**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

**FORM 10-Q**
| **(Mark One)** | ** **                                                                                                                                                                               |
|----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **x**          | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                             |
| ** **     | ** **                                                                                                                                                                               |
| ** **     | **For the quarterly period ended April 30, 2007**                                                                                                                                        |
| ** **     | ** **                                                                                                                                                                               |
| **OR**         |
| ** **     | ** **                                                                                                                                                                               |
| **o**          | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                            |
| ** **     | ** **                                                                                                                                                                               |
| ** **     | **For the transition period from                            to** |

 

**CommissionFile Number:  1-15529**

**OPTIOSOFTWARE, INC.**

(Exact name ofregistrant as specified in its charter)

| **Georgia**                                                     |   | **58-1435435**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or 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’stelephone number, including area code: **(770) 576-3500**

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes x  No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated  filer x |
|---------------------------|--------|---------------------|--------|--------------------------|

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theSecurities Exchange Act). Yes  o  No  x

There were22,373,694 shares of the Registrant’s common stock outstanding as of June 11,2007.

 

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**OPTIO SOFTWARE, INC.**

**FORM 10-Q**

# **For the Quarterly Period Ended April 30, 2007**

**TABLE OF CONTENTS**
|            | ** ** | **PART I – FINANCIAL  INFORMATION**                                                    |   |   |
|------------|------------|---------------------------------------------------------------------------------------------|--------|--------|
| ** ** | ** ** | ** **                                                                                  |   |   |
| Item 1.    |       | Financial  Statements                                                                       |   |   |
| Item 2.    |       | Management’s  Discussion and Analysis of Financial Conditionand Results  of Operations |   |   |
| Item 3.    |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |   |
| Item 4.    |       | Controls and  Procedures                                                                    |   |   |
|       |       |                                                                                        |   |   |
| ** ** | ** ** | **PART II – OTHER  INFORMATION**                                                       |   |   |
| ** ** | ** ** | ** **                                                                                  |   |   |
| Item 1.    |       | Legal Proceedings                                                                           |   |   |
| Item  1A.  |       | Risk  Factors                                                                               |   |   |
| Item 2.    |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |   |   |
| Item 3.    |       | Defaults  Upon Senior Securities                                                            |   |   |
| Item 4.    |       | Submission  of Matters to a Vote of Security Holders                                        |   |   |
| Item 5.    |       | Other Information                                                                           |   |   |
| Item  6.   |       | Exhibits                                                                                    |   |   |

 

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# **FORWARD-LOOKING STATEMENTS**

In addition to historical information, this QuarterlyReport on Form 10-Q for the quarter ended April 30, 2007 containsforward-looking statements that involve risks and uncertainties. Suchforward-looking statements are made pursuant to the “safe-harbor” provisions ofthe Private Securities Litigation Reform Act of 1995 and are made based onmanagement’s current expectations or beliefs as well as assumptions made by,and information currently available to, management.  These forward-looking statements include,among other things, statements regarding Optio Software, Inc.’s (“we”, “us”, “our”,the “Company” or “Optio”) anticipated costs and expenses, Optio’s capital needsand financing plans, product and service development, Optio’s growthstrategies, integration of acquired entities, market demand for Optio’sproducts and services, relationships with Optio’s strategic marketingalliances, and competition. These forward-looking statements include, amongothers, those statements including the words “expects,” “anticipates,” “intends,”“believes,” “may,” “plan,” “could,” “should,” “will,” and similar language. Youare cautioned not to place undue reliance on the forward-looking statements inthis document, which speak only as of the date of this Quarterly Report on Form10-Q. Optio undertakes no obligation to publicly release any revisions to theforward-looking statements or reflect events or circumstances after the date ofthis Form 10-Q.  Optio’s actual resultsmay differ significantly from those projected in the forward-lookingstatements. Factors that might cause or contribute to such differences include,but are not limited to, risks associated with Optio’s reliance on strategicmarketing and reseller relationships, collectibility of accounts receivable,fluctuations in operating results, failure to integrate new products and newlyacquired companies, diversion of management resources relating to acquisitions,reduction in cash reserves relating to acquisitions or the share repurchaseprogram, challenges relating to acquisitions and the possibility that this maycause Optio to no longer be profitable, the negative effect on Optio’s earningsrelating to the amortization or potential write-down of acquired assets orgoodwill, failure  to retain the businessrelationships with existing customers from acquisitions, changes incompetition, changes in economic conditions in the U.S. and in other countriesin which Optio currently does business (both general and relative to thetechnology industry), delays or inability to develop new or unique softwareproducts, market acceptance of new products, the failure of new products tooperate as anticipated, expectation of achieving and sustaining operatingprofits and earnings, including timing of such cash flows and companyperformance, disputes regarding Optio’s intellectual property, risks relatingto the delisting of Optio’s stock, possible adverse results of pending orfuture litigation, or risks associated with Optio’s international operations.These and additional factors are set forth in Item 1A of Optio’s Annual Reporton Form 10-K for the fiscal year ended January 31, 2007 (the “2007 AnnualReport”), filed with the Securities and Exchange Commission (“SEC”) on May 1,2007. You should carefully review the risk factors in the 2007 Annual Reportand any additional risks described in other documents that Optio files fromtime to time with the SEC.

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# **PART I – FINANCIAL INFORMATION**

ITEM 1.  FINANCIAL STATEMENTS

**Optio Software, Inc.**

**ConsolidatedCondensed Balance Sheets**
| ** **                                       | ** ** | **January 31,  2007** | ** ** | **April 30,  2007** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                                       | ** ** | ** **                 | ** ** | **(Unaudited)**          | ** ** |
| **ASSETS**                                       | ** ** | ** **                 | ** ** | ** **               | ** ** |
| Current assets:                                  | ** ** | ** **                 | ** ** | ** **               | ** ** |
| Cash and cash equivalents                        |       | $                          | 11,948,000 |                     | $          | 11,205,000 |   |
| Accounts receivable, net                         |       | 3,903,000                  |       | 3,620,000                |       |
| Prepaid expenses and other current assets        |       | 723,000                    |       | 1,004,000                |       |
| Notes receivable from related party              |       | 5,000                      |       | 5,000                    |       |
| Total current  assets                            |       | 16,579,000                 |       | 15,834,000               |       |
| Property and  equipment, net                     |       | 2,714,000                  |       | 2,672,000                |       |
| Other assets:                                    |       |                       |       |                     |       |
| Goodwill                                         |       | 2,302,000                  |       | 2,302,000                |       |
| Other intangible assets, net                     |       | 1,250,000                  |       | 1,172,000                |       |
| Other                                            |       | 92,000                     |       | 89,000                   |       |
| Total assets                                     |       | $                          | 22,937,000 |                     | $          | 22,069,000 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                       |       |                     |       |
| Current  liabilities:                            |       |                       |       |                     |       |
| Accounts payable                                 |       | $                          | 1,088,000  |                     | $          | 1,239,000 |   |
| Accrued expenses                                 |       | 1,755,000                  |       | 1,651,000                |       |
| Current portion of lease incentive liability     |       | 122,000                    |       | 122,000                  |       |
| Current portion of capital lease obligations     |       | 78,000                     |       | 65,000                   |       |
| Deferred revenue                                 |       | 7,439,000                  |       | 7,547,000                |       |
| Total current  liabilities                       |       | 10,482,000                 |       | 10,624,000               |       |
|                                             |       |                       |       |                     |       |
| Long-term  portion of lease incentive liability  |       | 806,000                    |       | 775,000                  |       |
| Long-term  portion of capital lease obligations  |       | 300,000                    |       | 300,000                  |       |
| Long-term  accrued rent payable                  |       | 526,000                    |       | 676,000                  |       |
| Other long-term  liabilities                     |       | 103,000                    |       | 125,000                  |       |
| Total  liabilities                               |       | 12,217,000                 |       | 12,500,000               |       |
| Commitments and  contingencies                   |       |                       |       |                     |       |
| Shareholders’  equity:                      |       |                       |       |                     |       |
| Common stock                                     |       | 53,787,000                 |       | 53,722,000               |       |
| Accumulated deficit                              |       | (43,251,000                | )          | (44,421,000              | )          |
| Accumulated other comprehensive income           |       | 184,000                    |       | 268,000                  |       |
| Total  shareholders’ equity                 |       | 10,720,000                 |       | 9,569,000                |       |
| Total liabilities and  shareholders’ equity |       | $                          | 22,937,000 |                     | $          | 22,069,000 |   |

 

***Seeaccompanying notes.***

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**Optio Software, Inc.**

**Consolidated Condensed Statementsof Operations and Comprehensive Loss**

**(Unaudited)**
| ** **                                                                             | ** ** | **Three Months Ended April 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
| Revenue:                                                                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| License fees                                                                           |       | $                                                    | 1,898,000  |   | $ | 1,283,000 |   |
| Subscription fees                                                                      |       | 555,000                                              |       | 610,000 |   |
| Services, maintenance, and other                                                       |       | 4,409,000                                            |       | 4,374,000 |   |
|                                                                                   |       | 6,862,000                                            |       | 6,267,000 |   |
| Costs of revenue  (exclusive of depreciation and amortization shown separately below): |       |                                                 |       |   |   |
| License fees                                                                           |       | 132,000                                              |       | 102,000 |   |
| Services, maintenance, and other                                                       |       | 1,677,000                                            |       | 1,671,000 |   |
|                                                                                   |       | 1,809,000                                            |       | 1,773,000 |   |
|                                                                                   |       | 5,053,000                                            |       | 4,494,000 |   |
| Operating  expenses:                                                                   |       |                                                 |       |   |   |
| Sales and marketing                                                                    |       | 2,539,000                                            |       | 2,831,000 |   |
| Research and development                                                               |       | 1,322,000                                            |       | 1,429,000 |   |
| General and administrative                                                             |       | 1,142,000                                            |       | 1,223,000 |   |
| Depreciation and amortization                                                          |       | 184,000                                              |       | 263,000 |   |
|                                                                                   |       | 5,187,000                                            |       | 5,746,000 |   |
| Loss from  operations                                                                  |       | (134,000                                             | )          | (1,252,000 | ) |
| Other income  (expense):                                                               |       |                                                 |       |   |   |
| Interest income                                                                        |       | 96,000                                               |       | 116,000 |   |
| Interest expense                                                                       |       | (1,000                                               | )          | (4,000 | ) |
| Other                                                                                  |       | 1,000                                                |       | (1,000 | ) |
|                                                                                   |       | 96,000                                               |       | 111,000 |   |
|                                                                                   |       |                                                 |       |   |   |
| Loss before  income taxes                                                              |       | (38,000                                              | )          | (1,141,000 | ) |
| Income tax  expense                                                                    |       | 16,000                                               |       | 29,000 |   |
| Net loss                                                                               |       | $                                                    | (54,000    | ) | $ | (1,170,000 | ) |
| Net loss per  share – basic and diluted                                           |       | $                                                    | (0.00      | ) | $ | (0.05 | ) |
| Weighted average  common shares outstanding – basic and diluted                   |       | 21,842,663                                           |       | 22,515,695 |   |
| Comprehensive  income (loss):                                                          |       |                                                 |       |   |   |
| Net loss                                                                               |       | $                                                    | (54,000    | ) | $ | (1,170,000 | ) |
| Foreign currency translation adjustment                                                |       | 47,000                                               |       | 84,000 |   |
| Comprehensive  loss                                                                    |       | $                                                    | (7,000     | ) | $ | (1,086,000 | ) |

 

***Seeaccompanying notes.***

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**Optio Software, Inc.**

**Consolidated Condensed Statementof Shareholders’ Equity**

**(Unaudited)**
| ** **                                    | ** ** | ** **            | ** ** | ** **   | ** ** | ** ** | ** ** | ** **      | ** ** | **Accumulated**   | ** ** | ** **             | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|--------------|------------|------------|------------|-----------------|------------|-------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **Common Stock** | ** ** | ** **   | ** ** | **Other**  | ** ** | **Total**       | ** ** |
| ** **                                    | ** ** | **Common**            | ** ** | **Treasury** | ** ** | ** ** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Shareholder’s** | ** ** |
| ** **                                    | ** ** | **Shares**            | ** ** | **Shares**   | ** ** | **Amount** | ** ** | **Deficit**     | ** ** | **Income**        | ** ** | **Equity**             | ** ** |
|                                          |       |                  |       |         |       |       |       |            |       |              |       |                   |       |
| Balance at  February 1, 2007                  |       | 22,461,514            |       | 40,000       |       | $          | 53,787,000 |            | $          | (43,251,000       | )          | $                      | 184,000    |   | $ | 10,720,000 |   |
| Comprehensive loss, net of tax:               |       |                  |       |         |       |       |       |            |       |              |       |                   |       |
| Net loss                                      |       | —                |       | —       |       | —     |       | (1,170,000      | )          | —            |       | (1,170,000             | )          |
| Foreign currency translation adjustment       |       | —                |       | —       |       | —     |       | —          |       | 84,000            |       | 84,000                 |       |
| Comprehensive loss                            |       |                  |       |         |       |       |       |            |       |              |       | (1,086,000             | )          |
| Treasury shares acquired                      |       | (92,500               | )          | 92,500       |       | (139,000   | )          |            |       |              |       | (139,000               | )          |
| Exercise of stock options                     |       | 61,500                |       |         |       | 8,000      |       | —          |       | —            |       | 8,000                  |       |
| Compensation expense related to stock options |       | —                |       | —       |       | 66,000     |       | —          |       | —            |       | 66,000                 |       |
| Balance at April 30,  2007                    |       | 22,430,514            |       | 132,500      |       | $          | 53,722,000 |            | $          | (44,421,000       | )          | $                      | 268,000    |   | $ | 9,569,000 |   |

 

***See accompanying notes****.*

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**Optio Software, Inc.**

**Consolidated Condensed Statementsof Cash Flows**

**(Unaudited)**
| ** **                                                                                 | ** ** | **Three Months Ended April 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                                     |       |                                                 |       |   |   |
| Net loss                                                                                   |       | $                                                    | (54,000    | ) | $ | (1,170,000 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                                                 |       |   |   |
| Depreciation                                                                               |       | 87,000                                               |       | 185,000 |   |
| Amortization of intangibles                                                                |       | 97,000                                               |       | 78,000 |   |
| Non-cash stock compensation                                                                |       | 81,000                                               |       | 66,000 |   |
| Loss on disposal of assets                                                                 |       | 2,000                                                |       | 10,000 |   |
| Provision for doubtful accounts                                                            |       | —                                               |       | (67,000 | ) |
| Deferred income taxes                                                                      |       | 10,000                                               |       | 10,000 |   |
| Changes in operating assets and liabilities:                                               |       |                                                 |       |   |   |
| Accounts receivable                                                                        |       | 1,026,000                                            |       | 438,000 |   |
| Prepaid expenses and other assets                                                          |       | (264,000                                             | )          | (262,000 | ) |
| Accounts payable                                                                           |       | (9,000                                               | )          | 127,000 |   |
| Accrued expenses                                                                           |       | (692,000                                             | )          | 3,000 |   |
| Income taxes payable                                                                       |       | (46,000                                              | )          | (14,000 | ) |
| Deferred revenue                                                                           |       | (53,000                                              | )          | 26,000 |   |
| Net cash  provided by (used in) operating activities                                       |       | 185,000                                              |       | (570,000 | ) |
|                                                                                       |       |                                                 |       |   |   |
| Cash flows from  investing activities:                                                     |       |                                                 |       |   |   |
| Purchases of property and equipment                                                        |       | (171,000                                             | )          | (139,000 | ) |
| Repayment of note receivable from M2 Systems                                               |       | 76,000                                               |       | — |   |
| Net cash used in  investing activities                                                     |       | (95,000                                              | )          | (139,000 | ) |
|                                                                                       |       |                                                 |       |   |   |
| Cash flows from  financing activities:                                                     |       |                                                 |       |   |   |
| Payments of notes payable and capital lease  obligations                                   |       | (1,000                                               | )          | (13,000 | ) |
| Proceeds from exercise of stock options                                                    |       | 186,000                                              |       | 8,000 |   |
| Purchases of treasury stock                                                                |       | —                                               |       | (139,000 | ) |
| Net cash  provided by (used in) financing activities                                       |       | 185,000                                              |       | (144,000 | ) |
|                                                                                       |       |                                                 |       |   |   |
| Impact of  foreign currency rate fluctuations on cash                                      |       | 68,000                                               |       | 110,000 |   |
| Net increase  (decrease) in cash and cash equivalents                                      |       | 343,000                                              |       | (743,000 | ) |
|                                                                                       |       |                                                 |       |   |   |
| Cash and cash  equivalents at beginning of period                                          |       | 7,954,000                                            |       | 11,948,000 |   |
| Cash and cash  equivalents at end of period                                                |       | $                                                    | 8,297,000  |   | $ | 11,205,000 |   |
|                                                                                       | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Supplemental  disclosures of cash flow information:                                        | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Cash paid during the period for:                                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Interest paid                                                                              |       | $                                                    | —     |   | $ | 3,000 |   |
| Income taxes  paid                                                                         |       | $                                                    | 6,000      |   | $ | 8,000 |   |

 

***Seeaccompanying notes.***

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**Optio Software, Inc.**

**Notes to the ConsolidatedCondensed Financial Statements**

**(Unaudited)**

**1.Description of Business**

OptioSoftware, Inc. (“we,” “us,” “our,” the “Company” or “Optio”), provides documentautomation and electronic health record solutions that enable organizations toachieve speed, accuracy, functionality and quality in their inbound andoutbound documents. The Company’s infrastructure software and services enhancethe form, content, distribution and availability of business critical information.The Company markets primarily to companies located principally in the UnitedStates and Europe.  The industry in whichthe Company operates is subject to rapid change due to development of newtechnologies and products.

**2. Basisof Presentation**

***InterimFinancial Information***

The accompanying interim consolidated condensedfinancial statements of the Company have been prepared in accordance with theinstructions for Quarterly Reports on Form 10-Q. Accordingly, certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted. In the opinion ofmanagement, all adjustments, consisting of normal recurring adjustments unlessotherwise disclosed in a separate note, considered necessary for a fairpresentation of the financial information for the interim period reported havebeen made.

The accompanying financial statements should be readin conjunction with the Company’s audited consolidated financial statements forthe year ended January 31, 2007, included in the Company’s Annual Report onForm 10-K for the year ended January 31, 2007 (the “2007 Annual Report”), filedwith the Securities and Exchange Commission on May 1, 2007. Results ofoperations for the three months ended April 30, 2007 are not necessarilyindicative of the results for the year ending January 31, 2008.

***Share-Based Compensation Plans***

InDecember 2004, the Financial Accounting Standards Board (FASB) issued SFAS No.123R, *Share-Based Payment*, whichrequires measurement of the cost of share-based payments to employees,including grants of employee stock options, to be recognized in the financialstatements based on their fair values beginning with the first interim orannual period after June 15, 2005. Effective February 1, 2006, the Company hasadopted SFAS No. 123R using the modified prospective method. Under this method,compensation cost recognized for periods subsequent to February 1, 2006 includes:(a) compensation cost for all share-based payments granted prior to, but notyet vested as of February 1, 2006, based on the grant date fair value estimatedin accordance with the original provisions of SFAS No. 123 amortized over theemployees’ service period (typically the options’ vesting period) and (b)compensation cost for all share-based payments granted subsequent to February1, 2006, based on the grant-date fair value estimated in accordance with theprovisions of SFAS No. 123R amortized ratably over the options’ vesting period.

Thefair value of the options used for the application of SFAS No. 123R disclosuresis estimated at the date of grant using the Black - Scholes option pricingmodel. In determining the fair value of options using the Black-Scholes optionpricing model, various assumptions such as expected life, volatility, risk-freeinterest rate, dividend yield and forfeiture rates are used.  The expected life of awards grantedrepresents the period of

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time that they areexpected to be outstanding. The Company determines the expected life using the “simplifiedmethod” in accordance with Staff Accounting Bulletin No. 107. Using theBlack-Scholes option valuation model, the Company estimates the volatility ofour common stock at the date of grant based on the historical volatility of ourcommon stock. Optio bases the risk-free interest rate used in the Black-Scholesoption valuation model on the implied yield currently available on U.S.Treasury zero-coupon issues with an equivalent remaining term equal to theexpected life of the award. Optio has not paid any cash dividends on our commonstock in the last ten years and we do not anticipate paying any cash dividendsin the foreseeable future. Consequently, the Company used an expected dividendyield of zero in the Black-Scholes option valuation model. Finally, the Companyuses historical data to estimate pre-vesting option forfeitures. Stock-basedcompensation is recorded for only those awards that are expected to vest. Thefollowing weighted-average assumptions were used for the three months endedApril 30, 2006 and 2007, respectively: risk-free interest rate of 4.7% and4.59%; no dividend yield; volatility of 133% and 116%; a forfeiture rate of20.99% and 23.2%; and an expected life of the options of 5.23 and 5.2 years.

Asummary of stock option activity for the three months ended April 30, 2007 isas follows:
| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life (in  Years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------|------------|
|                                     |       |                       |       |                                   |       |                                                            |       |                                |       |
| Outstanding  options at February 1, 2007 |       | 6,526,377                  |       | $                                      | 1.01       |                                                            |       |                                |       |   |
| Options granted                          |       | 45,000                     |       | $                                      | 1.39       |                                                            |       |                                |       |   |
| Options exercised                        |       | (61,500                    | )          | $                                      | 0.13       |                                                            |       |                                |       |   |
| Options canceled/forfeited               |       | (49,287                    | )          | $                                      | 6.80       |                                                            |       |                                |       |   |
| Outstanding  options at April 30, 2007   |       | 6,460,590                  |       | $                                      | 0.97       |                                                            | 6.79       |                                | $          | 3,322,089 |   |
| Exercisable options at  April 30, 2007   |       | 5,129,947                  |       | $                                      | 0.90       |                                                            | 6.37       |                                | $          | 3,187,576 |   |

 

Otherinformation pertaining to option activity during the three months ended April30, 2007 and 2006 was as follows:
|                                                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                             |       |     |       |     |       |
| Weighted average  grant date fair value of stock options granted |       | $        | 1.16       |     | $          | 1.18 |   |
| Total fair value  of stock options vested                        |       | $        | 32,807     |     | $          | 95,736 |   |
| Total intrinsic value  of stock options exercised                |       | $        | 100,163    |     | $          | 454,494 |   |

 

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The following tablesummarizes information concerning options outstanding and exercisable as ofApril 30, 2007:
|                             | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                        | ** ** |
|-----------------------------|------------|------------------------------|------------|-----------------------------------------------------|------------|
| **Exercise Prices**    | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                        |       |                         |       |                                                |       |   |   |   |   |   |   |
| $  0.002  - $0.10 |       | 1,164,900                    |       | N/A                                                 |       | $ | 0.036 |   | 1,164,900 |   | $ | 0.04 |   |
| $  0.10  - $0.78  |       | 458,040                      |       | 5.73                                                |       | $ | 0.64 |   | 382,640 |   | $ | 0.62 |   |
| $  0.80  - $0.80  |       | 2,535,555                    |       | 0.78                                                |       | $ | 0.80 |   | 2,535,555 |   | $ | 0.80 |   |
| $  0.88  - $1.09  |       | 49,180                       |       | 7.96                                                |       | $ | 0.99 |   | 37,221 |   | $ | 0.98 |   |
| $  1.10  - $1.10  |       | 715,500                      |       | 7.36                                                |       | $ | 1.10 |   | 380,252 |   | $ | 1.10 |   |
| $  1.12  - $1.31  |       | 663,752                      |       | 8.61                                                |       | $ | 1.29 |   | 221,563 |   | $ | 1.28 |   |
| $  1.32  - $1.50  |       | 692,280                      |       | 7.77                                                |       | $ | 1.46 |   | 231,433 |   | $ | 1.45 |   |
| $  1.61  - $10.00 |       | 152,497                      |       | 4.61                                                |       | $ | 5.01 |   | 147,497 |   | $ | 5.13 |   |
| $12.50 - $12.50             |       | 1,300                        |       | 2.93                                                |       | $ | 12.50 |   | 1,300 |   | $ | 12.50 |   |
| $16.00 - $16.00             |       | 27,586                       |       | 2.76                                                |       | $ | 16.00 |   | 27,586 |   | $ | 16.00 |   |
|                        |       | 6,460,590                    |       | 6.79                                                |       | $ | 0.97 |   | 5,129,947 |   | $ | 0.90 |   |

 

***Goodwill and Other IntangibleAssets***

TheCompany acquired goodwill and other intangible assets in connection with theacquisition of VertiSoft Corporation (“VertiSoft”) in August 2004. Under thepurchase method of accounting pursuant to Statement of Financial AccountingStandards (“SFAS”) No. 141, *BusinessCombinations*, the total purchase price was allocated to the acquiredentity’s net tangible and intangible assets based on their estimated fairvalues as of the date of the acquisition. The excess of the purchase price overthe fair value of the net tangible assets/liabilities and identifiableintangible assets acquired was recorded as goodwill. In accordance with SFAS142, *Goodwill and Other Intangibles,*goodwilland intangible assets with indefinite lives resulting from businesscombinations have not been amortized but instead will be tested for impairmentat least annually (more frequently if certain indicators are present) whileidentifiable intangible assets with finite lives are being amortized over theirestimated useful lives. In the event that the Company’s management determinesthat the value of goodwill or intangible assets has become impaired, theCompany will incur an accounting charge for the amount of impairment during thefiscal quarter in which the determination is made. The Company has selectedAugust 1 as its annual impairment testing date for its goodwill. The Companyperformed an analysis comparing the fair value of the reporting units with thecarrying value of such reporting units, including goodwill, and determined thatno impairment of its goodwill existed.

Asof April 30, 2007, the gross carrying amount and the accumulated amortizationby major intangible asset class is as follows:
| **Intangible Asset** | ** ** | **Estimated  Useful Life** | ** ** | **Gross Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Value** | ** ** |
|---------------------------|------------|---------------------------------|------------|--------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| Customer  relationships   |       | 11.5  years                     |       | $                              | 1,260,000  |                          | $          | 451,000                      |       | $ | 809,000 |   |
| Technology                |       | 3  months – 5 years        |       | 893,000                        |       | 568,000                       |       | 325,000                      |       |
| Non-compete agreement     |       | 5 years                         |       | 85,000                         |       | 47,000                        |       | 38,000                       |       |
|                           |            |                                 |            |                                |            |                               |            |                              |            |  |  |  |

 

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***Non-CashTransactions***

During the second quarter of the prior fiscal year, Optio renegotiatedthe lease for its headquarter facilities. As part of the new lease agreement,the landlord contributed $1.0 million towards the improvements of the space.This $1.0 million in leasehold improvements was reflected as a fixed asset withan offsetting lease incentive liability of $1.0 million, which will reducefuture rent expense, and was recorded as a liability on Optio’s condensedconsolidated balance sheet.  Theliability has been amortized to a current balance of $897,000 as of April 30,2007.

***New Accounting Pronouncements***

In June 2006, the Financial Accounting StandardsBoard (“FASB”) issued FASB Interpretation No. 48, “Accounting forUncertainty in Income Taxes,” (“FIN 48”). FIN 48 clarifies accounting foruncertainty in income taxes recognized in a company’s financial statements inaccordance with FASB Statement No. 109, “Accounting for Income Taxes” byprescribing a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return that results in a tax benefit. FIN 48 is effective forfiscal years beginning after December 15, 2006 and must be applied to allopen tax positions upon initial adoption. Additionally, FIN No. 48provides guidance on de-recognition, income statement classification ofinterest and penalties, accounting in interim periods, disclosure, andtransition. This interpretation is effective for fiscal years beginning afterDecember 15, 2006. The cumulative effect of applying the provisions of FIN48 is required to be reported as an adjustment to tax liabilities and to theopening balance of retained earnings in the year adopted.

In February 2007, the FASB issued FASB No.159 “The Fair Value Option for Financial Assets and Financial Liabilities –including an amendment of FASB Statement No. 115”.  This Statement permits entities to choose tomeasure many financial instruments and certain other items at fair value. Theobjective is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. This Statement is expected to expand the use offair value measurement, which is consistent with the Board’s long-termmeasurement objectives for accounting for financial instruments.  This Statement is effective as of thebeginning of an entity’s first fiscal year that begins after November 15, 2007.Early adoption is permitted as of the beginning of a fiscal year that begins onor before November 15, 2007, provided the entity also elects to apply theprovisions of FASB Statement No. 157, *FairValue Measurements. *The Companydid not elect early adoption. The Company does not expect FASB 159 to have amaterial impact on the Company’s results of operations or financial position.

**3. Net Loss per Share**

Netloss per share has been computed in accordance with SFAS 128, *Earnings per Share*, which requiresdisclosure of basic and diluted earnings per share. Basic earnings per shareexcludes any dilutive effects of stock options. Diluted earnings per shareincludes the impact of potentially dilutive securities.

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Thefollowing table sets forth the computation of net income per share:
| ** **                                                                                     | ** ** | **Three months ended April 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2006**                                             | ** ** | **2007** | ** ** |
|                                                                                           |       |                                                 |       |   |   |
| Net loss                                                                                       |       | $                                                    | (54,000    | ) | $ | (1,170,000 | ) |
| Weighted average  shares outstanding – basic                                              |       | 21,842,663                                           |       | 22,515,695 |   |
| Dilutive  securities                                                                           |       | —                                               |       | — |   |
| Weighted average  shares outstanding – diluted                                            |       | 21,842,663                                           |       | 22,515,695 |   |
| Net loss per  share – basic and diluted                                                   |       | $                                                    | 0.00       |   | $ | (0.05 | ) |
| Potentially dilutive  stock options, excluded from diluted weighted average shares outstanding |       | 4,619,334                                            |       | 5,075,362 |   |

 

**4. Segment and Geographic Information**

The Company’sbusiness is organized around geographic areas. Optio’s U.S. operations andEuropean operations represent Optio’s two reportable segments. The foreignlocations principally function as distributors of products developed by theCompany in the United States. The accounting policies described in the summaryof significant accounting policies are applied consistently across thesegments. Intersegment sales are based on intercompany transfer prices toachieve a reasonable margin upon distribution. Revenues are attributable toeach segment based on the location of the subsidiary originating the sale,which is typically the geographic location where the software is installed.

Segment information forthe three months ended April 30, 2007 and 2006 is summarized below.
| Three Months ended  April 30, 2006 | ** ** | **United  States** | ** ** | **Europe** | ** ** | **Combined** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|------------------|------------|------------------|------------|
| Revenue from  external customers:                      |       |               |       |       |       |         |       |             |       |             |       |
| License fees                                           |       | $                  | 1,477,000  |       | $          | 421,000      |       | $                | 1,898,000  |             | $          | — |   | $ | 1,898,000 |   |
| Subscription revenue                                   |       | 545,000            |       | 10,000     |       | 555,000      |       | —           |       | 555,000          |       |
| Services, maintenance and other                        |       | 3,739,000          |       | 670,000    |       | 4,409,000    |       | —           |       | 4,409,000        |       |
| Inter-segment revenue                                  |       | 97,000             |       | 32,000     |       | 129,000      |       | (129,000         | )          | —           |       |
| Total revenue                                          |       | 5,858,000          |       | 1,133,000  |       | 6,991,000    |       | (129,000         | )          | 6,862,000        |       |
| Interest income                                        |       | 96,000             |       | —     |       | 96,000       |       | —           |       | 96,000           |       |
| Interest expense                                       |       | 1,000              |       | —     |       | 1,000        |       | —           |       | 1,000            |       |
| Depreciation and  amortization                         |       | 178,000            |       | 6,000      |       | 184,000      |       | —           |       | 184,000          |       |
| Income tax  expense                                    |       | 16,000             |       | —     |       | 16,000       |       | —           |       | 16,000           |       |
| Segment income  (loss) before income taxes             |       | 75,000             |       | (113,000   | )          | (38,000      | )          | —           |       | (38,000          | )          |
| Segment net  income (loss)                             |       | 59,000             |       | (113,000   | )          | (54,000      | )          | —           |       | (54,000          | )          |
| Total segment  assets                                  |       | 19,361,000         |       | 3,808,000  |       | 23,169,000   |       | (3,520,000       | )          | 19,649,000       |       |
| Expenditures for  long-lived assets                    |       | 169,000            |       | 2,000      |       | 171,000      |       | —           |       | 171,000          |       |
|                                                        |            |                    |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

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| Three Months ended  April 30, 2007 | ** ** | **United  States** | ** ** | **Europe** | ** ** | **Combined** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|------------------|------------|------------------|------------|
| Revenue from  external customers:                      |       |               |       |       |       |         |       |             |       |             |       |
| License fees                                           |       | $                  | 833,000    |       | $          | 450,000      |       | $                | 1,283,000  |             | $          | — |   | $ | 1,283,000 |   |
| Subscription revenue                                   |       | 599,000            |       | 11,000     |       | 610,000      |       | —           |       | 610,000          |       |
| Services, maintenance and other                        |       | 3,567,000          |       | 807,000    |       | 4,374,000    |       | —           |       | 4,374,000        |       |
| Inter-segment revenue                                  |       | 113,000            |       | 89,000     |       | 202,000      |       | (202,000         | )          | —           |       |
| Total revenue                                          |       | 5,112,000          |       | 1,357,000  |       | 6,469,000    |       | (202,000         | )          | 6,267,000        |       |
| Interest income                                        |       | 116,000            |       | —     |       | 116,000      |       | —           |       | 116,000          |       |
| Interest expense                                       |       | 4,000              |       | —     |       | 4,000        |       | —           |       | 4,000            |       |
| Depreciation and  amortization                         |       | 248,000            |       | 15,000     |       | 263,000      |       | —           |       | 263,000          |       |
| Income tax  expense                                    |       | 29,000             |       | —     |       | 29,000       |       | —           |       | 29,000           |       |
| Segment loss  before income taxes                      |       | (1,084,000         | )          | (57,000    | )          | (1,141,000   | )          | —           |       | (1,141,000       | )          |
| Segment net loss                                       |       | (1,113,000         | )          | (57,000    | )          | (1,170,000   | )          | —           |       | (1,170,000       | )          |
|                                                   |       |               |       |       |       |         |       |             |       |             |       |
| Total segment  assets                                  |       | 21,183,000         |       | 4,817,000  |       | 26,000,000   |       | (3,931,000       | )          | 22,069,000       |       |
| Expenditures for  long-lived assets                    |       | 136,000            |       | 3,000      |       | 139,000      |       | —           |       | 139,000          |       |
|                                                        |            |                    |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

**5.Note Receivable**

As furtherexplained in Note 3 of the Notes to Consolidated Financial Statements includedin Optio’s 2007 Annual Report, Optio held a note receivable from M2 SystemsCorporation (“M2 Systems”) as partial consideration for the sale by Optio ofits Muscato Corporation (“Muscato”) and Translink Solutions Corporationbusiness units.

On November 6,2006, Optio received approximately $2,758,000 in cash, representing fullrepayment of the M2 Systems note receivable, plus accrued interest.  Such repayment represented an earlyretirement of the note, originally due December 1, 2007.  In connection with such repayment, Optioreleased its lien on the assets of M2 systems, its subsidiaries and relatedentities and the parties executed mutual releases.

**6.Share Repurchase Program**

On January 5,2007, Optio announced a share repurchase plan under which we could repurchaseup to $2.0 million of our common stock over a twelve month period.  During the quarter ended April 30, 2007, wepurchased a total of 92,500 shares at an average purchase price of $1.48 pershare, or approximately $139,000 in the aggregate including broker fees.  The repurchased shares were held and notcancelled.  As of April 30, 2007, thedollar value of shares that remained available for repurchase under thisprogram was approximately $1,803,000. The repurchases for the quarter ended April 30, 2007 are reflected inthe following table:

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| **Period**                     | ** ** | **Total  Number of  Shares  Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Shares  Purchased As  Part of Publicly  Announced Plan** | ** ** | **Approximate Dollar  Value of Shares That  May Yet Be  Repurchased Under The  Program** | ** ** |
|--------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| 2/1/2007 –  4/30/2007 (1) |       | 92,500                                       |       | $                                                | 1.48       |                                                                                      | 132,500    |                                                                                                                             | $          | 1,803,000 |   |
|                                |            |                                              |            |                                                  |            |                                                                                           |            |                                                                                                                                  |            |  |  |

 

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(1)  Last repurchase date was April 30, 2007.

**7.Income Taxes**

The Companyadopted the provisions of FIN 48 on February 1, 2007. After application ofthe provisions of FIN 48, it was not necessary for the Company to recognize anyliability for unrecognized tax benefits or adjustment to the balance ofretained earnings as of February 1, 2007. The Company’s policy is toclassify interest and penalties related to unrecognized tax benefits in incometax expense. As of February 1, 2007, the Company had no accrued interestand penalties related to unrecognized tax benefits. As of February 1,2007, after the implementation of FIN 48, the Company’s unrecognized tax benefitswere $0. The amount, if recognized, that would affect the effective tax rate is$0.

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

**OVERVIEW**

Optio is engagedprimarily in the development, sale and support of infrastructure software thatenhances the form, content, distribution and availability of businessinformation. Optio’s primary business consists of providing software andservices that address organizations’ needs for customized information deliveredvia print, fax and e-mail to users of enterprise and healthcareapplications.

Optiomarkets and sells its software and services throughout the United States,Europe and the Asia Pacific region, through its direct sales force andcertified resellers. Optio has offices in the United States, France, the UnitedKingdom and Germany. Optio also offers consulting services, which providecustomers with implementation assistance and training. No single customeraccounted for 10% or more of Optio’s revenue for the three months ended April30, 2007 or 2006.

**CriticalAccounting Policies and Use of Estimates**

Optio has identified significant accountingpolicies and estimates that are critical to the understanding of its financialstatements.

*Revenue Recognition*

*Overview*

TheCompany’s revenue consists of perpetual fees derived from the Company’ssoftware products, maintenance, consulting services, customer training andsubscription fees received from the licensing of the Company’s softwareproducts and maintenance. The Company generally charges fees for licenses ofits

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software productseither based on the number of Central Processing Units (“CPUs”) on which theproduct is installed or, to a lesser extent, based on the number of persons orhospital beds registered to use the product. The Company’s revenue recognitionpolicies are in accordance with Statement of Position (“SOP”) No. 97-2, *Software Revenue Recognition*, as amendedby SOP No. 98-9, *Software RevenueRecognition With Respect to Certain Transactions* and the Securitiesand Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101, *Revenue Recognition in Financial Statements,*as amended by SAB 104, *Revenue Recognition*.

*LicenseFees*

TheCompany licenses its products through its direct sales force and indirectly throughresellers. In general, software license revenues are recognized when anon-cancelable license agreement has been signed and the customer acknowledgesan unconditional obligation to pay, the software product has been delivered,there are no significant uncertainties surrounding product acceptance, the feesare fixed or determinable, collection is considered probable, the remainingelements such as future services are not considered essential to thefunctionality of the software and the Company has a legally enforceable claimnot subject to refund or forfeiture if future services are not rendered.Delivery is considered to have occurred when title and risk of loss have beentransferred to the customer, which generally occurs when media containing the licensedprograms is provided to a common carrier. In case of electronic delivery,delivery occurs when the customer is given access to the licensed programs. Ifcollectibility is not considered probable, revenue is recognized when the feeis collected. The Company enters into reseller arrangements that typicallyprovide for sublicense fees payable based upon a percentage of list price. TheCompany does not grant its resellers the right of return.

TheCompany recognizes revenue using the residual method pursuant to therequirements of SOP No. 97-2, as amended by SOP No. 98-9.Revenues recognized from multiple-element software arrangements are allocatedto each element of the arrangement based on the fair values of the elements,such as licenses for software products, maintenance, consulting services orcustomer training. The determination of fair value is based on objectiveevidence, which is specific to the Company and can differ from amountscontained in the customer arrangement. The Company limits its assessment ofobjective evidence for each element to either the price charged when the sameelement is sold separately or the price established by management having therelevant authority to do so, for an element not yet sold separately. Ifevidence of fair value of all undelivered elements exists but evidence does notexist for one or more delivered elements, then revenue is recognized using theresidual method. Under the residual method, the fair value of the undeliveredelements is deferred and the remaining portion of the arrangement fee isallocated to the delivered elements and recognized as revenue when theaforementioned criteria is met.

TheCompany records deferred revenue for software license agreements when cash hasbeen received from the customer and the agreement does not qualify for revenuerecognition under the Company’s revenue recognition policy. The Company recordsaccounts receivable for software license agreements when the agreementqualifies for revenue recognition but cash or other consideration has not beenreceived from the customer.

*SubscriptionRevenue*

TheCompany**also licenses certain of its productsin the form of a subscription service contract, with terms typically rangingfrom three to five years.  Subscriptionrevenue, which includes a license of the software product, technical supportand future unspecified enhancements to the software product, is recognized on adaily basis over the term of the agreement. Unlike license fee revenue,subscription service agreements include licenses that are not perpetual induration.

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*Services,Maintenance and Other Revenue*

Consulting servicesrevenue and customer training revenue are recognized as such services areperformed because they are incidental to the functionality of the Company’ssoftware.  Maintenance revenues, whichinclude revenues bundled with software license agreements that entitle thecustomers to technical support and future unspecified enhancements to theCompany’s products, are deferred and recognized ratably over the related termof the maintenance agreement, which is generally twelve months. In accordancewith Emerging Issues Task Force release 01-14, *IncomeStatement Characterization of Reimbursements Received for Out of PocketExpenses Incurred*, the Company recognizes reimbursable expenses asrevenue and as an expense in cost of revenue in all periods presented.

*AccountsReceivable*

Optio maintains allowances fordoubtful accounts for estimated losses resulting from customers’ inability tomake payments required under their contracts. The amount of Optio’s reserve is based on historical experience and Optio’s specific review and analysis of thereceivables outstanding. Management reviews its accounts receivable on aregular basis to determine if any such amounts may be potentially uncollectible.The Company includes any balances that are determined to be uncollectible,along with a general reserve at varying percentages of 2% for domestic and 3%for international balances less than 30 days old, respectively, to 50% forinternational accounts more than 90 days old, in its overall allowance fordoubtful accounts. Based on management’s best estimate, it believes the Company’sallowance for doubtful accounts is adequate as presented; however, the amountof the reserve could be different under different conditions or using varyingassumptions. If the percentage of the general reserve were to increase by 1%,an additional $37,000 reserve would be required. If the financial condition of Optio’s customers were to deteriorate, resulting intheir inability to make payments, additional reserves would be required,increasing Optio’s bad debt expenseincluded in general and administrative expenses.

*ImpairmentAssessments*

Optio follows Statement of Financial AccountingStandards (“SFAS”) No. 142, *Goodwill andOther Intangible Assets*. This standard requires that goodwill nolonger be amortized and instead be tested for impairment on a periodic basis.

Pursuant to SFAS 142, Optio isrequired to test goodwill for impairment upon adoption and annually or moreoften if events or changes in circumstances indicate that the asset might beimpaired. SFAS 142 provides for a two-stage approach to determining whether andby how much goodwill has been impaired. The first stage requires a comparisonof the fair value of the reporting unit, in our case, the former VertiSoftbusiness, to its net book value. If the fair value is greater than book value,no impairment is deemed to have occurred. If the fair value is less than bookvalue, then the second stage must be completed to determine the amount, if any,of actual impairment. Optio has selected August 1 as its annual impairmenttesting date for its goodwill. The Company performed an analysis as of August 1,2006, comparing the fair value of the reporting units with the carrying valueof such reporting units, including goodwill, and determined that no impairmentof its goodwill existed. While noimpairment charge was determined to be necessary in the current year, theCompany’s future assessments could lead management to determine that thegoodwill is completely or partially impaired, which would require the Companyto record an impairment charge of up to $2.3 million.

The process of evaluating the potentialimpairment of goodwill is highly subjective and requires significant judgmentdecisions. In estimating our fair value, we will make estimates and judgmentsabout future revenues and cash flows. Our forecasts will be based uponassumptions that are consistent with the plans and

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estimates we are using to manageour business. Changes in these estimates could change our conclusion regardingimpairment of goodwill and potentially result in a non-cash goodwill impairmentcharge for all or a portion of the goodwill balance. For long-lived assets,accounting standards dictate that assets become impaired when the undiscountedfuture cash flows expected to be generated by them are less than their carryingamounts. In such cases, the affected assets are written down to their estimatedfair value.

*Foreign Currencies*

The financial position and results of operations ofthe Company’s foreign subsidiaries are generally measured using localcurrencies as the functional currencies, including the British pound and theEuro. Assets and liabilities of these subsidiaries are translated into U.S.dollars at the exchange rate in effect at each reporting period. Income andexpense items are translated at average exchange rates for the period. Theresulting translation adjustments are recorded in the foreign currencytranslation adjustment account. Optio and its subsidiaries conduct theirbusiness locally, thus the effects of changes in foreign currency exchangerates have had a minimal effect on the Company’s results of operations to date.

**RESULTSOF OPERATIONS**

***ThreeMonths Ended April 30, 2007 Compared to Three Months Ended April 30, 2006***

**Revenues**

The followingtable sets forth certain items from Optio’s condensed consolidated statementsof operations as a percentage of total revenue for the periods indicated.

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| ** **                                                                   | ** ** | **Three Months  Ended April 30,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                         | ** ** | **2007** | ** ** |
| Revenue:                                                                     |       |                                             |       |   |   |
| License fees                                                                 |       | 28                                               | %          | 20 | % |
| Subscription  fees                                                           |       | 8                                                |       | 10 |   |
| Services,  maintenance and other                                             |       | 64                                               |       | 70 |   |
| Total revenue                                                                |       | 100                                              |       | 100 |   |
| Costs of revenue  (excluding depreciation and amortization, included below): |       |                                             |       |   |   |
| License fees                                                                 |       | 2                                                |       | 2 |   |
| Services,  maintenance and other                                             |       | 24                                               |       | 26 |   |
| Total cost of  revenue                                                       |       | 26                                               |       | 28 |   |
|                                                                         |       | 74                                               |       | 72 |   |
| Operating expenses:                                                          |       |                                             |       |   |   |
| Sales and  marketing                                                         |       | 37                                               |       | 45 |   |
| Research and  development                                                    |       | 19                                               |       | 23 |   |
| General and  administrative                                                  |       | 17                                               |       | 20 |   |
| Depreciation and  amortization                                               |       | 3                                                |       | 4 |   |
| Total operating  expenses                                                    |       | 76                                               |       | 92 |   |
| Loss from operations                                                         |       | (2                                               | )          | (20 | ) |
| Interest and other  income                                                   |       | 1                                                |       | 1 |   |
| Net loss                                                                     |       | (1                                               | )%         | (19 | )% |

 

**Revenues**

Totalrevenues decreased from $6.9 million in the three months ended April 30, 2006to $6.3 million in the three months ended April 30, 2007.

*License fees*

Revenuesfrom software licenses decreased 32% to $1.3 million in the three months endedApril 30, 2007 from $1.9 million for the three months ended April 30,2006.  License revenue from Optio’s healthcaredivision remained relatively consistent for the three months ended April 30,2007 as compared to the three months ended April 30, 2006.  For Optio’s enterprise division, softwarelicense revenue declined significantly as we continue to face pressure in thedocument management output market as ERP vendors begin to offer similarfunctionality and competitors continue to offer lower cost solutions.  In addition, our imaging solutions have notgenerated revenue as quickly as we anticipated nor have we released ourbusiness process management solutions, which we anticipated would generatereplacement revenue for our declining document output management market.  Sales of Optio’s newer products, includingOptio Imaging Solutions, require a longer sales cycle than our traditionaloutput solutions products.

Approximately$245,000 of Optio’s software license revenue during the three months endedApril 30, 2007 was derived from partners, such as resellers, value-addeddistributors or OEM relationships, representing 19% of license revenue forOptio. During the three months ended April 30, 2006, Optio generated $360,000of

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its softwarelicense revenue through partners, also representing 19% of Optio’s licenserevenue.  The decrease in revenue derivedfrom partners was consistent with the decrease experienced by our direct salesforce.

*Subscriptionfees*

Subscriptionrevenue increased to $610,000 in the three months ended April 30, 2007 from$555,000 in the three months ended April 30, 2006. Optio has signed additionalcontracts and additional modules for existing contracts, increasing the monthlyamount recognized on a subscription basis.

*Services, maintenance and other*

Revenues from services, maintenance and other remainedconstant at  $4.4 million for the three monthsended April 30, 2007 and 2006, respectively. Services revenue decreased to  $1.1 million for the three months ended April30, 2007 from $1.3 million for the three months ended April 30, 2006.  The decline in license revenue contributed tothe associated decline in services revenue.  Maintenance revenue increased to $3.3 million for the three months endedApril 30, 2007 from $3.1 million for the three months ended April 30, 2006.Maintenance revenue continues to increase as Optio adds to its customer baseand moderately increases the price of its annual maintenance fees.

*Revenue Mix*

Revenue from licenses represented 20% of total revenuein the three months ended April 30, 2007, a significant decrease from licenserevenue at 28% of total revenue in the three months ended April 30, 2006.Subscription revenue represented 10% of total revenue in the three months endedApril 30, 2007, increasing from 8% of total revenue from the same quarter lastyear.   Services, maintenance and otherrevenue constituted 70% of total revenue in the three months ended April 30,2007, an increase from a percentage contribution of 64% in the prior yearcomparative period. Accordingly, the overall change in revenue mix mostsignificantly resulted from the decline in license fees for the three monthsended April 30, 2007 as compared to the same quarter last year.

**Costs of Revenues**

Total costs of revenues remainedconstant at  $1.8 million in the threemonths ended April 30, 2007 and 2006, respectively.

*Licenses*

Costs of revenues from licensesconsist of costs related to the packaging and distribution of the products,fees paid for integration of third-party software products and fees paid toreferral partners. Costs of revenues from licenses decreased to $102,000 in thethree months ended April 30, 2007 from $132,000 in the three months ended April30, 2006.   Fewer products which includethird-party software were sold during the three months ended April 30, 2007, ascompared to the three months ended April 30, 2006, reducing the costs ofrevenue from licenses. In addition, fees paid to referral partners declined$6,000 from the three months ended April 30, 2007 to the three months endedApril 30, 2006 as we had fewer deals referred by independent parties.

*Services, Maintenance and Other*

Costs of revenues from services,maintenance and other consist of personnel, subcontracting and other

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expenses relating to the cost ofproviding customer support, education and consulting and implementationservices. Costs of revenues from services, maintenance and other remainedconstant at $1.7 million in the three months ended April 30, 2007 and 2006,respectively. Optio slightly increased its internal implementation staff ascompared to the same quarter in the prior year and, as a result, Optio reliedless on external outsourcers. This resulted in a $73,000 decrease in the costof outsourcers in the three months ended April 30, 2007 as compared to thethree months ended April 30, 2006. The cost of internal staff and theirassociated costs increased slightly by $92,000 between the periods April 30,2007 and 2006 due to salary increases and minor staff augmentation.

**Operating Expenses**

*Sales and Marketing*

Sales and marketing expensesconsist primarily of salaries, commissions, bonuses and benefits earned bysales 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 expensesincreased 12% to $2.8 million from $2.5 million for the three months endedApril 30, 2007 and 2006, respectively. Sales and marketing expenses were45% and 37% of total revenue for the three months ended April 30, 2007 and2006, respectively.  Salaries increasedapproximately $100,000 between the two quarters, due mainly to salary increasesand increased staffing.    Discretionaryspending, in the aggregate, was also higher as compared to the same quarter inthe prior fiscal year due largely to increased travel expenses.  Partly offsetting this increase in expenseswere reduced direct marketing expenditures, which decreased $23,000 between thethree months ended April 30, 2007 and the three months ended April 30, 2006.

*Research and Development*

Research and development expense consists primarily ofsalaries, benefits and equipment for software developers, quality assurancepersonnel, and product managers.

Research and development expenses increased 8% to $1.4million for the three months ended April 30, 2007 from $1.3 million in thethree months ended April 30, 2006. Research and development salaries and associated benefits increased$131,000 between the periods, primarily due to salary increases, as opposed toadditional staff.

*General and Administrative*

General and administrative expenses consist primarilyof salaries, benefits and related costs for executive, finance, human resourcesand information services personnel. General and administrative expenses alsoinclude legal, accounting, insurance and other professional services.

General and administrative expenses increased to $1.2million from $1.1 million in the three months ended April 30, 2007 and 2006,respectively. General and administrative expenses increased due to thefollowing: (i) $67,000 of increased salaries representing additional accountingand administrative staff as well as salary increases (ii) an increase of$53,000 in recruiting fees related to sales staff augmentation and (iii) increasedconsulting fees attributable to activities for future Sarbanes-Oxley compliancerequirements.

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*Depreciation and Amortization*

Depreciation and amortization expense increased to$263,000 from $184,000 for the three months ended April 30, 2007 and 2006,respectively. The increase was primarily due to Optio’s renegotiation of thelease for Optio’s headquarters in which the landlord contributed $1.0 milliontowards the improvements of the space. These leasehold improvements, as well as an additional $700,000purchased directly by Optio, are being depreciated over the term of the newlease or the expected useful life of the assets, as appropriate.  This increase was partly offset by a decreasein amortization expense as intangibles are amortized over the estimated usefullife of the asset using the cash flow method, which results in a greater expensein the earlier periods and reduced expense in the later periods. This resultedin a greater expense in periods prior to fiscal year 2008.

*Interest Income*

Interest income increased to $116,000 in the threemonths ended April 30, 2007 from $96,000 in the three months ended April 30,2006. Current interest income primarily represents interest earned on fundsinvested in short-term financial instruments, as compared to the same period inthe prior year where most interest income was attributable to the thenoutstanding M2 Systems note receivable.

*Interest Expense*

Interest expense increased to $4,000 in the threemonths ended April 30, 2007, an increase from $1,000 in the three months endedApril 30, 2006. Interest expense primarily represents the interest paid onOptio’s capital leases.

**LIQUIDITY AND CAPITAL RESOURCES**

Optio had $11.2million and $11.9 million in cash and cash equivalents at April 30, 2007 andJanuary 31, 2007, respectively.

The followingtable sets forth certain selected statements of cash flow information for thethree months ended April 30, 2007:
| Net cash used in operations                |   | $        | (570,000 | ) |
|--------------------------------------------|--------|----------|----------|---|
| Net cash used in  investing activities     |   | (139,000 | )        |
| Net cash used in  financing activities     |   | (144,000 | )        |
| Net decrease in cash  and cash equivalents |   | (743,000 | )        |

 

Cash used in operations wasprimarily the result of a net loss of $1,170,000, plus a reduction in theprovision for doubtful accounts of $67,000, less the $263,000 add-back ofnon-cash depreciation and amortization expense, stock compensation, loss ondisposal of assets, provision for deferred taxes and changes in working capital resulting in a $405,000inflow of cash.  The major component ofsuch working capital changes was a decline in accounts receivable due partly tothe collection of several large receivables outstanding as of January 31, 2007,resulting in additional cash inflow of $438,000.  In addition, payments due to suppliersincreased by $127,000 and deferred revenues were reduced by $26,000.  Partly offsetting this favorability was anincrease in spending for prepaids and other assets as Optio prepaid several ofits insurance policies and other marketing expenses resulting in a $261,000outflow, as well as decreases in income taxes payable and accrued expenses. Ininvesting activities, Optio purchased $139,000 of property and equipment. Optio’sfinancing activities included purchases of treasury stock of $139,000 andpayments under capital leases totaling $13,000, less receipts of $8,000 fromthe exercise of stock options.

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On April 26, 2007, Optio extended its existing line of credit throughApril 19, 2008. The line of credit bears interest at prime rate, subject toincrease based on Optio’s performance relative to certain financialratios.  Optio may borrow up to $4.0 million,or such lesser amount as may be determined based on the level of eligibleaccounts receivable.  Currently, Optiohas estimated that approximately $1.3 million would be available for borrowingsbased upon Optio’s historical accounts receivable balance. Accounts receivable,equipment, general intangibles and other assets, as defined in the loanagreement, collateralize the line of credit. The loan agreement containsvarious covenants, including liquidity and earnings before interest, taxes,depreciation and amortization (“EBITDA”) requirements and restrictions on thepayment of dividends. As of April 30, 2007, Optio was in compliance with therequired financial ratios. There were no borrowings under the line of credit asof April 30, 2007.

Management believesthat the existing cash and cash equivalents, together with the line of credit,will provide adequate cash to fund its anticipated cash needs at least throughthe next twelve months. Optio intends to expand its product line, which mayrequire acquisitions of companies or products that enhance the Company’sproduct line. As a result, Optio may attempt to raise additional funds throughequity or debt financing. There can be no assurance that Optio will be able toraise additional funds on favorable terms, or at all. Although not anticipated,a dramatic decrease in demand for Optio’s products or services, or a dramaticchange in technology related to Optio’s products or services offered, couldhave a negative impact on Optio’s liquidity. This risk may include thepotential for Optio not meeting its debt covenant requirements, making anyborrowings under the line of credit unavailable.

**NewAccounting Pronouncements**

In February 2007, the FASB issued FASB No.159 “The Fair Value Option for Financial Assets and Financial Liabilities –including an amendment of FASB Statement No. 115.  This Statement permits entities to choose tomeasure many financial instruments and certain other items at fair value. Theobjective is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. This Statement is expected to expand the use offair value measurement, which is consistent with the Board’s long-termmeasurement objectives for accounting for financial instruments.  This Statement is effective as of thebeginning of an entity’s first fiscal year that begins after November 15, 2007.Early adoption is permitted as of the beginning of a fiscal year that begins onor before November 15, 2007, provided the entity also elects to apply theprovisions of FASB Statement No. 157, *FairValue Measurements. *TheCompany did not elect early adoption. The Company does not expect FASB 159 tohave a material impact on the Company’s results of operations or financialposition.

ITEM 3.** **QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Optio provides itsservices to customers primarily in the United States and, to a lesser extent,in Europe and elsewhere throughout the world. As a result, Optio’s financialresults could be affected by various factors, such as changes in foreigncurrency exchange rates or weak economic conditions in foreign markets. Allsales are currently made in both U.S. dollars and local currencies. Astrengthening of the U.S. dollar or the weakening of these local currenciescould make Optio’s products less competitive in foreign markets. Based upon therelative size of Optio’s foreign operations, Optio believes its exposure toforeign currency fluctuations is not a material risk. Optio’s interest incomeand expense are sensitive to changes in the general level of U.S. interestrates. Based on Optio’s cash equivalents balance and the nature of itsoutstanding debt, Optio believes its exposure to interest rate risk is notmaterial.

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ITEM 4.  CONTROLS AND PROCEDURES.

Our ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof our disclosure controls and procedures (as defined in Rule 13a-15(e) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) as of April30, 2007, and have concluded that, as of such date, our disclosure controls andprocedures are effective in ensuring that information required to be disclosedby us in the reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

Our management isresponsible for establishing and maintaining adequate internal audit controlsover financial reporting, as such term is defined in the Exchange Act, Rule13(a) – 15(f).  Our Chief ExecutiveOfficer and Chief Financial Officer also concluded that, as of April 30, 2007,our disclosure controls and procedures are effective in ensuring thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,to allow timely decisions regarding required disclosure.

*Changesin Internal Controls*

There were nochanges in our internal controls over financial reporting that occurred duringthe quarter ended April 30, 2007, that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

**PART II –OTHER INFORMATION**

ITEM 1. LEGALPROCEEDINGS

On November 13,2001, a lawsuit styled Kevin Dewey vs. Optio Software, Inc., et. al. was filedin the United States District Court for the Southern District of New York. Thecomplaint was filed against the underwriters in the Company’s initial publicoffering as well as Optio and certain officers and directors of Optio, by asingle plaintiff purportedly on behalf of persons purchasing Optio’s commonstock between December 14, 1999 and December 6, 2000. The lawsuit also seeksclass action status. Optio is a co-defendant with approximately 300 otherissuers in this suit. The complaint includes allegations of violations of (i)Section 11 of the Securities Act of 1933, as amended (the “Securities Act”), byall named defendants, (ii) Section 12(a)(2) of the Securities Act by theunderwriter defendants, (iii) Section 15 of the Securities Act by theindividual defendants, and (iv) Section 10(b) of the Securities Exchange Act of1934, as amended, and Rule 10b-5 promulgated thereunder by the underwriterdefendants. The complaint alleges that Optio’s prospectus was materially falseand misleading because it failed to disclose, among other things, that: (i) theunderwriters had solicited and received excessive and undisclosed commissionsfrom certain investors in exchange for which the underwriters allocated tothose investors material portions of a limited number of Optio shares issued inconnection with the Optio initial public offering; and (ii) the underwritershad entered into agreements with customers whereby the underwriters agreed toallocate Optio shares to those customers in the Optio initial public offering inexchange for which the customers agreed to purchase additional Optio shares inthe aftermarket at pre-determined prices. The complaint seeks unspecifiedamounts as compensatory damages as a result of Optio’s alleged actions, as wellas punitive damages and reimbursement for the plaintiffs’ attorneys’ fees andassociated costs and expenses of the lawsuit. A proposal to settle the claimsagainst Optio and other companies and individual defendants in the litigationwas conditionally accepted by Optio. The completion of the settlement issubject to a number of conditions, including Court approval. The Courtpreliminarily approved the settlement on February 15, 2005, subject to certainmodifications which are currently pending approval by the defendants. Under thesettlement, the plaintiffs will dismiss and release all claims against

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participating defendantsin exchange for a contingent payment guaranty by the insurance companiescollectively responsible for insuring the issuers in the action. Optio maystill have yet undetermined exposure to the underwriters pursuant toindemnification provisions in the underwriting agreement entered into at thetime of the initial public offering. Under the guaranty, all of the insurersfor all the issuers will be required to pay an amount equal to $1.0 billionless any amounts ultimately collected by the plaintiffs from the underwriterdefendants in all of the pending cases. A settlement fairness hearing was heldon April 24, 2006, however no ruling has been issued yet by the Court.  There can be no assurance that this proposedsettlement will be approved and implemented in its current form, or atall.  On December 5, 2006, the UnitedStates Court of Appeals for the Second Circuit overturned the District Court’scertification of the class of plantiffs who are pursuing the claims that wouldbe settled in the settlement against the underwriter defendants.  Plantiffs filed a Petition for Rehearing andRehearing En Banc with the Second circuit on January 5, 2007 in response to theSecond Circuit’s decision. The Petition for Rehearing and Rehearing En Banc wasdenied on April 6, 2007. Plaintiffs have informed the District Court that theywould like to be heard as to whether the settlement may still be approved eventhough the Petition for Rehearing was denied. The District Court indicated that the settlement in its current form isnot viable. The disposition of this matter is limited to Optio’s $300,000corporate insurance deductible. The Company has completed payment of theinsurance deductible through payment of legal fees. Optio will have noadditional exposure unless the insurance companies become insolvent or unlessOptio’s liability exceeds its policy limits through this matter or othermatters. Optio’s insurance companies currently have an A or AA rating. Therange of loss, if any, cannot be estimated and thus no potential loss isreflected in Optio’s consolidated financial statements.

Managementbelieves that it has meritorious defenses in the foregoing matter and intendsto pursue its position vigorously.  Whilelitigation is inherently subject to many uncertainties, management does notbelieve that the outcome of this case will have a material adverse effect onthe financial position of Optio. However, depending on the amount and timing of an unfavorable resolutionof the lawsuit, it is possible that Optio’s financial condition, results ofoperation or liquidity could be materially affected.

In addition, Optiois party to routine litigation or administrative proceedings incidental to itsbusiness, none of which is believed by the Company to be likely to have amaterial effect on the financial condition, results of operations or liquidityof the Company.

ITEM 1A. RISKFACTORS

Inaddition to the other information set forth in this report, the factorsdiscussed under “Item 1A. Risk Factors” in Part I of the 2007 Annual Reportcould materially affect our business, financial condition or future results.The risks described in our 2007 Annual Report are not the only risks facing ourCompany. Additional risks and uncertainties not currently known to us or thatwe currently deem to be immaterial also may materially adversely affect ourbusiness, financial condition or operating results.

ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHERINFORMATION

None.

ITEM 6. EXHIBITS

(a)          Exhibits

31.1                          Certification of CEO pursuantto Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

31.2                          Certification of CFO pursuantto Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.

32.1                          Certification by CEO pursuantto 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.

32.2                          Certificationby CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized on the 14th day of June,2007.
|        |   | OPTIO SOFTWARE, INC. |                                                                                   |
|--------|--------|----------------------|----------------------------------------------------------------------------------------|
|   |   |                 |                                                                                   |   |
|        |   | By:                  |   /s/ C. Wayne Cape                                                          |   |
|   |   |                 |        C. Wayne  Cape                               |
|   |   |                 |         President  and Chief Executive Officer |

 

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