** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

** **

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

 

**                                               **For the quarterly period ended April 30,2006

** **

**OR**

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

 

**                                               **For the transition period from                    to                   

** **

**Commission FileNumber:  1-15529**

** **

**OPTIO SOFTWARE, INC.**

(Exact name of registrant as specified in its charter)

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

 

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes x  No  o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act).

Large acceleratedfiler o                    Accelerated filer o                              Non-acceleratedfiler x

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

There were22,577,944 shares of the Registrant’s common stock outstanding as of June 9,2006.

 

 

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**OPTIO SOFTWARE, INC.**

**FORM 10-Q**

**For the Quarterly Period Ended April 30, 2006**

**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  |       | 15         |       |
| Item 3.                                       |       | Quantitative and Qualitative Disclosures About Market  Risk                                       |       | 24         |       |
| Item 4.                                       |       | Controls and Procedures                                                                           |       | 24         |       |
|                                          |       |                                                                                              |       |       |       |
| **PART II  — OTHER INFORMATION**    | ** ** | ** **                                                                                        | ** ** |
| ** **                                    | ** ** | ** **                                                                                        | ** ** | ** ** | ** ** |
| Item  1.                                      |       | Legal  Proceedings                                                                                |       | 25         |       |
| Item 1A.                                 |       | Risk  Factors                                                                                     |       | 26         |       |
| Item 2.                                       |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                      |       | 26         |       |
| Item 3.                                       |       | Defaults Upon Senior Securities                                                                   |       | 26         |       |
| Item 4.                                       |       | Submission of Matters to a Vote of Security Holders                                               |       | 26         |       |
| Item  5.                                      |       | Other  Information                                                                                |       | 26         |       |
| Item 6.                                       |       | Exhibits                                                                                          |       | 26         |       |
|                                               |            |                                                                                                   |            |            |            |  |  |  |  |

 

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# **FORWARD-LOOKINGSTATEMENTS**

In addition to historical information, this QuarterlyReport on Form 10-Q for the quarter ended April 30, 2006contains forward-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-lookingstatements include, among other things, statements regarding Optio Software, Inc.’s(“Optio”) anticipated costs and expenses, Optio’s capital needs and financingplans, product and service development, Optio’s growth strategies, integrationof acquired entities, 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 statementsincluding the words “expects,” “anticipates,” “intends,” “believes” and similarlanguage. Optio’s actual results may differ significantly from those projectedin the forward-looking statements. Factors that might cause or contribute tosuch differences include, but are not limited to, risks associated with Optio’sreliance on strategic marketing and reseller relationships, collectibility ofaccounts receivable and notes receivable (specifically, the note receivablefrom M2 Systems Corporation), fluctuations in operating results because ofacquisitions or dispositions, failure to integrate new products and newlyacquired companies, diversion of management resources relating to acquisitions,reduction in cash reserves relating to acquisitions, challenges relating toacquisitions and the possibility that this may cause Optio to no longer beprofitable, the negative effective on Optio’s earnings relating to theamortization or potential write-down of acquired assets or goodwill,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 software products,market acceptance of new products, the failure of new products to operate asanticipated, expectation of achieving and sustaining operating profits andearnings, including timing of such cash flows and company performance, disputesregarding Optio’s intellectual property, risks relating to the delisting ofOptio’s stock, possible adverse results of pending or future litigation, orrisks associated with Optio’s international operations. These and additionalfactors are set forth in Item 1A of Optio’s Annual Report on Form 10-Kfor the fiscal year ended January 31, 2006 (the “2006 Annual Report”),filed with the Securities and Exchange Commission (“SEC”) on May 1, 2006.You should carefully review the risk factors in the 2006 Annual Report and anyadditional risks described in other documents that Optio files from time totime with the SEC. You are cautioned not to place undue reliance on theforward-looking statements in this document, which speak only as of the date ofthis Quarterly Report on Form 10-Q. Optio undertakes no obligationto publicly release any revisions to the forward-looking statements or reflectevents or circumstances after the date of this document.

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# **PART I— FINANCIAL INFORMATION**

ITEM 1. FINANCIAL STATEMENTS

**OptioSoftware, Inc.Consolidated Condensed Balance Sheets**
| ** **                                                                            | ** ** | **January 31,  2006** | ** ** | **April 30,  2006** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                                                                            | ** ** | ** **                 | ** ** | **(Unaudited)**          | ** ** |
| **ASSETS**                                                                            | ** ** | ** **                 | ** ** | ** **               | ** ** |
| Current assets:                                                                       | ** ** | ** **                 | ** ** | ** **               | ** ** |
| Cash and cash equivalents                                                             |       | $                          | 7,954,000  |                     | $          | 8,297,000 |   |
| Accounts receivable, net                                                              |       | 4,811,000                  |       | 3,846,000                |       |
| Prepaid expenses and other current assets                                             |       | 720,000                    |       | 987,000                  |       |
| Notes receivable from related party                                                   |       | 5,000                      |       | 5,000                    |       |
| Current portion of note receivable from M2                                            |       | 323,000                    |       | 288,000                  |       |
| Total current  assets                                                                 |       | 13,813,000                 |       | 13,423,000               |       |
| Property and  equipment, net                                                          |       | 613,000                    |       | 699,000                  |       |
| Other assets:                                                                         |       |                       |       |                     |       |
| Note receivable from M2, net of impairment reserve  of $900,000, less current portion |       | 1,720,000                  |       | 1,679,000                |       |
| Goodwill                                                                              |       | 1,846,000                  |       | 2,227,000                |       |
| Other intangible assets, net                                                          |       | 1,615,000                  |       | 1,518,000                |       |
| Other                                                                                 |       | 91,000                     |       | 103,000                  |       |
| Total assets                                                                          |       | $                          | 19,698,000 |                     | $          | 19,649,000 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                        |       |                       |       |                     |       |
| Current liabilities:                                                                  |       |                       |       |                     |       |
| Accounts payable                                                                      |       | $                          | 922,000    |                     | $          | 927,000 |   |
| Accrued expenses                                                                      |       | 2,218,000                  |       | 1,504,000                |       |
| Current portion of capital lease obligations                                          |       | 1,000                      |       | —                   |       |
| Deferred revenue                                                                      |       | 7,373,000                  |       | 7,382,000                |       |
| Total current  liabilities                                                            |       | 10,514,000                 |       | 9,813,000                |       |
|                                                                                  |       |                       |       |                     |       |
| Other long-term  liabilities                                                          |       | 63,000                     |       | 73,000                   |       |
| Total  liabilities                                                                    |       | 10,577,000                 |       | 9,886,000                |       |
| Commitments and  contingencies                                                        |       |                       |       |                     |       |
| Shareholders’ equity:                                                            |       |                       |       |                     |       |
| Common stock                                                                          |       | 52,577,000                 |       | 53,226,000               |       |
| Accumulated deficit                                                                   |       | (43,533,000                | )          | (43,587,000              | )          |
| Accumulated other comprehensive income                                                |       | 77,000                     |       | 124,000                  |       |
| Total  shareholders’ equity                                                      |       | 9,121,000                  |       | 9,763,000                |       |
| Total liabilities and  shareholders’ equity                                      |       | $                          | 19,698,000 |                     | $          | 19,649,000 |   |

*** ***

***Seeaccompanying notes.***

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**OptioSoftware, Inc.Consolidated Condensed Statements of Operations and Comprehensive Income (Loss)(Unaudited)**
| ** **                                                                             | ** ** | **Three Months Ended April 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                             | ** ** | **2006** | ** ** |
| **Revenue:**                                                                           |       |                                                 |       |   |   |
| License fees                                                                           |       | $                                                    | 2,211,000  |   | $ | 1,898,000 |   |
| Subscription fees                                                                      |       | 509,000                                              |       | 555,000 |   |
| Services, maintenance, and other                                                       |       | 4,196,000                                            |       | 4,409,000 |   |
|                                                                                   |       | 6,916,000                                            |       | 6,862,000 |   |
| Costs of revenue  (exclusive of depreciation and amortization shown separately below): |       |                                                 |       |   |   |
| License fees                                                                           |       | 182,000                                              |       | 132,000 |   |
| Services, maintenance, and other                                                       |       | 1,615,000                                            |       | 1,677,000 |   |
|                                                                                   |       | 1,797,000                                            |       | 1,809,000 |   |
|                                                                                   |       | 5,119,000                                            |       | 5,053,000 |   |
| Operating expenses:                                                                    |       |                                                 |       |   |   |
| Sales and marketing                                                                    |       | 2,861,000                                            |       | 2,539,000 |   |
| Research and development                                                               |       | 1,278,000                                            |       | 1,322,000 |   |
| General and administrative                                                             |       | 917,000                                              |       | 1,142,000 |   |
| Depreciation and amortization                                                          |       | 188,000                                              |       | 184,000 |   |
|                                                                                   |       | 5,244,000                                            |       | 5,187,000 |   |
| Loss from  operations                                                                  |       | (125,000                                             | )          | (134,000 | ) |
| Other income (expense):                                                                |       |                                                 |       |   |   |
| Interest income                                                                        |       | 56,000                                               |       | 96,000 |   |
| Interest expense                                                                       |       | (2,000                                               | )          | (1,000 | ) |
| Other                                                                                  |       | (1,000                                               | )          | 1,000 |   |
|                                                                                   |       | 53,000                                               |       | 96,000 |   |
|                                                                                   |       |                                                 |       |   |   |
| Loss before  income taxes                                                              |       | (72,000                                              | )          | (38,000 | ) |
| Income tax  expense                                                                    |       | 18,000                                               |       | 16,000 |   |
| Net loss                                                                               |       | $                                                    | (90,000    | ) | $ | (54,000 | ) |
| Net loss per  share — basic and diluted                                           |       | $                                                    | 0.00       |   | $ | 0.00 |   |
| Weighted average  common shares outstanding — basic and diluted                   |       | 20,860,295                                           |       | 21,842,663 |   |
| Comprehensive income  (loss):                                                          |       |                                                 |       |   |   |
| Net loss                                                                               |       | $                                                    | (90,000    | ) | $ | (54,000 | ) |
| Foreign currency translation adjustment                                                |       | 132,000                                              |       | 47,000 |   |
| Comprehensive  income (loss)                                                           |       | $                                                    | 42,000     |   | $ | (7,000 | ) |

 

***Seeaccompanying notes.***

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

 
| ** **                                    | ** ** | **Common Stock** | ** ** | **Accumulated** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Shareholders’** | ** ** |
|-----------------------------------------------|------------|-----------------------|------------|-----------------|------------|---------------------------------------|------------|-------------------------------|------------|
| ** **                                    | ** ** | **Shares**            | ** ** | **Amount**      | ** ** | **Deficit**                           | ** ** | **Income**                    | ** ** | **Equity** | ** ** |
|                                          |       |                  |       |            |       |                                  |       |                          |       |   |   |
| Balance at February 1, 2006              |       | 21,435,826            |       | $               | 52,577,000 |                                  | $          | (43,533,000                   | )          | $ | 77,000 |   | $ | 9,121,000 |   |
| Comprehensive  income, net of tax:            |       |                  |       |            |       |                                  |       |                          |       |   |   |
| Net loss                                      |       | —                |       | —          |       | (54,000                               | )          | —                        |       | (54,000 | ) |
| Foreign currency translation adjustment       |       | —                |       | —          |       | —                                |       | 47,000                        |       | 47,000 |   |
| Comprehensive loss                            |       |                  |       |            |       |                                  |       |                          |       | (7,000 | ) |
| Exercise of stock options                     |       | 339,874               |       | 187,000         |       | —                                |       | —                        |       | 187,000 |   |
| VertiSoft Shares released from escrow         |       | 310,000               |       | 381,000         |       | —                                |       | —                        |       | 381,000 |   |
| Compensation expense related to stock options |       | —                |       | 81,000          |       | —                                |       | —                        |       | 81,000 |   |
| Balance at  April 30, 2006               |       | 22,085,700            |       | $               | 53,226,000 |                                  | $          | (43,587,000                   | )          | $ | 124,000 |   | $ | 9,763,000 |   |

 

***Seeaccompanying notes****.*

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

 
| ** **                                                                       | ** ** | **Three Months Ended April 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                                             | ** ** | **2006** | ** ** |
|                                                                             |       |                                                 |       |   |   |
| Cash flows from  operating activities:                                           |       |                                                 |       |   |   |
| Net loss                                                                         |       | $                                                    | (90,000    | ) | $ | (54,000 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                    |       | 104,000                                              |       | 87,000 |   |
| Amortization of intangibles                                                      |       | 84,000                                               |       | 97,000 |   |
| Non-cash stock compensation                                                      |       | —                                               |       | 81,000 |   |
| Loss on disposal of assets                                                       |       | —                                               |       | 2,000 |   |
| Provision for deferred taxes                                                     |       | 10,000                                               |       | 10,000 |   |
| Changes in  operating assets and liabilities:                                    |       |                                                 |       |   |   |
| Accounts receivable                                                              |       | 473,000                                              |       | 1,026,000 |   |
| Prepaid expenses and other assets                                                |       | (261,000                                             | )          | (264,000 | ) |
| Accounts payable                                                                 |       | (32,000                                              | )          | (9,000 | ) |
| Accrued expenses                                                                 |       | (390,000                                             | )          | (692,000 | ) |
| Income taxes payable                                                             |       | —                                               |       | (46,000 | ) |
| Deferred revenue                                                                 |       | 323,000                                              |       | (53,000 | ) |
| Net cash  provided by operating activities                                       |       | 221,000                                              |       | 185,000 |   |
|                                                                             |       |                                                 |       |   |   |
| Cash flows from  investing activities:                                           |       |                                                 |       |   |   |
| Purchases of property and equipment                                              |       | (135,000                                             | )          | (171,000 | ) |
| Repayment of note receivable from M2 Systems                                     |       | 81,000                                               |       | 76,000 |   |
| Net cash used in  investing activities                                           |       | (54,000                                              | )          | (95,000 | ) |
|                                                                             |       |                                                 |       |   |   |
| Cash flows from  financing activities:                                           |       |                                                 |       |   |   |
| Payments of notes payable and capital lease  obligations                         |       | (21,000                                              | )          | (1,000 | ) |
| Proceeds from exercise of stock options                                          |       | 92,000                                               |       | 186,000 |   |
| Net cash  provided by financing activities                                       |       | 71,000                                               |       | 185,000 |   |
|                                                                             |       |                                                 |       |   |   |
| Impact of  foreign currency rate fluctuations on cash                            |       | 126,000                                              |       | 68,000 |   |
| Net increase in  cash and cash equivalents                                       |       | 364,000                                              |       | 343,000 |   |
|                                                                             |       |                                                 |       |   |   |
| Cash and cash  equivalents at beginning of period                                |       | 5,433,000                                            |       | 7,954,000 |   |
| Cash and cash  equivalents at end of period                                      |       | $                                                    | 5,797,000  |   | $ | 8,297,000 |   |
|                                                                             |       |                                                 |       |   |   |
| Supplemental disclosures  of cash flow information:                              |       |                                                 |       |   |   |
| Cash paid during  the period for:                                                |       |                                                 |       |   |   |
| Interest paid                                                                    |       | $                                                    | 2,000      |   | $ | — |   |
| Income taxes  paid                                                               |       | $                                                    | 8,000      |   | $ | 6,000 |   |

 

***Seeaccompanying notes.***

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

**1. Description of Business**

OptioSoftware, Inc. (the “Company” or “Optio”), provides document automationand electronic health record solutions that enable organizations to achieveunprecedented 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 criticalinformation. The Company markets primarily to companies located principally inthe United States and Europe. The industry in which the Company operates issubject to rapid change due to development of new technologies and products.

**2. Basisof Presentation**

#### ***Interim FinancialInformation***

Theaccompanying interim consolidated condensed financial statements of the Companyhave been prepared in accordance with the instructions for Quarterly Reports onForm 10-Q. Accordingly, certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America havebeen condensed or omitted. In the opinion of management, all adjustments,consisting of normal recurring adjustments unless otherwise disclosed in aseparate note, considered necessary for a fair presentation of the financialinformation for the interim period reported have been made.

Theaccompanying financial statements should be read in conjunction with theCompany’s audited consolidated financial statements for the year ended January 31,2006, included in the Company’s Annual Report on Form 10-K for theyear ended January 31, 2006 (the “2006 Annual Report”), filed with theSecurities and Exchange Commission on May 1, 2006. Results of operationsfor the three months ended April 30, 2006 are not necessarily indicativeof the results for the year ending January 31, 2007.

***Share-Based Compensation Plans***

EffectiveJanuary 1, 1997, the Company adopted a Stock Incentive Plan (the “Plan”)for employees and key persons that provides for the issuance of stockincentives covering up to 12,500,000 shares of common stock. The Plan providesfor the grant of incentive stock options, non-qualified stock options,restricted stock awards and stock appreciation rights. The terms and conditionsof stock incentives granted under the Plan, including the number of shares, theexercise price and the time at which such options become exercisable aredetermined by the Board of Directors. The term of options granted under thePlan may not exceed 10 years and the options generally vest over periodsranging from three to five years. Prior to the adoption of the Plan, optionswhich had no termination period were granted to certain officers and selectedemployees.

On October 15,1999, the Company adopted a Directors’ Stock Option Plan (the “Directors’ Plan”)for directors of the Company who are not officers or employees of the Company.The Directors’ Plan provides for issuance of options to purchase the Company’scommon stock at an exercise price equal to fair market value on the date ofgrant and expire 10 years after issuance. The options become fully vested as ofthe date of issuance.

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A summary of stock optionactivity is as follows:
| ** **                                    | ** ** | **Number of  Shares** | ** ** | **Exercise Price  Per Share** | ** **               | **Weighted  Average  Exercise  Price** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|-----------------------------------------|--------------------------|----------------------------------------|------------|
|                                          |       |                       |       |                                    |                     |                                   |       |
| Outstanding  options at January 31, 2006 |       | 6,874,052                  |       | $                                       | 0.01 - $16.00            |                                   | $          | 0.93 |   |
| Options granted                               |       | 72,940                     |       | $                                       | 1.22 - $  1.46 |                                   | $          | 1.36 |   |
| Options exercised                             |       | (349,874                   | )          | $                                       | 0.25 - $  1.28 |                                   | $          | 0.56 |   |
| Options expired                               |       | —                     |       | —                                  |                     | —                                 |       |
| Options canceled/forfeited                    |       | (331,521                   | )          | $                                       | 0.25 - $16.00            |                                   | $          | 1.30 |   |
| Outstanding  options at April 30, 2006   |       | 6,265,597                  |       | $                                       | 0.01 - $16.00            |                                   | $          | 0.93 |   |
| Exercisable options at  April 30, 2006   |       | 5,228,775                  |       | $                                       | 0.01 - $16.00            |                                   | $          | 0.91 |   |

 

The following table summarizes information concerningoptions outstanding and exercisable as of April 30, 2006:
| **Options Outstanding**   | ** ** | **Options Exercisable**                            | ** ** |
|--------------------------------|------------|---------------------------------------------------------|------------|
| **Number of Shares** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|                           |       |                                                    |       |   |   |   |   |   |   |   |   |
| 6,265,597                      |       | 3.34                                                    |       | $0.93 |   | 5,228,775 |   | 2.36 |   | $0.91 |   |

 

Forpurposes of calculating the weighted average remaining contractual life in theabove table, 1,264,900 options that have no expiration period have beenexcluded. No options issued during the quarters ended April 30, 2005 or2006 had intrinsic value as the options were granted at an exercise price equalto the quoted market price at the date of grant. The weighted-average fairvalue of options granted during the three months ended April 30, 2005 and2006 equaled $1.22 and $1.18 per share, respectively.

Priorto February 1, 2006, the Company accounted for its stock-based employeecompensation arrangements under the intrinsic value method prescribed byAccounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees* (“APB No. 25”),as allowed by Statement of Financial Accounting Standards (“SFAS”) No. 123,*Accounting for Stock-Based Compensation*,as amended by SFAS No. 148, *Accountingfor Stock-Based Compensation—Transition and Disclosure*. As a result,no expense was recognized for options that were granted with an exercise priceequal to quoted market price at the date of grant. In December 2004, theFinancial Accounting Standards Board (FASB) issued SFAS No. 123R, *Share-Based Payment*, which amended SFAS No. 123and supersedes APB No. 25. SFAS No. 123R requires measurement of thecost of share-based payments to employees, including grants of employee stockoptions, to be recognized in the financial statements based on their fairvalues beginning with the first interim or annual period after June 15,2005. Subsequent to the effective date, the pro forma disclosures previouslypermitted under SFAS No. 123 are no longer an alternative to financialstatement recognition. Effective February 1, 2006, the Company has adoptedSFAS No. 123R using the modified prospective method. Under this method,compensation cost recognized during the three-month period ended April 30,2006 includes: (a) compensation cost for all share-based payments grantedprior to, but not yet vested as of February 1, 2006, based on the grantdate fair value estimated in accordance with the original provisions of SFAS No. 123amortized over the employees’ service period (typically the options’ vestingperiod) and (b) compensation cost for all share-based payments granted

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subsequent to February 1,2006, based on the grant-date fair value estimated in accordance with theprovisions of SFAS No. 123R amortized ratably over the options’ vestingperiod.

Forperiods prior to adoption of SFAS No. 123R, companies were required tocalculate the estimated fair value of options and could elect to either includethe estimated cost in earnings or disclose the pro forma effect in thefootnotes to their financial statements. The Company chose to disclose the proforma effect.

Thefair value of the options used for the application of SFAS No. 123Rdisclosures is estimated at the date of grant using the Black-Scholes optionpricing model. In determining the fair value of options using the Black-Scholesoption pricing model, various assumption such as expected life, volatility,risk-free interest rate, dividend yield and forfeiture rates are used. Theexpected life of awards granted represents the period of 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-based compensationis recorded for only those awards that are expected to vest. The followingweighted-average assumptions were used for the three months ended April 30,2006: risk-free interest rate of 4.70%; no dividend yield; volatility of 133%;a forfeiture rate of 20.99%; and an expected life of the options of 5.23 years.

For purposes of pro forma disclosures, the estimatedfair value of the options is amortized to expense over the options’ vestingperiod. The following table illustrates the effect on net loss and net loss pershare had the Company applied the fair value recognition provisions of SFAS No. 123to account for our employee stock option plan for the three-month period ended April 30,2005, because stock-based employee compensation was not accounted for using thefair value recognition method during that period (in thousands, except pershare data):
| ** **                                             | ** ** | **Three Months  Ended April 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                         | ** ** |
|                                                   |       |                                             |       |
| Net loss as  reported                                  |       | $                                                | (90,000    | ) |
| Deduct:  Compensation cost using the fair value method |       | $                                                | (99,000    | ) |
| Pro forma net  loss                                    |       | $                                                | (189,000   | ) |
| Net loss per  share as reported — basic           |       | $                                                | 0.00       |   |
| Net loss per  share as reported — diluted         |       | $                                                | 0.00       |   |
| Pro forma net  loss per share — basic             |       | $                                                | (0.01      | ) |
| Pro forma net loss per  share — diluted           |       | $                                                | (0.01      | ) |

 

Thehistorical pro forma impact of applying the fair value method prescribed bySFAS No. 123 is not representative of the impact that may be expected inthe future due to changes resulting from additional grants in future years andchanges in assumptions such as volatility, interest rates and expected lifeused to estimate fair value of the grants in future years.

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Notethat the above pro forma disclosure was not presented for the three-monthperiod ended April 30, 2006 because stock-based employee compensation hasbeen accounted for using the fair value recognition method under SFAS No. 123Rfor this period. Implementation of SFAS No. 123R resulted in $81,000 ofshare-based compensation expense, reflected entirely within the general andadministrative line item of the Consolidated Condensed Statement of Operationsand Comprehensive Income (Loss). No deferred tax asset was recognized duringthe three months ended April 30, 2006 due to the valuation allowanceplaced on the Company’s deferred tax assets. The adoption of SFAS No. 123Rhad no impact on cash flows from operations or financing activities.

Asof April 30, 2006, unrecognized compensation expense related to unvestedoptions was $694,114. This expense is expected to be recognized over a weightedaverage period of 1.93 years.

Asof April, 2006, the Company has reserved 11,150,706 shares of common stock forissuance upon exercise of stock options under the Plan, 1,363,900 shares ofcommon stock for issuance upon exercise of stock options outside of the Planand 240,000 shares of common stock for issuance upon exercise of stock optionsunder the Directors’ Plan.

***Goodwill and Other IntangibleAssets***

The Company acquiredgoodwill and other intangible assets in connection with the acquisition ofVertiSoft Corporation (“VertiSoft”) in August 2004. Under the purchasemethod of accounting pursuant to SFAS 141, the total purchase price wasallocated to the acquired entity’s net tangible and intangible assets based ontheir estimated fair values as of the date of the completion of theacquisition. The excess of the purchase price over the fair value of the nettangible assets/liabilities and identifiable intangible assets acquired wasrecorded as goodwill. In accordance with SFAS 142, goodwill and intangibleassets with indefinite lives resulting from business combinations have not beenamortized but instead will be tested for impairment at least annually (morefrequently if certain indicators are present) while identifiable intangibleassets with finite lives are being amortized over their estimated useful lives.In the event that the Company’s management determines that the value ofgoodwill or intangible assets has become impaired, the Company will incur anaccounting charge for the amount of impairment during the fiscal quarter in whichthe determination is made. The Company has selected August 1 as its annualimpairment testing date for its goodwill. The Company performed an analysiscomparing the fair value of the reporting units with the carrying value of suchreporting units, including goodwill, and determined that no impairment of itsgoodwill existed.

As of April 30,2006, the gross carrying amount and the accumulated amortization by majorintangible asset class is as follows:
| **Intangible Asset** | ** ** | **Useful Life**     | ** ** | **Gross Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Value** | ** ** |
|---------------------------|------------|--------------------------|------------|--------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| Customer  relationships   |       | 11.5  years              |       | $                              | 1,260,000  |                          | $          | 295,000                      |       | $ | 965,000 |   |
| Technology                |       | 3  months – 5 years |       | 893,000                        |       | 395,000                       |       | 498,000                      |       |
| Non-compete agreement     |       | 5 years                  |       | 85,000                         |       | 30,000                        |       | 55,000                       |       |
|                           |            |                          |            |                                |            |                               |            |                              |            |  |  |  |

 

**3. Net Loss per Share**

Net loss per share hasbeen computed in accordance with SFAS 128, *Earnings per Share*,which requires disclosure of basic and diluted earnings per share. Basicearnings per share excludes any dilutive effects of stock options. Dilutedearnings per share includes the impact of potentially dilutive securities.

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The following table setsforth the computation of net loss per share:
| ** **                                                                                                                   | ** ** | **Three months ended April 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **2005**                                             | ** ** | **2006** | ** ** |
|                                                                                                                         |       |                                                 |       |   |   |
| Net loss                                                                                                                     |       | $                                                    | (90,000    | ) | $ | (54,000 | ) |
| Weighted average  shares outstanding — basic                                                                            |       | 20,860,295                                           |       | 21,842,663 |   |
| Dilutive  securities                                                                                                         |       | —                                               |       | — |   |
| Weighted average  shares outstanding — diluted                                                                          |       | 20,860,295                                           |       | 21,842,663 |   |
| Net loss per  share — basic and diluted                                                                                 |       | $                                                    | 0.00       |   | $ | 0.00 |   |
| Potentially  dilutive stock options, excluded from diluted weighted average shares outstanding                     |       | 3,242,652                                            |       | 4,619,334 |   |
| Potentially dilutive  VertiSoft shares held in escrow excluded from diluted weighted average common  shares outstanding |       | 310,000                                              |       | — |   |

 

**4. Segment and Geographic Information**

TheCompany’s business is organized around geographic areas. Optio’s U.S.operations and European operations represent Optio’s two reportable segments.The foreign locations principally function as distributors of productsdeveloped by the Company in the United States. The accounting policiesdescribed in the summary of significant accounting policies are appliedconsistently across the segments. Intersegment sales are based on intercompanytransfer prices to achieve a reasonable margin upon distribution. Revenues areattributable to each segment based on the location of the subsidiaryoriginating the sale, which is typically the geographic location where thesoftware is installed.

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Segment information forthe three months ended April 30, 2006 and 2005 is summarized below.
| **Three Months ended  April 30, 2005** | ** ** | **United  States** | ** ** | **Europe** | ** ** | **Combined** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|------------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|------------------|------------|------------------|------------|
| Revenue from external  customers:                          |       |               |       |       |       |         |       |             |       |             |       |
| License fees                                               |       | $                  | 1,939,000  |       | $          | 272,000      |       | $                | 2,211,000  |             | $          | — |   | $ | 2,211,000 |   |
| Services, maintenance andother                             |       | 3,602,000          |       | 594,000    |       | 4,196,000    |       | —           |       | 4,196,000        |       |
| Subscription  revenue                                      |       | 509,000            |       | —     |       | 509,000      |       | —           |       | 509,000          |       |
| Inter-segment  revenue                                     |       | 53,000             |       | 45,000     |       | 98,000       |       | (98,000          | )          | —           |       |
| Total revenue                                              |       | 6,103,000          |       | 911,000    |       | 7,014,000    |       | (98,000          | )          | 6,916,000        |       |
| Interest income                                            |       | 56,000             |       | —     |       | 56,000       |       | —           |       | 56,000           |       |
| Interest expense                                           |       | 2,000              |       | —     |       | 2,000        |       | —           |       | 2,000            |       |
| Depreciation and  amortization                             |       | 178,000            |       | 10,000     |       | 188,000      |       | —           |       | 188,000          |       |
| Income tax  expense                                        |       | 18,000             |       | —     |       | 18,000       |       | —           |       | 18,000           |       |
| Segment income  (loss) before income taxes                 |       | 267,000            |       | (339,000   | )          | (72,000      | )          | —           |       | (72,000          | )          |
| Segment net  income (loss)                                 |       | 249,000            |       | (339,000   | )          | (90,000      | )          | —           |       | (90,000          | )          |
| Total segment  assets                                      |       | 17,271,000         |       | 3,361,000  |       | 20,632,000   |       | (3,125,000       | )          | 17,507,000       |       |
| Expenditures for  long-lived assets                        |       | 118,000            |       | 17,000     |       | 135,000      |       | —           |       | 135,000          |       |
|                                                            |            |                    |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

** **
| **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 |   |
| Services, maintenance andother                             |       | 3,739,000          |       | 670,000    |       | 4,409,000    |       | —           |       | 4,409,000        |       |
| Subscription  revenue                                      |       | 545,000            |       | 10,000     |       | 555,000      |       | —           |       | 555,000          |       |
| 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  |       | 23,171,000   |       | (3,520,000       | )          | 19,649,000       |       |
| Expenditures for  long-lived assets                        |       | 169,000            |       | 2,000      |       | 171,000      |       | —           |       | 171,000          |       |
|                                                            |            |                    |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

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**5.Note Receivable**

** **               As further explained in Note 3 of the Notes toConsolidated Financial Statements included in Optio’s 2006 Annual Report, Optioholds a note receivable from M2 Systems Corporation (“M2 Systems”) as partialconsideration for the sale by Optio of its Muscato Corporation (“Muscato”) andTranslink Solutions Corporation business units. Under the terms of the note, M2Systems was required to make payments of $100,000 each on September 1,2003 and December 1, 2003 and a payment of $115,000 on June 1, 2004.M2 Systems failed to make these payments on their respective due dates;however, payment was made prior to an event of default. All payments subsequentto June 1, 2004 have been made on their respective due dates.

** **               During thethird quarter of fiscal 2004, as a result of M2 Systems failure to make timelypayments in the prior quarters, management determined that this was anindication that it was probable that Optio would be unable to collect allamounts due according to the contractual terms of the note. At that time, theloan was considered impaired and was written down to the assessed fair value ofthe collateral. As of October 31, 2003, the collateral, includingtechnology, accounts receivable, fixed assets and the discounted net cash flowsof maintenance contracts was estimated to have an approximate fair value of$2.8 million, substantially less than the $3.7 million note receivable balanceas of October 31, 2003. Thus Optio recorded an impairment charge of$900,000 during the year ended January 31, 2004. Optio continues toreassess the value of the collateral on an ongoing basis. The amount of thenote receivable recorded could be materially different under differentconditions or using different assumptions, including, without limitation, thevarying assumptions regarding the fair value of the collateral. If M2 Systemsdefaults on the note and the collateral proves to be of no value to theCompany, the Company would incur an additional loss of approximately $2.0million.

** **               On September 15, 2004, Optio notified M2 Systemsof certain non-monetary defaults under the M2 Systems’ note. M2 Systemsdisputed these defaults. Optio did not accelerate the indebtedness under the M2Systems’ note, but the parties agreed to modify the loan documents to addressthe alleged defaults by M2 Systems to give Optio additional collateral. On May 18,2005, the parties executed modified and additional security documents grantingOptio a security interest in the assets of certain of M2 Systems’ affiliatesand placing greater restrictions on the use of the collateral.

** **               Based on the timely payments by M2 Systems over theprevious six fiscal quarters and the absence of any impairment indications, theCompany has concluded that no additional impairment charge is warranted at thistime.

**6.Acquisition of VertiSoft Corporation**

** **               On August 10, 2004, Optio consummated the mergerof VertiSoft, a privately held Georgia corporation, and Optio Software II, Inc.,a wholly owned subsidiary of Optio, whereby VertiSoft became the survivingwholly owned subsidiary of Optio. Subsequently, on September 15, 2004,VertiSoft was merged with and into Optio, with Optio remaining the survivingcorporation. The consideration paid for all of the common stock of VertiSoftincluded $348,000 in cash, the issuance of 1.5 million shares of Optio commonstock, of which 310,000 shares were held in escrow for a period of 18 months tosecure the indemnification obligations of the shareholders of VertiSoft, theissuance of options for the purchase of 340,000 shares of common stock andfuture conditional cash payments of $225,000 to be paid out in variousinstallments over the following two years, contingent upon the achievement ofcertain customer retention and product development goals. A cash payment of $75,000was paid on August 30, 2005. Additional cash payments of $150,000 werepaid in May 2006. The cash component of the consideration given was paidfrom funds generated from the on-going operations of Optio. The purchase pricefor VertiSoft consisted of the following:

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| Cash paid in initial  transaction       |   | $         | 348,000   |   |
|-----------------------------------------|--------|-----------|-----------|--------|
| Cash paid in  contingent payment        |   | 75,000    |      |
| Common stock  issued (1,500,000 shares) |   | 1,690,000 |      |
| Stock options  issued                   |   | 361,000   |      |
| Acquisition  costs                      |   | 339,000   |      |
|                                    |   | $         | 2,813,000 |   |

 

Thevalue of the common stock issued above was based on the market price of Optio’scommon stock for a reasonable period before and after the date the merger wasannounced. The 310,000 shares held in escrow were released at the end of the 18month period, the value of the shares based on the market value of Optio’scommon stock on that date was added to goodwill.

Theacquired assets consisted primarily of accounts receivable, software,machinery, equipment, furniture and fixtures, cash, and all of the interests,rights and benefits accruing to VertiSoft under any sales orders, salescontracts, service agreements, and purchase orders. In connection with theacquisition, Optio also assumed the liabilities of VertiSoft, consistingprimarily of promissory notes payable (totaling approximately $1,100,000),accounts payable, accrued payroll, and service agreements.

Thepurchase price was allocated to the assets and liabilities assumed based ontheir respective fair values on the date of acquisitions as follows:

| Tangible assets acquired |   | $          | 280,000   |   |
|--------------------------|--------|------------|-----------|--------|
| Liabilities  assumed     |   | (1,932,000 | )         |
| Technology               |   | 839,000    |      |
| Customer  relationships  |   | 1,314,000  |      |
| Non-compete  agreement   |   | 85,000     |      |
| Goodwill                 |   | 2,227,000  |      |
|                     |   | $          | 2,813,000 |   |

 

The  acquired technology is being amortized overperiods ranging from three months to five years, the customer relationships arebeing amortized over 11.5 years and the non-compete agreement with theshareholders of VertiSoft is being amortized over five years.

Theresults of operations of VertiSoft have been included in Optio’s consolidatedcondensed financial statements from the date of acquisition.

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

#### **OVERVIEW**

Optio is engaged primarily in the development, sale and support ofinfrastructure software that enhances the form, content, distribution andavailability of business information. Optio’s primary business consists ofproviding software and services that addresses organizations’ needs forcustomized information delivered via print, fax and e-mail to users ofenterprise and healthcare applications.

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

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withimplementation assistance and training. No single customer accounted for 10% ormore of Optio’s revenue for the three months ended April 30, 2006 or 2005.

**CriticalAccounting Policies and Use of Estimates**

Optiohas 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 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 ofpersons or hospital beds registered to use the product. The Company’s revenuerecognition policies are in accordance with Statement of Position (“SOP”) No. 97-2,*Software Revenue Recognition*, asamended by SOP No. 98-9, *SoftwareRevenue Recognition With Respect to Certain Transactions* and theSecurities and 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 indirectlythrough resellers. 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 the functionalityof the software and the Company has a legally enforceable claim not subject torefund or forfeiture if future services are not rendered. Delivery isconsidered to have occurred when title and risk of loss have been transferredto 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 isrecognized as revenue.

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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. Subscription revenue, which includes a license of thesoftware product, technical support and future unspecified enhancements to thesoftware product, is recognized on a daily basis over the term of theagreement. Unlike license fee revenue, subscription service agreements includelicenses that are not perpetual in duration.

*Services,Maintenance and Other Revenue*

Consultingservices revenue and customer training revenue are recognized as such servicesare performed because as they are incidental to the functionality of theCompany’s software. Maintenance revenues, which include revenues bundled withsoftware license agreements that entitle the customers to technical support andfuture unspecified enhancements to the Company’s products, are deferred andrecognized ratably over the related term of the maintenance agreement, which isgenerally twelve months. In accordance with Emerging Issues Task Force release01-14, *Income StatementCharacterization of Reimbursements Received for Out of Pocket Expenses Incurred*,the Company recognizes reimbursable expenses as revenue and as an expense incost of revenue in all periods presented.

*NoteReceivable*

Optio holds a note from M2 Systems as partialconsideration for the sale of Muscato and TransLink. Under the terms ofthis note, M2 Systems was required to make payments of $100,000 on September 1,2003 and December 1, 2003 and a payment of $115,000 on June 1, 2004.M2 Systems failed to make these payments on their respective due dates;however, each payment was made prior to an event of default under the terms ofthe note. All payments subsequent to June 1, 2004 have been made on theirrespective due dates.

During the third quarter of 2004, as a result of M2 Systems failure tomake timely payments, management determined that this was an indication that itwas probable that Optio would be unable to collect all amounts due according tothe contractual terms of the note. At that time, the loan was consideredimpaired and was written down to the assessed fair value of the collateral. Asof October 31, 2003, the collateral, including technology, accountsreceivable, fixed assets and the discounted net cash flows of maintenancecontracts 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 yearended January 31, 2004. Optio continues to reassess the value of thecollateral on an ongoing basis. The amount of the note receivable recordedcould be materially different under different conditions or using differentassumptions, including the varying assumptions regarding the fair value of the collateral.In Optio’s initial assessment of the collateral, varying assumptions, includingthe length of time of which customers would continue on maintenance, resultedin estimates of the value of the collateral ranging from $1.8 million to $3.5million, which could have resulted in an impairment charge ranging from$200,000 to $1.9 million. Optio’s continued assessment of the collateral hasresulted in varying estimates of the value of the collateral ranging from $1.9million to $2.5 million, which could currently result in an additionalimpairment charge of $100,000 or a reversal of the previously recordedimpairment charge of $500,000. If M2

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Systems defaults on the note and the collateral provesto be of no value to Optio, Optio would incur an additional loss ofapproximately $2.0 million. TheCompany periodically assesses the value of the collateral and the note, asreflected on the Company’s consolidated financial statements.

On September 15, 2004 Optio notified M2Systems of certain non-monetary defaults under the note. M2 Systems disputedthese defaults. Optio did not accelerate the indebtedness under the note, but the parties agreed to modify theloan documents to address the alleged defaults by M2 Systems giving Optioadditional collateral. On May 18, 2005, the parties executed modified andadditional security documents granting Optio a security interest in the assetsof certain M2 Systems’ affiliates and placing greater restrictions on the useof the collateral.

Based on the timely payments by M2 Systems over the previous six fiscalquarters and the absence of any impairment indications, the Company hasconcluded that no additional impairmentcharge is warranted at this time.

*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 potentiallyuncollectible. The Company includes any balances that are determined to beuncollectible, along with a general reserve at varying percentages of 3%, forbalances less than 30 days old, to 50% for international accounts more than 90days old, in its overall allowance for doubtful accounts. Based on management’sbest estimate, it believes the Company’s allowance for doubtful accounts isadequate as presented; however, the amount of the reserve could be differentunder different conditions or using varying assumptions. If the percentage ofthe general reserve were to increase by 1%, an additional $55,000 reserve wouldbe required. If the financial condition of Optio’s customers were to deteriorate, resulting in their inability to makepayments, additional reserves would be required, increasing Optio’s bad debt expense included in general andadministrative expenses.

*ImpairmentAssessments*

Optio adopted Statement of FinancialAccounting Standards (“SFAS”) No. 142, *Goodwill and OtherIntangible Assets*, on February 1, 2002. This standard requiresthat goodwill no longer be amortized and instead be tested for impairment on aperiodic basis.

Pursuant to SFAS 142, Optio is requiredto test goodwill for impairment upon adoption and annually or more often ifevents or changes in circumstances indicate that the asset might be impaired.SFAS 142 provides for a two-stage approach to determining whether and by howmuch goodwill has been impaired. The first stage requires a comparison of thefair value of the reporting unit, in our case, the former VertiSoft business,to its net book value. If the fair value is greater than book value, noimpairment 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 1,2005, 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 impaired, which would require the Company to record animpairment charge of $2.2 million.

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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 estimates we are using tomanage our business. Changes in these estimates could change our conclusionregarding impairment of goodwill and potentially result in a non-cash goodwillimpairment charge for all or a portion of the goodwill balance. For long-livedassets, accounting standards dictate that assets become impaired when theundiscounted future cash flows expected to be generated by them are less thantheir carrying amounts. In such cases, the affected assets are written down totheir estimated fair value.

*Foreign Currencies*

The financial position and results of operationsof the 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 year-end. Income and expenseitems are translated at average exchange rates for the year. The resultingtranslation adjustments are recorded in the foreign currency translationadjustment account. Optio and its subsidiaries conduct their business locally,thus the effects of changes in foreign currency exchange rates have had aminimal effect on the Company’s results of operations to date.

**RESULTSOF OPERATIONS**

***ThreeMonths Ended April 30, 2006 Compared to Three Months Ended April 30,2005***

## **Revenues**

The following table sets forth certain items fromOptio’s statements of operations as a percentage of total revenue for theperiods indicated.

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| ** **                                                                   | ** ** | **Three Months Ended  April 30,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **   2005   **     | ** ** | **   2006   ** | ** ** |
| Revenue:                                                                     |       |                                             |       |   |   |
| License fees                                                                 |       | 32                                               | %          | 28 | % |
| Subscription fees                                                            |       | 7                                                |       | 8 |   |
| Services, maintenance and other                                              |       | 61                                               |       | 64 |   |
| Total revenue                                                                |       | 100                                              |       | 100 |   |
| Costs of revenue  (excluding depreciation and amortization, included below): |       |                                             |       |   |   |
| License fees                                                                 |       | 3                                                |       | 2 |   |
| Services, maintenance and other                                              |       | 23                                               |       | 24 |   |
| Total cost of revenue                                                        |       | 26                                               |       | 26 |   |
|                                                                         |       | 74                                               |       | 74 |   |
|                                                                         |       |                                             |       |   |   |
| Operating expenses:                                                          |       |                                             |       |   |   |
| Sales and marketing                                                          |       | 42                                               |       | 37 |   |
| Research and development                                                     |       | 18                                               |       | 19 |   |
| General and administrative                                                   |       | 13                                               |       | 17 |   |
| Depreciation and amortization                                                |       | 3                                                |       | 3 |   |
| Total operating expenses                                                     |       | 76                                               |       | 76 |   |
| Loss from  operations                                                        |       | (2                                               | )          | (2 | ) |
| Interest and  other income                                                   |       | 1                                                |       | 1 |   |
| Net loss                                                                     |       | (1                                               | %)         | (1 | %) |

 

**Revenues**

Total revenues remained constant at $6.9 millionfor the three months ended April 30, 2005 and 2006, respectively.

*License fees*

Revenues from software licenses decreased 14% to$1.9 million in the three months ended April 30, 2006 from $2.2 millionfor the three months ended April 30, 2005. During the three months ended April 30,2005, Optio entered into a single contract with a new customer valued at over$325,000 in software license revenue. During the three months ended April 30,2006, Optio’s average contract size for new customers declined 50%, in largepart due to the fact that there was no single large contract over $100,000.Sales of Optio’s newer products, including Optio Print Manager, require alonger sales cycle, impacting sales of Optio Print Manager in the first quarterof fiscal 2007. We have also experienced, and expect in the future, that thesales cycle for Optio Imaging Solutions may be longer than our traditionaloutput solutions products. However, Optio continued to see significant sales ofupgrades and additional products back to the existing customer base, in boththe enterprise and healthcare market.

Approximately $360,000 of Optio’s softwarelicense revenue during the three months ended April 30, 2006 was derivedfrom partners, such as resellers, value-added distributors or OEMrelationships, representing 19% of license revenue for Optio. During the threemonths ended April 30, 2005, Optio generated $550,000 of its softwarelicense revenue through partners, representing 25% of Optio’s license revenue.As with direct sales, Optio entered into a single significant contract duringthe three months ended April 30, 2005, while there was no comparableagreement in the three months ended April 30, 2006.

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*Subscriptionfees*

Subscription revenue increased to $555,000 in thethree months ended April 30, 2006 from $509,000 in the three months ended April 30,2005. Optio has signed additional contracts and additional modules for existingcontracts, increasing the monthly amount recognized on a subscription basis.

*Services, maintenance and other*

Revenues from services, maintenance and otherincreased to $4.4 million from $4.2 million during   the three months ended April 30, 2006and 2005, respectively. Services revenue decreased to $1.3 million from $1.4million for the three months ended April 30, 2006 and 2005, respectively. Adecline in software license revenue contributed to a decline in associatedconsulting services revenue. Maintenance revenue increased $400,000 to $3.1million in the three months ended April 30, 2006 from $2.8 million in thethree months ended April 30, 2005. Maintenance revenue continues toincrease as Optio adds to its customer base and increases the price of itsannual maintenance fees.

*Revenue Mix*

Revenue from licenses represented 28% of totalrevenue in the three months ended April 30, 2006 and 32% of total revenuein the three months ended April 30, 2005. Subscription revenue represented8% and 7% of total revenue in the three months ended April 30, 2006 and2005, respectively.  Services,maintenance and other revenue constituted 64% and 61% of total revenue in thethree months ended April 30, 2006 and 2005, respectively. Revenue fromlicenses declined between the three months ended April 30, 2006 and 2005,thus causing the percentage of revenue to shift towards services, maintenanceand other, which increased during those same periods.

 **Costs of Revenues**

Total costs of revenues remainedconstant at  $1.8 million in the threemonths ended April 30, 2006 and 2005.

*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 $132,000 in thethree months ended April 30, 2006 from $182,000 in the three months ended April 30,2005. Fees paid for the integration of third-party software products declinedapproximately $60,000. Fewer products which include third-party software weresold during the three months ended April 30, 2006, as compared to thethree months ended April 30, 2005.

*Services, Maintenance and Other*

Costs of revenues from services, maintenance andother consist of personnel, subcontracting and other expenses relating to thecost of providing customer support, education and consulting and implementationservices. Costs of revenues from services, maintenance and other increased to$1.7 million in the three months ended April 30, 2006 from $1.6 million inthe three months ended April 30, 2005. Optio continued to keep a reducednumber of internal implementation staff and, as a result, Optio relied moreheavily on external

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outsourcers. This resulted in a$75,000 increase in the cost of outsourcers in the three months ended April 30,2006 as compared to the three months ended April 30, 2005.

**Operating Expenses**

*Sales and Marketing*

Sales and marketing expenses consist primarily ofsalaries, commissions, bonuses and benefits earned by sales and marketingpersonnel, direct expenditures such as travel, communication and occupancy andmarketing expenditures related to direct mail, trade shows and otheradvertising.

Sales and marketing expenses decreased 11% to$2.5 million from $2.9 million for the three months ended April 30, 2006and 2005, respectively. Sales and marketing expenses were 37% and 42%,respectively, of total revenue for the same periods. Direct marketingexpenditures decreased $60,000 between the three months ended April 30,2006 and the three months ended April 30, 2005, due to an effort to reducetrade-show expenses. In addition, commissions and bonuses decreasedapproximately $175,000 between the two quarters. This decrease was the resultof a decline in software license revenue and a modification to the Company’scompensation plans, providing for lower commission rates until a certain levelof productivity is achieved. Finally, additional expenses of $85,000 werereduced between the two quarters, resulting from savings in seminars andmeetings and other overhead costs allocated to the sales and marketingdepartments.

*Research and Development*

Research and development expense consistsprimarily of salaries, benefits and equipment for software developers, qualityassurance personnel, and product managers.

Research and development expenses remainedconstant at $1.3 million during the three months ended April 30, 2006 and2005. Research and development staff actually declined from 46 individuals asof April 30, 2005 to 45 individuals as of April 30, 2006; however,salary increases caused overall expenses to increase.

 *General and Administrative*

General and administrative expenses consistprimarily of salaries, benefits and related costs for executive, finance, humanresources and information services personnel. General and administrativeexpenses also include legal, accounting, insurance and other professional services.

General and administrative expenses increased to$1.1 million from $900,000 in the three months ended April 30, 2006 and2005, respectively. General and administrative expenses increased due to thefollowing: (i) $80,000 of compensation expense related to stock optionsand (ii) an increase of $100,000 in recruiting fees related to executiverecruitment and sales staff augmentation. Optio adopted SFAS No. 123R asof February 1, 2006. This statement requires companies to expense the fairvalue of stock options over the related service period. As SFAS No. 123Rwas adopted effective for the first quarter of fiscal 2007, no such expense isreflected in the first quarter of fiscal 2006.

*Depreciation and Amortization*

Depreciation and amortization expense decreasedto $184,000 from $188,000 for the three months ended April 30, 2006 and2005, respectively. This decrease was primarily the result of a decrease indeprecation expense resulting from a greater number of Optio’s assets becomingfully depreciated.

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*Interest Income*

Interest income increased to $96,000 in the threemonths ended April 30, 2006 from $56,000 in the three months ended April 30,2005. Interest income primarily represents interest earned on the principal ofthe M2 Systems’ note receivable and has increased due to an increase in theinterest rate on the note.

*Interest Expense*

Interest expense decreased to $1,000 from $2,000in the three months ended April 30, 2006 and 2005, respectively. Interestexpense primarily represents the interest paid on Optio’s capital leases.

**LIQUIDITY AND CAPITAL RESOURCES**

Optio had $8.3 million and $8.0 million in cashand cash equivalents at April 30, 2006 and January 31, 2006,respectively.

The following table sets forthcertain selected statements of cash flow information for the three months endedApril 30, 2006:

| Net cash provided by  operations           |   | $       | 185,000 |   |
|--------------------------------------------|--------|---------|---------|--------|
| Net cash used in  investing activities     |   | (95,000 | )       |
| Net cash  provided by financing activities |   | 185,000 |    |
| Net increase in cash  and cash equivalents |   | 343,000 |    |

 

Cash provided by operations wasprimarily the result of a $54,000 net loss, plus a $277,000 add-back ofnon-cash depreciation and amortization expense, stock compensation, loss ondisposal of assets and provision for deferred taxes, less changes in workingcapital resulting in a $38,000 outflow of cash. The major component of suchworking capital changes was the Company’s use of funds to pay down accruedexpenses and accounts payable by approximately $692,000, primarily representingthe payment of Optio’s year-end commissions and bonuses and other year-endexpenses such as audit fees. In addition, Optio prepaid several of its renewedinsurance policies and other marketing expenses, resulting in a $264,000 cashoutflow. This amount was partially offset by a decline in accounts receivablefrom the collection of several large receivables outstanding as of January 31,2006, resulting in additional cash inflow of $1,026,000. In investingactivities, Optio received $76,000 in payments on the receivable from M2Systems and purchased $171,000 of property and equipment, primarily related tothe remodeling of Optio’s headquarter office space. Optio’s financingactivities included receipts of $186,000 from the exercise of stock options.

On April 27, 2005, Optioextended its existing line of credit through April 19, 2006. Subsequently,on April 21, 2006, Optio extended the line of credit through April 19,2007. The line of credit bears interest at prime rate, subject to increasebased on Optio’s performance relative to certain financial ratios. Optio mayborrow up to $4.0 million, or such lesser amount as may be determined based onthe level of eligible accounts receivable. Currently, Optio has estimated thatapproximately $2.0 million would be available for borrowings based upon Optio’shistorical accounts receivable balance. Accounts receivable, equipment, generalintangibles and other assets, as defined in the loan agreement, collateralizethe line of credit. The loan agreement contains various covenants, includingliquidity and earnings before interest, taxes, depreciation and amortization (“EBITDA”)requirements and restrictions on the payment of dividends. On December 4,2003, the line of credit was amended, effective April 30, 2003, to modifythe calculation of certain financial ratios to exclude any impairment chargesrelated to the M2 Systems’ note receivable. As of April 30, 2006, Optiowas in

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compliancewith the required financial ratios. There were no borrowings under the line ofcredit as of April 30, 2006.

The Company holds a notereceivable from M2 Systems as partial consideration for the sale of Muscato andTransLink. The payment schedule of the note requires four quarterlyinstallments of $100,000, including interest calculated at the prime rate, upto a maximum of 6.75% (6.75% as of April 30, 2006), 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 inthe quarter ending January 31, 2008. Should the note become uncollectible,Optio’s liquidity would be negatively impacted by the amount of the remaininginstallment payments, as reflected above.

On August 10,2004, Optio acquired VertiSoft. The terms of the purchase included futureconditional cash payments of $225,000 to be paid out in various installmentsover the following years, contingent upon the achievement of certain customer retentionand product development goals. Optio paid the first $75,000 installment ofconditional cash payments in August 2005. The additional $150,000 ofconditional cash payments were made in May 2006.

Management believes that theexisting cash and cash equivalents, together with the line of credit, willprovide adequate cash to fund its anticipated cash needs at least through thenext twelve months. Optio intends to expand its product line, which may requireacquisitions of companies or products that enhance the Company’s product line.As a result, Optio may attempt to raise additional funds through equity or debtfinancing. There can be no assurance that Optio will be able to raiseadditional funds on favorable terms, or at all. Although not anticipated, adramatic 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.

ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Optio provides its services tocustomers primarily in the United States and, to a lesser extent, in Europe andelsewhere throughout the world. As a result, Optio’s financial results could beaffected by various factors, such as changes in foreign currency exchange ratesor weak economic conditions in foreign markets. All sales are currently made inboth U.S. dollars and local currencies. A strengthening of the U.S. dollar orthe weakening of these local currencies could make Optio’s products lesscompetitive in foreign markets. Based upon the relative size of Optio’s foreignoperations, Optio believes its exposure to foreign currency fluctuations is nota material risk. Optio’s interest income and expense are sensitive to changesin the general level of U.S. interest rates. Based on Optio’s cash equivalentsbalance and the nature of its outstanding debt, Optio believes its exposure tointerest rate risk is not material.

ITEM 4. CONTROLSAND PROCEDURES.

Our Chief Executive Officer andChief Financial Officer have evaluated the effectiveness of our disclosurecontrols and procedures (as defined in Rule 13a-15(e) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) as of April 30,2006, 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 Chief Executive Officer and Chief Financial Officeralso concluded that, as of April 30, 2006, our disclosure controls andprocedures are effective in ensuring that

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information required tobe disclosed by us in the reports that we file or submit under the Exchange Actis accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, to allow timely decisionsregarding required disclosure.

*Changesin Internal Controls*

There were no changes in ourinternal controls over financial reporting that occurred during the quarterended April 30, 2006, that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

**PART II— OTHER INFORMATION**

ITEM 1. LEGALPROCEEDINGS

On November 13, 2001, a lawsuit styled KevinDewey vs. Optio Software, Inc., et. al. was filed in the United StatesDistrict Court for the Southern District of New York. The complaint was filedagainst the underwriters in the Company’s initial public offering as well asOptio and certain officers and directors of Optio, by a single plaintiffpurportedly on behalf of persons purchasing Optio’s common stock between December 14,1999 and December 6, 2000. The lawsuit also seeks class action status.Optio is a co-defendant with approximately 300 other issuers in this suit. Thecomplaint includes allegations of violations of (i) Section 11 of theSecurities Act of 1933, as amended (the “Securities Act”), by all nameddefendants, (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 SecuritiesExchange Act of 1934, as amended, and Rule 10b-5 promulgatedthereunder by the underwriter defendants. The complaint alleges that Optio’sprospectus was materially false and misleading because it failed to disclose,among other things, that: (i) the underwriters had solicited and receivedexcessive and undisclosed commissions from certain investors in exchange forwhich the underwriters allocated to those investors material portions of alimited number of Optio shares issued in connection with the Optio initialpublic offering; and (ii) the underwriters had entered into agreementswith customers whereby the underwriters agreed to allocate Optio shares tothose customers in the Optio initial public offering in exchange for which thecustomers agreed to purchase additional Optio shares in the aftermarket atpre-determined prices. The complaint seeks unspecified amounts as compensatorydamages as a result of Optio’s alleged actions, as well as punitive damages andreimbursement for the plaintiffs’ attorneys’ fees and associated costs andexpenses of the lawsuit. A proposal to settle the claims against Optio andother companies and individual defendants in the litigation was conditionallyaccepted by Optio. The completion of the settlement is subject to a number ofconditions, including Court approval. The Court preliminarily approved thesettlement on February 15, 2005, subject to certain modifications whichare currently pending approval by the defendants. Under the settlement, theplaintiffs will dismiss and release all claims against 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. The disposition of this matter islimited to Optio’s $300,000 corporate insurance deductible. The Company hascompleted payment of the insurance deductible through payment of legal fees.Optio will have no additional exposure unless the insurance companies becomeinsolvent or unless Optio’s liability exceeds its policy limits through thismatter or other matters. Optio’s insurance companies currently have an A or AArating. The range of loss, if any, cannot be estimated and thus no potentialloss is reflected in Optio’s condensed consolidated financial statements.

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Management believes that it hasmeritorious defenses in the foregoing matter and intends to pursue its positionvigorously. While litigation is inherently subject to many uncertainties,management does not believe that the outcome of this case will have a materialadverse effect on the financial position of Optio. However, depending on theamount and timing of an unfavorable resolution of the lawsuit, it is possiblethat Optio’s financial condition, results of operation or liquidity could bematerially affected.

In addition, Optio is party toroutine litigation or administrative proceedings incidental to its business,none of which is believed by the Company to be likely to have a material effecton the financial condition, results of operations or liquidity of the Company.

ITEM 1A. RISKFACTORS

In addition to the otherinformation set forth in this report, the factors discussed under “Item 1A.Risk Factors” in Part I of the 2006 Annual Report could materially affectour business, financial condition or future results. The risks described in our2006 Annual Report are not the only risks facing our Company. Additional risksand uncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition or operating results.

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

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHERINFORMATION

None.

ITEM 6. EXHIBITS

(a)          Exhibits

 2.1                              Amendment No. 2 toAgreement and Plan of Reorganization, by and among Optio Software, Inc.,Optio Software II, Inc., VertiSoft Corporation and Shareholders ofVertiSoft Corporation, dated May 19, 2006.

31.1                           Certificationof CEO pursuant to Rule 13a-14(a) of the Securities ExchangeAct of 1934, as amended.

31.2                           Certificationof CFO pursuant to Rule 13a-14(a) of the Securities ExchangeAct of 1934, as amended.

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32.1                           Certificationby CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act 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 the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized on the14th day of June, 2006.
|        |   | OPTIO SOFTWARE, INC. |
|--------|--------|----------------------|
|   |   |                 |   |   |
|   |   | By:                  |   | /s/ C. Wayne Cape |
|   |   |                 |   | C. Wayne Cape |
|   |   |                 |   | President and Chief Executive Officer |

 

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