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

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FORM 10-Q

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

For the Quarterly Period Ended July 31, 2001

or

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

For the transition period from  to

Commission File Number: 1-15529

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

Georgia(State of other jurisdiction of
incorporation or organization)

58-1435435(I.R.S. Employer Identification No.)3015 Windward Plaza, Fairways II,
Alpharetta, GA 30005(Address of principal executive offices)

30005(Zip Code)


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

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

There
were 18,533,232 shares of the Registrant's common stock outstanding as of September 14, 2001.

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OPTIO SOFTWARE, INC.    FORM 10-Q  For the Quarterly Period Ended July 31, 2001    TABLE OF CONTENTS

|                             |  |                                                                                       |  | Page
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|PART IFINANCIAL INFORMATION
|Item 1.                      |  | Financial Statements                                                                  |  | 4   
|Item 2.                      |  | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 13  
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 21  
|PART IIOTHER INFORMATION   
|Item 1.                      |  | Legal Proceedings                                                                     |  | 23  
|Item 2.                      |  | Changes in Securities and Use of Proceeds                                             |  | 23  
|Item 3.                      |  | Defaults Upon Senior Securities                                                       |  | 23  
|Item 4.                      |  | Submission of Matters to a Vote of Security Holders                                   |  | 23  
|Item 5.                      |  | Other Information                                                                     |  | 23  
|Item 6.                      |  | Exhibits and Reports on Form 8-K                                                      |  | 24  

2

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FORWARD-LOOKING STATEMENTS

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

3

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PART IFINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Optio Software, Inc.
Consolidated Condensed Balance Sheets

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

See accompanying notes.

4

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

|                                            |                                                             | Three Months Ended July 31, |           
|------------------------------------------- | ----------------------------------------------------------- | --------------------------- | ----------
|
|Revenue:                                    |                                                             |                             |           
|                                            | License fees                                                |                             | $         
|                                            | Services, maintenance, and other                            |                             |           
|                                            |                                                             |                             |           
|                                            |                                                             |                             | 10,228,000
|Costs of revenue:                           |                                                             |                             |           
|                                            | License fees                                                |                             |           
|                                            | Services, maintenance, and other                            |                             |           
|                                            |                                                             |                             |           
|                                            |                                                             |                             | 4,068,000 
|                                            |                                                             |                             |           
|                                            |                                                             |                             | 6,160,000 
|Operating expenses:                         |                                                             |                             |           
|                                            | Sales and marketing                                         |                             |           
|                                            | Research and development                                    |                             |           
|                                            | General and administrative                                  |                             |           
|                                            | Depreciation and amortization                               |                             |           
|                                            |                                                             |                             |           
|                                            |                                                             |                             | 9,535,000 
|                                            |                                                             |                             |           
|Loss from operations                        |                                                             |                             | (3,375,000
|Other income (expense):                     |                                                             |                             |           
|                                            | Interest income                                             |                             |           
|                                            | Interest expense                                            |                             |           
|                                            | Other                                                       |                             |           
|                                            |                                                             |                             |           
|                                            |                                                             |                             | 68,000    
|Loss before income taxes                    |                                                             |                             | (3,307,000
|Income tax expense                          |                                                             |                             | 28,000    
|                                            |                                                             |                             |           
|Net loss                                    |                                                             | $                           | (3,335,000
|                                            |                                                             |                             |           
|Net loss per sharebasic                    |                                                             | $                           | (0.19     
|                                            |                                                             |                             |           
|Net loss per sharediluted                  |                                                             | $                           | (0.19     
|                                            |                                                             |                             |           
|Weighted average shares outstandingbasic   |                                                             |                             | 17,456,618
|                                            |                                                             |                             |           
|Weighted average shares outstandingdiluted |                                                             |                             | 17,456,618
|                                            |                                                             |                             |           
|Comprehensive loss:                         |                                                             |                             |           
|                                            | Net loss                                                    |                             | $         
|                                            | Foreign currency translation adjustment                     |                             |           
|                                            | Unrealized loss on marketable securities available for sale |                             |           
|                                            |                                                             |                             |           
|                                            | Comprehensive loss                                          |                             | $         
|                                            |                                                             |                             |           

See accompanying notes.

5

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

|                                            |                                                             | Six Months Ended July 31, |           
|------------------------------------------- | ----------------------------------------------------------- | ------------------------- | ----------
|
|Revenue:                                    |                                                             |                           |           
|                                            | License fees                                                |                           | $         
|                                            | Services, maintenance, and other                            |                           |           
|                                            |                                                             |                           |           
|                                            |                                                             |                           | 19,571,000
|Costs of revenue:                           |                                                             |                           |           
|                                            | License fees                                                |                           |           
|                                            | Services, maintenance, and other                            |                           |           
|                                            |                                                             |                           |           
|                                            |                                                             |                           | 6,960,000 
|                                            |                                                             |                           |           
|                                            |                                                             |                           | 12,611,000
|Operating expenses:                         |                                                             |                           |           
|                                            | Sales and marketing                                         |                           |           
|                                            | Research and development                                    |                           |           
|                                            | General and administrative                                  |                           |           
|                                            | Depreciation and amortization                               |                           |           
|                                            |                                                             |                           |           
|                                            |                                                             |                           | 16,285,000
|                                            |                                                             |                           |           
|Loss from operations                        |                                                             |                           | (3,674,000
|Other income (expense):                     |                                                             |                           |           
|                                            | Interest income                                             |                           |           
|                                            | Interest expense                                            |                           |           
|                                            | Other                                                       |                           |           
|                                            |                                                             |                           |           
|                                            |                                                             |                           | 502,000   
|Loss before income taxes                    |                                                             |                           | (3,172,000
|Income tax expense                          |                                                             |                           | 305,000   
|                                            |                                                             |                           |           
|Net loss                                    |                                                             | $                         | (3,477,000
|                                            |                                                             |                           |           
|Net loss per sharebasic                    |                                                             | $                         | (0.20     
|                                            |                                                             |                           |           
|Net loss per sharediluted                  |                                                             | $                         | (0.20     
|                                            |                                                             |                           |           
|Weighted average shares outstandingbasic   |                                                             |                           | 17,325,063
|                                            |                                                             |                           |           
|Weighted average shares outstandingdiluted |                                                             |                           | 17,325,063
|                                            |                                                             |                           |           
|Comprehensive loss:                         |                                                             |                           |           
|                                            | Net loss                                                    |                           | $         
|                                            | Foreign currency translation adjustment                     |                           |           
|                                            | Unrealized loss on marketable securities available for sale |                           |           
|                                            |                                                             |                           |           
|                                            | Comprehensive loss                                          |                           | $         
|                                            |                                                             |                           |           

See accompanying notes.

6

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

|                                |                                                                      | Common Stock                                                |         |   |            | Accumulated
Other
Comprehensive
Loss |   |             |   |             |         
|------------------------------- | -------------------------------------------------------------------- | ----------------------------------------------------------- | ------- | - | ---------- | ------------------------------------ | - | ----------- | - | ----------- | --------
|
|
|Balance at February 1, 2001     |                                                                      | 17,641,032                                                  |         | $ | 49,557,000 |                                      | $ | (14,187,000 | ) | $           | (266,000
|Comprehensive loss, net of tax: |                                                                      |                                                             |         |   |            |                                      |   |             |   |             |         
|                                |                                                                      | Net loss                                                    |         |  |            |                                      |  |             |   | (10,594,000 | )       
|                                |                                                                      | Foreign currency translation adjustment                     |         |  |            |                                      |  |             |   |            |         
|                                |                                                                      | Unrealized loss on marketable securities available for sale |         |  |            |                                      |  |             |   |            |         
|                                | Comprehensive loss                                                   |                                                             |         |   |            |                                      |   |             |   |             |         
|                                | Change in deferred compensation related to stock option terminations |                                                             |        |   |            | (48,000                              | ) |             |  |             |         
|                                | Amortization of deferred compensation                                |                                                             |        |   |            |                                     |   |             |  |             |         
|                                | Exercise of stock options                                            |                                                             | 859,500 |   |            | 538,000                              |   |             |  |             |         
|                                |                                                                      |                                                             |         |   |            |                                      |   |             |   |             |         
|Balance at July 31, 2001        |                                                                      | 18,500,532                                                  |         | $ | 50,047,000 |                                      | $ | (24,781,000 | ) | $           | (388,000
|                                |                                                                      |                                                             |         |   |            |                                      |   |             |   |             |         

See accompanying notes.

7

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Optio Software, Inc.  Consolidated Condensed Statements of Cash Flows

|                                                     |                                                                             | Six Months Ended July 31,                         |                                          
|---------------------------------------------------- | --------------------------------------------------------------------------- | ------------------------------------------------- | -----------------------------------------
|
|Cash flows from operating activities:                |                                                                             |                                                   |                                          
|                                                     | Net loss                                                                    |                                                   | $                                        
|                                                     | Adjustments to reconcile net loss to net cash used in operating activities: |                                                   |                                          
|                                                     |                                                                             | Depreciation                                      |                                          
|                                                     |                                                                             | Amortization of intangible assets                 |                                          
|                                                     |                                                                             | Provision for doubtful accounts                   |                                          
|                                                     |                                                                             | Write-down of ecIndX investment                   |                                          
|                                                     |                                                                             | Gain on sale of marketable securities             |                                          
|                                                     |                                                                             | (Gain) loss on disposal of property and equipment |                                          
|                                                     |                                                                             | Non-cash compensation and interest                |                                          
|                                                     |                                                                             | Deferred income taxes                             |                                          
|                                                     |                                                                             | Changes in operating assets and liabilities:      |                                          
|                                                     |                                                                             |                                                   | Accounts receivable                      
|                                                     |                                                                             |                                                   | Prepaid expenses and other current assets
|                                                     |                                                                             |                                                   | Accounts payable                         
|                                                     |                                                                             |                                                   | Accrued expenses                         
|                                                     |                                                                             |                                                   | Income taxes payable                     
|                                                     |                                                                             |                                                   | Deferred revenue                         
|                                                     |                                                                             |                                                   |                                          
|Net cash used in operating activities                |                                                                             |                                                   | (4,222,000                               
|Cash flows from investing activities:                |                                                                             |                                                   |                                          
|                                                     | Purchases of marketable securities                                          |                                                   |                                          
|                                                     | Proceeds from the sale of marketable securities                             |                                                   |                                          
|                                                     | Proceeds from the sale of property and equipment                            |                                                   |                                          
|                                                     | Purchases of property and equipment                                         |                                                   |                                          
|                                                     | Advances to related parties and shareholders                                |                                                   |                                          
|                                                     | Acquisition of business, net of cash acquired                               |                                                   |                                          
|                                                     |                                                                             |                                                   |                                          
|Net cash used in investing activities                |                                                                             |                                                   | (25,810,000                              
|Cash flows from financing activities:                |                                                                             |                                                   |                                          
|                                                     | Payments of notes payable and capital lease obligations                     |                                                   |                                          
|                                                     | Advances on the line of credit                                              |                                                   |                                          
|                                                     | Payments on the line of credit                                              |                                                   |                                          
|                                                     | Proceeds from exercise of stock options                                     |                                                   |                                          
|                                                     |                                                                             |                                                   |                                          
|Net cash used in financing activities                |                                                                             |                                                   | 66,000                                   
|Impact of foreign currency rate fluctuations on cash |                                                                             |                                                   | (110,000                                 
|Net decrease in cash                                 |                                                                             |                                                   | (30,076,000                              
|Cash at beginning of period                          |                                                                             |                                                   | 46,826,000                               
|                                                     |                                                                             |                                                   |                                          
|Cash at end of period                                |                                                                             | $                                                 | 16,750,000                               
|                                                     |                                                                             |                                                   |                                          
|Supplemental disclosures of cash flow information:   |                                                                             |                                                   |                                          
|                                                     | Cash paid during the year for:                                              |                                                   |                                          
|                                                     |                                                                             | Interest                                          |                                          
|                                                     |                                                                             |                                                   |                                          
|                                                     |                                                                             | Income taxes                                      |                                          
|                                                     |                                                                             |                                                   |                                          

See accompanying notes.

8

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

1.  Description of Business

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

2.  Basis of Presentation

Interim Financial Information

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

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

New Pronouncements

In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations("SFAS 141") and No. 142,Goodwill and Other Intangible Assets("SFAS 142"). SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. SFAS No. 141 also changes the criteria to
recognize intangible assets apart from goodwill. Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized, but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. Companies are required to
immediately adopt the amortization provisions of SFAS 142 as it relates to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in their fiscal year beginning after December 15, 2001. The Company anticipates adopting SFAS 142
in accordance with the provisions of the statement. SFAS 142 may not be applied retroactively. Substantially all of the Company's goodwill and intangible assets balance of $24.6 million
as of July 31, 2001, was recorded in March 2000, in conjunction with the acquisition of Muscato Corporation and TransLink Solutions Corporation. The goodwill balance is being amortized
over five years. The impact of the adoption as it relates to goodwill, which exists currently, is to eliminate amortization of goodwill expense beginning with the year ending January 31, 2003.
In addition, should the carrying value of the Company's goodwill exceed the fair value of the Company, an impairment loss would be recognized.

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

9

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undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. During the six months ended July 31, 2001, the Company incurred losses,
which might indicate that the carrying amounts of goodwill and intangible assets might be impaired. However, the Company's estimate of undiscounted cash flows indicated that such carrying amounts were
expected to be recovered. The Company's estimate of undiscounted cash flows were based, in part, on the strategic plans of the business unit associated with the goodwill and intangible assets. Should
the Company fail to execute such strategic plans, it is reasonably possible that the estimate of undiscounted cash flows may change in the near term resulting in the need to write-down
those assets to fair value.

3.  Acquisition

On March 27, 2000, the Company purchased all of the outstanding capital stock of Muscato Corporation ("Muscato"), thereby making Muscato a wholly-owned
subsidiary of the Company. In
addition, on the same date, the Company purchased substantially all of the assets of TransLink Solutions Corporation ("TransLink"), an affiliate of Muscato. The consideration paid Muscato was
$28,000,000, of which $20,000,000 was paid in cash at the closing. The Company issued a promissory note for the remaining $8,000,000, which is due and payable on March 27, 2030. During the
three months ended April 30, 2001, the notes payable were adjusted for the settlement of unrecorded liabilities deductible from the notes payable, resulting in new notes payable balance of
$7,836,000. The purchase price for the assets acquired from TransLink was $5,000,000 in cash paid at closing.

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

Muscato
is a provider of business-to-business infrastructure software and services that enable the secure, reliable transformation and exchange of
e-commerce, financial and healthcare transactions across diverse trading communities. TransLink currently provides application service provider hosting of Muscato's products for Muscato's
healthcare customers under a recurring revenue licensing model.

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

Tangible assets acquired

$
1,808,000Liabilities assumed


(3,103,000
)Technology


1,600,000Assembled workforce


685,000Customer base


280,000Goodwill


31,730,000$
33,000,000


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

10

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

Revenue

$
20,730,000Net loss


(4,031,000
)Net loss per share  basic and diluted

$
(0.23
)Weighted average shares outstanding  basic and diluted


17,325,063


4.  Net Loss per Share

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

|                                                                             |  | Three months ended July 31, |           
|---------------------------------------------------------------------------- |  | --------------------------- | ----------
|
|Net loss                                                                     |  | $                           | (3,335,000
|                                                                             |  |                             |           
|Weighted average shares outstandingbasic and diluted                        |  |                             | 17,456,618
|                                                                             |  |                             |           
|Net loss per sharebasic                                                     |  | $                           | (0.19     
|                                                                             |  |                             |           
|Net loss per sharediluted                                                   |  | $                           | (0.19     
|                                                                             |  |                             |           
|Potentially dilutive stock options, excluded from diluted net loss per share |  |                             | 8,092,744 
|                                                                             |  |                             |           

|                                                                             |  | Six months ended July 31, |           
|---------------------------------------------------------------------------- |  | ------------------------- | ----------
|
|Net loss                                                                     |  | $                         | (3,477,000
|                                                                             |  |                           |           
|Weighted average shares outstandingbasic and diluted                        |  |                           | 17,325,063
|                                                                             |  |                           |           
|Net loss per sharebasic                                                     |  | $                         | (0.20     
|                                                                             |  |                           |           
|Net loss per sharediluted                                                   |  | $                         | (0.20     
|                                                                             |  |                           |           
|Potentially dilutive stock options, excluded from diluted net loss per share |  |                           | 8,645,959 
|                                                                             |  |                           |           

5.  Segment and Geographic Information

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

11

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Segment information for the six months ended July 31, 2000 and 2001 is summarized below.

|Six Months ended
July 31, 2000     |                                 | United
States |            | France     |  | United
Kingdom |         | Australia |           | Combined |  | Eliminations |         | Consolidated |           
|---------------------------------- | ------------------------------- | ------------- | ---------- | ---------- |  | -------------- | ------- | --------- | --------- | -------- |  | ------------ | ------- | ------------ | ----------
|Revenue from external customers:   |                                 |               |            |            |  |                |         |           |           |          |  |              |         |              |           
|                                   | License fees                    |               | $          | 8,320,000  |  | $              | 426,000 |           | $         | 433,000  |  | $            | 94,000  |              | $         
|                                   | Services, maintenance and other |               |            | 9,441,000  |  |                | 550,000 |           |           | 277,000  |  |              | 30,000  |              |           
|Intersegment revenue               |                                 |               | 207,000    |            |  | 23,000         |         |           |          |          |  |             |         |              | 230,000   
|                                   |                                 |               |            |            |  |                |         |           |           |          |  |              |         |              |           
|                                   | Total revenue                   |               |            | 17,968,000 |  |                | 999,000 |           |           | 710,000  |  |              | 124,000 |              |           
|Interest income                    |                                 |               | 672,000    |            |  |               |         |           |          |          |  |             |         |              | 672,000   
|Interest expense                   |                                 |               | (193,000   | )          |  |               |         |           |          |          |  |             |         |              | (193,000  
|Depreciation and amortization      |                                 |               | 2,917,000  |            |  | 13,000         |         |           | 2,000     |          |  | 2,000        |         |              | 2,934,000 
|Income tax expense                 |                                 |               | 214,000    |            |  | 1,000          |         |           | 90,000    |          |  |             |         |              | 305,000   
|Segment net income (loss)          |                                 |               | (3,256,000 | )          |  | (61,000        | )       |           | 232,000   |          |  | (392,000     | )       |              | (3,477,000
|Total segment assets               |                                 |               | 65,458,000 |            |  | 1,692,000      |         |           | 1,181,000 |          |  | 280,000      |         |              | 68,611,000
|Expenditures for long-lived assets |                                 |               | 25,686,000 |            |  | 40,000         |         |           |          |          |  | 33,000       |         |              | 25,759,000

|Six Months ended
July 31, 2001     |                                 | United
States |            | France     |  | United
Kingdom |           | Australia |           | Combined |  | Eliminations |        | Consolidated |            
|---------------------------------- | ------------------------------- | ------------- | ---------- | ---------- |  | -------------- | --------- | --------- | --------- | -------- |  | ------------ | ------ | ------------ | -----------
|Revenue from external customers:   |                                 |               |            |            |  |                |           |           |           |          |  |              |        |              |            
|                                   | License fees                    |               | $          | 5,991,000  |  | $              | 440,000   |           | $         | 206,000  |  | $            | 16,000 |              | $          
|                                   | Services, maintenance and other |               |            | 10,392,000 |  |                | 567,000   |           |           | 339,000  |  |              | 50,000 |              |            
|Intersegment revenue               |                                 |               | 149,000    |            |  | 54,000         |           |           |          |          |  |             |        |              | 203,000    
|                                   |                                 |               |            |            |  |                |           |           |           |          |  |              |        |              |            
|                                   | Total revenue                   |               |            | 16,532,000 |  |                | 1,061,000 |           |           | 545,000  |  |              | 66,000 |              |            
|Interest income                    |                                 |               | 133,000    |            |  | 11,000         |           |           |          |          |  | 1,000        |        |              | 145,000    
|Interest expense                   |                                 |               | (316,000   | )          |  | (9,000         | )         |           | (1,000    | )        |  |             |        |              | (326,000   
|Depreciation and amortization      |                                 |               | 4,336,000  |            |  | 23,000         |           |           | 11,000    |          |  | 5,000        |        |              | 4,375,000  
|Segment net loss                   |                                 |               | (9,783,000 | )          |  | (465,000       | )         |           | (29,000   | )        |  | (317,000     | )      |              | (10,594,000
|Total segment assets               |                                 |               | 46,325,000 |            |  | 1,509,000      |           |           | 1,251,000 |          |  | 238,000      |        |              | 49,323,000 
|Expenditures for long-lived assets |                                 |               | 240,000    |            |  | 67,000         |           |           |          |          |  | 2,000        |        |              | 309,000    

6.  Income Taxes

The Company incurred a loss in the three and six months ended July 31, 2001. As a result, the Company evaluated the realizability of the resulting tax
assets from carryback opportunities and recorded refundable income taxes to the extent of taxes previously paid. A valuation allowance has been recognized to reduce the net deferred income tax assets
to zero. The Company has not recognized any benefit from the future use of the deferred tax assets because management's evaluation of all the available evidence in assisting the realizability of the
tax benefits of such loss carryforwards indicates that the underlying assumptions of the future profitable operations contain risks that do not provide sufficient assurance to recognize such tax
benefits currently. During the three months ended July 31, 2001, the Company received a refund of income taxes previously paid in the amount of $1,269,000.

7.  Investment in ecIndX.

The Company invested $2.0 million in ecIndX, Inc., a supply chain collaboration vendor, in exchange for a minority interest in the company. An
additional $209,000 of costs incurred related to making the investment were added to the basis of the investment. In conjunction with the investment, ecIndX, Inc. entered into the Company's
standard software license agreement to purchase $1.0 million in software and related services, of which approximately $1,094,000 has been recognized to date. ecIndX, Inc. was founded and
is partly owned by an individual who is a shareholder and director of the Company and who holds options to purchase 665,000 shares of the Company's common stock. During the three months ended
April 30, 2001, management reassessed the value of this investment based on recent ecIndX stock transactions. As a result, the investment was written down $200,000 to a value of $2,009,000.

12

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

OVERVIEW

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

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

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

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

Optio
markets and sells its software and services throughout the United States, Europe, and the Asian Pacific through its direct sales force and certified resellers. As of
July 31, 2001, Optio had 54 sales and sales support personnel and approximately 75 resellers. Optio also offers consulting services which provide customers with implementation assistance and
training. In the past, Optio has outsourced approximately 65-75% of its consulting services work to certified consulting partners. During the three months ended July 31, 2001, that
percentage has decreased to approximately 40-45%. As of July 31, 2001, Optio had 49 internal consulting services personnel.

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

In
March 2000, Optio purchased Muscato Corporation ("Muscato"), located in Orlando, Florida, providing Optio with a new business-to-business
infrastructure software and technology, e.ComEngine. Although Muscato remains a wholly-owned subsidiary, it has been substantially integrated into the sales and support of not only Muscato's former
products, but all of Optio's existing products as well. Optio also purchased Muscato's affiliate TransLink Solutions Corporation ("TransLink") which hosts the Muscato products in an ASP environment.

13

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The acquisitions of both Muscato and TransLink were accounted for as purchase transactions and thus, their results are reflected after the date of acquisition. The goodwill and other
intangibles associated with these acquisitions are being amortized over periods of two to five years.

RESULTS OF OPERATIONS

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

Revenues

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

|                          |                                 | Three Months Ended July 31, |   
|------------------------- | ------------------------------- | --------------------------- | --
|
|Revenue:                  |                                 |                             |   
|                          | License fees                    |                             | 44
|                          | Services, maintenance and other |                             | 56
|                          |                                 |                             |   
|Total revenue             |                                 | 100                         |   
|                          |                                 |                             |   
|Costs of revenue:         |                                 |                             |   
|                          | License fees                    |                             | 2 
|                          | Services, maintenance and other |                             | 38
|                          |                                 |                             |   
|Total cost of revenue     |                                 | 40                          |   
|                          |                                 |                             |   
|Gross profit              |                                 | 60                          |   
|Operating expenses:       |                                 |                             |   
|                          | Sales and marketing             |                             | 40
|                          | Research and development        |                             | 14
|                          | General and administrative      |                             | 18
|                          | Depreciation and amortization   |                             | 21
|                          |                                 |                             |   
|Total operating expenses  |                                 | 93                          |   
|                          |                                 |                             |   
|Loss from operations      |                                 | (33                         | ) 
|Interest and other income |                                 | 1                           |   
|                          |                                 |                             |   
|Net loss                  |                                 | (32                         | %)
|                          |                                 |                             |   

Revenues

Total revenues decreased 8% to $9.4 million from $10.2 million for the three months ended July 31, 2001 and 2000, respectively.

License fees

Revenues from licenses decreased 17% to $3.7 million from $4.5 million for the three months ended July 31, 2001 and 2000, respectively. As
a result of the weak economy and weaker technology spending, the Company's software license revenue decreased compared to the same period in the prior year. However, the Company's software license
revenue grew 29% over the prior quarter from $2.9 million in the three months ended April 30, 2001 to $3.7 million in the three months ended July 31, 2001. This increase
was the result of improved efficiency of our smaller direct sales force.

The
company's average sales price during the three months ended July 31, 2001 decreased slightly to $81,000 from $109,000 in the prior quarter. A greater volume of license
sales accounted for the increase in software license revenue from the three months ended April 30, 2001.

14

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Services, maintenance and other

Revenues from services, maintenance and other remained constant from the prior year at $5.7 million for both July 31, 2001 and 2000. Services
revenue alone increased $260,000. Despite the decrease in license fee revenue, the overall increase in the Company's number of customers, coupled with on-going projects from prior
quarters, resulted in a slight increase in implementation and other services revenue. Maintenance revenue remained constant between the three months ended July 31, 2001 and 2000 at
$2.5 million. Other revenue decreased $220,000 primarily the result of a large equipment sale in the three months ended July 31, 2000.

Revenue Mix

Revenues from licenses represented 40% and 44% of total revenue for the three months ended July 31, 2001 and 2000, respectively. The sales mix shift
towards services revenue was due to the decline of the Company's license revenue in the three months ended July 31, 2001, while the Company's services, maintenance, and other revenue remained
constant in conjunction with the increased number of customers and outstanding consulting projects.

Costs of Revenues

Total costs of revenues decreased 20% to $3.3 million from $4.1 million in the three months ended July 31, 2001 and 2000, respectively.

Licenses

Costs of revenues from licenses consists of costs related to the packaging and distribution of the products, fees paid for incorporation of third-party
software products, and fees paid to referral partners. Costs of revenues from licenses decreased 48% to $112,000 from $215,000 for the three months ended July 31, 2001 and 2000, respectively.
The decrease was primarily due to decreased referral partner fees from $120,000 in the three months ended July 31, 2000 to $5,000 in the three months ended July 31, 2001, as fewer sales
were obtained through referral partners.

Services, maintenance and other

Costs of revenues from services, maintenance and other consists of personnel, subcontract and other expenses relating to the cost of providing customer
support, education and professional services. Costs of revenue from services, maintenance and other decreased 18% to $3.2 million from $3.9 million in the three months ended
July 31, 2001 and 2000, respectively. Costs of revenues from services, maintenance and other decreased as a percentage of total revenue from 38% in 2000 to 33% in 2001. The decrease was
primarily the result of the following: a) a decrease in the number of outsourcers used to assist in implementations, b) a decrease in the number of internal staff as a result of a
reduction in force, and c) an allocation of certain services personnel to assist in the development of a new product, thus pushing their cost to research and development. In the past, Optio has
outsourced approximately 65-75% of its consulting services work to certified consulting partners. During the three months ended July 31, 2001, that percentage decreased to
approximately 40-45%. The use of outsourcers typically results in a lower gross margin on services revenue.

15

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Operating Expenses

Sales and Marketing

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

Sales
and marketing expenses increased 3% to $4.2 million from $4.1 million for the three months ended July 31, 2001 and 2000, respectively. Sales and marketing
expenses were 45% and 40% of total revenue for the same periods. The increase was primarily the result of severance costs associated with the Company's reduction in force. In addition, during the
three months ended July 31, 2001, Optio incurred charges of approximately $150,000 related to the cancellation of its 2001 users conference.

Research and Development

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

Research
and development expenses decreased 5% to $1.3 million from $1.4 million in the three months ended July 31, 2001 and 2000, respectively, representing 15%
and 14% of total revenue for the same periods. The decrease was primarily the result of a decrease in the use of outside independent consultants resulting from tighter expense control. This
represented an approximately $86,000 savings compared to the three months ended July 31, 2000.

General and Administrative

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

General
and administrative expenses increased 22% to $2.3 million from $1.9 million for the three months ended July 31, 2001 and 2000, respectively. These
expenses represent 24% and 18% of total revenue for the same periods. The increase in general administrative expenses as a percentage of revenue is primarily the result of (i) an increase in
the Company's allowance for doubtful accounts receivable of approximately $650,000, (ii) a severance charge as a result of the Company's reductions in force, both offset by (iii) a
significant savings in salaries and other expenses as a result of the Company's reduction in force completed during the first quarter.

Depreciation and Amortization

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

Interest Income

Interest income decreased to $66,000 from $206,000 in the three months ended July 31, 2001 and 2000, respectively. The Company invested an average cash
balance of approximately $5.5 million during the three months ended July 31, 2001. In the same period of 2000, the Company invested an average cash balance of approximately
$17.0 million.

Interest Expense

Interest expense increased from $144,000 in the three months ended July 31, 2000 to $182,000 in the three months ended July 31, 2001 primarily
the result of interest incurred on new leases the

16

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Company entered into during the year. Interest expense primarily represents interest on the promissory notes given in connection with the acquisitions of Muscato and TransLink.

Income Tax Expense

The provision for income taxes was $0 and $28,000 for the three months ended July 31, 2001 and 2000, respectively. The tax expense incurred in the three
months ended July 31, 2000 resulted from the Company's foreign operations. During the three months ended July 31, 2001, the Company incurred a loss for which a tax benefit was not
recorded. The Company evaluated the realizability of the resulting tax assets from carryback opportunities and has recorded refundable income taxes to the extent of taxes previously paid. A valuation
allowance has been recorded related to deferred tax assets based on management's assessment that the assets are not more likely than not to be realized.

RESULTS OF OPERATIONS

Six Months Ended July 31, 2001 Compared to Six Months Ended July 31, 2000

Revenues

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

|                          |                                 | Six Months Ended July 31, |   
|------------------------- | ------------------------------- | ------------------------- | --
|
|Revenue:                  |                                 |                           |   
|                          | License fees                    |                           | 47
|                          | Services, maintenance and other |                           | 53
|                          |                                 |                           |   
|                          |                                 | Total revenue             |   
|                          |                                 |                           |   
|Costs of revenue:         |                                 |                           |   
|                          | License fees                    |                           | 3 
|                          | Services, maintenance and other |                           | 32
|                          |                                 |                           |   
|                          |                                 | Total cost of revenue     |   
|                          |                                 |                           |   
|Gross profit              |                                 | 65                        |   
|Operating expenses:       |                                 |                           |   
|                          | Sales and marketing             |                           | 40
|                          | Research and development        |                           | 13
|                          | General and administrative      |                           | 15
|                          | Depreciation and amortization   |                           | 15
|                          |                                 |                           |   
|                          |                                 | Total operating expenses  |   
|                          |                                 |                           |   
|Loss from operations      |                                 | (18                       | ) 
|Interest and other income |                                 | 2                         |   
|                          |                                 |                           |   
|Loss before income taxes  |                                 | (16                       | ) 
|Income taxes              |                                 | 2                         |   
|                          |                                 |                           |   
|Net loss                  |                                 | (18                       | %)
|                          |                                 |                           |   

Revenues

Total revenues decreased 8% to $18.0 million from $19.6 million for the six months ended July 31, 2001 and 2000, respectively.

17

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License fees

Revenues from licenses decreased 39% to $6.7 million from $9.3 million for the six months ended July 31, 2001 and 2000, respectively. The
Company's software license revenue has suffered as a result of the following: (i) poor execution and follow through on integrating the Muscato acquisition and its products, creating confusion
of sales effort and focus, and thus negatively impacting revenues, coupled with (ii) weaker technology spending as a result of the weak economy.

Services, maintenance and other

Revenues from services, maintenance and other increased 10% to $11.3 million from $10.3 million in the six months ended July 31, 2001 and
2000, respectively. Services revenue alone increased $250,000. Despite the decrease in license fee revenue, the overall increase in the Company's number of customers, coupled with on-going
projects from prior quarters, resulted in a slight increase in implementation and other services revenue. Maintenance revenue increased significantly to $5.0 million from $4.1 million in
the six months ended July 31, 2001 and 2000, respectively. The overall increase in the Company's number of customers, both through new sales and through the acquisition of Muscato in
March 2000, has resulted in increased technical support. Other revenue decreased $100,000 primarily the result of a large equipment sale in the six months ended July 31, 2000 offset by
the addition of processing revenue beginning in April 2000 after the acquisition of Muscato.

Revenue Mix

Revenues from licenses represented 37% and 47% of total revenue for the six months ended July 31, 2001 and 2000, respectively. The sales mix shift
towards services revenue was due to the decline of the Company's license revenue in the six months ended July 31, 2001, while the Company's services, maintenance, and other revenue increased as
a result of the increased number of customers and outstanding consulting projects as well as the addition of consulting and maintenance revenue following the acquisition of Muscato in
March 2000.

Costs of Revenues

Total costs of revenues increased 8% to $7.5 million from $7.0 million in the six months ended July 31, 2001 and 2000, respectively.

Licenses

Costs of revenues from licenses consists of costs related to the packaging and distribution of the products, fees paid for incorporation of third-party
software products, and fees paid to referral partners. Costs of revenues from licenses decreased 53% to $282,000 from $606,000 for the six months ended July 31, 2001 and 2000, respectively. The
decrease was primarily due to decreased referral partner fees from $384,000 in the six months ended July 31, 2000 to $38,000 in the six months ended July 31, 2001, as fewer sales were
obtained through referral partners.

Services, maintenance and other

Costs of revenues from services, maintenance and other consists of personnel, subcontract and other expenses relating to the cost of providing customer
support, education and professional services. Costs of revenue from services, maintenance and other increased 14% to $7.2 million from $6.4 million in the six months ended
July 31, 2001 and 2000, respectively. Costs of revenues from services, maintenance and other increased as a percentage of total revenue from 32% in 2000 to 40% in 2001. This increase is
directly attributable to the significant increase in consulting services personnel obtained with the acquisition of Muscato. Total consulting services personnel increased from 63 just prior to the
acquisition of Muscato in March 2000 to 101 as of April 30, 2001. In April of 2001, the Company

18

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began to reduce its services personnel, however, it still maintained a greater number of employees than before the acquisition of Muscato. In addition, at the beginning of the three months ended
July 31, 2001, the Company began reducing its use of outsourcers, which typically bring a lower gross margin than performing the work internally. However, this shift was not in effect long
enough to make a significant effect on the six months ended July 31, 2001, thus cost of services, maintenance and other revenue still increased from the same period in the prior year.

Operating Expenses

Sales and Marketing

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

Sales
and marketing expenses increased 22% to $9.6 million from $7.8 million for the six months ended July 31, 2001 and 2000, respectively. Sales and marketing
expenses were 53% and 40% of total revenue for the same periods. The increase was primarily the result of the following: (i) committing additional monies to marketing and advertising programs
to capitalize on the opportunity the Company forsaw with its e.comSeries of products; (ii) amounts spent on the Company's annual sales seminar in the three months ended April 30, 2001,
resulting in approximately $200,000 in additional expense over the previous year's annual sales seminar; (iii) severance costs associated with the Company's reductions in force; and
(iv) charges of approximately $150,000 incurred in the three months ended July 31, 2001 related to the cancellation of the Company's 2001 users conference.

Research and Development

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

Research
and development expenses increased 11% to $2.9 million from $2.6 million in the six months July 31, 2001 and 2000, respectively, representing 16% and 13%
of total revenue for the same periods. The increase is primarily the result of the addition of the Muscato research and development team in March 2000.

General and Administrative

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

General
and administrative expenses increased 41% to $4.1 million from $2.9 million for the six months ended July 31, 2001 and 2000, respectively. These expenses
represent 23% and 15% of total revenue for the same periods. The increase in general and administrative expenses as a percentage of revenue is primarily the result of (i) an increase in the
Company's allowance for doubtful accounts receivable of approximately $825,000, (ii) the addition of the expenses of Muscato and TransLink subsequent to their acquisition dates, (iii) a
write-down of the investment in ecIndX, Inc. of approximately $200,000, and (iv) severance charges as a result of the Company's reductions in force.

Depreciation and Amortization

Depreciation and amortization expense increased to $4.4 million from $2.9 million for the six months ended July 31, 2001 and 2000,
respectively. This increase is due to the additional amortization expense resulting from the purchase of Muscato and TransLink on March 27, 2000.

19

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Interest Income

Interest income decreased to $145,000 from $672,000 in the six months ended July 31, 2001 and 2000, respectively. The Company invested approximately
$46.0 million just prior to the acquisition of Muscato and TransLink in March 2000. A portion of the purchase price was $25.0 million in cash, thus significantly reducing the
Company's cash balances and resulting interest income.

Interest Expense

Interest expense increased from $193,000 in the six months ended July 31, 2000 to $326,000 in the six months ended July 31, 2001 primarily the
result of interest incurred on the promissory notes given in connection with the acquisition of Muscato in March 2000 and on new leases the Company entered into during the year.

Income Tax Expense

The provision for income taxes was $0 and $305,000 for the six months ended July 31, 2001 and 2000, respectively. The tax expense incurred in the six
months ended July 31, 2000 resulted from non-deductible losses from the Company's foreign operations. During the six months ended July 31, 2001, the Company incurred a loss
for which a tax benefit was not allowed. The Company evaluated the realizability of the resulting tax assets from carryback opportunities and has recorded refundable income taxes to the extent of
taxes previously paid. A valuation allowance has been recorded related to deferred tax assets based on management's assessment that the assets are not more likely than not to be realized.

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 2001 and 2000 the Company had $6.3 million and $16.7 million, respectively, of cash and cash equivalents.

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

Net cash used in operations

$
(3,392,000
)Net cash used in investing activities


(263,000
)Net cash provided by financing activities


1,154,000Net decrease in cash and cash equivalents


(2,448,000
)


Cash used in operations was the result of a $10.6 million loss which was offset by the add-back of non-cash depreciation and
amortization expense of $4.4 million. The Company improved collections on accounts receivable, resulting in a cash inflow of $1.8 million. In addition, the Company received its federal
income tax refund of $1.3 million. Finally, the Company significantly reduced accounts payable primarily through cost savings, resulting in a use of cash of $1.6 million. In investing
activities, the Company used $309,000 in the purchase of property and equipment in the ordinary course of business. The Company's financing activities included the receipt of $538,000 in connection
with the exercise of stock options and net borrowings on the Company's line of credit and payments of notes payable and capital lease obligations of $616,000.

Optio
has promissory notes payable to the former shareholders of Muscato in the amount of $7.8 million, which are due and payable on March 27, 2030.

On
March 29, 2001, the Company entered into a line of credit agreement with Branch Banking and Trust Company for a $5.0 million line of credit. The line of credit, which
matures on March 29, 2002, bears interest at prime rate plus 0.50% and is collateralized by accounts receivable, equipment, general intangibles and other assets as defined in the agreement. The
Company may borrow up to the

20

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lesser of $5,000,000 or 70% of the Company's eligible receivables, as defined in the agreement. The agreement contains various covenants, including tangible net worth and earnings before interest,
taxes, depreciation and amortization requirements and restrictions on dividends. As of July 31, 2001, the Company had $724,000 outstanding on the line of credit.

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

NEW PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations("SFAS 141") and No. 142,Goodwill and Other Intangible Assets("SFAS 142"). SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations. SFAS No. 141 also changes the criteria to
recognize intangible assets apart from goodwill. Under SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized, but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. Companies are required to
immediately adopt the amortization provisions of SFAS 142 as it relates to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in their fiscal year beginning after December 15, 2001. The Company anticipates adopting SFAS 142
in accordance with the provisions of the statement. SFAS 142 may not be applied retroactively. Substantially all of the Company's goodwill and intangible assets balance of $24.6 million
as of July 31, 2001, was recorded in March 2000, in conjunction with the acquisition of Muscato Corporation and TransLink Solutions Corporation. The goodwill balance is being amortized
over five years. The impact of the adoption as it relates to goodwill, which exists currently, is to eliminate amortization of goodwill expense beginning
with the year ending January 31, 2003. In addition, should the carrying value of the Company's goodwill exceed the fair value of the Company, an impairment loss would be recognized.

The
Company is currently assessing the value of its goodwill and intangibles in accordance with Statement of Financial Accounting Standard No. 121, Accounting for the Impairment of Long-Lived Assets to be Disposed
Of."The Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying
amounts of those assets. During the six months ended July 31, 2001, the Company incurred losses, which might indicate that the carrying amounts of goodwill and intangible assets might be
impaired. However, the Company's estimate of undiscounted cash flows indicated that such carrying amounts were expected to be recovered. The Company's estimate of undiscounted cash flows were based,
in part, on the strategic plans of the business unit associated with the goodwill and intangible assets. Should the Company fail to execute such strategic plans, it is reasonably possible that the
estimate of undiscounted cash flows may change in the near term resulting in the need to write-down those assets to fair value.

ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The
Company provides its services to customers primarily in the United States and, to a lesser extent, in Europe and elsewhere throughout the world. As a result, the Company's
financial results could be affected by factors, such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. All sales are currently made in both U.S. dollars and
local currencies. A

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strengthening of the U.S. dollar or the weakening of these local currencies could make the Company's products less competitive in foreign markets. The Company's interest income and expense is
sensitive to changes in the general level of U.S. interest rates. Based on the Company's cash equivalents balance and the nature of its outstanding debt, management believes its exposure to interest
rate risk is not material. The Company's available for sale marketable securities are carried at fair value and subject to the risks of general market fluctuations.

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PART IIOTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The
Company is from time to time involved in routine litigation incidental to the conduct of its business. The Company is not currently a party to any material legal proceeding.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

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

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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



|Name                                                  |                   | Votes For |            | Votes Withheld
|----------------------------------------------------- | ----------------- | --------- | ---------- | --------------
|Elected to hold office until the 2003 Annual Meeting: |                   |           |            |               
|                                                      | David Dunn-Rankin |           | 14,934,629 |               
|                                                      | David T. Leach    |           | 14,942,825 |               



ITEM 5. OTHER INFORMATION

Our
common stock is quoted on the Nasdaq National Market System. In order to remain listed on this market, we must meet Nasdaq's listing maintenance standards. Nasdaq listing
maintenance requirements include a series of financial tests relating to net tangible assets, public float, number of market makers and shareholders, and maintaining a minimum bid price of $1.00 per
share for shares of our common stock. The minimum bid price of our common stock is currently below $1.00. On April 25, 2001, we received a notice from Nasdaq that our common stock had failed to
maintain a $1.00

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minimum bid price for 30 consecutive trading days and we would have a 90 day grace period in which to return to compliance. On July 25, 2001, we received an additional notice from Nasdaq
that, because
our common stock had not maintained the $1.00 minimum bid price during the grace period, Nasdaq intended to proceed with the delisting of our common stock. We filed an appeal of this determination and
requested a hearing before a Nasdaq Listing Qualifications Panel. We were granted the appeal and the delisting process was stopped until after the outcome of the hearing was determined. The hearing
was held on September 7, 2001 at which time the Company proposed a plan for returning to compliance with Nadaq's listing maintenance requirements and requested additional time to implement such
plan. Nasdaq has not yet responded to our proposed plan.

On
August 9, 2001, the Company issued a press release announcing the election of Warren Neuburger, the Company's President and Chief Executive Officer, to the Company's Board
of Directors.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

On
May 10, 2001, the Company filed a report on Form 8-K to report that the Company had issued a press release announcing the appointment of Warren K.
Neuburger at its new President and Chief Operating Officer.

On
July 9, 2001, the Company filed a report on Form 8-K to announce the appointment of Warren K. Neuburger as its Chief Executive Officer, in addition to his
roles as President and Chief Operating Officer.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 14th day of September, 2001.

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

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