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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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(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, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission File Number: 1-15529



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OPTIO SOFTWARE, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Georgia                                                        |  | 58-1435435                          
|(State of other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|3015 Windward Plaza, Fairways II, Alpharetta, GA               |  | 30005                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



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



---



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



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Securities Exchange Act of 1934).    Yes ̈No  x



There were 19,529,387 shares of the Registrants common stock outstanding as of June 3, 2004.



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##### Table of Contents

OPTIO SOFTWARE, INC.



FORM 10-Q



For the Quarterly Period Ended April 30, 2004



TABLE OF CONTENTS



|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                       |  | Page
|        |  | PART I  FINANCIAL INFORMATION                                                        |  |     
|        |  |                                                                                      
|Item 1. |  | Financial Statements                                                                  |  | 4   
|Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 13  
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 19  
|Item 4. |  | Controls and Procedures                                                               |  | 19  
|        |  |                                                                                      
|        |  | PART II  OTHER INFORMATION                                                           |  |     
|        |  |                                                                                      
|Item 1. |  | Legal Proceedings                                                                     |  | 20  
|Item 2. |  | Changes in Securities and Use of Proceeds                                             |  | 20  
|Item 3. |  | Defaults Upon Senior Securities                                                       |  | 20  
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  | 20  
|Item 5. |  | Other Information                                                                     |  | 21  
|Item 6. |  | Exhibits and Reports on Form 8-K                                                      |  | 21  



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FORWARD-LOOKING STATEMENTS



In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995 and are made based on management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 (Optio) anticipated costs and expenses,
Optios capital needs and financing plans, product and service development, Optios growth strategies, market demand for Optios products and services, relationships with Optios strategic marketing alliances, and competition.
These forward-looking statements include, among others, those statements including the words expects, anticipates, intends, believes and similar language. Optios actual results may differ
significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, risks associated with Optios reliance on strategic marketing and reseller
relationships, collectibility of accounts receivable and notes receivable, fluctuations in operating results because of acquisitions or dispositions, changes in competition, changes in economic conditions in the U.S. and in other countries in which
Optio currently does business (both general and relative to the technology industry), delays or inability in developing new or unique software products, market acceptance of new products, the failure of new products to operate as anticipated,
expectation of achieving and sustaining operating profits and earnings, including timing of such cash flows and company performance, disputes regarding Optios intellectual property, risks relating to the delisting of Optios stock,
possible adverse results of pending or future litigation, or risks associated with Optios international operations. These and additional factors are set forth in Safe Harbor Compliance Statement for Forward-Looking Statements
included as Exhibit 99.1 to this Quarterly Report on Form 10-Q. You should carefully review these risks and additional risks described in other documents Optio files from time to time with the Securities and Exchange Commission, including the Annual
Report on Form 10-K that Optio has filed. You are cautioned not to place undue reliance on the forward-looking statements in this document, which speak only as of the date of this Quarterly Report on Form 10-Q. Optio undertakes no obligation to
publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.



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##### Table of Contents

PART I  FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



Optio
Software, Inc.



Consolidated Condensed Balance Sheets



|                                                   |  |                  |             |   |                |   |             |  
|-------------------------------------------------- |  | ---------------- | ----------- | - | -------------- | - | ----------- | -
|                                                   |  | January 31, 2004 |             |   | April 30, 2004 |  
|                                                   |  |                  |             |   | (Unaudited)    |  
|ASSETS                                             |  |                  |             |   |                |   |             |  
|Current assets:                                    |  |                  |             |   |                |   |             |  
|Cash and cash equivalents                          |  | $                | 5,328,000   |   |                | $ | 5,991,000   |  
|Accounts receivable, net                           |  |                  | 5,293,000   |   |                |   | 4,736,000   |  
|Prepaid expenses and other current assets          |  |                  | 283,000     |   |                |   | 458,000     |  
|Notes receivable from related party                |  |                  | 5,000       |   |                |   | 5,000       |  
|Current portion of note receivable from M2         |  |                  | 310,000     |   |                |   | 310,000     |  
|                                                   |  |                  |             |   |                |   |             |  
|Total current assets                               |  |                  | 11,219,000  |   |                |   | 11,500,000  |  
|Property and equipment, net                        |  |                  | 541,000     |   |                |   | 543,000     |  
|Other assets:                                      |  |                  |             |   |                |   |             |  
|Note receivable from M2, net, less current portion |  |                  | 2,376,000   |   |                |   | 2,292,000   |  
|Other                                              |  |                  | 110,000     |   |                |   | 103,000     |  
|                                                   |  |                  |             |   |                |   |             |  
|Total assets                                       |  | $                | 14,246,000  |   |                | $ | 14,438,000  |  
|                                                   |  |                  |             |   |                |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY               |  |                  |             |   |                |   |             |  
|Current liabilities:                               |  |                  |             |   |                |   |             |  
|Accounts payable                                   |  | $                | 812,000     |   |                | $ | 1,014,000   |  
|Accrued expenses                                   |  |                  | 2,627,000   |   |                |   | 1,943,000   |  
|Current portion of capital lease obligations       |  |                  | 76,000      |   |                |   | 76,000      |  
|Deferred revenue                                   |  |                  | 6,256,000   |   |                |   | 6,273,000   |  
|                                                   |  |                  |             |   |                |   |             |  
|Total current liabilities                          |  |                  | 9,771,000   |   |                |   | 9,306,000   |  
|                                                   |  |                 
|Capital lease obligations, less current portion    |  |                  | 87,000      |   |                |   | 69,000      |  
|Other long-term liabilities                        |  |                  | 101,000     |   |                |   | 97,000      |  
|                                                   |  |                  |             |   |                |   |             |  
|Total liabilities                                  |  |                  | 9,959,000   |   |                |   | 9,472,000   |  
|Shareholders equity:                              |  |                  |             |   |                |   |             |  
|Common stock                                       |  |                  | 50,291,000  |   |                |   | 50,435,000  |  
|Accumulated deficit                                |  |                  | (46,084,000 | ) |                |   | (45,515,000 | )
|Accumulated other comprehensive income             |  |                  | 80,000      |   |                |   | 46,000      |  
|                                                   |  |                  |             |   |                |   |             |  
|Total shareholders equity                         |  |                  | 4,287,000   |   |                |   | 4,966,000   |  
|                                                   |  |                  |             |   |                |   |             |  
|Total liabilities and shareholders equity         |  | $                | 14,246,000  |   |                | $ | 14,438,000  |  
|                                                   |  |                  |             |   |                |   |             |  



See accompanying notes.



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Optio Software, Inc.



Consolidated Condensed Statements of Operations

(Unaudited)



|                                                                                      |  |                              |            |   |      |   |            |  
|------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                      |  | Three Months Ended April 30, |           
|                                                                                      |  | 2003                         |            |   | 2004 |  
|Revenue:                                                                              |  |                              |            |   |      |   |            |  
|License fees                                                                          |  | $                            | 2,070,000  |   |      | $ | 2,881,000  |  
|Services, maintenance, and other                                                      |  |                              | 4,445,000  |   |      |   | 4,325,000  |  
|                                                                                      |  |                              |            |   |      |   |            |  
|                                                                                      |  |                              | 6,515,000  |   |      |   | 7,206,000  |  
|Costs of revenue (exclusive of depreciation and amortization shown separately below): |  |                              |            |   |      |   |            |  
|License fees                                                                          |  |                              | 118,000    |   |      |   | 149,000    |  
|Services, maintenance, and other                                                      |  |                              | 1,603,000  |   |      |   | 1,586,000  |  
|                                                                                      |  |                              |            |   |      |   |            |  
|                                                                                      |  |                              | 1,721,000  |   |      |   | 1,735,000  |  
|                                                                                      |  |                              |            |   |      |   |            |  
|                                                                                      |  |                              | 4,794,000  |   |      |   | 5,471,000  |  
|                                                                                      |  |                             
|Operating expenses:                                                                   |  |                              |            |   |      |   |            |  
|Sales and marketing                                                                   |  |                              | 2,381,000  |   |      |   | 2,695,000  |  
|Research and development                                                              |  |                              | 964,000    |   |      |   | 1,085,000  |  
|General and administrative                                                            |  |                              | 1,123,000  |   |      |   | 1,053,000  |  
|Depreciation and amortization                                                         |  |                              | 179,000    |   |      |   | 71,000     |  
|                                                                                      |  |                              |            |   |      |   |            |  
|                                                                                      |  |                              | 4,647,000  |   |      |   | 4,904,000  |  
|                                                                                      |  |                              |            |   |      |   |            |  
|Income from operations                                                                |  |                              | 147,000    |   |      |   | 567,000    |  
|Other income (expense):                                                               |  |                              |            |   |      |   |            |  
|Interest income                                                                       |  |                              | 49,000     |   |      |   | 42,000     |  
|Interest expense                                                                      |  |                              | (3,000     | ) |      |   | (4,000     | )
|Other                                                                                 |  |                              | 6,000      |   |      |   | 21,000     |  
|                                                                                      |  |                              |            |   |      |   |            |  
|                                                                                      |  |                              | 52,000     |   |      |   | 59,000     |  
|                                                                                      |  |                             
|Income before income taxes                                                            |  |                              | 199,000    |   |      |   | 626,000    |  
|Income tax expense                                                                    |  |                              | 6,000      |   |      |   | 57,000     |  
|                                                                                      |  |                              |            |   |      |   |            |  
|Net income                                                                            |  | $                            | 193,000    |   |      | $ | 569,000    |  
|                                                                                      |  |                              |            |   |      |   |            |  
|Net income per share  basic                                                          |  | $                            | 0.01       |   |      | $ | 0.03       |  
|                                                                                      |  |                              |            |   |      |   |            |  
|Net income per share  diluted                                                        |  | $                            | 0.01       |   |      | $ | 0.02       |  
|                                                                                      |  |                              |            |   |      |   |            |  
|Weighted average shares outstanding  basic                                           |  |                              | 19,140,644 |   |      |   | 19,399,918 |  
|                                                                                      |  |                              |            |   |      |   |            |  
|Weighted average shares outstanding  diluted                                         |  |                              | 20,595,179 |   |      |   | 23,002,374 |  
|                                                                                      |  |                              |            |   |      |   |            |  
|Comprehensive income:                                                                 |  |                              |            |   |      |   |            |  
|Net income                                                                            |  | $                            | 193,000    |   |      | $ | 569,000    |  
|Foreign currency translation adjustment                                               |  |                              | 12,000     |   |      |   | (34,000    | )
|                                                                                      |  |                              |            |   |      |   |            |  
|Comprehensive income                                                                  |  | $                            | 205,000    |   |      | $ | 535,000    |  
|                                                                                      |  |                              |            |   |      |   |            |  



See accompanying notes.



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Optio Software, Inc.



Consolidated Condensed Statement of Shareholders Equity

(Unaudited)



|                                        |  |              |  |                     |            |  |                                       |             |   |                            |   |         |   |  |   |           |  
|--------------------------------------- |  | ------------ |  | ------------------- | ---------- |  | ------------------------------------- | ----------- | - | -------------------------- | - | ------- | - |  | - | --------- | -
|                                        |  | Common Stock |  | Accumulated Deficit |            |  | Accumulated OtherComprehensive Income |             |   | Total Shareholders Equity |  
|                                        |  | Shares       |  | Amount              |            |  |                                      
|Balance at February 1, 2004             |  | 19,261,144   |  | $                   | 50,291,000 |  | $                                     | (46,084,000 | ) |                            | $ | 80,000  |   |  | $ | 4,287,000 |  
|Comprehensive income, net of tax:       |  |              |  |                     |            |  |                                       |             |   |                            |   |         |   |  |   |           |  
|Net income                              |  |             |  |                     |           |  |                                       | 569,000     |   |                            |   |        |   |  |   | 569,000   |  
|Foreign currency translation adjustment |  |             |  |                     |           |  |                                       |            |   |                            |   | (34,000 | ) |  |   | (34,000   | )
|                                        |  |              |  |                     |            |  |                                       |             |   |                            |   |         |   |  |   |           |  
|Comprehensive income                    |  |              |  |                     |            |  |                                       |             |   |                            |   |         |   |  |   | 535,000   |  
|Exercise of stock options               |  | 203,231      |  |                     | 144,000    |  |                                       |            |   |                            |   |        |   |  |   | 144,000   |  
|                                        |  |              |  |                     |            |  |                                       |             |   |                            |   |         |   |  |   |           |  
|Balance at April 30, 2004               |  | 19,464,375   |  | $                   | 50,435,000 |  | $                                     | (45,515,000 | ) |                            | $ | 46,000  |   |  | $ | 4,966,000 |  
|                                        |  |              |  |                     |            |  |                                       |             |   |                            |   |         |   |  |   |           |  



See accompanying notes.



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Optio Software, Inc.



Consolidated Condensed Statements of Cash Flows

(Unaudited)



|                                                                                            |  |                              |           |   |      |   |           |  
|------------------------------------------------------------------------------------------- |  | ---------------------------- | --------- | - | ---- | - | --------- | -
|                                                                                            |  | Three Months Ended April 30, |          
|                                                                                            |  | 2003                         |           |   | 2004 |  
|Cash flows from operating activities:                                                       |  |                              |           |   |      |   |           |  
|Net income                                                                                  |  | $                            | 193,000   |   |      | $ | 569,000   |  
|Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |                              |           |   |      |   |           |  
|Depreciation and amortization                                                               |  |                              | 179,000   |   |      |   | 71,000    |  
|Provision for doubtful accounts                                                             |  |                              | (67,000   | ) |      |   | 16,000    |  
|Changes in operating assets and liabilities:                                                |  |                              |           |   |      |   |           |  
|Accounts receivable                                                                         |  |                              | 93,000    |   |      |   | 480,000   |  
|Prepaid expenses and other current assets                                                   |  |                              | 257,000   |   |      |   | (189,000  | )
|Accounts payable                                                                            |  |                              | (573,000  | ) |      |   | 212,000   |  
|Accrued expenses                                                                            |  |                              | (460,000  | ) |      |   | (672,000  | )
|Deferred revenue                                                                            |  |                              | 291,000   |   |      |   | 55,000    |  
|                                                                                            |  |                              |           |   |      |   |           |  
|Net cash provided by (used in) operating activities                                         |  |                              | (87,000   | ) |      |   | 542,000   |  
|                                                                                            |  |                             
|Cash flows from investing activities:                                                       |  |                              |           |   |      |   |           |  
|Purchases of property and equipment                                                         |  |                              | (40,000   | ) |      |   | (74,000   | )
|Repayment of note receivable from M2 Systems                                                |  |                              |          |   |      |   | 83,000    |  
|Repayments from related parties under notes receivable                                      |  |                              | 29,000    |   |      |   |          |  
|                                                                                            |  |                              |           |   |      |   |           |  
|Net cash provided by (used in) investing activities                                         |  |                              | (11,000   | ) |      |   | 9,000     |  
|                                                                                            |  |                             
|Cash flows from financing activities:                                                       |  |                              |           |   |      |   |           |  
|Payments of notes payable and capital lease obligations                                     |  |                              | (14,000   | ) |      |   | (19,000   | )
|Proceeds from exercise of stock options                                                     |  |                              |          |   |      |   | 144,000   |  
|                                                                                            |  |                              |           |   |      |   |           |  
|Net cash provided by (used in) financing activities                                         |  |                              | (14,000   | ) |      |   | 125,000   |  
|                                                                                            |  |                             
|Impact of foreign currency rate fluctuations on cash                                        |  |                              | 2,000     |   |      |   | (13,000   | )
|Net increase (decrease) in cash and cash equivalents                                        |  |                              | (110,000  | ) |      |   | 663,000   |  
|                                                                                            |  |                             
|Cash and cash equivalents at beginning of period                                            |  |                              | 3,902,000 |   |      |   | 5,328,000 |  
|                                                                                            |  |                              |           |   |      |   |           |  
|Cash and cash equivalents at end of period                                                  |  | $                            | 3,792,000 |   |      | $ | 5,991,000 |  
|                                                                                            |  |                              |           |   |      |   |           |  
|Supplemental disclosures of cash flow information:                                          |  |                              |           |   |      |   |           |  
|Cash paid during the year for:                                                              |  |                              |           |   |      |   |           |  
|Interest paid                                                                               |  | $                            | 23,000    |   |      | $ | 4,000     |  
|                                                                                            |  |                              |           |   |      |   |           |  
|Income taxes paid                                                                           |  | $                            | 6,000     |   |      | $ | 57,000    |  
|                                                                                            |  |                              |           |   |      |   |           |  



See accompanying notes.



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Optio Software, Inc.



Notes to the Consolidated Condensed Financial Statements

(Unaudited)



1.
Description of Business



Optio Software, Inc.
(Optio or the Company) provides infrastructure software and services that enhance the form, content, distribution and availability of business critical information. The Company markets primarily to companies located
principally in the United States and Europe. The industry in which the Company operates is subject to rapid change due to development of new technologies and products.



2. Basis of Presentation



Interim Financial Information



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



The accompanying financial statements should be read in conjunction with the Companys audited consolidated financial statements for the year ended
January 31, 2004, included in the Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 21, 2004. Results of operations for the three months ended April 30, 2004 are not necessarily indicative of the
results for the year ending January 31, 2005.



Employee Stock Options



The Company accounts for stock based awards using the
intrinsic value method under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations. Under APB 25, when the exercise price of the Companys stock options
equals or exceeds the market price of the underlying stock on the date of grant, no compensation expense is recorded.



Based on the additional disclosure requirements of SFAS 148, Accounting for Stock Based Compensation  Transition and Disclosure  an
Amendment to SFAS 123, the following illustrates the assumptions and the effect on net income and net income per share if the Company had applied the fair value recognition provisions of SFAS 123.



Pro forma information regarding net income required by SFAS 123 Accounting
for Stock-Based Compensation, requires that the information be determined as if the Company had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method. The fair value for these options was
estimated at the date of grant using the minimum value method through December 15, 1999, the date of the Companys initial public offering. For those options granted subsequent to December 15, 1999, the fair value of each option was estimated
on the date of grant using the Black-Scholes option pricing model with



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Optio Software, Inc.



Notes to the Consolidated Condensed Financial Statements

(Unaudited)  (Continued)



the following weighted-average assumptions used for the three months ended April 30, 2003 and 2004: risk-free interest rates of 3.47% and 3.45% for the three months ended April 30, 2003 and 2004, respectively; no
dividend yield; volatility of 137% and 154% for the three months ended April 30, 2003 and 2004, respectively; and an expected life of the options of 7.40 and 7.44 years for the three months ended April 30, 2003 and 2004, respectively.



For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting periods. The weighted-average fair value of options granted during the three months ended April 30, 2003 and 2004 equaled $0.38 and $1.52 per share, respectively. The Companys pro
forma information as determined using the fair value method of accounting under SFAS 123, was as follows:



|                                                      |  |                              |          |   |      |   |         |  
|----------------------------------------------------- |  | ---------------------------- | -------- | - | ---- | - | ------- | -
|                                                      |  | Three Months Ended April 30, |         
|                                                      |  | 2003                         |          |   | 2004 |  
|Net income as reported                                |  | $                            | 193,000  |   |      | $ | 569,000 |  
|Deduct: Compensation cost using the fair value method |  |                              | (162,000 | ) |      |   | (77,000 | )
|                                                      |  |                              |          |   |      |   |         |  
|Pro forma net income                                  |  | $                            | 31,000   |   |      | $ | 492,000 |  
|                                                      |  |                              |          |   |      |   |         |  
|Net income per share as reported  basic              |  |                              | 0.01     |   |      |   | 0.03    |  
|Net income per share as reported  diluted            |  |                              | 0.01     |   |      |   | 0.02    |  
|Pro forma net income per share  basic                |  |                              | 0.00     |   |      |   | 0.03    |  
|Pro forma net income per share  diluted              |  |                              | 0.00     |   |      |   | 0.02    |  



3. Net Income per Share



Net income per share has been computed in accordance with
SFAS 128, Earnings per Share, which requires disclosure of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of stock options. Diluted earnings per share includes the impact of potentially dilutive
securities.



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



|                                              |  |                              |            |      |   |           
|--------------------------------------------- |  | ---------------------------- | ---------- | ---- | - | ----------
|                                              |  | Three months ended April 30,
|                                              |  | 2003                         |            | 2004
|Net income                                    |  | $                            | 193,000    |      | $ | 569,000   
|                                              |  |                              |            |      |   |           
|Weighted average shares outstanding  basic   |  |                              | 19,140,644 |      |   | 19,399,918
|Dilutive stock options                        |  |                              | 1,454,535  |      |   | 3,602,456 
|                                              |  |                              |            |      |   |           
|Weighted average shares outstanding  diluted |  |                              | 20,595,179 |      |   | 23,002,374
|                                              |  |                              |            |      |   |           
|Net loss per share  basic                    |  | $                            | 0.01       |      | $ | 0.03      
|                                              |  |                              |            |      |   |           
|Net loss per share  diluted                  |  | $                            | 0.01       |      | $ | 0.02      
|                                              |  |                              |            |      |   |           



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Optio Software, Inc.



Notes to the Consolidated Condensed Financial Statements

(Unaudited) (Continued)



4. Segment and Geographic Information



The Company is organized around geographic areas. Optios U.S. operations and Optio Europe represent Optios two reportable segments. Optios other foreign subsidiary is classified as Other.
The foreign locations principally function as distributors of products developed by the Company in the United States. The accounting policies described in the summary of significant accounting policies are applied consistently across the segments.
Intersegment sales are based on intercompany transfer prices to achieve a reasonable margin upon distribution.



Segment information for the three months ended April 30, 2003 and 2004 is summarized below.



|                                          |  |               |            |        |   |           |       |  |          |         |              |   |            |              |   |            |   |  |   |           
|----------------------------------------- |  | ------------- | ---------- | ------ | - | --------- | ----- |  | -------- | ------- | ------------ | - | ---------- | ------------ | - | ---------- | - |  | - | ----------
|Three Months ended April 30,
2003         |  | United States |            | Europe |   |           | Other |  | Combined |         | Eliminations |   |            | Consolidated
|Revenue from external customers:          |  |               |            |        |   |           |       |  |          |         |              |   |            |              |   |            |   |  |   |           
|License fees                              |  | $             | 1,660,000  |        | $ | 410,000   |       |  | $        |        |              | $ | 2,070,000  |              | $ |           |   |  | $ | 2,070,000 
|Services, maintenance and other           |  |               | 3,911,000  |        |   | 528,000   |       |  |          | 6,000   |              |   | 4,445,000  |              |   |           |   |  |   | 4,445,000 
|Inter-segment revenue                     |  |               | 92,000     |        |   | 29,000    |       |  |          |        |              |   | 121,000    |              |   | (121,000   | ) |  |   |          
|                                          |  |               |            |        |   |           |       |  |          |         |              |   |            |              |   |            |   |  |   |           
|Total revenue                             |  |               | 5,663,000  |        |   | 967,000   |       |  |          | 6,000   |              |   | 6,636,000  |              |   | (121,000   | ) |  |   | 6,515,000 
|Interest income                           |  |               | 49,000     |        |   |          |       |  |          |        |              |   | 49,000     |              |   |           |   |  |   | 49,000    
|Interest expense                          |  |               | 3,000      |        |   |          |       |  |          |        |              |   | 3,000      |              |   |           |   |  |   | 3,000     
|Depreciation and amortization             |  |               | 161,000    |        |   | 18,000    |       |  |          |        |              |   | 179,000    |              |   |           |   |  |   | 179,000   
|Income tax expense                        |  |               | 6,000      |        |   |          |       |  |          |        |              |   | 6,000      |              |   |           |   |  |   | 6,000     
|Segment income (loss) before income taxes |  |               | 486,000    |        |   | (294,000  | )     |  |          | 7,000   |              |   | 199,000    |              |   |           |   |  |   | 199,000   
|Segment net income (loss)                 |  |               | 480,000    |        |   | (294,000  | )     |  |          | 7,000   |              |   | 193,000    |              |   |           |   |  |   | 193,000   
|Total segment assets                      |  |               | 15,509,000 |        |   | 2,497,000 |       |  |          | 117,000 |              |   | 18,123,000 |              |   | (4,206,000 | ) |  |   | 13,917,000
|Expenditures for long-lived assets        |  |               | 23,000     |        |   | 17,000    |       |  |          |        |              |   | 40,000     |              |   |           |   |  |   | 40,000    



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Optio Software, Inc.



Notes to the Consolidated Condensed Financial Statements

(Unaudited)  (Continued)



|                                   |  |               |            |        |   |           |  |          |        |              |   |            |              |   |            |   |  |   |           
|---------------------------------- |  | ------------- | ---------- | ------ | - | --------- |  | -------- | ------ | ------------ | - | ---------- | ------------ | - | ---------- | - |  | - | ----------
|Three Months ended April 30,
2004  |  | United States |            | Europe |   | Other     |  | Combined |        | Eliminations |   |            | Consolidated
|Revenue from external customers:   |  |               |            |        |   |           |  |          |        |              |   |            |              |   |            |   |  |   |           
|License fees                       |  | $             | 2,267,000  |        | $ | 614,000   |  | $        |       |              | $ | 2,881,000  |              | $ |           |   |  | $ | 2,881,000 
|Services, maintenance and other    |  |               | 3,696,000  |        |   | 629,000   |  |          |       |              |   | 4,325,000  |              |   |           |   |  |   | 4,325,000 
|Inter-segment revenue              |  |               | 115,000    |        |   | 70,000    |  |          |       |              |   | 185,000    |              |   | (185,000   | ) |  |   |          
|                                   |  |               |            |        |   |           |  |          |        |              |   |            |              |   |            |   |  |   |           
|Total revenue                      |  |               | 6,078,000  |        |   | 1,313,000 |  |          |       |              |   | 7,391,000  |              |   | (185,000   | ) |  |   | 7,206,000 
|Interest income                    |  |               | 37,000     |        |   | 5,000     |  |          |       |              |   | 42,000     |              |   |           |   |  |   | 42,000    
|Interest expense                   |  |               | 4,000      |        |   |          |  |          |       |              |   | 4,000      |              |   |           |   |  |   | 4,000     
|Depreciation and amortization      |  |               | 63,000     |        |   | 8,000     |  |          |       |              |   | 71,000     |              |   |           |   |  |   | 71,000    
|Income tax expense                 |  |               | 57,000     |        |   |          |  |          |       |              |   | 57,000     |              |   |           |   |  |   | 57,000    
|Segment income before income taxes |  |               | 620,000    |        |   | 6,000     |  |          |       |              |   | 626,000    |              |   |           |   |  |   | 626,000   
|Segment net income                 |  |               | 563,000    |        |   | 6,000     |  |          |       |              |   | 569,000    |              |   |           |   |  |   | 569,000   
|Total segment assets               |  |               | 15,978,000 |        |   | 2,965,000 |  |          | 87,000 |              |   | 19,030,000 |              |   | (4,592,000 | ) |  |   | 14,438,000
|Expenditures for long-lived assets |  |               | 44,000     |        |   | 30,000    |  |          |       |              |   | 74,000     |              |   |           |   |  |   | 74,000    



5. Legal Proceedings



On November 13, 2001, a lawsuit styled Kevin Dewey vs.
Optio Software, Inc., et. al. was filed in the United States District Court for the Southern District of New York. The complaint was filed against the underwriters in Optios initial public offering as well as Optio and certain officers and
directors of Optio, by a single plaintiff purportedly on behalf of persons purchasing Optios common stock between December 14, 1999 and December 6, 2000 and seeks class action status. The complaint includes allegations of violations of (i)
Section 11 of the Securities Act of 1933 by all named defendants, (ii) Section 12(a)(2) of the Securities Act of 1933 by the underwriter defendants, (iii) Section 15 of the Securities Act of 1933 by the individual defendants, and (iv) Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the underwriter defendants. The complaint alleges that Optios prospectus was materially false and misleading because it failed to disclose, among other things,
that: (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of a limited number of Optio shares issued in
connection with the Optio initial public offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate Optio shares to those customers in the Optio initial public offering in exchange for
which the customers agreed to purchase additional Optio shares in the aftermarket at pre-determined prices. Optio believes the lawsuit is without merit. Thus, Optio intends to defend vigorously against the plaintiffs claims. The complaint
seeks unspecified amounts as compensatory damages as a result of Optios alleged actions, as well as punitive damages and reimbursement for the plaintiffs attorneys fees and associated costs and expenses of the lawsuit. Optio is
currently engaged in settlement negotiations between its insurance carrier and the plaintiffs. The range of loss, if any, cannot be estimated and thus no potential loss is reflected in Optios financial statements.



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Optio Software, Inc.



Notes to the Consolidated Condensed Financial Statements

(Unaudited)  (Continued)



6. Note Receivable



As
further explained in Notes 3 and 4 of the Notes to Consolidated Financial Statements included in Optios Annual Report on Form 10-K, Optio holds a note receivable from M2 Systems Corporation (M2 Systems) as partial consideration for
the sale by Optio of its Muscato Corporation (Muscato) and Translink Solutions Corporation business units. Under the terms of this note, M2 Systems was required to make a payment of $115,000 on June 1, 2004. M2 Systems failed to make
this payment and Optio formally notified M2 Systems of its failure to pay on June 3, 2004. M2 Systems has thirty days from the date of this notification to make such payment, or it would be an event of default under the note. Optio intends to take
action as allowed under the promissory note and security documents upon an event of default.



During the third quarter of 2004, as a result of M2 Systems failure to make timely payments, management determined that this was an indication that it was probable that Optio would be unable to collect all amounts due
according to the contractual terms of the note. At that time, the loan was considered impaired and was written down to the assessed fair value of the collateral. As of October 31, 2003, the collateral, including technology, accounts receivable,
fixed assets and the discounted net cash flows of maintenance contracts was estimated to have an approximate fair value of $2.8 million, substantially less than the $3.7 million note receivable balance as of October 31, 2003. Thus Optio recorded an
impairment charge of $900,000 during the year ended January 31, 2004. Optio continues to reassess the value of the collateral on an ongoing basis. The amount of the note receivable recorded could be materially different under different conditions or
using different assumptions, including the varying assumptions regarding the fair value of the collateral. If M2 Systems defaults on the note and the collateral proves to be of no value to the Company, the Company would incur an additional loss of
approximately $2.6 million. The Company has the right to receive the quarterly financial statements of M2 Systems and Muscato and has certain audit rights as to the collateral for the note; therefore, the Company periodically assesses the value of
the collateral and the note, as reflected in the Companys financial statements.



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



OVERVIEW



Optio is engaged primarily in the development, sale and support of infrastructure software that enhances the form, content, distribution and availability
of business information. Optios primary business consists of providing software and services that addresses organizations needs for customized information delivered via print, fax and e-mail to users of enterprise and healthcare
applications.



Optio markets and sells its software and
services throughout the United States, Europe and the Asia Pacific region, through its direct sales force and certified resellers. Optio has offices in the United States, France, the United Kingdom and Germany. Optio also offers consulting services,
which provide customers with implementation assistance and training. No single customer accounted for 10% or more of Optios revenue for the three months ended April 30, 2004 or 2003.



Critical Accounting Policies and Use of Estimates



Optio has identified significant accounting policies and estimates that are
critical to the understanding of its financial statements.



Revenue
Recognition



Overview



The Companys revenue consists of fees for licenses of the
Companys software products, maintenance, consulting services and customer training. The Company generally charges fees for licenses of its software products either based on the number of Central Processing Units (CPUs) on which the
product is installed or, to a lesser extent, based on the number of persons or hospital beds registered to use the product. The Companys revenue recognition policies are in accordance with Statement of Position (SOP) No. 97-2,
Software Revenue Recognition, as amended by SOP No. 98-9, Software Revenue Recognition, With Respect to Certain Transactions and the Securities and Exchange Commissions Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition in Financial Statements, as amended by SAB 104, Revenue Recognition.



License Fees



The
Company licenses its products through its direct sales force and indirectly through resellers. In general, software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an
unconditional obligation to pay, the software product has been delivered, there are no significant uncertainties surrounding product acceptance, the fees are fixed or determinable and collection is considered probable. Delivery is considered to have
occurred when title and risk of loss have been transferred to the customer, which generally occurs when media containing the licensed programs is provided to a common carrier. In case of electronic delivery, delivery occurs when the customer is
given access to the licensed programs. If collectibility is not considered probable, revenue is recognized when the fee is collected. The Company enters into reseller arrangements that typically provide for sublicense fees payable to the Company
based upon a percentage of list price. The Company does not grant its resellers the right of return.



The Company recognizes revenue using the residual method pursuant to the requirements of SOP No. 97-2, as amended by SOP No. 98-9. Revenues recognized
from multiple-element software



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arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as licenses
for software products, maintenance, consulting services or customer training. The determination of fair value is based on objective evidence, which is specific to the Company. The Company limits its assessment of objective evidence for each element
to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists
but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee
is recognized as revenue.



The Company records deferred revenue
for software license agreements when cash has been received from the customer and the agreement does not qualify for revenue recognition under the Companys revenue recognition policy. The Company records accounts receivable for software
license agreements when the agreement qualifies for revenue recognition but cash or other consideration has not been received from the customer.



Services, Maintenance and Other Revenue



Consulting services revenues and customer training revenues are recognized as such services are performed, as they are incidental to the functionality of
the software. Maintenance revenues, which include revenues bundled with software license agreements that entitle the customers to technical support and future unspecified enhancements to the Companys products, are deferred and recognized
ratably over the related agreement period, generally twelve months. In accordance with Emerging Issues Task Force release 01-14, Income Statement Characterization of Reimbursements Received for Out of Pocket Expenses Incurred, the
Company recognizes reimbursable expenses as revenue and as an expense in cost of revenue in all periods presented.



Note Receivable



Optio holds a note from M2 Systems as partial consideration for the sale of Muscato and TransLink. Under the terms of this note, M2 Systems was required
to make payments of $100,000 each on September 1, 2003 and December 1, 2003. M2 Systems failed to make both payments on their respective due dates; however, payment was made prior to an event of default. In addition, M2 Systems was required to make
a payment of $115,000 on June 1, 2004. M2 Systems failed to make this payment and Optio formally notified M2 Systems of its failure to pay on June 3, 2004. M2 Systems has thirty days from the date of this notification to make such payment, or it
would be an event of default under the note. Optio intends to take action as allowed under the promissory note and security documents upon an event of default.



During the third quarter of 2004, as a result of M2 Systems failure to make timely payments, management determined that this was an indication that it
was probable that Optio would be unable to collect all amounts due according to the contractual terms of the note. At that time, the loan was considered impaired and was written down to the assessed fair value of the collateral. As of October 31,
2003, the collateral, including technology, accounts receivable, fixed assets and the discounted net cash flows of maintenance contracts was estimated to have an approximate fair value of $2.8 million, substantially less than the $3.7 million note
receivable balance as of October 31, 2003. Thus Optio recorded an impairment charge of $900,000. Optio continues to reassess the value of the collateral on an ongoing basis. The amount of the note receivable recorded could be materially different
under different conditions or using different assumptions, including the varying assumptions regarding the fair value of the collateral. In Optios assessment of the collateral, varying assumptions, including the length of time of which
customers would continue on maintenance, resulted in estimates of the value of the collateral ranging from $1.8 million to $3.5 million, which could have resulted in an impairment charge ranging from $200,000 to $1.9 million. If M2 Systems defaults
on the note and the collateral proves to be of no value to Optio, Optio would incur an additional loss of approximately $2.6 million.



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Accounts Receivable



Optio maintains allowances for doubtful accounts for estimated losses resulting from customers inability to make payments required under their
contracts. The amount of Optios reserve is based on historical experience and Optios specific review and analysis of the receivables outstanding. Management reviews its accounts receivable on a regular 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 3% to 20%, in its overall allowance for doubtful accounts. Based on
managements best estimate it believes the Companys allowance for doubtful accounts is adequate as presented, however, the amount of the reserve could be different under different conditions or using varying assumptions. If the percentage
of the general reserve were to increase by 1%, an additional $50,000 reserve would be required. If the financial condition of Optios customers were to deteriorate, resulting in their inability to make payments, additional reserves would be
required, increasing Optios bad debt expense included in general and administrative expenses.



RESULTS OF OPERATIONS



Three
Months Ended April 30, 2004 Compared to Three Months Ended April 30, 2003



Revenues



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



|                                                                            |  |                              |   |  |      |  
|--------------------------------------------------------------------------- |  | ---------------------------- | - |  | ---- | -
|                                                                            |  | Three Months Ended April 30, |  
|                                                                            |  | 2003                         |   |  | 2004 |  
|Revenue:                                                                    |  |                              |   |  |      |  
|License fees                                                                |  | 32                           | % |  | 40   | %
|Services, maintenance and other                                             |  | 68                           |   |  | 60   |  
|                                                                            |  |                              |   |  |      |  
|Total revenue                                                               |  | 100                          |   |  | 100  |  
|                                                                            |  |                              |   |  |      |  
|Costs of revenue (excluding depreciation and amortization, included below): |  |                              |   |  |      |  
|License fees                                                                |  | 2                            |   |  | 2    |  
|Services, maintenance and other                                             |  | 25                           |   |  | 22   |  
|                                                                            |  |                              |   |  |      |  
|Total cost of revenue                                                       |  | 27                           |   |  | 24   |  
|                                                                            |  |                              |   |  |      |  
|                                                                            |  | 73                           |   |  | 76   |  
|                                                                            |  |                             
|Operating expenses:                                                         |  |                              |   |  |      |  
|Sales and marketing                                                         |  | 36                           |   |  | 37   |  
|Research and development                                                    |  | 15                           |   |  | 15   |  
|General and administrative                                                  |  | 17                           |   |  | 15   |  
|Depreciation and amortization                                               |  | 3                            |   |  | 1    |  
|                                                                            |  |                              |   |  |      |  
|Total operating expenses                                                    |  | 71                           |   |  | 68   |  
|                                                                            |  |                              |   |  |      |  
|Income from operations                                                      |  | 2                            |   |  | 8    |  
|Interest and other income                                                   |  | 1                            |   |  | 1    |  
|                                                                            |  |                              |   |  |      |  
|Income tax expense                                                          |  |                             |   |  | 1    |  
|                                                                            |  |                              |   |  |      |  
|Net loss                                                                    |  | 3                            | % |  | 8    | %
|                                                                            |  |                              |   |  |      |  



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Revenues



Total revenues increased 11% to $7.2 million from $6.5 million for the three months ended April 30, 2004 and 2003, respectively.



License fees



Revenues from software licenses increased 39% to $2.9 million from $2.1 million for the three months ended April 30, 2004
and 2003, respectively. In the previous year, Optio felt the affects of pricing pressure resulting from tighter corporate spending and a challenging economy. In the current year, Optio has been able to capture additional business resulting from a
slightly improving economy and increased IT spending. In addition, Optios continued financial strength and the addition of new products such as Optio Print Manager and the SAP version of Optio e.ComIntegrate have allowed us to compete in new
markets. Optio gained 31 new customers through its direct sales force in the three months ended April 30, 2004 compared to 20 in the three months ended April 30, 2003. License fee revenues from Optios European division increased from $410,000
in the three months ended April 30, 2003, to $614,000 in the three months ended April 30, 2004, largely a result of Optios efforts to build upon our existing partnerships, for example, Oracle, in the European marketplace.



Approximately $475,000 of Optios software license revenue during the
three months ended April 30, 2004 was derived from partners, such as resellers, value-added distributors or OEM relationships, representing 16% of license revenue for Optio. During the three months ended April 30, 2003, Optio generated $873,000 of
its software license revenue through partners, representing 42% of Optios license revenue, significantly higher than the current year due to three large contracts sold through one of Optios healthcare resellers.



Services, maintenance and other



Revenues from services, maintenance and other decreased to $4.3 million in
the three months ended April 30, 2004 from $4.4 million in same period of the prior year. Services revenue decreased to $1.5 million for the three months ended April 30, 2004 from $1.8 million in the three months ended April 30, 2003. In the three
months ended April 30, 2003, Optio was involved in large consulting engagements with specific large integrators, contributing an additional $250,000 to services revenue in that quarter. These projects were completed during the second quarter of
fiscal year 2004. Maintenance revenue increased $200,000 to $2.8 million in the three months ended April 30, 2004 from $2.6 million in the three months ended April 30, 2003. Maintenance revenue continues to increase as Optio adds to its customer
base and increases the price of its annual maintenance fees.



Revenue Mix



Revenues from licenses represented 40% of total revenue
in the three months ended April 30, 2004 and 32% of total revenue in the three months ended April 30, 2003. The 39% increase in software license revenue year-over-year, while services and maintenance revenue has remained relatively consistent, has
caused the revenue mix to shift towards a greater percentage of software license revenue.



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##### Table of Contents

Costs of Revenues



Total costs of revenues remained constant at $1.7 million in both the three months ended April 30, 2004 and 2003.



Licenses



Costs of revenues from licenses consist of costs related to the packaging and distribution of the products, fees paid for
integration of third-party software products and fees paid to referral partners. Costs of revenues from licenses increased to $149,000 in the three months ended April 30, 2004 from $118,000 in the three months ended April 30, 2003, primarily the
result of additional referral fees created by Optios improved referral partner relationships.



Services, maintenance and other



Costs of revenues from services, maintenance and other consist of personnel, subcontracting and other expenses relating to the cost of providing customer support, education and consulting and implementation services. Costs of revenues from
services, maintenance and other remained constant at $1.6 million for both the three months ended April 30, 2004 and 2003. The cost of outsourcers, often used in the implementation of Optios products at customer sites, remained constant at
approximately $400,000 in both periods. Optios internal headcount for its consulting and support departments has remained consistent between the quarters.



Operating Expenses



Sales and Marketing



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



Sales and
marketing expenses increased 13% to $2.7 million from $2.4 million for the three months ended April 30, 2004 and 2003, respectively. Sales and marketing expenses were 37% and 36%, respectively, of total revenue for the same periods. While direct
marketing expenditures remained relatively consistent between the two quarters, Optio increased its sales and marketing headcount by eight individuals over the previous year, primarily in its marketing staff and healthcare sales staff. In addition,
commissions and bonuses were increased approximately $40,000, resulting from improved software sales. Finally, travel and related expenses increased approximately $50,000, resulting from increased headcount and travel by Optios EMEA
organization.



Research and Development



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



Research and development expenses increased to $1.1 million in the three months ended April 30, 2004 from $1.0 million in the three months ended April 30, 2003. This increase is primarily the result of increased wages
and slightly increased travel and meeting expenses within the development group.



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##### Table of Contents

General and Administrative



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



General and administrative expenses remained constant at $1.1 million in both the three months ended April 30, 2004 and 2003. While overall, general and
administrative expenses remained relatively constant, Optio was able to save $110,000 in legal fees and $90,000 in insurance premiums. This was offset by increased salaries of $75,000 and bad debt expense of $45,000.



Depreciation and Amortization



Depreciation and amortization expense decreased to $71,000 from $179,000 for
the three months ended April 30, 2004 and 2003, respectively. This decrease is due to a greater number of Optios fixed assets becoming fully depreciated during the three months ended April 30, 2004.



Interest Income



Interest income decreased to $42,000 from $49,000 in the three months ended April 30, 2004 and 2003, respectively, primarily
the result of a reduction in principal of the M2 Systems note receivable and lower interest rates.



Interest Expense



Interest expense increased to $4,000 from $3,000 in the three months ended April 30, 2004 and 2003, respectively. Interest expense primarily represents the interest paid on Optios capital leases.



LIQUIDITY AND CAPITAL RESOURCES



Optio had $6.0 million and $3.8 million in cash and cash equivalents at
April 30, 2004 and 2003, respectively.



The following table
sets forth certain selected statements of cash flow information for the three months ended April 30, 2004:



|                                          |  |   |        
|----------------------------------------- |  | - | -------
|Net cash provided by operations           |  | $ | 542,000
|Net cash provided by investing activities |  |   | 9,000  
|Net cash provided by financing activities |  |   | 125,000
|Net increase in cash and cash equivalents |  |   | 663,000



Cash provided by
operations was primarily the result of $569,000 in net income, plus a $71,000 add-back of non-cash depreciation and amortization expense, offset primarily by changes in working capital resulting in a $114,000 outflow of cash. The major component of
such working capital changes was the Companys use of funds to pay down accrued expenses by approximately $672,000, primarily representing the payment of Optios year-end bonuses. In addition, Optio prepaid several of its renewed insurance
policies and other marketing expenses, resulting in a $189,000 cash outflow. This was partially offset by improved collections on accounts receivable resulting in additional cash inflow of $480,000. Finally, Optios payables increased $212,000,
a result of timing of payments. In investing activities, Optio received $83,000 in payments on the receivable from M2 Systems and purchased $74,000 of property and equipment in the ordinary course of business. Optios financing activities
included receipts of $144,000 from the exercise of stock options, offset by payments of capital lease obligations of $19,000.



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##### Table of Contents

On April 8, 2004 Optio extended the line of credit with its bank through April 19, 2005. The line of
credit bears interest at prime rate, subject to increase based on Optios performance relative to certain financial ratios. Optio may borrow up to $4.0 million, or such lesser amount as may be determined based on the level of accounts
receivable. Accounts receivable, equipment, general intangibles and other assets as defined in the agreement collateralize the line of credit. The agreement contains various covenants, including liquidity and EBITDA requirements and restrictions on
dividends. During fiscal year 2005, Optio estimates that it will have approximately $2.0 million available for borrowings under this line of credit based upon Optios historical accounts receivable balance.



The Company holds a note receivable from M2 Systems as consideration for the
sale of Muscato and TransLink. The payment schedule of the note requires four quarterly installments of $100,000, including interest calculated at the prime rate as of the third business day preceding each calendar year end (4.0% as of December 29,
2003), through January 31, 2004, four quarterly payments of $115,000, including interest, through January 31, 2005, and eleven quarterly payments of $120,000 through October 31, 2007. The balance of the note, plus any additional accrued interest, is
to be paid in the quarter ending January 31, 2008.



Management
believes that the existing cash and cash equivalents, together with Optios line of credit, will provide adequate cash to fund its anticipated cash needs at least through the next twelve months. Optio intends to expand its product line, which
may require acquisitions of companies or products in an attempt to enhance our product line. As a result, we may attempt to raise additional funds through equity or debt financing. There can be no assurance that we will be able to raise additional
funds on favorable terms, or at all. Although not anticipated, a dramatic decrease in demand for Optios products or services, or a dramatic change in technology related to Optios products or services offered, could have a negative impact
on Optios liquidity. This risk may include the potential for Optio to not meet its debt covenant requirements, making any borrowings under the line of credit unavailable.



ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



Optio provides its services to customers primarily in the United States and, to a lesser extent, in Europe and elsewhere throughout the world. As a
result, Optios financial results could be affected by factors, such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. All sales are currently made in both U.S. dollars and local currencies. A
strengthening of the U.S. dollar or the weakening of these local currencies could make Optios products less competitive in foreign markets. Based upon the relative size of Optios foreign operations, Optio believes its exposure to foreign
currency fluctuations is not a material risk. Optios interest income and expense are sensitive to changes in the general level of U.S. interest rates. Based on Optios cash equivalents balance and the nature of its outstanding debt, Optio
believes its exposure to interest rate risk is not material.



ITEM 4. CONTROLS AND PROCEDURES.



As
of April 30, 2004, Optio, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (the Evaluation). Based upon the Evaluation, our Chief Executive Officer and Chief Financial Officer concluded that Optios disclosure controls and procedures are effective in
ensuring that material information relating to Optio, including its consolidated subsidiaries, is made known to them by others within the organization,



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particularly during the period in which this quarterly report was being prepared. There were no significant changes in
Optios internal controls or in other factors that could significantly affect these controls subsequent to the date of the Evaluation.



PART II  OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



On November
13, 2001, a lawsuit styled Kevin Dewey vs. Optio Software, Inc., et. al. was filed in the United States District Court for the Southern District of New York. The complaint was filed against the underwriters in Optios initial public offering as
well as Optio and certain officers and directors of Optio, by a single plaintiff purportedly on behalf of persons purchasing Optios common stock between December 14, 1999 and December 6, 2000 and seeks class action status. The complaint
includes allegations of violations of (i) Section 11 of the Securities Act of 1933 by all named defendants, (ii) Section 12(a)(2) of the Securities Act of 1933 by the underwriter defendants, (iii) Section 15 of the Securities Act of 1933 by the
individual defendants, and (iv) Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the underwriter defendants. The complaint alleges that Optios prospectus was materially false and misleading because
it failed to disclose, among other things, that: (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of a
limited number of Optio shares issued in connection with the Optio initial public offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate Optio shares to those customers in the Optio
initial public offering in exchange for which the customers agreed to purchase additional Optio shares in the aftermarket at pre-determined prices. Optio believes the lawsuit is without merit. Thus, Optio intends to defend vigorously against the
plaintiffs claims. The complaint seeks unspecified amounts as compensatory damages as a result of Optios alleged actions, as well as punitive damages and reimbursement for the plaintiffs attorneys fees and associated costs
and expenses of the lawsuit. Optio is currently engaged in settlement negotiations between its insurance carrier and the plaintiffs. The range of loss, if any, cannot be estimated and thus no potential loss is reflected in Optios financial
statements.



Management believes that it has meritorious
defenses in the foregoing matter and intends to pursue its position vigorously. Litigation is inherently subject to many uncertainties; however, management does not believe that the outcome of this case will have a material adverse effect on the
financial position of Optio. However, depending on the amount and timing of an unfavorable resolution of the contingency, it is possible that Optios future results of operations or cash flows could be materially affected.



Optio is from time to time involved in other routine litigation incidental to
the conduct of its business.



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



None.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



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



None.



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ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a)
Exhibits



|     |  |                                                                                                                               
|---- |  | ------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of CEO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                           
|     | 
|31.2 |  | Certification of CFO pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.                           
|     | 
|32.1 |  | Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification by CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|99.1 |  | Safe Harbor Compliance Statement for Forward-Looking Statements.                                                              



(b) Reports on Form 8-K



|    |  |                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | A form 8-K was filed on April 8, 2004 to furnish the Companys fourth quarter and year-end earnings press release dated April 6, 2004.



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 14thday of June, 2004.



OPTIO SOFTWARE, INC.By:

/s/ C. Wayne CapeC. Wayne CapePresident and Chief Executive Officer




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