payments of notes payable and capital lease obligations                     |                               |                                                  
|                                                     | Advances on the line of credit                                              |                               |                                                  
|                                                     | Payments on the line of credit                                              |                               |                                                  
|                                                     | Proceeds from exercise of stock options                                     |                               |                                                  
|                                                     |                                                                             |                               |                                                  
|Net cash (used in) provided by financing activities  |                                                                             |                               | (21,000                                          
|Impact of foreign currency rate fluctuations on cash |                                                                             |                               | (151,000                                         
|Net decrease in cash                                 |                                                                             |                               | (34,797,000                                      
|Cash at beginning of period                          |                                                                             |                               | 46,826,000                                       
|                                                     |                                                                             |                               |                                                  
|Cash at end of period                                |                                                                             | $                             | 12,029,000                                       
|                                                     |                                                                             |                               |                                                  
|Supplemental disclosures of cash flow information:   |                                                                             |                               |                                                  
|                                                     | Cash paid (refunded) during the year for:                                   |                               |                                                  
|                                                     |                                                                             | Interest                      |                                                  
|                                                     |                                                                             |                               |                                                  
|                                                     |                                                                             | Income taxes                  |                                                  
|                                                     |                                                                             |                               |                                                  

See
accompanying notes.

8

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Optio Software, Inc.  Notes to the Consolidated Condensed Financial Statements  (Unaudited)

1.  Description of Business

Optio Software, Inc. (the "Company") is engaged primarily in the development, sale and support of document customization and e-business
infrastructure software to companies located principally in the United States and Europe. The industry in which the Company operates is subject to rapid change due to development of new technologies
and products.

2.  Basis of Presentation

Interim Financial Information

The accompanying interim consolidated condensed financial statements of the Company have been prepared in accordance with the instructions for
Form 10-Q. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. In the opinion of management, all adjustments necessary for a fair presentation of the financial information for the interim period and
year-to-date periods reported have been made and are of a normal recurring nature.

The
accompanying financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended January 31, 2001, included
in the Company's Annual Report on Form 10-K, dated May 1, 2001, filed with the Securities and Exchange Commission. Results of operations for the three and nine months ended
October 31, 2001 are not necessarily indicative of the results for the entire year ending January 31, 2002.

New Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations("SFAS 141") and No. 142,Goodwill and Other Intangible Assets("SFAS 142"). SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. SFAS 141 also changes the criteria to recognize
intangible assets apart from goodwill. Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized, but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. Companies are required to
immediately adopt the amortization provisions of SFAS 142 as it relates to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in their fiscal year beginning after December 15, 2001. The Company anticipates adopting SFAS 142
in accordance with the provisions of the statement on February 1, 2002. SFAS 142 may not be applied retroactively. Substantially all of the Company's goodwill and intangible assets
balance of $11.8 million as of October 31, 2001, was recorded in March 2000, in conjunction with the acquisition of Muscato Corporation and TransLink Solutions Corporation. The
goodwill balance is being amortized over five years. The impact of the adoption as it relates to goodwill, which exists currently, is to eliminate amortization of goodwill expense beginning with the
year ending January 31, 2003. In addition, should the carrying value of the Company's goodwill exceed the fair value of the related assets, an impairment loss would be recognized.

The
Company is currently assessing the value of its goodwill and intangibles in accordance with Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed
Of.The Company records impairment losses on long-lived assets
used in

9

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operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of
those assets. On December 4, 2001, the Company sold its Muscato Corporation business units and the assets the Company originally acquired from TransLink Solutions Corporation. As a result, an
impairment charge of $10.9 million was recorded during the three months ended October 31, 2001 to record the value of intangible assets resulting from the acquisition of these business
units at their fair value based on the ultimate sales price.

The
Financial Accounting Standards Board issued SFAS 144,Accounting for the Impairment or Disposal of Long-Lived Assetswhich
supersedes SFAS 121,Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.SFAS 144 supercedes the provisions
of APB Option No. 30,Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactionswith regard to reporting the effects of a disposal of a segment of a business. The statement provides a single accounting model
for long-lived assets to be disposed of and significantly changes the criteria required to classify an asset as held-for-sale. Under this statement, more dispositions will qualify for discontinued
operations treatment
in the income statement and expected future operating losses from discontinued operations will be displayed in discontinued operations in the period in which the losses are incurred. The standard is
effective for fiscal years beginning after December 15, 2001. Management believes that the adoption of this standard will not have a material effect on the Company's financial position or
results of operations.

3.  Acquisition

On March 27, 2000, the Company purchased all of the outstanding capital stock of Muscato Corporation ("Muscato"), thereby making Muscato a wholly-owned
subsidiary of the Company. In addition, on the same date, the Company purchased substantially all of the assets of TransLink Solutions Corporation ("TransLink"), an affiliate of Muscato. The
consideration paid to the shareholders of Muscato was $28.0 million, of which $20.0 million was paid in cash at the closing. The Company issued promissory notes for the remaining
$8.0 million, which was due and payable on March 27, 2030. During the three months ended April 30, 2001, the notes payable were adjusted for the settlement of unrecorded
liabilities deductible from the notes payable, resulting in new notes payable balance of $7.8 million. The purchase price for the assets acquired from TransLink was $5.0 million in cash
paid to TransLink at closing.

The
cash component of each purchase price was paid out of the net proceeds of the Company's initial public offering. Each of the acquisitions was accounted for as a purchase
transaction for financial accounting purposes, and accordingly, the results of operations of Muscato and TransLink have been included in the Company's consolidated condensed financial statements from
the date of the acquisition.

The
purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values on the date of acquisition as follows:

Tangible assets acquired

$
1,808,000Liabilities assumed


(3,103,000
)Technology


1,600,000Assembled workforce


685,000Customer base


280,000Goodwill


31,730,000$
33,000,000


10

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The
technology is being amortized over an average estimated life of two years. The assembled workforce, customer base, and goodwill are amortized over estimated lives of five years.

The
pro forma effect of combining Muscato and TransLink with the Company's operations for the nine months ended October 31, 2000 is as follows:

Revenue

$
29,081,000Net loss


(9,922,000
)Net loss per share  basic and diluted

$
(0.57
)Weighted average shares outstanding  basic and diluted


17,424,562


The
Muscato and TransLink businesses were sold subsequent to the quarter ended October 31, 2001, resulting in a $10.9 million impairment charge. See Note 8.

4.  Net Loss per Share

The following table sets forth the computation of net loss per share:

|                                                                             |  | Three months ended
October 31, |           
|---------------------------------------------------------------------------- |  | ------------------------------ | ----------
|
|Net loss                                                                     |  | $                              | (5,133,000
|                                                                             |  |                                |           
|Weighted average shares outstanding  basic and diluted                      |  |                                | 17,621,398
|                                                                             |  |                                |           
|Net loss per share  basic and diluted                                       |  | $                              | (0.29     
|                                                                             |  |                                |           
|Potentially dilutive stock options, excluded from diluted net loss per share |  |                                | 6,552,154 
|                                                                             |  |                                |           

|                                                                             |  | Nine months ended
October 31, |           
|---------------------------------------------------------------------------- |  | ----------------------------- | ----------
|
|Net loss                                                                     |  | $                             | (8,611,000
|                                                                             |  |                               |           
|Weighted average shares outstanding  basic and diluted                      |  |                               | 17,424,562
|                                                                             |  |                               |           
|Net loss per share  basic and diluted                                       |  | $                             | (0.49     
|                                                                             |  |                               |           
|Potentially dilutive stock options, excluded from diluted net loss per share |  |                               | 8,350,071 
|                                                                             |  |                               |           

5.  Segment and Geographic Information

The Company is organized around geographic areas. The Company operates in four geographic segments, the United States, France, the United Kingdom and
Australia. The foreign locations principally function as distributors of products developed by the Company in the United States. The accounting policies as described in the summary of significant
accounting policies of the Company's Form 10-K are applied consistently across the segments. Intersegment sales are based on intercompany transfer prices to achieve a reasonable
margin upon distribution.

11

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Segment information for the nine months ended October 31, 2000 and 2001 is summarized below.

|Nine Months ended October 31, 2000 |                                 | United
States |            | France     |  | United
Kingdom |           | Australia |           | Combined  |  | Eliminations |         | Consolidated |           
|---------------------------------- | ------------------------------- | ------------- | ---------- | ---------- |  | -------------- | --------- | --------- | --------- | --------- |  | ------------ | ------- | ------------ | ----------
|Revenue from external customers:   |                                 |               |            |            |  |                |           |           |           |           |  |              |         |              |           
|                                   | License fees                    |               | $          | 11,110,000 |  | $              | 584,000   |           | $         | 640,000   |  | $            | 128,000 |              | $         
|                                   | Services, maintenance and other |               |            | 14,139,000 |  |                | 757,000   |           |           | 504,000   |  |              | 60,000  |              |           
|Intersegment revenue               |                                 |               | 377,000    |            |  | 160,000        |           |           |          |           |  |             |         |              | 537,000   
|                                   |                                 |               |            |            |  |                |           |           |           |           |  |              |         |              |           
|                                   | Total revenue                   |               |            | 25,626,000 |  |                | 1,501,000 |           |           | 1,144,000 |  |              | 188,000 |              |           
|Interest income                    |                                 |               | 849,000    |            |  |               |           |           |          |           |  |             |         |              | 849,000   
|Interest expense                   |                                 |               | (334,000   | )          |  | (1,000         | )         |           |          |           |  |             |         |              | (335,000  
|Depreciation and amortization      |                                 |               | 5,031,000  |            |  | 24,000         |           |           | 3,000     |           |  | 4,000        |         |              | 5,062,000 
|Income tax expense                 |                                 |               | 213,000    |            |  | 1,000          |           |           | 127,000   |           |  |             |         |              | 341,000   
|Segment net income (loss)          |                                 |               | (7,900,000 | )          |  | (316,000       | )         |           | 312,000   |           |  | (707,000     | )       |              | (8,611,000
|Total segment assets               |                                 |               | 60,778,000 |            |  | 1,311,000      |           |           | 1,292,000 |           |  | 203,000      |         |              | 63,584,000
|Expenditures for long-lived assets |                                 |               | 1,102,000  |            |  | 70,000         |           |           |          |           |  | 35,000       |         |              | 1,207,000 

|Nine Months ended October 31, 2001 |                                 | United
States |             | France     |  | United
Kingdom |           | Australia |           | Combined |  | Eliminations |         | Consolidated |            
|---------------------------------- | ------------------------------- | ------------- | ----------- | ---------- |  | -------------- | --------- | --------- | --------- | -------- |  | ------------ | ------- | ------------ | -----------
|Revenue from external customers:   |                                 |               |             |            |  |                |           |           |           |          |  |              |         |              |            
|                                   | License fees                    |               | $           | 9,094,000  |  | $              | 813,000   |           | $         | 420,000  |  | $            | 92,000  |              | $          
|                                   | Services, maintenance and other |               |             | 15,714,000 |  |                | 910,000   |           |           | 547,000  |  |              | 81,000  |              |            
|Intersegment revenue               |                                 |               | 296,000     |            |  | 104,000        |           |           | 10,000    |          |  |             |         |              | 410,000    
|                                   |                                 |               |             |            |  |                |           |           |           |          |  |              |         |              |            
|                                   | Total revenue                   |               |             | 25,104,000 |  |                | 1,827,000 |           |           | 977,000  |  |              | 173,000 |              |            
|Interest income                    |                                 |               | 179,000     |            |  | 26,000         |           |           | 3,000     |          |  | 1,000        |         |              | 209,000    
|Interest expense                   |                                 |               | (474,000    | )          |  | (11,000        | )         |           | (1,000    | )        |  |             |         |              | (486,000   
|Depreciation and amortization      |                                 |               | 6,500,000   |            |  | 34,000         |           |           | 19,000    |          |  | 8,000        |         |              | 6,561,000  
|Segment net loss                   |                                 |               | (23,340,000 | )          |  | (266,000       | )         |           | 32,000    |          |  | (376,000     | )       |              | (23,950,000
|Total segment assets               |                                 |               | 32,293,000  |            |  | 1,868,000      |           |           | 1,293,000 |          |  | 298,000      |         |              | 35,752,000 
|Expenditures for long-lived assets |                                 |               | 249,000     |            |  | 79,000         |           |           |          |          |  | 2,000        |         |              | 330,000    

6.  Income Taxes

The Company incurred a loss in the three and nine months ended October 31, 2001. As a result, the Company evaluated the realizability of the resulting
tax assets from carryback opportunities and recorded refundable income taxes to the extent of taxes previously paid. A valuation allowance has been recognized to reduce the net deferred income tax
assets to zero. The Company has not recognized any benefit from the future use of the deferred tax assets because management's evaluation of all the available evidence in assessing the realizability
of the tax benefits of such loss carryforwards indicates that the underlying assumptions of the future profitable operations contain risks that do not provide sufficient assurance to recognize such
tax benefits currently. During the nine months ended October 31, 2001, the Company received a refund of income taxes previously paid in the amount of $1.5 million.

7.  Investment in ecIndX

The Company invested $2.0 million in ecIndX, Inc., a supply chain collaboration vendor, in exchange for a minority interest in the company. An
additional $209,000 of costs incurred related to making the investment were added to the basis of the investment. In conjunction with the investment, ecIndX, Inc. entered into the Company's
standard software license agreement to purchase $1.0 million in software and related services, of which approximately $1.1 million has been recognized to date. EcIndX, Inc. was
founded and is partly owned by an individual who is a shareholder and director of the Company and who holds options to purchase 665,000 shares of the Company's common stock. During the three months
ended April 30, 2001, management reassessed the value of this investment

12

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based on recent ecIndx stock transactions. As a result, the investment was written down $200,000 to a value of $2.0 million.

8.  Subsequent Events

On December 4, 2001, the Company sold its Muscato and TransLink business units to M2 Systems Corporation. The stock of Muscato was sold for
consideration of $250,000 cash, a note receivable of $3.25 million and the retirement of the long-term notes in the aggregate amount of $8.8 million in principal and interest
related to the original purchase of Muscato. The assets of the TransLink business unit were sold for a note receivable of $750,000. As a result, an impairment charge of $10.9 million was
recorded during the three months ended October 31, 2001 to record the value of intangible assets resulting from the acquisition of these business units at their fair value based on the ultimate
sales price.

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

OVERVIEW

Optio Software, Inc. ("Optio", or the "Company") was incorporated in Georgia in 1981 as Technology Marketing, Inc., and changed its name to
Xpoint Corporation in 1982, then to Optio Software, Inc. in 1997. The Company currently operates through three wholly-owned subsidiaries: Optio Software, Europe S.A. ("Optio Europe"), located
in France, and its wholly-owned subsidiary Optio Software, UK Pvt. Limited ("Optio UK"), located in the United Kingdom; Optio Software, Asia Pacific, ("Optio Australia") located in Australia; and
Muscato Corporation ("Muscato"), located in Orlando, Florida. On December 4, 2001, Optio sold the Muscato subsidiary to M2 Systems Corporation.

Optio
is engaged primarily in the development, sale and support of document customization and e-business infrastructure software to companies located principally in the
United States, Europe and Australia. For most of Optio's operating history, its primary business consisted of providing software and services that addressed organizations' needs for customized
information delivered via print, fax and e-mail to users of enterprise and healthcare applications. During fiscal year 2000, Optio began expanding its business plan to develop new software
and services that would help its customers move from paper-intensive commerce to e-business.

In
June 1999, Optio tested its first e-business product, Optio e.ComPresent, which was then released in September 1999. In March 2000, Optio announced
the initial release of its e.ComIntegrate product which provides organizations with the ability to conduct business-to-business e-commerce and
participate in e-marketplaces through the creation, transformation and exchange of XML documents. In April 2000, Optio announced e.ComPayments, the third product
offering in its e.ComSeries. Optio e.ComPayments represents Optio's full-scale payment platform providing comprehensive support for electronic and traditional payments.
Finally, with the purchase of Muscato in March 2000, Optio added e.ComEngine, which provides trading partner management, data routing, translation and transaction management for enterprises
desiring to integrate data intra- and inter-enterprise. With the subsequent sale of Muscato on December 4, 2001, Optio transferred ownership of the e.ComEngine product to M2 Systems
Corporation. Optio and M2 Systems Corporation agreed to enter into a Reseller Agreement allowing Optio to resell the e.ComEngine product.

Optio
also offers consulting services which provide customers with implementation assistance and training. In order to better service customers and support the growth of its
consulting business, the Company uses Optio certified independent consulting companies to help deliver consulting services to the Company's customer base.

Optio
markets and sells its software and services throughout the United States, Europe, and the Asian Pacific through its direct sales force and certified resellers. As of
October 31, 2001, Optio had 51 sales and sales support personnel and approximately 75 resellers. Optio also offers consulting services which provide customers with implementation assistance and
training. In the past, Optio has outsourced approximately 65-75% of its consulting services work to certified consulting partners. During the three months ended July 31, 2001, that
percentage decreased to approximately 40-45% and during the three months ended October 31, 2001, decreased even further to approximately 25-35%. As of October 31,
2001, Optio had 47 internal consulting services personnel.

As
of October 31, 2001, Optio had over 4,000 customers worldwide using Optio's software and services. No single customer accounted for 10% or more of Optio's revenue for the
three months ended October 31, 2001 or 2000.

In
March 2000, Optio purchased Muscato, providing Optio with a new business-to-business infrastructure software and technology, e.ComEngine. Although
Muscato remained a wholly-owned

14

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subsidiary, it was substantially integrated into the sales and support of not only Muscato's former products, but all of Optio's existing products as well. Optio also purchased the assets of Muscato's
affiliate TransLink which hosts the Muscato products in an ASP environment.

The
acquisitions of both Muscato and the TransLink assets were accounted for as purchase transactions and thus, their results are reflected in the Company's consolidated financial
statements from the date of acquisition. The goodwill and other intangibles associated with these acquisitions are being amortized over periods of two to five years.

On
December 4, 2001, Optio sold the Muscato and TransLink businesses to M2 Systems Corporation.

RESULTS OF OPERATIONS

Three Months Ended October 31, 2001 Compared to Three Months Ended October 31, 2000

Revenues

The following table sets forth certain items from the Company's statements of operations as a percentage of total revenue for the periods indicated.

|                                    |                                 | Three Months Ended
October 31, |   
|----------------------------------- | ------------------------------- | ------------------------------ | --
|
|Revenue:                            |                                 |                                |   
|                                    | License fees                    |                                | 38
|                                    | Services, maintenance and other |                                | 62
|                                    |                                 |                                |   
|                                    |                                 | Total revenue                  |   
|                                    |                                 |                                |   
|Costs of revenue:                   |                                 |                                |   
|                                    | License fees                    |                                | 2 
|                                    | Services, maintenance and other |                                | 44
|                                    |                                 |                                |   
|                                    |                                 | Total cost of revenue          |   
|                                    |                                 |                                |   
|Gross profit                        |                                 | 54                             |   
|Operating expenses:                 |                                 |                                |   
|                                    | Sales and marketing             |                                | 56
|                                    | Research and development        |                                | 17
|                                    | General and administrative      |                                | 18
|                                    | Impairment of intangibles       |                                |  
|                                    | Depreciation and amortization   |                                | 26
|                                    |                                 |                                |   
|                                    |                                 | Total operating expenses       |   
|                                    |                                 |                                |   
|Loss from operations                |                                 | (62                            | ) 
|Interest and other income (expense) |                                 | 1                              |   
|                                    |                                 |                                |   
|Net loss                            |                                 | (62                            | %)
|                                    |                                 |                                |   

Revenues

Total revenues increased 16% to $9.7 million from $8.4 million for the three months ended October 31, 2001 and 2000, respectively.

15

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License fees

Revenues from licenses increased 18% to $3.8 million from $3.2 million for the three months ended October 31, 2001 and 2000, respectively.
During the three months ended October 31, 2000, the Company experienced substantial turnover in its sales organization. As the Company was transitioning from strictly distributed output
management ("DOM") products to a combination of DOM and e-business products, many sales personnel had difficulty integrating the sales efforts for the new e.ComSeries of products,
resulting in significant turnover. As a result, software sales during the three months ended October 31, 2000 suffered. Despite the weak economy and weaker technology spending, license revenue
has increased during the three months ended October 31, 2001 as a result of improved sales efficiency.

The
Company's average sales price during the three months ended October 31, 2001 remained constant at $80,000. In August 2001, the Company announced new product packages
which allowed the Company to compete at various price and functionality levels which were not previously marketed. These new packages included a "lite" version of the Company's products which are
priced lower than the "standard" and "professional" packages. During the quarter, the Company entered into two license arrangements, each valued at over $300,000. However, a significant volume of the
new "lite" packages kept the average sales price consistent with the prior quarter.

Services, maintenance and other

Revenues from services, maintenance and other increased to $5.9 million in the three months ended October 31, 2001 from $5.2 million in
the prior year. Services revenue increased $612,000. The overall increase in software license revenue and the Company's number of customers, resulted in a slight increase in implementation and other
services revenue. Maintenance revenue increased approximately
$200,000 from $2.4 million in the three months ended October 31, 2000 to $2.6 million in the three months ended October 31, 2001. Other revenue decreased $63,000 primarily
the result of fees earned from the 2000 users conference in the three months ended October 31, 2000.

Revenue Mix

Revenues from licenses represented 39% and 38% of total revenue for the three months ended October 31, 2001 and 2000, respectively.

Costs of Revenues

Total costs of revenues decreased 30% to $2.7 million from $3.8 million in the three months ended October 31, 2001 and 2000, respectively.

Licenses

Costs of revenues from licenses consists of costs related to the packaging and distribution of the products, fees paid for incorporation of third-party
software products and fees paid to referral partners. Costs of revenues from licenses decreased 56% to $69,000 from $158,000 for the three months ended October 31, 2001 and 2000, respectively.
The decrease was primarily due to decreased referral partner fees from $41,000 in the three months ended October 31, 2000 to $2,000 in the three months ended October 31, 2001, as fewer
sales were obtained through referral partners. In addition, distribution costs decreased approximately $20,000 during the three months ended October 31, 2001 as a result of cost savings from
providing our user's manuals electronically in lieu of printed books.

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Services, maintenance and other

Costs of revenues from services, maintenance and other consists of personnel, subcontract and other expenses relating to the cost of providing customer
support, education and professional services. Costs of revenue from services, maintenance and other decreased 29% to $2.6 million from $3.7 million in the three months ended
October 31, 2001 and 2000, respectively. Costs of revenues from services, maintenance and other decreased as a percentage of total revenue from 44% in 2000 to 27% in 2001. The decrease was
primarily the result of the following: a) a decrease in the number of outsourcers used
to assist in implementations, b) a decrease in the number of internal staff as a result of a reduction in force, and c) an allocation of certain service personnel to assist in the
development of a new product, thus moving their cost to research and development. In the past, Optio has outsourced approximately 65-75% of its consulting services work to certified
consulting partners. During the three months ended October 31, 2001, that percentage decreased to approximately 25-35%. The use of outsourcers typically results in a lower gross
margin on services revenue.

Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of salaries, commissions, bonuses and benefits earned by sales and marketing personnel, direct expenditures such
as travel, communication and occupancy and marketing expenditures related to direct mail, trade shows and other advertising.

Sales
and marketing expenses decreased 32% to $3.2 million from $4.7 million for the three months ended October 31, 2001 and 2000, respectively. Sales and
marketing expenses were 33% and 56% of total revenue for the same periods. The decrease was primarily the result of 1) expenses of approximately $350,000 related to the Company's annual users
conference which was held in 2000 but not held in 2001, 2) a decrease of approximately $400,000 of marketing and advertising costs in the three months ended October 31, 2001 as a result
of cost reduction efforts by the Company and 3) a significant reduction in sales and marketing personnel from 106 as of October 31, 2000 to 60 as of October 31, 2001.

Research and Development

Research and development expenses consists primarily of salaries, benefits and equipment for software developers, quality assurance personnel, and product
managers.

Research
and development expenses increased 15% to $1.6 million from $1.4 million in the three months October 31, 2001 and 2000, respectively, representing a
consistent 17% of total revenue for the same periods. The increase during the three months ended October 31, 2001 was primarily the result of the use of an outside independent consultant to
assist with quality assurance testing of the Company's products and the allocation of costs from the Company's consulting group as these personnel assisted with research and development projects for
one of the Company's new products.

General and Administrative

General and administrative expenses consist primarily of salaries, benefits and related costs for executive, finance, human resources and information services
personnel. General and administrative expenses also includes legal, accounting and other professional services.

General
and administrative expenses increased 60% to $2.4 million from $1.5 million for the three months ended October 31, 2001 and 2000, respectively. These
expenses represent 24% and 18% of total revenue for the same periods. The increase in general administrative expenses as a percentage of revenue is primarily the result of the write-off of
a $750,000 note receivable from a shareholder during the three months ended October 31, 2001.

17

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Impairment of Intangibles

On December 4, 2001, the Company sold its Muscato and TransLink business units. This sale resulted in a $10.9 million impairment of intangibles
during the three months ended October 31, 2001 to reduce the intangibles to fair value as of October 31, 2001.

Depreciation and Amortization

Depreciation and amortization expense increased to $2.2 million from $2.1 million for the three months ended October 31, 2001 and 2000,
respectively. This increase is due to an increase in depreciation expense resulting from normal additions to property and equipment.

Interest Income

Interest income decreased to $64,000 from $177,000 in the three months ended October 31, 2001 and 2000, respectively. The Company invested an average
cash balance of approximately $5.4 million during the three months ended October 31, 2001. In the same period of 2000, the Company invested an average cash balance of approximately
$12.9 million.

Interest Expense

Interest expense increased from $142,000 in the three months ended October 31, 2000 to $160,000 in the three months ended October 31, 2001
primarily the result of interest incurred on new leases the Company entered into during 2001. Interest expense primarily represents interest on the promissory notes issued in connection with the
acquisition of Muscato.

Income Tax Expense

The provision for income taxes which was $13,000 and $35,000 for the three months ended October 31, 2001 and 2000, respectively resulted from the
Company's foreign operations. A valuation allowance has been recorded related to deferred tax assets based on management's assessment that the likelihood of realizing such assets is not more likely
than not.

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RESULTS OF OPERATIONS

Nine Months Ended October 31, 2001 Compared to Nine Months Ended October 31, 2000

Revenues

The following table sets forth certain items from the Company's statements of operations as a percentage of total revenue for the periods indicated.

|                                    |                                 | Nine Months Ended
October 31, |   
|----------------------------------- | ------------------------------- | ----------------------------- | --
|
|Revenue:                            |                                 |                               |   
|                                    | License fees                    |                               | 45
|                                    | Services, maintenance and other |                               | 55
|                                    |                                 |                               |   
|                                    |                                 | Total revenue                 |   
|                                    |                                 |                               |   
|Costs of revenue:                   |                                 |                               |   
|                                    | License fees                    |                               | 3 
|                                    | Services, maintenance and other |                               | 36
|                                    |                                 |                               |   
|                                    |                                 | Total cost of revenue         |   
|                                    |                                 |                               |   
|Gross profit                        |                                 | 61                            |   
|Operating expenses:                 |                                 |                               |   
|                                    | Sales and marketing             |                               | 45
|                                    | Research and development        |                               | 14
|                                    | General and administrative      |                               | 16
|                                    | Impairment of intangibles       |                               |  
|                                    | Depreciation and amortization   |                               | 18
|                                    |                                 |                               |   
|                                    |                                 | Total operating expenses      |   
|                                    |                                 |                               |   
|Loss from operations                |                                 | (32                           | ) 
|Interest and other income (expense) |                                 | 2                             |   
|                                    |                                 |                               |   
|Loss before income taxes            |                                 | (30                           | ) 
|Income taxes                        |                                 | 1                             |   
|                                    |                                 |                               |   
|Net loss                            |                                 | (31                           | %)
|                                    |                                 |                               |   

Revenues

Total revenues decreased 1% to $27.7 million from $27.9 million for the nine months ended October 31, 2001 and 2000, respectively.

License fees

Revenues from licenses decreased 16% to $10.4 million from $12.5 million for the nine months ended October 31, 2001 and 2000,
respectively. While the Company's software license revenue increased during the three months ended October 31, 2001, nine month results for October 31, 2001 suffered as a result of the
following: (i) difficulties in integrating the Muscato acquisition and its products, negatively impacting the sales effort and focus, and thus negatively impacting revenues in the first two
quarters of 2001, coupled with (ii) weaker technology spending as a result of the weak economy.

19

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Services, maintenance and other

Revenues from services, maintenance and other increased 12% to $17.3 million from $15.5 million in the nine months ended October 31, 2001
and 2000, respectively. Services revenue increased $860,000. Despite the decrease in license fee revenue, the overall increase in the Company's number of customers, coupled with on-going
projects from prior quarters, resulted in a slight increase in implementation and other services revenue. Maintenance revenue increased to $7.7 million from $6.6 million in the nine
months ended October 31, 2001 and 2000, respectively. The overall increase in the Company's number of customers, both through new sales and through the acquisition of Muscato in
March 2000, has resulted in increased technical support. Other revenue increased $138,000 primarily the result of a large equipment sale in the nine months ended October 31, 2000 offset
by the addition of processing revenue beginning in April 2000 after the acquisition of Muscato.

Revenue Mix

Revenues from licenses represented 38% and 45% of total revenue for the nine months ended October 31, 2001 and 2000, respectively. The sales mix shift
towards services revenue was due to the decline of the Company's license revenue in the nine months ended October 31, 2001, while the Company's services, maintenance, and other revenue
increased as a result of the increased number of customers and outstanding consulting projects, as well as the addition of consulting and maintenance revenue following the acquisition of Muscato in
March 2000.

Costs of Revenues

Total costs of revenues decreased 6% to $10.2 million from $10.8 million in the nine months ended October 31, 2001 and 2000, respectively.

Licenses

Costs of revenues from licenses consists of costs related to the packaging and distribution of the products, fees paid for incorporation of third-party
software products and fees paid to referral partners. Costs of revenues from licenses decreased 54% to $351,000 from $764,000 for the nine months ended October 31, 2001 and 2000, respectively.
The decrease was primarily due to decreased referral partner fees from $425,000 in the nine months ended October 31, 2000 to $40,000 in the nine months ended October 31, 2001, as fewer
sales were obtained through referral partners.

Services, maintenance and other

Costs of revenues from services, maintenance and other consists of personnel, subcontract and other expenses relating to the cost of providing customer
support, education and professional services. Costs of revenue from services, maintenance and other decreased 2% to $9.8 million from $10.0 million in the nine months ended
October 31, 2001 and 2000, respectively. The decrease was primarily the result of the following: a) a decrease in the number of outsourcers used to assist in implementations, b) a
decrease in the number of internal staff as a result of a reduction in force, and c) an allocation of certain services personnel to assist in the development of a new product, thus moving their
cost to research and development. In the past, Optio has outsourced approximately 65-75% of its consulting services work to certified consulting partners. During the three months ended
October 31, 2001, that percentage decreased to approximately 25-35%. The use of outsourcers typically results in a lower gross margin on services revenue. Costs of revenues from
services, maintenance and other remained relatively constant at 36% in 2000 and 2001. This increase is directly attributable to the significant increase in consulting services personnel obtained with
the acquisition of Muscato.

20

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Operating Expenses

Sales and Marketing

Sales and marketing expenses consist primarily of salaries, commission, bonuses and benefits earned by sales and marketing personnel, direct expenditures such
as travel, communication and occupancy and marketing expenditures related to direct mail, trade shows and other advertising.

Sales
and marketing expenses increased 2% to $12.8 million from $12.5 million for the nine months ended October 31, 2001 and 2000, respectively. Sales and
marketing expenses were 46% and 45% of total revenue for the same periods. The increase was primarily the result of the following: (i) committing additional capital to marketing and advertising
programs to capitalize on the opportunities with the e.comSeries of products in the first quarter of the nine months ended October 31, 2001; (ii) amounts spent on the Company's annual
sales seminar in the three months ended April 30, 2001, resulting in approximately $200,000 in additional expense over the previous year's annual sales seminar; offset by (iii) a
decrease in expenses of approximately $350,000 related to the Company's election not to hold a 2001 users conference and (iv) a decrease of approximately $400,000 of marketing and advertising
costs in the three months ended October 31, 2001 as a result of cost reduction efforts by the Company.

Research and Development

Research and development expenses consists primarily of salaries, benefits and equipment for software developers, quality assurance personnel, and product
managers.

Research
and development expenses increased 12% to $4.5 million from $4.0 million in the nine months ended October 31, 2001 and 2000, respectively, representing
16% and 14% of total revenue for the same periods. The increase was primarily the result of (i) the use of an outside independent consultant to assist with quality assurance testing of the
Company's products, (ii) the allocation of costs from the Company's consulting group as these personnel assisted with research and development projects for one
of the Company's new products, and (iii) the increased costs of a research and development group for the Muscato products.

General and Administrative

General and administrative expenses consist primarily of salaries, benefits and related costs for executive, finance, human resources and information services
personnel. General and administrative expenses also includes legal, accounting and other professional services.

General
and administrative expenses increased 47% to $6.4 million from $4.4 million for the nine months ended October 31, 2001 and 2000, respectively. These
expenses represent 23% and 16% of total revenue for the same periods. The increase in general and administrative expenses as a percentage of revenue is primarily the result of (i) an increase
in the Company's allowance for doubtful accounts receivable of approximately $825,000, (ii) the addition of the expenses of Muscato and TransLink subsequent to their acquisition dates,
(iii) a write-down of the investment in ecIndX of approximately $200,000, (iv) the write-off of a $750,000 note receivable from a shareholder, and
(v) severance charges as a result of the Company's reduction in force.

Impairment of Intangibles

On December 4, 2001, the Company sold its Muscato and TransLink business units. This sale resulted in a $10.9 million impairment of intangibles
during the three months ended October 31, 2001 to reduce the intangibles to fair value.

21

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Depreciation and Amortization

Depreciation and amortization expense increased to $6.6 million from $5.1 million for the nine months ended October 31, 2001 and 2000,
respectively. This increase is due to the additional amortization expense resulting from the purchase of Muscato and TransLink on March 27, 2000.

Interest Income

Interest income decreased to $209,000 from $849,000 in the nine months ended October 31, 2001 and 2000, respectively. The Company invested approximately
$46.0 million just prior to the acquisition of Muscato and TransLink in March 2000. A portion of the purchase price was $28.0 million in cash, thus significantly reducing the
Company's cash balances and resulting interest income.

Interest Expense

Interest expense increased from $335,000 in the nine months ended October 31, 2000 to $486,000 in the nine months ended October 31, 2001
primarily the result of interest incurred on the promissory notes issued in connection with the acquisition of Muscato in March 2000 and new leases the Company entered into during 2001.

Income Tax Expense

The provision for income taxes was $13,000 and $341,000 for the nine months ended October 31, 2000, respectively. The tax expense incurred in the nine
months ended October 31, 2001 and 2000 resulted from taxable income on the Company's foreign operations. During the nine months ended October 31, 2001, the Company incurred a loss for
income tax purposes. A valuation allowance has been recorded related to deferred tax assets based on management's assessment that the likelihood of realizing such assets is not more likely than not.

LIQUIDITY AND CAPITAL RESOURCES

At October 31, 2001 and 2000 the Company had $5.8 million and $12.0 million, respectively, of cash and cash equivalents.

The
following table sets forth certain selected statements of cash flow information for the nine months ended October 31, 2001:

Net cash used in operations

$
(3,434,000
)Net cash used in investing activities


(285,000
)Net cash provided by financing activities


693,000Net decrease in cash and cash equivalents


(2,969,000
)


Cash
used in operations was the result of a $24.0 million loss which was offset by the add-back of non-cash depreciation and amortization expense of
$6.6 million, a non-cash impairment of intangibles of $10.9 million and a noncash increase in allowance for doubtful accounts of $1.1 million. The Company improved
collections on accounts receivable, resulting in a cash inflow of $1.2 million. In addition, the Company received a federal income tax refund of $1.4 million. Finally, the Company
significantly reduced accounts payable primarily through cost savings, resulting in a use of cash of $1.2 million. In investing activities, the Company used $330,000 in the purchase of property
and equipment in the ordinary course of business. The Company's financing activities included the receipt of $558,000 in connection with the exercise of stock options and net borrowings on the
Company's line of credit and payments of notes payable and capital lease obligations of $135,000.

Optio
has promissory notes payable to the former shareholders of Muscato in the amount of $7.8 million, which were due and payable on March 27, 2030. On
December 4, 2001, the Company sold

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the Muscato subsidiary. As part of the consideration for the sale, this $7.8 million note payable was retired.

On
March 29, 2001, the Company entered into a line of credit agreement with Branch Banking and Trust Company for a $5.0 million line of credit. The line of credit, which
matures on March 29, 2002, bears interest at prime rate plus 0.50% and is collateralized by accounts receivable, equipment, general intangibles and other assets as defined in the agreement. The
Company may borrow up to the lesser of $5.0 million or 70% of the Company's eligible receivables, as defined in the agreement. The agreement contains various covenants, including tangible net
worth and earnings before interest, taxes, depreciation and amortization requirements and restrictions on dividends. As of October 31, 2001 Optio was not in compliance with the required
financial ratios and was in default on the line of credit. The Company has obtained a waiver of the violated financial covenants as of October 31, 2001 from the bank. As of October 31,
2001, the Company had $290,000 outstanding on the line of credit.

The
Company intends to finance its future operations and growth through a combination of product revenues, borrowings available under the line of credit and private debt or equity
financing. Based on its current available reserves, the Company believes that during the year ending January 31, 2002, it may have to secure additional funding. There can be no assurance that
the Company will be successful in raising the anticipated additional capital on favorable terms, or at all, and failure to raise such capital could result in a material adverse effect on the Company's
ability to meet its business objectives.

NEW PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations("SFAS 141") and No. 142,Goodwill and Other Intangible Assets("SFAS 142"). SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. SFAS 141 also changes the criteria to recognize
intangible assets apart from goodwill. Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized, but are reviewed annually (or more frequently if impairment
indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. Companies are required to
immediately adopt the amortization provisions of SFAS 142 as it relates to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in their fiscal year beginning after December 15, 2001. The Company anticipates adopting SFAS 142
in accordance with the provisions of the statement. SFAS 142 may not be applied retroactively. Substantially all of the Company's goodwill and intangible assets balance of $11.8 million
as of October 31, 2001, was recorded in March 2000, in conjunction with the acquisition of Muscato and TransLink. The goodwill balance is being amortized over five years. The impact of
the adoption as it relates to goodwill, which exists currently, is to eliminate amortization of goodwill expense beginning with the year ending January 31, 2003. In addition, should the
carrying value of the Company's goodwill exceed the fair value of the Company, an impairment loss would be recognized.

The
Company is currently assessing the value of its goodwill and intangibles in accordance with Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed
Of.The Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts
of those assets. On December 4, 2001, the Company sold its Muscato and TransLink business units, resulting in a $10.9 million impairment of intangible assets during the three months
ended October 31, 2001.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company provides its services to customers primarily in the United States and, to a lesser extent, in Europe and elsewhere throughout the world. As a
result, the Company's financial results could be affected by factors, such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. All sales are currently made in
both U.S. dollars and local currencies. A strengthening of the U.S. dollar or the weakening of these local currencies could make the Company's products less competitive in foreign markets. The
Company's interest income and expense is sensitive to changes in the general level of U.S. interest rates. Based on the Company's cash equivalents balance and the nature of its outstanding debt,
management believes its exposure to interest rate risk is not material. The Company's available for sale marketable securities are carried at fair value and subject to the risks of general market
fluctuations.

PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On November 13, 2001, a putative class action complaint was filed in the United States District Court for the Southern District of New York. The complaint is
styled asKevin Dewey, on behalf of himself and all others similarly situated, vs. Optio Software, Inc., Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Bear, Stearns &
Co., Inc., FleetBoston Robertson Stephens, Inc., Deutsche Bank Securities, Inc., Dain Rauscher Incorporated, U.S. Bancorp Piper Jaffray, Inc., C. Wayne Cape and F. Barron
Hughes, Index Number 01 CV 10051. The defendants include certain of the underwriters in the Company's initial public offering as well as certain current and former officers and
directors of the Company. The complaint was filed by a single plaintiff purportedly on behalf of persons purchasing the Company's common stock between December 14, 1999 and December 6, 2000 and seeks
class action status. The complaint includes allegations of violations of (i) Section 11 of the Securities Act of 1933 by all named defendants, (ii) Section 12(a)(2) of the Securities Act of 1933 by
the underwriter defendants, (iii) Section 15 of the Securities Act of 1933 by the individual defendants, and (iv) Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder by the underwriter defendants. Plaintiff seeks unspecified damages and other relief. The Company intends to defend vigorously against the plaintiff's claims. To date, neither the Company,
Wayne C. Cape nor F. Barron Hughes has been served with the complaint.

The
Company is from time to time involved in routine litigation incidental to the conduct of its business.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

On December 15, 1999, the Company commenced an initial public offering of its Common Stock. The net proceeds from the offering to the Company after
deducting the discounts, commissions, fees and expenses were $47.0 million. Approximately $1.2 million of the proceeds were used for the repayment of our indebtedness to three former
shareholders incurred in connection with the repurchase of their common stock in December 1998. In March 2000, $20 million of the proceeds were used for the acquisition of all of
the capital stock of Muscato and an additional $5 million was used to acquire the assets of TransLink. In August 2000, the Company invested $2.2 million in ecIndX, a supply chain
collaboration vendor, in exchange for a minority interest in the company. In December 2000, Optio issued a note receivable in the amount of $400,000 to a company that was considered a potential
strategic investment. Subsequent to January 31, 2001, this company filed for bankruptcy and the $400,000 was fully reserved as uncollectible. Pending use of the net proceeds, the Company has
invested the funds in money market funds and used them for general corporate purposes, including working capital.

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ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

Our common stock is quoted on the Nasdaq National Market System. In order to remain listed on this market, we must meet Nasdaq's listing maintenance standards.
Nasdaq listing maintenance requirements include a series of financial tests relating to stockholders' equity, public float, number of market makers and shareholders, and maintaining a minimum bid
price of $1.00 per share for shares of our common stock. The minimum bid price of our common stock is currently below $1.00. On April 25, 2001, we received a notice from Nasdaq that our common
stock had failed to maintain a $1.00 minimum bid price for 30 consecutive trading days and we would have a 90 day grace period in which to return to compliance. On July 25, 2001, we
received an additional notice from Nasdaq that, because our common stock had not maintained the $1.00 minimum bid price during the grace period, Nasdaq intended to proceed with the delisting of our
common stock. We filed an appeal of this determination and requested a hearing before a Nasdaq Listing Qualifications Panel. We were granted the appeal and the delisting process was halted until after
the outcome of the hearing was determined. The hearing
was held on September 7, 2001 at which time the Company proposed a plan for returning to compliance with Nadaq's listing maintenance requirements and requested additional time to implement such
plan. Subsequently, on September 27, 2001, Nasdaq issued a moratorium on the minimum bid price and public float requirements for continued listing on Nasdaq. The suspension of these
requirements will be through January 2, 2002.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)
Exhibits

|10.1 |  | Stock Purchase Agreement dated December 4, 2001 by and between Optio Software, Inc. and M2 Systems Corporation
|---- |  | --------------------------------------------------------------------------------------------------------------
|10.2 |  | Asset Purchase Agreement dated December 4, 2001 by and between Optio Software, Inc. and M2 Systems Corporation
|10.3 |  | M2 Systems Corporation $3,250,000 Non-Negotiable Promissory Note                                              
|10.4 |  | M2 Systems Corporation $750,000 Non-Negotiable Promissory Note                                                
|99.1 |  | Safe Harbor Compliance Statements for Forward Looking Statements                                              

(b)
Reports on Form 8-K

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on the 14th day of December, 2001.

| |  | OPTIO SOFTWARE, INC.
| |  | --------------------
| |  | By:                 

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