**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

**(Mark One)**

| **x**  | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                             |
|--------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                     |
|   |       | **For the quarterly period ended October 31, 2007**                                                                                                                                                                                                                                                                                      |
|   |       |                                                                                                                                                                                                                                                                                                                                     |
| **OR** |
|   |       |                                                                                                                                                                                                                                                                                                                                     |
| **o**  | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                                                                                                                            |
|   |       |                                                                                                                                                                                                                                                                                                                                     |
|   |       | **For the transition period from                           to                         ** |

 

**Commission File Number: 1-15529**

 

**OPTIOSOFTWARE, INC.**

(Exact name of registrantas specified in its charter)

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes xNo o

 

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

 

| Large accelerated filer  o |   | Accelerated filer o |   | Non-accelerated filer x |
|----------------------------|--------|---------------------|--------|-------------------------|

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Securities Exchange Act). Yes o No x

 

There were 21,287,004 shares of the Registrant’s common stockoutstanding as of December 5, 2007.

 

 

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**OPTIO SOFTWARE, INC.**

** **

**FORM 10-Q**

 

# **For the QuarterlyPeriod Ended October 31, 2007**

# ** **

**TABLE OF CONTENTS**

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

 

2

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# **FORWARD-LOOKINGSTATEMENTS**

# ** **

In addition to historical information, this QuarterlyReport on Form 10-Q for the quarter ended October 31, 2007 containsforward-looking statements that involve risks and uncertainties. Suchforward-looking statements are made pursuant to the “safe-harbor” provisions ofthe Private Securities Litigation Reform Act of 1995 and are made based onmanagement’s current expectations or beliefs as well as assumptions made by,and information currently available to, management. These forward-lookingstatements include, among other things, statements regarding Optio Software,Inc.’s (“we”, “us”, “our”, the “Company” or “Optio”) anticipated costs andexpenses, Optio’s capital needs and financing plans, product and servicedevelopment, Optio’s growth strategies, integration of acquired entities,market demand for Optio’s products and services, relationships with Optio’sstrategic marketing alliances, and competition. These forward-lookingstatements include, among others, those statements including the words “expects,”“anticipates,” “intends,” “believes,” “may,” “plan,” “could,” “should,” “will,”and similar language. You are cautioned not to place undue reliance on theforward-looking statements in this document, which speak only as of the date ofthis Quarterly Report on Form 10-Q. Optio undertakes no obligation to publiclyrelease any revisions to the forward-looking statements or reflect events orcircumstances after the date of this Form 10-Q. Optio’s actual results maydiffer significantly from those projected in the forward-looking statements.Factors that might cause or contribute to such differences include, but are notlimited to, risks associated with Optio’s reliance on strategic marketing andreseller relationships, collectibility of accounts receivable, fluctuations inoperating results, failure to integrate new products and newly acquiredcompanies, diversion of management resources relating to acquisitions ordivestitures, reduction in cash reserves relating to acquisitions or the sharerepurchase program, challenges relating to acquisitions or divestitures and thepossibility that this may cause Optio to no longer be profitable, the negativeeffect on Optio’s earnings relating to the amortization or potential write-downof acquired assets or goodwill, failure to retain the business relationshipswith existing customers from acquisitions, changes in competition, changes ineconomic conditions in the U.S. and in other countries in which Optio currentlydoes business (both general and relative to the technology industry), delays orinability to develop new or unique software products, market acceptance of newproducts, the failure of new products to operate as anticipated, expectation ofachieving and sustaining operating profits and earnings, including timing ofsuch cash flows and company performance, disputes regarding Optio’sintellectual property, risks relating to the delisting of Optio’s stock, possibleadverse results of pending or future litigation, or risks associated with Optio’sinternational operations. These and additional factors are set forth in Item 1Aof Optio’s Annual Report on Form 10-K for the fiscal year ended January 31,2007 (the “2007 Annual Report”), filed with the Securities and ExchangeCommission (“SEC”) on May 1, 2007. You should carefully review the risk factorsin the 2007 Annual Report and any additional risks described in other documentsthat Optio files from time to time with the SEC.

 

3

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# ** **

# **PART I – FINANCIALINFORMATION**

# ** **

ITEM 1. FINANCIALSTATEMENTS

 

**Optio Software, Inc.**

**Consolidated Condensed BalanceSheets**

 
| ** **                                       | ** ** | **January 31,  2007** | ** ** | **October 31,  2007** | ** ** |
|--------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | ** **                 | ** ** | **(Unaudited)**            | ** ** |
| **ASSETS**                                       | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Current assets:                                  | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Cash and cash  equivalents                       |       | $                          | 11,948,000 |                       | $          | 9,467,000 |   |
| Accounts  receivable, net                        |       | 3,903,000                  |       | 4,113,000                  |       |
| Prepaid expenses  and other current assets       |       | 728,000                    |       | 878,000                    |       |
| Total current  assets                            |       | 16,579,000                 |       | 14,458,000                 |       |
| Property and  equipment, net                     |       | 2,714,000                  |       | 2,564,000                  |       |
| Other assets:                                    |       |                       |       |                       |       |
| Goodwill                                         |       | 2,302,000                  |       | 2,302,000                  |       |
| Other intangible  assets, net                    |       | 1,250,000                  |       | 1,027,000                  |       |
| Other                                            |       | 92,000                     |       | 100,000                    |       |
| Total assets                                     |       | $                          | 22,937,000 |                       | $          | 20,451,000 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |                       |       |                       |       |
| Current  liabilities:                            |       |                       |       |                       |       |
| Accounts payable                                 |       | $                          | 1,088,000  |                       | $          | 933,000 |   |
| Accrued expenses                                 |       | 1,755,000                  |       | 1,606,000                  |       |
| Current portion  of lease incentive liability    |       | 122,000                    |       | 122,000                    |       |
| Current portion  of capital lease obligations    |       | 78,000                     |       | 97,000                     |       |
| Deferred revenue                                 |       | 7,439,000                  |       | 7,698,000                  |       |
| Total current  liabilities                       |       | 10,482,000                 |       | 10,456,000                 |       |
|                                             |       |                       |       |                       |       |
| Long-term  portion of lease incentive liability  |       | 806,000                    |       | 714,000                    |       |
| Long-term  portion of capital lease obligations  |       | 300,000                    |       | 315,000                    |       |
| Long-term  accrued rent payable                  |       | 526,000                    |       | 740,000                    |       |
| Other long-term  liabilities                     |       | 103,000                    |       | 138,000                    |       |
| Total  liabilities                               |       | 12,217,000                 |       | 12,363,000                 |       |
| Commitments and  contingencies                   |       |                       |       |                       |       |
| Shareholders’  equity:                      |       |                       |       |                       |       |
| Common stock                                     |       | 53,787,000                 |       | 53,454,000                 |       |
| Accumulated  deficit                             |       | (43,251,000                | )     | (45,726,000                | )          |
| Accumulated  other comprehensive income          |       | 184,000                    |       | 360,000                    |       |
| Total  shareholders’ equity                 |       | 10,720,000                 |       | 8,088,000                  |       |
| Total  liabilities and shareholders’ equity |       | $                          | 22,937,000 |                       | $          | 20,451,000 |   |

 

***Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.***

 

4

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**Optio Software, Inc.**

**Consolidated Condensed Statementsof Operations and Comprehensive Income (Loss)**

**(Unaudited)**

 
| ** **                                                                             | ** ** | **Three Months Ended October 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                               | ** ** | **2007** | ** ** |
| Revenue:                                                                               | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| License fees                                                                           |       | $                                                      | 2,201,000  |   | $ | 1,932,000 |   |
| Subscription  fees                                                                     |       | 597,000                                                |       | 652,000 |   |
| Services,  maintenance, and other                                                      |       | 4,776,000                                              |       | 4,244,000 |   |
|                                                                                   |       | 7,574,000                                              |       | 6,828,000 |   |
| Costs of revenue  (exclusive of depreciation and amortization shown separately below): |       |                                                   |       |   |   |
| License fees                                                                           |       | 112,000                                                |       | 202,000 |   |
| Services,  maintenance, and other                                                      |       | 1,830,000                                              |       | 1,730,000 |   |
|                                                                                   |       | 1,942,000                                              |       | 1,932,000 |   |
|                                                                                   |       | 5,632,000                                              |       | 4,896,000 |   |
| Operating  expenses:                                                                   |       |                                                   |       |   |   |
| Sales and marketing                                                                    |       | 2,619,000                                              |       | 2,469,000 |   |
| Research and  development                                                              |       | 1,385,000                                              |       | 1,026,000 |   |
| General and  administrative                                                            |       | 1,272,000                                              |       | 1,395,000 |   |
| Gain on reversal  of impairment of M2 Note                                             |       | (900,000                                               | )          | — |   |
| Depreciation and  amortization                                                         |       | 266,000                                                |       | 257,000 |   |
|                                                                                   |       | 4,642,000                                              |       | 5,147,000 |   |
| Income (loss)  from operations                                                         |       | 990,000                                                |       | (251,000 | ) |
| Other income  (expense):                                                               |       |                                                   |       |   |   |
| Interest income                                                                        |       | 119,000                                                |       | 97,000 |   |
| Interest expense                                                                       |       | (2,000                                                 | )          | (6,000 | ) |
| Other                                                                                  |       | —                                                 |       | 2,000 |   |
|                                                                                   |       | 117,000                                                |       | 93,000 |   |
|                                                                                   |       |                                                   |       |   |   |
| Income (loss)  before income taxes                                                     |       | 1,107,000                                              |       | (158,000 | ) |
| Income tax  expense                                                                    |       | 19,000                                                 |       | 2,000 |   |
| Net income  (loss)                                                                     |       | $                                                      | 1,088,000  |   | $ | (160,000 | ) |
| Net income  (loss) per share – basic                                              |       | $                                                      | 0.05       |   | $ | (0.01 | ) |
| Net income  (loss) per share – diluted                                            |       | $                                                      | 0.04       |   | $ | (0.01 | ) |
| Weighted average  common shares outstanding – basic                               |       | 22,301,466                                             |       | 22,065,515 |   |
| Weighted average  common shares outstanding – diluted                             |       | 24,662,565                                             |       | 22,065,515 |   |
| Comprehensive  income (loss):                                                          |       |                                                   |       |   |   |
| Net income  (loss)                                                                     |       | $                                                      | 1,088,000  |   | $ | (160,000 | ) |
| Foreign currency  translation adjustment                                               |       | (1,000                                                 | )          | 97,000 |   |
| Comprehensive  income (loss)                                                           |       | $                                                      | 1,087,000  |   | $ | (63,000 | ) |

 

***Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.***

 

5

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**Optio Software, Inc.**

**Consolidated Condensed Statementsof Operations and Comprehensive Income (Loss)**

**(Unaudited)**

 
| ** **                                                                             | ** ** | **Nine Months Ended October 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                              | ** ** | **2007** | ** ** |
| Revenue:                                                                               | ** ** | ** **                                            | ** ** | ** ** | ** ** |
| License fees                                                                           |       | $                                                     | 5,742,000  |   | $ | 4,751,000 |   |
| Subscription  fees                                                                     |       | 1,712,000                                             |       | 1,895,000 |   |
| Services, maintenance,  and other                                                      |       | 13,750,000                                            |       | 13,063,000 |   |
|                                                                                   |       | 21,204,000                                            |       | 19,709,000 |   |
| Costs of revenue  (exclusive of depreciation and amortization shown separately below): |       |                                                  |       |   |   |
| License fees                                                                           |       | 390,000                                               |       | 428,000 |   |
| Services,  maintenance, and other                                                      |       | 5,151,000                                             |       | 5,112,000 |   |
|                                                                                   |       | 5,541,000                                             |       | 5,540,000 |   |
|                                                                                   |       | 15,663,000                                            |       | 14,169,000 |   |
| Operating  expenses:                                                                   |       |                                                  |       |   |   |
| Sales and  marketing                                                                   |       | 7,701,000                                             |       | 8,108,000 |   |
| Research and  development                                                              |       | 4,082,000                                             |       | 3,856,000 |   |
| General and  administrative                                                            |       | 3,794,000                                             |       | 4,151,000 |   |
| Gain on reversal  of impairment of M2 Note                                             |       | (900,000                                              | )          | — |   |
| Depreciation and  amortization                                                         |       | 650,000                                               |       | 793,000 |   |
|                                                                                   |       | 15,327,000                                            |       | 16,908,000 |   |
| Income (loss)  from operations                                                         |       | 336,000                                               |       | (2,739,000 | ) |
| Other income  (expense):                                                               |       |                                                  |       |   |   |
| Interest income                                                                        |       | 327,000                                               |       | 324,000 |   |
| Interest expense                                                                       |       | (4,000                                                | )          | (18,000 | ) |
| Other                                                                                  |       | (3,000                                                | )          | 2,000 |   |
|                                                                                   |       | 320,000                                               |       | 308,000 |   |
|                                                                                   |       |                                                  |       |   |   |
| Income (loss)  before income taxes                                                     |       | 656,000                                               |       | (2,431,000 | ) |
| Income tax  expense                                                                    |       | 71,000                                                |       | 44,000 |   |
| Net income  (loss)                                                                     |       | $                                                     | 585,000    |   | $ | (2,475,000 | ) |
| Net income  (loss) per share – basic                                              |       | $                                                     | 0.03       |   | $ | (0.11 | ) |
| Net income  (loss) per share – diluted                                            |       | $                                                     | 0.02       |   | $ | (0.11 | ) |
| Weighted average  common shares outstanding – basic                               |       | 22,149,422                                            |       | 22,291,367 |   |
| Weighted average  common shares outstanding – diluted                             |       | 24,731,182                                            |       | 22,291,367 |   |
| Comprehensive  income (loss):                                                          |       |                                                  |       |   |   |
| Net income  (loss)                                                                     |       | $                                                     | 585,000    |   | $ | (2,475,000 | ) |
| Foreign currency  translation adjustment                                               |       | 66,000                                                |       | 176,000 |   |
| Comprehensive  income (loss)                                                           |       | $                                                     | 651,000    |   | $ | (2,299,000 | ) |

 

***Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.***

 

6

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**Optio Software, Inc.**

**Consolidated Condensed Statementof Shareholders’ Equity**

**(Unaudited)**

 
| ** **                                     | ** ** | **Common Stock** | ** ** | ** **           | **Accumulated  Other** | ** ** | **Total**  | ** **               |
|------------------------------------------------|------------|-----------------------|------------|----------------------|------------------------|------------|------------|--------------------------|
| ** **                                     | ** ** | **Common  Shares**    | ** ** | **Treasury  Shares** | ** **             | **Amount** | ** ** | **Accumulated  Deficit** | ** ** | **Comprehensive  Income** | ** ** | **Shareholder’s  Equity** | ** ** |
|                                           |       |                  |       |                 |                   |       |       |                     |   |   |   |   |   |
| Balance at  February 1, 2007                   |       | 22,461,514            |       | 40,000               |                   | $          | 53,787,000 |                     | $ | (43,251,000 | ) | $ | 184,000 |   | $ | 10,720,000 |   |
| Comprehensive  loss, net of tax:               |       |                  |       |                 |                   |       |       |                     |   |   |   |   |   |
| Net loss                                       |       | —                |       | —               |                   | —     |       | (2,475,000               | ) | — |   | (2,475,000 | ) |
| Foreign currency  translation adjustment       |       | —                |       | —               |                   | —     |       | —                   |   | 176,000 |   | 176,000 |   |
| Comprehensive  loss                            |       |                  |       |                 |                   |       |       |                     |   |   |   | (2,299,000 | ) |
| Treasury shares  acquired                      |       | (529,700              | )          | 529,700              |                   | (777,000   | )          |                     |   |   |   | (777,000 | ) |
| Exercise of  stock options                     |       | 90,740                |       | —               |                   | 32,000     |       | —                   |   | — |   | 32,000 |   |
| Compensation  expense related to stock options |       | —                |       | —               |                   | 412,000    |       | —                   |   | — |   | 412,000 |   |
| Balance at  October 31, 2007                   |       | 22,022,554            |       | 569,700              |                   | $          | 53,454,000 |                     | $ | (45,726,000 | ) | $ | 360,000 |   | $ | 8,088,000 |   |

 

***Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.***

 

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**Optio Software, Inc.**

**Consolidated Condensed Statementsof Cash Flows**

**(Unaudited)**

 
| ** **                                                                                           | ** ** | **Nine Months Ended October 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                              | ** ** | **2007** | ** ** |
| Cash flows from  operating activities:                                                               | ** ** | ** **                                            |       |   |   |
| Net income  (loss)                                                                                   |       | $                                                     | 585,000    |   | $ | (2,475,000 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |       |                                                  |       |   |   |
| Depreciation                                                                                         |       | 367,000                                               |       | 570,000 |   |
| Amortization of  intangibles                                                                         |       | 283,000                                               |       | 223,000 |   |
| Non-cash stock  compensation                                                                         |       | 318,000                                               |       | 412,000 |   |
| Loss on disposal  of assets                                                                          |       | 2,000                                                 |       | 14,000 |   |
| Provision for  doubtful accounts                                                                     |       | 33,000                                                |       | 69,000 |   |
| Gain on reversal  of valuation reserve on M2 Systems                                                 |       | (900,000                                              | )          | — |   |
| Deferred income  taxes                                                                               |       | 60,000                                                |       | 36,000 |   |
| Changes in  operating assets and liabilities:                                                        |       |                                                  |       |   |   |
| Accounts  receivable                                                                                 |       | 749,000                                               |       | (116,000 | ) |
| Prepaid expenses  and other assets                                                                   |       | (96,000                                               | )          | (132,000 | ) |
| Accounts payable                                                                                     |       | 343,000                                               |       | (204,000 | ) |
| Accrued expenses                                                                                     |       | (658,000                                              | )          | (184,000 | ) |
| Income taxes  payable                                                                                |       | (50,000                                               | )          | 90,000 |   |
| Deferred revenue                                                                                     |       | (508,000                                              | )          | 94,000 |   |
| Net cash  provided by (used in) operating activities                                                 |       | 528,000                                               |       | (1,603,000 | ) |
|                                                                                                 |       |                                                  |       |   |   |
| Cash flows from  investing activities:                                                               |       |                                                  |       |   |   |
| Purchases of  property and equipment                                                                 |       | (1,093,000                                            | )          | (306,000 | ) |
| Payment in  connection with the purchase of VertiSoft                                                |       | (75,000                                               | )          | — |   |
| Repayment of  note receivable from M2 Systems                                                        |       | 220,000                                               |       | — |   |
| Net cash used in  investing activities                                                               |       | (948,000                                              | )          | (306,000 | ) |
|                                                                                                 |       |                                                  |       |   |   |
| Cash flows from  financing activities:                                                               |       |                                                  |       |   |   |
| Payments of  notes payable and capital lease obligations                                             |       | (11,000                                               | )          | (60,000 | ) |
| Proceeds from  exercise of stock options                                                             |       | 404,000                                               |       | 32,000 |   |
| Purchases of  treasury stock                                                                         |       | —                                                |       | (777,000 | ) |
| Net cash provided  by (used in) financing activities                                                 |       | 393,000                                               |       | (805,000 | ) |
|                                                                                                 |       |                                                  |       |   |   |
| Impact of  foreign currency rate fluctuations on cash                                                |       | 84,000                                                |       | 233,000 |   |
| Net increase  (decrease) in cash and cash equivalents                                                |       | 57,000                                                |       | (2,481,000 | ) |
|                                                                                                 |       |                                                  |       |   |   |
| Cash and cash  equivalents at beginning of period                                                    |       | 7,954,000                                             |       | 11,948,000 |   |
| Cash and cash  equivalents at end of period                                                          |       | $                                                     | 8,011,000  |   | $ | 9,467,000 |   |

 

***The accompanying notes are an integral part of these condensedconsolidated financial statements.***

 

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**Optio Software, Inc.**

**Notes to the ConsolidatedCondensed Financial Statements**

**(Unaudited)**

 

**1. Description of Business**

 

Optio Software, Inc. (“we,” “us,” “our,” the “Company”or “Optio”) provides document automation and electronic health record solutionsthat enable organizations to achieve speed, accuracy, functionality and qualityin their inbound and outbound documents. The Company’s infrastructure softwareand services enhance the form, content, distribution and availability of businesscritical information. The Company markets primarily to companies locatedprincipally in the United States and Europe. The industry in which the Companyoperates is subject to rapid change due to development of new technologies andproducts.

 

**2. Basisof Presentation**

 

#### ***Interim Financial Information***

#### ** **

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

 

The accompanying financial statements should be read inconjunction with the Company’s audited consolidated financial statements forthe year ended January 31, 2007, included in the Company’s Annual Report onForm 10-K for the year ended January 31, 2007 (the “2007 Annual Report”), filedwith the Securities and Exchange Commission on May 1, 2007. Results ofoperations for the three and nine months ended October 31, 2007 are notnecessarily indicative of the results for the year ending January 31, 2008.

 

***Share-BasedCompensation Plans***

 

In December 2004, the Financial Accounting StandardsBoard (FASB) issued SFAS No. 123R, *Share-BasedPayment*, which requires measurement of the cost of share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values beginningwith the first interim or annual period after June 15, 2005. Effective February1, 2006, the Company has adopted SFAS No. 123R using the modified prospectivemethod. Under this method, compensation cost recognized for periods subsequentto February 1, 2006 includes: (a) compensation cost for all share-basedpayments granted prior to, but not yet vested as of February 1, 2006, based onthe grant date fair value estimated in accordance with the original provisionsof SFAS No. 123 amortized over the employees’ service period (typically theoptions’ vesting period) and (b) compensation cost for all share-based paymentsgranted subsequent to February 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS No. 123R amortized ratablyover the options’ vesting period.

 

The fair value of the options used for the applicationof SFAS No. 123R disclosures is estimated at the date of grant using the Black- Scholes option pricing model. In determining the fair value of options usingthe Black-Scholes option pricing model, various assumptions such as expectedlife, volatility, risk-free interest rate, dividend yield and forfeiture ratesare used. The expected life of awards granted represents the period of

 

9

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time that they areexpected to be outstanding. The Company determines the expected life using the “simplifiedmethod” in accordance with Staff Accounting Bulletin No. 107. Using theBlack-Scholes option valuation model, the Company estimates the volatility ofour common stock at the date of grant based on the historical volatility of ourcommon stock. Optio bases the risk-free interest rate used in the Black-Scholesoption valuation model on the implied yield currently available on U.S.Treasury zero-coupon issues with an equivalent remaining term equal to theexpected life of the award. Optio has not paid any cash dividends on our commonstock in the last ten years and we do not anticipate paying any cash dividendsin the foreseeable future. Consequently, the Company used an expected dividendyield of zero in the Black-Scholes option valuation model. Finally, the Companyuses historical data to estimate pre-vesting option forfeitures. Stock-basedcompensation is recorded for only those awards that are expected to vest. Thefollowing weighted-average assumptions were used for the three and nine monthsended October 31, 2007: risk-free interest rate of 4.15% and 4.73%,respectively; no dividend yield; volatility of 172% and 150%, respectively; aforfeiture rate of 24.0% and 24.0% respectively; and an expected life of theoptions of 5.3 and 5.3 years, respectively.

 

A summary of stock option activity for the nine monthsended October 31, 2007 is as follows:

 
| ** **                               | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life (in  Years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------|------------|
|                                     |       |                       |       |                                   |       |                                                            |       |                                |       |
| Outstanding  options at February 1, 2007 |       | 6,526,377                  |       | $                                      | 1.01       |                                                            |       |                                |       |   |
| Options granted                          |       | 250,000                    |       | $                                      | 1.54       |                                                            |       |                                |       |   |
| Options  exercised                       |       | (90,740                    | )          | $                                      | 0.35       |                                                            |       |                                |       |   |
| Options  canceled/forfeited              |       | (338,552                   | )          | $                                      | 2.39       |                                                            |       |                                |       |   |
| Outstanding  options at October 31, 2007 |       | 6,347,085                  |       | $                                      | 0.96       |                                                            | 6.31       |                                | $          | 4,326,283 |   |
| Exercisable  options at October 31, 2007 |       | 5,473,776                  |       | $                                      | 0.91       |                                                            | 6.00       |                                | $          | 4,157,714 |   |

 

Other information pertaining to option activity duringthe nine months ended October 31, 2007 and 2006 was as follows:

 
| ** **                                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                             |       |     |       |     |       |
| Weighted average  grant date fair value of stock options granted |       | $        | 1.38       |     | $          | 1.19 |   |
| Total fair value  of stock options vested                        |       | $        | 124,079    |     | $          | 907,707 |   |
| Total intrinsic  value of stock options exercised                |       | $        | 110,766    |     | $          | 549,656 |   |

 

10

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The following tablesummarizes information concerning options outstanding and exercisable as ofOctober 31, 2007:

 
| **Options Outstanding**           | ** ** | **Options Exercisable** | ** ** |
|----------------------------------------|------------|------------------------------|------------|
| **Exercise  Prices**                   | ** ** | **Number of  Shares**   | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                                   |       |                         |       |   |   |   |   |   |   |   |   |
| $  0.002  - $ 0.05      |       | 1,064,900                    |       | N/A |   | $ | 0.03 |   | 1,064,900 |   | $ | 0.03 |   |
| $  0.10  - $  0.78 |       | 542,770                      |       | 6.37 |   | $ | 0.55 |   | 530,270 |   | $ | 0.54 |   |
| $  0.80  - $0.80             |       | 2,535,555                    |       | 0.27 |   | $ | 0.80 |   | 2,535,555 |   | $ | 0.80 |   |
| $  0.91  - $1.09             |       | 44,380                       |       | 7.61 |   | $ | 1.00 |   | 37,107 |   | $ | 0.99 |   |
| $  1.10  - $1.10             |       | 702,500                      |       | 6.86 |   | $ | 1.10 |   | 538,127 |   | $ | 1.10 |   |
| $  1.12  - $1.31             |       | 644,222                      |       | 8.13 |   | $ | 1.29 |   | 293,106 |   | $ | 1.28 |   |
| $  1.32  - $1.61             |       | 641,645                      |       | 7.58 |   | $ | 1.47 |   | 308,598 |   | $ | 1.47 |   |
| $  1.70  - $10.00            |       | 145,167                      |       | 4.29 |   | $ | 5.17 |   | 140,167 |   | $ | 5.29 |   |
| $12.50 - $12.50                        |       | 1,300                        |       | 2.42 |   | $ | 12.50 |   | 1,300 |   | $ | 12.50 |   |
| $16.00 - $16.00                        |       | 24,646                       |       | 2.25 |   | $ | 16.00 |   | 24,646 |   | $ | 16.00 |   |
|                                   |       | 6,347,085                    |       | 6.31 |   | $ | 0.96 |   | 5,473,776 |   | $ | 0.91 |   |

 

***Goodwill and Other IntangibleAssets***

 

The Company acquiredgoodwill and other intangible assets in connection with the acquisition ofVertiSoft Corporation (“VertiSoft”) in August 2004. Under the purchase methodof accounting pursuant to Statement of Financial Accounting Standards (“SFAS”)No. 141, *Business Combinations*,the total purchase price was allocated to the acquired entity’s net tangibleand intangible assets based on their estimated fair values as of the date ofthe acquisition. The excess of the purchase price over the fair value of thenet tangible assets/liabilities and identifiable intangible assets acquired wasrecorded as goodwill. In accordance with SFAS 142, *Goodwill and Other Intangibles,*goodwill and intangibleassets with indefinite lives resulting from business combinations have not beenamortized but instead will be tested for impairment at least annually (morefrequently if certain indicators are present) while identifiable intangibleassets with finite lives are being amortized over their estimated useful lives.In the event that the Company’s management determines that the value ofgoodwill or intangible assets has become impaired, the Company will incur anaccounting charge for the amount of impairment during the fiscal quarter inwhich the determination is made. The Company has selected August 1 as itsannual impairment testing date for its goodwill. The Company performed ananalysis comparing the fair value of the reporting units with the carryingvalue of such reporting units, including goodwill, and determined that no impairmentof its goodwill existed.

 

As of October 31,2007, the gross carrying amount and the accumulated amortization by majorintangible asset class is as follows:

 
| **Intangible Asset** | ** ** | **Estimated  Useful Life** | ** ** | **Gross Carrying  Value** | ** ** | **Accumulated  Amortization** | ** ** | **Net Carrying  Value** | ** ** |
|---------------------------|------------|---------------------------------|------------|--------------------------------|------------|-------------------------------|------------|------------------------------|------------|
| Customer  relationships   |       | 11.5 years                      |       | $                              | 1,260,000  |                          | $          | 526,000                      |       | $ | 734,000 |   |
| Technology                |       | 3 months – 5 years         |       | 893,000                        |       | 630,000                       |       | 263,000                      |       |
| Non-compete  agreement    |       | 5 years                         |       | 85,000                         |       | 55,000                        |       | 30,000                       |       |
|                           |            |                                 |            |                                |            |                               |            |                              |            |  |  |  |

 

11

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***Non-CashTransactions***

 

Duringthe second quarter of the prior fiscal year, Optio entered into a capital leasefor telephone equipment in the amount of $422,000. In addition, Optiorenegotiated the lease for its headquarter facilities. As part of the new leaseagreement, the landlord contributed $1.0 million towards the improvements ofthe space. This $1.0 million in leasehold improvements was capitalized asproperty and equipment with an offsetting lease incentive liability of $1.0million, which will reduce future rent expense, and was recorded as a liabilityon Optio’s condensed consolidated balance sheet. The liability has beenamortized to a current balance of $836,000 as of October 31, 2007. During thesecond quarter of the current fiscal year, Optio entered into a capital leasefor additional telephone equipment in the amount of $43,000. In the thirdquarter of the current fiscal year, Optio entered into a capital lease forcommunications equipment in the amount of $62,000.

 

***New Accounting Pronouncements***

 

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”). FIN 48clarifies accounting for uncertainty in income taxes recognized in a company’sfinancial statements in accordance with FASB Statement No. 109, “Accountingfor Income Taxes” by prescribing a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return that results in a taxbenefit. FIN 48 is effective for fiscal years beginning after December 15,2006 and must be applied to all open tax positions upon initial adoption.Additionally, FIN 48 provides guidance on de-recognition, income statementclassification of interest and penalties, accounting in interim periods,disclosure, and transition. This interpretation is effective for fiscal yearsbeginning after December 15, 2006. The cumulative effect of applying theprovisions of FIN 48 is required to be reported as an adjustment to taxliabilities and to the opening balance of retained earnings in the year adopted.TheCompany adopted the provisions of FIN 48 on February 1, 2007. Afterapplication of the provisions of FIN 48, it was not necessary for the Companyto recognize any liability for unrecognized tax benefits or adjustment to thebalance of retained earnings as of February 1, 2007. The Company’s policyis to classify interest and penalties related to unrecognized tax benefits inincome tax expense. As of February 1, 2007, the Company had no accruedinterest and penalties related to unrecognized tax benefits. As ofFebruary 1, 2007, after the implementation of FIN 48, the Company’sunrecognized tax benefits were $0. The amount, if recognized, that would affectthe effective tax rate is $0.

 

In September 2006, the FASB issued FASB No. 157, “FairValue Measurements”, which defined fair value, establishes a framework formeasuring fair value under GAAP, and expands disclosures about fair valuemeasurements. FASB 157 applies to other accounting pronouncements that requireor permit fair value measurement. FASB 157 is effective for financialstatements issued for fiscal years beginning after November 15, 2007 (Optio’sfiscal 2009), and for interim periods within those fiscal years. The Companyhas not completed its evaluation of the potential impact, if any, of theadoption of FASB 157 on the Company’s consolidated financial position, resultsof operations and cash flows.

 

InFebruary 2007, the FASB issued FASB No. 159 “The Fair Value Option forFinancial Assets and Financial Liabilities – including an amendment of FASBStatement No. 115”. This Statement permits entities to choose to measure manyfinancial instruments and certain other items at fair value. The objective isto improve financial reporting by providing entities with the opportunity tomitigate volatility in reported earnings caused by measuring related assets andliabilities differently without having to apply complex hedge accountingprovisions. This Statement is expected to expand the use of fair valuemeasurement, which is consistent with the Board’s long-term measurementobjectives for accounting for financial instruments. This Statement iseffective as of the beginning of an entity’s first fiscal year that beginsafter November 15, 2007. Early adoption is permitted as of the beginning of afiscal year that begins on or before November 15, 2007, provided the entityalso elects to apply the provisions of FASB Statement No. 157, *Fair Value Measurements.*The Company didnot elect early adoption. The Company has not completed its evaluation of thepotential impact, if any, of the adoption of FASB 159 on the Company’sconsolidated financial position, results of operations and cash flows.

 

12

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**3. Net Income (Loss) per Share**

 

Net income (loss) per share has been computed inaccordance with SFAS 128, *Earnings per Share*,which requires disclosure of basic and diluted earnings per share. Basicearnings per share excludes any dilutive effects of stock options. Dilutedearnings per share includes the impact of potentially dilutive securities.

 

The following table sets forth the computation of netincome (loss) per share:

 
| ** **                                                                                      | ** ** | **Three months ended October 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                               | ** ** | **2007** | ** ** |
|                                                                                            |       |                                                   |       |   |   |
| Net income  (loss)                                                                              |       | $                                                      | 1,088,000  |   | $ | (160,000 | ) |
| Weighted average  shares outstanding – basic                                               |       | 22,301,466                                             |       | 22,065,515 |   |
| Dilutive  securities                                                                            |       | 2,361,099                                              |       | — |   |
| Weighted average  shares outstanding – diluted                                             |       | 24,662,565                                             |       | 22,065,515 |   |
| Net income  (loss) per share – basic                                                       |       | $                                                      | 0.05       |   | $ | (0.01 | ) |
| Net income  (loss) per share – diluted                                                     |       | $                                                      | 0.04       |   | $ | (0.01 | ) |
| Potentially  dilutive stock options, excluded from diluted weighted average shares  outstanding |       | 1,941,991                                              |       | 3,924,303 |   |

 
| ** **                                                                                      | ** ** | **Nine months ended October 31,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2006**                                              | ** ** | **2007** | ** ** |
|                                                                                            |       |                                                  |       |   |   |
| Net income  (loss)                                                                              |       | $                                                     | 585,000    |   | $ | (2,475,000 | ) |
| Weighted average  shares outstanding – basic                                               |       | 22,149,422                                            |       | 22,291,367 |   |
| Dilutive  securities                                                                            |       | 2,581,760                                             |       | — |   |
| Weighted average  shares outstanding – diluted                                             |       | 24,731,182                                            |       | 22,291,367 |   |
| Net income  (loss) per share – basic                                                       |       | $                                                     | 0.03       |   | $ | (0.11 | ) |
| Net income  (loss) per share – diluted                                                     |       | $                                                     | 0.02       |   | $ | (0.11 | ) |
| Potentially  dilutive stock options, excluded from diluted weighted average shares  outstanding |       | 1,704,031                                             |       | 3,955,334 |   |

 

**4. Segment and Geographic Information**

 

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

 

13

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Segment information for the three and nine months ended October 31,2007 and 2006 is summarized below.

 
| **Three Months ended  October 31, 2006** | ** ** | **United  States** | ** ** | **Europe** | ** ** | **Combined** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|------------------|------------|------------------|------------|
| Revenue from  external customers:                            |       |               |       |       |       |         |       |             |       |             |       |
| License fees                                                 |       | $                  | 1,845,000  |       | $          | 356,000      |       | $                | 2,201,000  |             | $          | — |   | $ | 2,201,000 |   |
| Subscription  revenue                                        |       | 586,000            |       | 11,000     |       | 597,000      |       | —           |       | 597,000          |       |
| Services,  maintenance and other                             |       | 3,958,000          |       | 818,000    |       | 4,776,000    |       | —           |       | 4,776,000        |       |
| Inter-segment  revenue                                       |       | 40,000             |       | 12,000     |       | 52,000       |       | (52,000          | )          | —           |       |
| Total revenue                                                |       | 6,429,000          |       | 1,197,000  |       | 7,626,000    |       | (52,000          | )          | 7,574,000        |       |
| Interest income                                              |       | 119,000            |       |       |       | 119,000      |       | —           |       | 119,000          |       |
| Interest expense                                             |       | 2,000              |       | —     |       | 2,000        |       | —           |       | 2,000            |       |
| Depreciation and  amortization                               |       | 257,000            |       | 9,000      |       | 266,000      |       | —           |       | 266,000          |       |
| Income tax  expense                                          |       | 19,000             |       | —     |       | 19,000       |       | —           |       | 19,000           |       |
| Segment income  (loss) before income taxes                   |       | 1,177,000          |       | (70,000    | )          | 1,107,000    |       | —           |       | 1,107,000        |       |
| Segment net  income (loss)                                   |       | 1,158,000          |       | (70,000    | )          | 1,088,000    |       | —           |       | 1,088,000        |       |
| Total segment  assets                                        |       | 22,091,000         |       | 3,624,000  |       | 25,715,000   |       | (3,588,000       | )          | 22,127,000       |       |
| Expenditures for  long-lived assets                          |       | 446,000            |       | 165,000    |       | 611,000      |       | —           |       | 611,000          |       |
|                                                              |            |                    |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

** **
| **Three Months ended  October 31, 2007** | ** ** | **United  States** | ** ** | **Europe** | ** ** | **Combined** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|------------------|------------|------------------|------------|
| Revenue from  external customers:                            |       |               |       |       |       |         |       |             |       |             |       |
| License fees                                                 |       | $                  | 1,592,000  |       | $          | 340,000      |       | $                | 1,932,000  |             | $          | — |   | $ | 1,932,000 |   |
| Subscription  revenue                                        |       | 641,000            |       | 11,000     |       | 652,000      |       | —           |       | 652,000          |       |
| Services,  maintenance and other                             |       | 3,354,000          |       | 890,000    |       | 4,244,000    |       | —           |       | 4,244,000        |       |
| Inter-segment  revenue                                       |       | 87,000             |       | 63,000     |       | 150,000      |       | (150,000         | )          | —           |       |
| Total revenue                                                |       | 5,674,000          |       | 1,304,000  |       | 6,978,000    |       | (150,000         | )          | 6,828,000        |       |
| Interest income                                              |       | 97,000             |       | —     |       | 97,000       |       | —           |       | 97,000           |       |
| Interest expense                                             |       | 4,000              |       | —     |       | 4,000        |       | —           |       | 4,000            |       |
| Depreciation and  amortization                               |       | 242,000            |       | 15,000     |       | 257,000      |       | —           |       | 257,000          |       |
| Income tax  expense                                          |       | 2,000              |       | —     |       | 2,000        |       | —           |       | 2,000            |       |
| Segment loss  before income taxes                            |       | (104,000           | )          | (54,000    | )          | (158,000     | )          | —           |       | (158,000         | )          |
| Segment net loss                                             |       | (106,000           | )          | (54,000    | )          | (160,000     | )          | —           |       | (160,000         | )          |
| Total segment  assets                                        |       | 19,739,000         |       | 4,795,000  |       | 24,534,000   |       | (4,083,000       | )          | 20,451,000       |       |
| Expenditures for  long-lived assets                          |       | 36,000             |       | —     |       | 36,000       |       | —           |       | 36,000           |       |
|                                                              |            |                    |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

14

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| **Nine Months ended  October 31, 2006** | ** ** | **United  States** | ** ** | **Europe** | ** ** | **Combined** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|------------------|------------|------------------|------------|
| Revenue from  external customers:                           |       |               |       |       |       |         |       |             |       |             |       |
| License fees                                                |       | $                  | 4,627,000  |       | $          | 1,115,000    |       | $                | 5,742,000  |             | $          | — |   | $ | 5,742,000 |   |
| Subscription  revenue                                       |       | 1,682,000          |       | 30,000     |       | 1,712,000    |       | —           |       | 1,712,000        |       |
| Services,  maintenance and other                            |       | 11,448,000         |       | 2,302,000  |       | 13,750,000   |       | —           |       | 13,750,000       |       |
| Inter-segment  revenue                                      |       | 165,000            |       | 61,000     |       | 226,000      |       | (226,000         | )          | —           |       |
| Total revenue                                               |       | 17,922000          |       | 3,508,000  |       | 21,430,000   |       | (226,000         | )          | 21,204,000       |       |
| Interest income                                             |       | 327,000            |       | —     |       | 327,000      |       | —           |       | 327,000          |       |
| Interest expense                                            |       | 4,000              |       | —     |       | 4,000        |       | —           |       | 4,000            |       |
| Depreciation and  amortization                              |       | 626,000            |       | 24,000     |       | 650,000      |       | —           |       | 650,000          |       |
| Income tax  expense (benefit)                               |       | 75,000             |       | (4,000     | )          | 71,000       |       | —           |       | 71,000           |       |
| Segment income  (loss) before income taxes                  |       | 807,000            |       | (151,000   | )          | 656,000      |       | —           |       | 656,000          |       |
| Segment net  income (loss)                                  |       | 732,000            |       | (147,000   | )          | 585,000      |       | —           |       | 585,000          |       |
| Total segment  assets                                       |       | 22,091,000         |       | 3,624,000  |       | 25,715,000   |       | (3,588,000       | )          | 22,127,000       |       |
| Expenditures for  long-lived assets                         |       | 918,000            |       | 175,000    |       | 1,093,000    |       | —           |       | 1,093,000        |       |
|                                                             |            |                    |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

** **
| **Nine Months ended  October 31, 2007** | ** ** | **United  States** | ** ** | **Europe** | ** ** | **Combined** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|------------|------------|--------------|------------|------------------|------------|------------------|------------|
| Revenue from  external customers:                           |       |               |       |       |       |         |       |             |       |             |       |
| License fees                                                |       | $                  | 3,701,000  |       | $          | 1,050,000    |       | $                | 4,751,000  |             | $          | — |   | $ | 4,751,000 |   |
| Subscription  revenue                                       |       | 1,861,000          |       | 34,000     |       | 1,895,000    |       | —           |       | 1,895,000        |       |
| Services,  maintenance and other                            |       | 10,385,000         |       | 2,678,000  |       | 13,063,000   |       | —           |       | 13,063,000       |       |
| Inter-segment  revenue                                      |       | 265,000            |       | 177,000    |       | 442,000      |       | (442,000         | )          | —           |       |
| Total revenue                                               |       | 16,212,000         |       | 3,939,000  |       | 20,151,000   |       | (442,000         | )          | 19,709,000       |       |
| Interest income                                             |       | 324,000            |       | —     |       | 324,000      |       | —           |       | 324,000          |       |
| Interest expense                                            |       | 16,000             |       | —     |       | 16,000       |       | —           |       | 16,000           |       |
| Depreciation and  amortization                              |       | 748,000            |       | 45,000     |       | 793,000      |       | —           |       | 793,000          |       |
| Income tax  expense                                         |       | 44,000             |       | —     |       | 44,000       |       | —           |       | 44,000           |       |
| Segment loss  before income taxes                           |       | (2,191,000         | )          | (240,000   | )          | (2,431,000   | )          | —           |       | (2,431,000       | )          |
| Segment net loss                                            |       | (2,235,000         | )          | (240,000   | )          | (2,475,000   | )          | —           |       | (2,475,000       | )          |
| Total segment  assets                                       |       | 19,739,000         |       | 4,795,000  |       | 24,534,000   |       | (4,083,000       | )          | 20,451,000       |       |
| Expenditures for  long-lived assets                         |       | 285,000            |       | 21,000     |       | 306,000      |       | —           |       | 306,000          |       |
|                                                             |            |                    |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

**5. Note Receivable**

 

As further explained in Note 3 of the Notes toConsolidated Financial Statements included in Optio’s 2007 Annual Report, Optioheld a note receivable from M2 Systems Corporation (“M2 Systems”) as partialconsideration for the sale by Optio of its Muscato Corporation (“Muscato”) andTranslink Solutions

 

15

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Corporationbusiness units.

 

On November 6, 2006, Optio received approximately$2,758,000 in cash, representing full repayment of the M2 Systems notereceivable, plus accrued interest. Such repayment represented an earlyretirement of the note, originally due December 1, 2007. In connection withsuch repayment, Optio released its lien on the assets of M2 systems, itssubsidiaries and related entities and the parties executed mutual releases.

 

**6. Share Repurchase Program**

 

On January 5, 2007, Optio announced a share repurchaseplan under which we could repurchase up to $2.0 million of our common stockover a twelve month period. During the quarter ended October 31, 2007, wepurchased a total of 156,500 shares at an average purchase price of $1.56 pershare, or approximately $248,000 in the aggregate including broker fees. Therepurchased shares were held and not cancelled. As of October 31, 2007, thedollar value of shares that remained available for repurchase under thisprogram was approximately $1,179,000. The repurchases for the quarter endedOctober 31, 2007 are reflected in the following table:

 
| **Three Months Ended October 31, 2007** | ** ** | **Life of Share Repurchase Program** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| **Period**                                                       | ** ** | **Total  Number of  Shares  Purchased**             | ** ** | **Average Price  Paid per Share** | ** ** | **Total Shares  Purchased As  Part of Publicly  Announced Plan** | ** ** | **Approximate Dollar  Value of Shares That  May Yet Be  Repurchased Under The  Program** | ** ** |
| 8/1/2007 –  10/31/2007 (1)                                  |       | 156,500                                                  |       | $ | 1.56 |   | 569,700 |   | $ | 1,179,000 |   |
|                                                                  |            |                                                          |            |  |  |  |  |  |  |  |  |

 

----

(1) Last repurchase date was October 31, 2007.

 

**7. Income Taxes**

 

The Company adopted the provisions of FIN 48 onFebruary 1, 2007. After application of the provisions of FIN 48, it wasnot necessary for the Company to recognize any liability for unrecognized taxbenefits or adjustment to the balance of retained earnings as ofFebruary 1, 2007. The Company’s policy is to classify interest andpenalties related to unrecognized tax benefits in income tax expense. As ofFebruary 1, 2007, the Company had no accrued interest and penaltiesrelated to unrecognized tax benefits. As of February 1, 2007, after theimplementation of FIN 48, the Company’s unrecognized tax benefits were $0. Theamount, if recognized, that would affect the effective tax rate is $0.

 

**8. LegalProceedings**

 

On November 13,2001, a lawsuit styled Kevin Dewey vs. Optio Software, Inc., et. al. was filedin the United States District Court for the Southern District of New York. Thecomplaint was filed against the underwriters in the Company’s initial publicoffering as well as Optio and certain officers and directors of Optio, by asingle plaintiff purportedly on behalf of persons purchasing Optio’s commonstock between December 14, 1999 and December 6, 2000. The lawsuit also soughtclass action status. Optio is a co-defendant with approximately 300 otherissuers in this suit. The complaint includes allegations of violations of (i)Section 11 of the Securities Act of 1933, as amended (the “Securities Act”), byall named defendants, (ii) Section 12(a)(2) of the Securities Act by theunderwriter defendants, (iii) Section 15 of the Securities Act by theindividual defendants, and (iv) Section 10(b) of the Securities Exchange Act of1934, as amended, and Rule 10b-5 promulgated thereunder by the underwriterdefendants. The complaint alleges that Optio’s prospectus was materially falseand misleading because it failed to disclose, among other things, that: (i) theunderwriters

 

16

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had solicited andreceived excessive and undisclosed commissions from certain investors inexchange for which the underwriters allocated to those investors materialportions of a limited number of Optio shares issued in connection with theOptio initial public offering; and (ii) the underwriters had entered intoagreements with customers whereby the underwriters agreed to allocate Optioshares to those customers in the Optio initial public offering in exchange forwhich the customers agreed to purchase additional Optio shares in theaftermarket at pre-determined prices. The complaint seeks unspecified amountsas compensatory damages as a result of Optio’s alleged actions, as well aspunitive damages and reimbursement for the plaintiffs’ attorneys’ fees andassociated costs and expenses of the lawsuit. A proposal to settle the claimsagainst Optio and other companies and individual defendants in the litigationwas conditionally accepted by Optio. On December 5, 2006, the United StatesCourt of Appeals for the Second Circuit overturned the District Court’scertification of the class of plaintiffs who are pursuing the claims that wouldbe settled in the settlement against the defendants. Plaintiffs filed apetition for rehearing and rehearing en banc with the Second Circuit Court of Appealsin response to the Second Circuit’s decision. The petition for rehearing andrehearing en banc was denied on April 6, 2007, but clarified that the plantiffsmay seek to certify a more limited class in District Court. On June 25, 2007,the District Court signed an order terminating the settlement.

 

Management believes that it has meritorious defensesin the foregoing matter and intends to pursue its position vigorously. Whilelitigation is inherently subject to many uncertainties, management does notbelieve that the outcome of this case will have a material adverse effect onthe financial position of Optio. However, depending on the amount and timing ofan unfavorable resolution of the lawsuit, it is possible that Optio’s financialcondition, results of operation or liquidity could be materially affected.

 

In addition, Optio is party to routine litigation oradministrative proceedings incidental to its business, none of which isbelieved by the Company to be likely to have a material effect on the financialcondition, results of operations or liquidity of the Company.

 

**9. Subsequent Event**

 

On November 23, 2007, the Company repurchased 701,250common shares for $1.20 per common share pursuant to Optio’s share repurchaseplan from a single shareholder in a privately negotiated transaction. This wasall of the shares owned by this shareholder. Optio can still purchase up toapproximately $300,000 of common shares under the share repurchase plan.

 

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

 

#### **OVERVIEW**

#### ** **

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

 

Optio markets and sells its software and servicesthroughout the United States, Europe and the Asia Pacific region, through itsdirect sales force and certified resellers. Optio has offices in the UnitedStates, France, the United Kingdom and Germany. Optio also offers consultingservices, that provide customers with implementation assistance and training.No single customer accounted for 10% or more of Optio’s revenue for the threeor nine months ended October 31, 2007.

 

17

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**Critical Accounting Policies and Use of Estimates**

 

Optio hasidentified significant accounting policies and estimates that are critical tothe understanding of its financial statements.

 

*Revenue Recognition*

* *

*Overview*

 

The Company’s revenue consists of perpetual feesderived from the Company’s software products, maintenance, consulting services,customer training and subscription fees received from the licensing of theCompany’s software products and maintenance. The Company generally charges feesfor licenses of its software products either based on the number of CentralProcessing Units (“CPUs”) on which the product is installed or, to a lesserextent, based on the number of persons or hospital beds registered to use theproduct. The Company’s revenue recognition policies are in accordance withStatement of Position (“SOP”) No. 97-2, *SoftwareRevenue Recognition*, as amended by SOP No. 98-9, *Software Revenue Recognition With Respect to CertainTransactions* and the Securities and Exchange Commission’s Staff AccountingBulletin (“SAB”) No. 101, *RevenueRecognition in Financial Statements,* as amended by SAB 104, *Revenue Recognition*.

 

*License Fees*

 

The Company licenses its products through its directsales force and indirectly through resellers. In general, software licenserevenues are recognized when a non-cancelable license agreement has been signedand the customer acknowledges an unconditional obligation to pay, the softwareproduct has been delivered, there are no significant uncertainties surroundingproduct acceptance, the fees are fixed or determinable, collection isconsidered probable, the remaining elements such as future services are notconsidered essential to the functionality of the software and the Company has alegally enforceable claim not subject to refund or forfeiture if futureservices are not rendered. Delivery is considered to have occurred when titleand risk of loss have been transferred to the customer, which generally occurswhen media containing the licensed programs is provided to a common carrier. Incase of electronic delivery, delivery occurs when the customer is given accessto the licensed programs. If collectability is not considered probable, revenueis recognized when the fee is collected. The Company enters into reseller arrangementsthat typically provide for sublicense fees payable based upon a percentage oflist price. The Company does not grant its resellers the right of return.

 

The Company recognizes revenue using the residualmethod pursuant to the requirements of SOP No. 97-2, as amended bySOP No. 98-9. Revenues recognized from multiple-element softwarearrangements are allocated to each element of the arrangement based on the fairvalues of the elements, such as licenses for software products, maintenance,consulting services or customer training. The determination of fair value isbased on objective evidence, which is specific to the Company and can differfrom amounts contained in the customer arrangement. The Company limits itsassessment of objective evidence for each element to either the price chargedwhen the same element is sold separately or the price established by managementhaving the relevant authority to do so, for an element not yet sold separately.If evidence of fair value of all undelivered elements exists but evidence doesnot exist for one or more delivered elements, then revenue is recognized usingthe residual method. Under the residual method, the fair value of theundelivered elements is deferred and the remaining portion of the arrangementfee is allocated to the delivered elements and recognized as revenue when theaforementioned criteria are met.

 

The Company records deferred revenue for softwarelicense agreements when the invoice is rendered to the customer and theagreement does not qualify for revenue recognition under the Company’s revenue 

 

18

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recognition policy. The Company records accounts receivable forsoftware license agreements when the agreement qualifies for revenuerecognition but cash or other consideration has not been received from thecustomer.

 

*Subscription Revenue*

 

The Company**also licensescertain of its products in the form of a subscription service contract, withterms typically ranging from three to five years. Subscription revenue, whichincludes a license of the software product, technical support and futureunspecified enhancements to the software product, is recognized on a proratabasis over the term of the agreement. Unlike license fee revenue, subscriptionservice agreements include licenses that are not perpetual in duration.

 

*Services, Maintenance and OtherRevenue*

 

Consultingservices revenue and customer training revenue are recognized as such servicesare performed because they are incidental to the functionality of the Company’ssoftware. Maintenance revenues, which include revenues bundled with softwarelicense agreements that entitle the customers to technical support and futureunspecified enhancements to the Company’s products, are deferred and recognizedratably over the related term of the maintenance agreement, which is generallytwelve months. In accordance with Emerging Issues Task Force release 01-14, *Income Statement Characterization of ReimbursementsReceived for Out of Pocket Expenses Incurred*, the Company recognizesreimbursable expenses as revenue and as an expense in cost of revenue in allperiods presented.

 

*AccountsReceivable*

 

Optio maintains allowances for doubtful accounts forestimated losses resulting from customers’ inability to make payments requiredunder their contracts. The amount of Optio’s reserve is based on historical experience and Optio’s specific review and analysis of thereceivables outstanding. Management reviews its accounts receivable on aregular basis to determine if any such amounts may be potentiallyuncollectible. The Company includes any balances that are determined to beuncollectible, along with a general reserve at varying percentages based onhistorical trends of 2% for domestic and 3% for international balances less than30 days old, respectively, to 50% for international accounts more than 90 daysold, in its overall allowance for doubtful accounts. Based on management’s bestestimate, it believes the Company’s allowance for doubtful accounts is adequateas presented; however, the amount of the reserve could be different underdifferent conditions or using varying assumptions. If the percentage of thegeneral reserve were to increase by 1%, an additional $40,000 reserve would berequired. If the financial condition of Optio’s customers were to deteriorate, resulting in their inability to makepayments, additional reserves would be required, increasing Optio’s bad debt expense included in general andadministrative expenses.

 

*ImpairmentAssessments*

 

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

 

Pursuant to SFAS 142, Optio is required to test goodwillfor impairment upon adoption and annually or more often if events or changes incircumstances indicate that the asset might be impaired. SFAS 142 provides fora two-stage approach to determining whether and by how much goodwill has beenimpaired. The first stage requires a comparison of the fair value of thereporting unit, in our case, the former VertiSoft 

 

19

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business, to its net book value.If the fair value is greater than book value, no impairment is deemed to haveoccurred. If the fair value is less than book value, then the second stage mustbe completed to determine the amount, if any, of actual impairment. Optio hasselected August 1 as its annual impairment testing date for its goodwill. The Company performed an analysis as ofAugust 1, 2007, comparing the fair value of the reporting units with thecarrying value of such reporting units, including goodwill, and determined thatno impairment of its goodwill existed. Whileno impairment charge was determined to be necessary in the current year, theCompany’s future assessments could lead management to determine that thegoodwill is completely or partially impaired, which would require the Companyto record an impairment charge of up to $2.3 million.

 

The process of evaluating the potential impairment ofgoodwill is highly subjective and requires significant judgment decisions. Inestimating our fair value, we will make estimates and judgments about futurerevenues and cash flows. Our forecasts will be based upon assumptions that areconsistent with the plans and estimates we are using to manage our business.Changes in these estimates could change our conclusion regarding impairment ofgoodwill and potentially result in a non-cash goodwill impairment charge forall or a portion of the goodwill balance. For long-lived assets other thangoodwill, accounting standards dictate that assets become impaired when theundiscounted future cash flows expected to be generated by them are less thantheir carrying amounts. In such cases, the affected assets are written down totheir estimated fair value.

 

*Foreign Currencies*

 

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

 

**RESULTS OF OPERATIONS**

 

***Three Months Ended October 31, 2007 Compared to Three Months EndedOctober 31, 2006***

 

## **Revenues**

## ** **

The following table setsforth certain items from Optio’s condensed consolidated statements ofoperations as a percentage of total revenue for the periods indicated.

 

20

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|                                                                              | ** ** | **Three Months   Ended October 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                                 | ** ** | **2007** | ** ** |
| Revenue:                                                                     |       |                                                     |       |   |   |
| License fees                                                                 |       | 29                                                       | %          | 28 | % |
| Subscription  fees                                                           |       | 8                                                        |       | 10 |   |
| Services,  maintenance and other                                             |       | 63                                                       |       | 62 |   |
| Total revenue                                                                |       | 100                                                      |       | 100 |   |
| Costs of revenue  (excluding depreciation and amortization, included below): |       |                                                     |       |   |   |
| License fees                                                                 |       | 2                                                        |       | 3 |   |
| Services,  maintenance and other                                             |       | 24                                                       |       | 25 |   |
| Total cost of  revenue                                                       |       | 26                                                       |       | 28 |   |
|                                                                         |       | 74                                                       |       | 72 |   |
|                                                                         |       |                                                     |       |   |   |
| Operating  expenses:                                                         |       |                                                     |       |   |   |
| Sales and  marketing                                                         |       | 35                                                       |       | 36 |   |
| Research and  development                                                    |       | 18                                                       |       | 15 |   |
| General and  administrative                                                  |       | 17                                                       |       | 21 |   |
| Gain on reversal  of impairment of M2 note.                                  |       | (12                                                      | )          | — |   |
| Depreciation and  amortization                                               |       | 3                                                        |       | 4 |   |
| Total operating  expenses                                                    |       | 61                                                       |       | 76 |   |
| Income (loss)  from operations                                               |       | 13                                                       |       | (4 | ) |
| Interest and  other income                                                   |       | 1                                                        |       | 2 |   |
| Income tax  expense                                                          |       | —                                                   |       | — |   |
| Net income  (loss)                                                           |       | 14                                                       | %          | (2 | )% |

* *

***Revenues***

* *

Total revenues decreased from $7.6 million in thethree months ended October 31, 2006 to $6.8 million in the three months endedOctober 31, 2007.

 

*License fees*

* *

Revenues from software licenses decreased 12% to $1.9million in the three months ended October 31, 2007 from $2.2 million for thethree months ended October 31, 2006. License revenue of $233,000 from Optio’shealthcare division for the three months ended October 31, 2007 wassubstantially below the level achieved during the three months ended October31, 2006, which included a single contract worth $600,000 in software. ForOptio’s enterprise division, software license revenue of $1.4 million in the USexceeded the level achieved in the same quarter of the prior fiscal year duesignificantly to a large contract closed during the quarter of approximately$300,000. In addition, Optio released it’s new ProCentra Intelligent DataCapture and ProCentra Content Center products at the beginning of the thirdquarter, contributing to the increase in license revenue for the US enterpriseteam. In Europe, software sales of $340,000 approximated the level achieved inthe same quarter of the prior year.

 

Approximately $390,000 of Optio’s software licenserevenue during the three months ended October 

 

21

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31, 2007 was derived from partners, such as resellers, value-addeddistributors or OEM relationships, representing 20% of license revenue forOptio. During the three months ended October 31, 2006, Optio generated $421,000of its software license revenue through partners, representing 19% of Optio’slicense revenue. As a proportion of overall license revenue, the percentagegenerated through partners was relatively unchanged as compared to the samequarter of the prior year.

 

*Subscription fees*

 

Subscription revenue increased to $652,000 in thethree months ended October 31, 2007 from $597,000 in the three months endedOctober 31, 2006. Optio has signed additional contracts and additional modulesfor existing contracts, increasing the monthly amount recognized on asubscription basis.

 

*Services, maintenance and other*

 

Revenues from services, maintenance and other declinedto $4.2 million for the three months ended October 31, 2007 from $4.8 millionfor the three months ended October 31, 2006. Services revenue decreased to  $0.9 million for the three months endedOctober 31, 2007 from $1.4 million for the three months ended October 31, 2006.The decline in license revenue, especially in the prior two quarters,contributed significantly to the associated decline in services revenue. Maintenancerevenue increased to $3.4 million for the three months ended October 31, 2007as compared to $3.3 million for the three months ended October 31, 2006.Maintenance revenue increases as Optio adds to its customer base combined withmoderately increased pricing for its annual maintenance fees, offset bymaintenance agreement expirations.

 

*Revenue Mix*

 

Revenue from licenses represented 28% of total revenuein the three months ended October 31, 2007, a slight decrease from licenserevenue at 29% of total revenue in the three months ended October 31, 2006.Subscription revenue represented 10% of total revenue in the three months endedOctober 31, 2007, increasing from 8% of total revenue from the same quarter lastyear. Services, maintenance and other revenue constituted 62% of total revenuein the three months ended October 31, 2007, a slight decrease from a percentagecontribution of 63% in the prior year comparative period. Accordingly, theoverall change in revenue mix reflected a slight decline in license fees andservices, maintenance, and other revenue offset by an increase in subscriptionrevenue for the three months ended October 31, 2007 as compared to the samequarter last year.

 

**Costs of Revenues**

 

Total costs of revenues remained constant at  $1.9 million in the three months endedOctober 31, 2007 and 2006, respectively.

 

*Licenses*

 

Costs of revenues from licenses consist of costs relatedto the packaging and distribution of the products, fees paid for integration ofthird-party software products and fees paid to referral partners. Costs ofrevenues from licenses increased to $202,000 in the three months ended October31, 2007 from $112,000 in the three months ended October 31, 2006. Moreproducts that include third-party software were sold during the three monthsended October 31, 2007, as compared to the three months ended October 31, 2006,increasing the costs of revenue from licenses. Partly offsetting this, feespaid to referral partners were reduced for the three months ended October 31,2007 compared to the three months ended October 31, 2006 as we had less dealsreferred by independent parties.

 

22

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*Services,Maintenance and Other*

 

Costs of revenues from services, maintenance and otherconsist of personnel, subcontracting and other expenses relating to the cost ofproviding customer support, education and consulting and implementationservices. Costs of revenues from services, maintenance and other decreasedslightly to  $1.7 million in the threemonths ended October 31, 2007 as compared to $1.8 million for the three monthsended October 31, 2006. Optio’s reliance on external outsourcers was reduced ascompared to the same quarter in the prior year partly offset by increased costsfor Optio’s internal implementation staff which reflected increased staffinglevels and higher individual compensation costs as compared to the same quarterin the prior year. The increase in individual compensation costs was mainly dueto salary increases for internal staff.

 

**OperatingExpenses**

 

*Sales andMarketing*

 

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

 

Sales and marketing expenses decreased 6% to $2.5million from $2.6 million for the three months ended October 31, 2007 and 2006,respectively. Sales and marketing expenses were 36% and35% of total revenue for the three months ended October 31, 2007 and 2006,respectively. Salaries decreased approximately $66,000 between the twoquarters, due mainly to reduced staffing partly offset by salary increases. Directmarketing expenditures were also reduced by approximately $63,000 between thethree months ended October 31, 2007 and the three months ended October 31, 2006.Partly offsetting this favorability was a moderate increase in discretionaryspending, in the aggregate, largely due to increased travel expenses ascompared to the same quarter in the prior year.

 

*Research and Development*

 

Researchand development expense consists primarily of salaries, benefits and equipmentfor software developers, quality assurance personnel, and product managers.

 

Researchand development expenses decreased to $1.0 million for the three months endedOctober 31, 2007 from $1.4 million for the three months ended October 31, 2006.Reduced staffing contributed to a reduction in salaries and associated benefitsof $329,000 as compared to the same quarter in the prior year. Otherdiscretionary expenses were also moderately lower, including consulting andtravel expenses.

 

 *General and Administrative*

 

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

 

Generaland administrative expenses increased to $1.4 million from $1.3 million in thethree months ended October 31, 2007 and 2006, respectively. General andadministrative expenses increased due to $72,000 in increased salariesrepresenting salary increases as well as higher benefit costs of $23,000. Consultingcosts and legal fees also increased due to ongoing strategic consultative andlegal matters. Partly offsetting these 

 

23

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increases was a reductionin recruiting fees of $81,000.

 

*Gain on reversal of valuationreserve of M2 note*

 

Inthe three months ended October 31, 2006, the carrying value of the M2 Systemsnote was effectively written up to its full face value and the impairmentcharge previously recorded by Optio relating to the M2 Systems note waseliminated. Optio recognized income of $900,000 that was a reduction of theCompany’s prior year third quarter operating expenses.

 

*Depreciation and Amortization*

 

Depreciationand amortization expense decreased slightly to $257,000 from $266,000 for thethree months ended October 31, 2007 and 2006, respectively. This decrease wasmainly due to lower amortization expense as intangibles are amortized over theestimated useful life of the asset using the cash flow method, which results ina greater expense in the earlier periods and reduced expense in the laterperiods. This resulted in a greater expense in periods prior to fiscal year2008. Depreciation expense was relatively constant and, for the three monthsended October 31, 2007 and 2006, respectively, reflected Optio’s renegotiationof the lease in mid 2006 for Optio’s headquarters in which the landlordcontributed $1.0 million towards the improvements of the space. These leaseholdimprovements, as well as an additional $700,000 purchased directly by Optio,are being depreciated over the term of the new lease or the expected usefullife of the assets, as appropriate.

 

*Interest Income*

 

Interestincome decreased to $97,000 in the three months ended October 31, 2007 from$119,000 in the three months ended October 31, 2006. Current interest incomeprimarily represents interest earned on funds invested in short-term financialinstruments, as compared to the same period in the prior year where most interestincome was attributable to the then outstanding M2 Systems note receivable.

 

*Interest Expense*

 

Interestexpense increased to $6,000 in the three months ended October 31, 2007, anincrease from $2,000 in the three months ended October 31, 2006. Interestexpense primarily represents the interest paid on Optio’s capital leases.

 

***Nine Months Ended October 31, 2007 Compared to Nine Months EndedOctober 31, 2006***

 

## **Revenues**

## ** **

The following table setsforth certain items from Optio’s condensed consolidated statements ofoperations as a percentage of total revenue for the periods indicated.

 

24

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| ** **                                                                   | ** ** | **Nine Months   Ended October 31,** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                                                | ** ** | **2007** | ** ** |
| Revenue:                                                                     |       |                                                    |       |   |   |
| License fees                                                                 |       | 27                                                      | %          | 24 | % |
| Subscription  fees                                                           |       | 8                                                       |       | 10 |   |
| Services,  maintenance and other                                             |       | 65                                                      |       | 66 |   |
| Total revenue                                                                |       | 100                                                     |       | 100 |   |
| Costs of revenue  (excluding depreciation and amortization, included below): |       |                                                    |       |   |   |
| License fees                                                                 |       | 2                                                       |       | 2 |   |
| Services,  maintenance and other                                             |       | 24                                                      |       | 26 |   |
| Total cost of  revenue                                                       |       | 26                                                      |       | 28 |   |
|                                                                         |       | 74                                                      |       | 72 |   |
|                                                                         |       |                                                    |       |   |   |
| Operating  expenses:                                                         |       |                                                    |       |   |   |
| Sales and  marketing                                                         |       | 36                                                      |       | 41 |   |
| Research and  development                                                    |       | 19                                                      |       | 20 |   |
| General and  administrative                                                  |       | 18                                                      |       | 21 |   |
| Gain on reversal  of impairment of M2 note.                                  |       | (4                                                      | )          | — |   |
| Depreciation and  amortization                                               |       | 3                                                       |       | 4 |   |
| Total operating  expenses                                                    |       | 72                                                      |       | 86 |   |
| Income (loss)  from operations                                               |       | 2                                                       |       | (14 | ) |
| Interest and  other income                                                   |       | 1                                                       |       | 1 |   |
| Net income  (loss)                                                           |       | 3                                                       | %          | (13 | )% |

* *

***Revenues***

* *

Total revenues decreased from $21.2 million in thenine months ended October 31, 2006 to $19.7 million in the nine months endedOctober 31, 2007.

 

*License fees*

* *

Revenues from software licenses decreased 17% to $4.8million in the nine months ended October 31, 2007 from $5.7 million for thenine months ended October 31, 2006. We continue to face pressure in thedocument management output market as ERP vendors now offer similarfunctionality and competitors continue to offer lower cost solutions. Inaddition, our imaging solutions did not generate revenue as quickly as weanticipated. We have just recently begun to release our business processmanagement solutions in modules, including the introduction of ProCentraIntelligent Data Capture released in August 2007, which we anticipated wouldgenerate replacement revenue for our declining document output managementmarket. Sales of Optio’s newer products, including Optio imaging solutions andprocess management solutions, require a longer sales cycle than our traditionaloutput solutions products. Across the two periods, Optio’s average contractsize remained relatively constant.

 

Approximately $982,000 of Optio’s software licenserevenue during the nine months ended October 31, 2007 was derived frompartners, such as resellers, value-added distributors or OEM relationships, 

 

25

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representing 21% of license revenue for Optio. During the nine monthsended October 31, 2006, Optio generated $1.4 million of its software licenserevenue through partners, representing 24% of Optio’s license revenue. In theprior year, we had several significant deals through our channel partners,while this year, there were many smaller transactions.

 

*Subscription fees*

 

Subscription revenue increased to $1.9 million in thenine months ended October 31, 2007 from $1.7 million in the nine months endedOctober 31, 2006. Optio has signed additional contracts and additional modulesfor existing contracts, increasing the monthly amount recognized on asubscription basis.

 

*Services, maintenance and other*

 

Revenues from services, maintenance and other decreasedto $13.1 million from $13.8 million for the nine months ended October 31, 2007and 2006, respectively. Services revenue decreased to  $3.1 million for the nine months endedOctober 31, 2007 from $4.0 million for the nine months ended October 31, 2006. Thedecline in license revenue contributed to the associated decline in consultingservices revenue. Maintenance revenue increased $300,000 to $10.0 million forthe nine months ended October 31, 2007 from $9.7 million for the nine monthsended October 31, 2006. Maintenance revenue continues to increase withadditions to Optio’s customer base, as well as from moderate increases in theprice of annual maintenance fees.

 

*Revenue Mix*

 

Revenue from licenses represented 24% of total revenuein the nine months ended October 31, 2007 and 27% of total revenue in the ninemonths ended October 31, 2006. Subscription revenue represented 10% and 8% oftotal revenue in the nine months ended October 31, 2007 and 2006, respectively.Services, maintenance and other revenue constituted 66% and 65% of totalrevenue in the nine months ended October 31, 2007 and 2006, respectively. Revenuefrom licenses declined between the nine months ended October 31, 2007 and 2006,thus causing the percentage of revenue to shift toward services, maintenanceand other as well as subscriptions, which increased during those same periods.

 

**Costs of Revenues**

 

Total costs of revenues remained constant at  $5.5 million in the nine months ended October31, 2007 and 2006, respectively.

 

*Licenses*

 

Costs of revenues from licenses increased to $428,000 inthe nine months ended October 31, 2007 from $390,000 in the nine months endedOctober 31, 2006. More products that include third-party software were soldduring the nine months ended October 31, 2007, as compared to the nine monthsended October 31, 2006, increasing the costs of revenue from licenses.

 

*Services,Maintenance and Other*

 

Costs of revenues from services, maintenance and otherdecreased slightly to $5.1 million in the nine months ended October 31, 2007from $5.2 million for the same period in 2006. Optio increased its internalimplementation staff as compared to the same period in the prior year and, as aresult, Optio relied less on external outsourcers. This resulted in a $509,000decrease in the cost of outsourcers in the nine months ended 

 

26

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October31, 2007 as compared to the nine months ended October 31, 2006. Alternatively,the cost of internal staff and their associated compensation and benefit costsincreased by $387,000 between the nine month periods ended October 31, 2007 and2006.

 

**OperatingExpenses**

 

*Sales andMarketing*

 

Sales and marketing expenses increased 5% to $8.1million from $7.7 million for the nine months ended October 31, 2007 and 2006,respectively. Sales and marketing expenses were 41% and36% of total revenue for the nine months ended October 31, 2007 and 2006,respectively. Salaries increased approximately $300,000 for the nine monthsended October 31, 2007 as compared to the same period in the prior year, duemainly to salary increases and increased staffing earlier in the year. Discretionaryspending, in the aggregate, was also higher as compared to the same period inthe prior fiscal year due largely to increased travel expenses of approximately$285,000. Partly offsetting this increase in expenses were reduced directmarketing expenditures, which decreased $207,000 between the nine months endedOctober 31, 2007 and the nine months ended October 31, 2006.

 

*Research and Development*

 

Researchand development expenses decreased 6% to $3.9 million for the nine months endedOctober 31, 2007 from $4.1 million in the nine months ended October 31, 2006. Researchand development salaries and associated benefits decreased $160,000 between theperiods, primarily due to reduced staffing implemented at mid-year partlyoffset by salary increases. Discretionary spending, in the aggregate, was alsoreduced for the nine months ended October 31, 2007 as compared to the sameperiod in the prior year. The most significant reduction was in consultingcosts of $74,000.

 

 *General and Administrative*

 

Generaland administrative expenses increased to $4.2 million from $3.8 million in thenine months ended October 31, 2007 and 2006, respectively. General andadministrative expenses increased due to the following: (i) $234,000 ofincreased consulting costs relating to several corporate strategic andcompliance initiatives, (ii)  $134,000 ofincreased salaries representing upgraded accounting and administrative staff aswell as salary increases, (iii) an increase of $94,000 in compensation expenserelating to corporate stock options under SFAS No. 123R, and (iv) increasedlegal fees of $64,000. Partially offsetting these increases were lower recruitingfees of $50,000.

 

*Gain on reversal of valuationreserve of M2 note*

 

Inthe nine months ended October 31, 2006, the carrying value of the M2 Systemsnote was effectively written up to its full face value and the impairmentcharge previously recorded by Optio relating to the M2 Systems note waseliminated. Optio recognized income of $900,000 that was a reduction of theCompany’s prior year operating expenses.

 

*Depreciation and Amortization*

 

Depreciationand amortization expense increased to $793,000 from $650,000 for the ninemonths ended October 31, 2007 and 2006, respectively. The increase wasprimarily due to Optio’s renegotiation of the 

 

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lease for Optio’sheadquarters in the second quarter of fiscal year 2007, in which the landlordcontributed $1.0 million towards the improvements of the space. These leaseholdimprovements, as well as an additional $700,000 purchased directly by Optio,are being depreciated over the term of the new lease or the expected usefullife of the assets, as appropriate. This increase was partly offset by adecrease in amortization expense as intangibles are amortized over theestimated useful life of the asset using the cash flow method, which results ina greater expense in the earlier periods and reduced expense in the laterperiods. This resulted in a greater expense in periods prior to fiscal year2008.

 

*Interest Income*

 

Interestincome decreased slightly to $324,000 in the nine months ended October 31, 2007from $327,000 in the nine months ended October 31, 2006. Current interestincome primarily represents interest earned on funds invested in short-termfinancial instruments, as compared to the same period in the prior year wheremost interest income was attributable to the then outstanding M2 Systems notereceivable.

 

*Interest Expense*

 

Interestexpense increased to $18,000 in the nine months ended October 31, 2007, anincrease from $4,000 in the nine months ended October 31, 2006. Interestexpense primarily represents the interest paid on Optio’s capital leases.

 

**New Accounting Pronouncements**

 

New accounting pronouncements applicable to theCompany are described in Footnote 2 of the Notes to the Consolidated CondensedFinancial Statements.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Optio had $9.5 million and $11.9 million in cash andcash equivalents at October 31, 2007 and January 31, 2007, respectively.

 

The following table sets forth certain selectedstatements of cash flow information for the nine months ended October 31, 2007:

 
| Net cash used in  operations               |   | $          | (1,603,000 | ) |
|--------------------------------------------|--------|------------|------------|---|
| Net cash used in  investing activities     |   | (306,000   | )          |
| Net cash used in  financing activities     |   | (805,000   | )          |
| Net decrease in  cash and cash equivalents |   | (2,481,000 | )          |

 

Cash used in operations was primarily the result of anet loss of $2,475,000, less the $793,000 add-back of non-cash depreciation andamortization expense, stock compensation expense of $412,000, loss on disposalof assets of $14,000, provision for doubtful accounts of $69,000, and provisionfor deferred taxes of $36,000. An increase in working capital requirementscontributed to net cash used in operations resulting in a $320,000 outflow ofcash. The increase in working capital requirements consisted of an increase inaccounts receivable of $116,000, due significantly to the high level of salesin October as well as a reduction in payments due to suppliers of $204,000 dueto the timing of payment. Also contributing to a decline in net cash providedby operating activities was an increase in spending for prepaids and otherassets as Optio prepaid several of its insurance policies and other marketingexpenses resulting in a $132,000 outflow, and a decrease in accrued expensesresulting in a $184,000 outflow. Partly offsetting these outflows was anincrease in income taxes payable and deferred revenue contributing a cumulativecash inflow of $184,000. In investing activities, Optio purchased $306,000 ofproperty and equipment. Optio’s financing activities included purchases oftreasury stock of $777,000, payments under capital leases totaling $60,000 andreceipts of $32,000 from the exercise of stock options. The purchases oftreasury stock were pursuant to a share repurchase plan announced by Optio onJanuary 5, 2007. The total amount authorized by the share repurchase plan was$2.0 million. As of 

 

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December6, 2007, Optio had repurchased 1,305,250 shares of Optio’s common stock at anaverage price per share of $1.31. Optio can still purchase up to approximately$291,000 of common stock under the share repurchase plan.

 

On April 26, 2007, Optio extended its existing line ofcredit through April 19, 2008. The line of credit bears interest at prime rate,subject to increase based on Optio’s performance relative to certain financialratios. Optio may borrow up to $4.0 million, or such lesser amount as may bedetermined based on the level of eligible accounts receivable. Currently, Optiohas estimated that approximately $1.8 million would be available for borrowingsbased upon Optio’s historical accounts receivable balance. Accounts receivable,equipment, general intangibles and other assets, as defined in the loanagreement, collateralize the line of credit. The loan agreement containsvarious covenants, including liquidity and earnings before interest, taxes,depreciation and amortization (“EBITDA”) requirements and restrictions on thepayment of dividends. As of October 31, 2007, Optio was in compliance with therequired financial ratios as amended on September 27, 2007. There were noborrowings under the line of credit as of October 31, 2007.

 

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

 

ITEM 3. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Optio provides its services to customers primarily inthe United States and, to a lesser extent, in Europe and elsewhere throughoutthe world. As a result, Optio’s financial results could be affected by variousfactors, such as changes in foreign currency exchange rates or weak economicconditions in foreign markets. All sales are currently made in both U.S.dollars and local currencies. A strengthening of the U.S. dollar or theweakening of these local currencies could make Optio’s products lesscompetitive in foreign markets. Based upon the relative size of Optio’s foreignoperations, Optio believes its exposure to foreign currency fluctuations is nota material risk. Optio’s interest income and expense are sensitive to changesin the general level of U.S. 

 

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interest rates. Based on Optio’s cash equivalents balance and thenature of its outstanding debt, Optio believes its exposure to interest raterisk is not material.

 

ITEM 4. CONTROLSAND PROCEDURES.

 

Our ChiefExecutive Officer and Chief Financial Officer have evaluated the effectivenessof our disclosure controls and procedures (as defined in Rule 13a-15(e) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”)) as of October31, 2007, and have concluded that, as of such date, our disclosure controls andprocedures are effective in ensuring that information required to be disclosedby us in the reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

 

Our management isresponsible for establishing and maintaining adequate internal audit controlsover financial reporting, as such term is defined in the Exchange Act, Rule13(a) – 15(f). Our Chief Executive Officer and Chief Financial Officer alsoconcluded that, as of October 31, 2007, our disclosure controls and proceduresare effective in ensuring that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, to allow timely decisions regarding required disclosure.

 

*Changesin Internal Controls*

 

There were nochanges in our internal controls over financial reporting that occurred duringthe quarter ended October 31, 2007, that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

**PART II –OTHER INFORMATION**

 

ITEM 1.LEGAL PROCEEDINGS

 

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

 

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2006, the United StatesCourt of Appeals for the Second Circuit overturned the District Court’scertification of the class of plaintiffs who are pursuing the claims that wouldbe settled in the settlement against the defendants. Plaintiffs filed apetition for rehearing and rehearing en banc with the Second Circuit Court ofAppeals in response to the Second Circuit’s decision. The petition forrehearing and rehearing en banc was denied on April 6, 2007, but clarified thatthe plantiffs may seek to certify a more limited class in District Court. OnJune 25, 2007, the District Court signed an order terminating the settlement.

 

Management believes that it has meritorious defensesin the foregoing matter and intends to pursue its position vigorously. Whilelitigation is inherently subject to many uncertainties, management does notbelieve that the outcome of this case will have a material adverse effect onthe financial position of Optio. However, depending on the amount and timing ofan unfavorable resolution of the lawsuit, it is possible that Optio’s financialcondition, results of operation or liquidity could be materially affected.

 

In addition, Optio is party to routine litigation oradministrative proceedings incidental to its business, none of which isbelieved by the Company to be likely to have a material effect on the financialcondition, results of operations or liquidity of the Company.

 

ITEM 1A. RISK FACTORS

 

In addition to theother information set forth in this report, the factors discussed under “Item1A. Risk Factors” in Part I of the 2007 Annual Report could materially affectour business, financial condition or future results. The risks described in our2007 Annual Report are not the only risks facing our Company. Additional risksand uncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition or operating results.

 

ITEM 2. UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

(a)          Exhibits

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

 

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| 31.2   |   | Certification of CFO pursuant to Rule  13a-14(a) of the Securities Exchange Act of 1934, as amended.                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                             |
| 32.1   |   | Certification by CEO pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |
|   |   |                                                                                                                             |
| 32.2   |   | Certification by CFO pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

 

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# **SIGNATURES**

# ** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized on the 10thday of December, 2007.

 

 
|   | OPTIO SOFTWARE, INC. |
|--------|----------------------|
|   |                 |
|   | By:                  | /s/ C. Wayne Cape |   |
|   |                 | C. Wayne Cape |
|   |                 | President and Chief Executive Officer |
|   |                 |
|        |                      |  |  |  |

 

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