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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-Q



(Mark One)

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



| | For the quarterly period ended October 31, 2003
| | -----------------------------------------------



OR



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



| | For the transition period from  to
| | ----------------------------------



Commission File Number: 1-15529



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OPTIO SOFTWARE, INC.

(Exact name of registrant as specified in its charter)



|Georgia                                                       |  | 58-1435435                         
|------------------------------------------------------------- |  | -----------------------------------
|(State of other jurisdictionof incorporation or organization) |  | (I.R.S. EmployerIdentification No.)



|3015 Windward Plaza, Fairways II, Alpharetta, GA |  | 30005     
|------------------------------------------------ |  | ----------
|(Address of principal executive offices)         |  | (Zip Code)



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



---



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



There were 19,232,264 shares of the Registrants common stock outstanding as of December 4, 2003.



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##### Table of Contents

OPTIO SOFTWARE, INC.



FORM 10-Q



For the Quarterly Period Ended October 31, 2003



TABLE OF CONTENTS



|                             |  | Page                                                                                 
|---------------------------- |  | -------------------------------------------------------------------------------------
|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 2.                      |  | Changes in 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 and Reports on Form 8-K                                                     



2



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##### Table of Contents

FORWARD-LOOKING STATEMENTS



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



3



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##### Table of Contents

PART IFINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



Optio
Software, Inc.



Consolidated Condensed Balance Sheets



|                                                |  | January 31, 2003 |             |   | October 31, 2003 |  
|----------------------------------------------- |  | ---------------- | ----------- | - | ---------------- | -
|                                                |  |                  |             |   | (Unaudited)      |  
|ASSETS                                          |  |                  |             |   |                  |  
|Current assets:                                 |  |                  |             |   |                  |  
|Cash and cash equivalents                       |  | $                | 3,902,000   |   |                  | $
|Accounts receivable, net                        |  |                  | 4,112,000   |   |                  |  
|Prepaid expenses and other current assets       |  |                  | 765,000     |   |                  |  
|Receivable on insurance claim                   |  |                  | 750,000     |   |                  |  
|Notes receivable from related party             |  |                  | 90,000      |   |                  |  
|Current portion of note receivable              |  |                  | 101,000     |   |                  |  
|                                                |  |                  |             |   |                  |  
|Total current assets                            |  |                  | 9,720,000   |   |                  |  
|Property and equipment, net                     |  |                  | 912,000     |   |                  |  
|Other assets:                                   |  |                  |             |   |                  |  
|Note receivable, net, less current portion      |  |                  | 3,571,000   |   |                  |  
|Other                                           |  |                  | 240,000     |   |                  |  
|                                                |  |                  |             |   |                  |  
|Total assets                                    |  | $                | 14,443,000  |   |                  | $
|                                                |  |                  |             |   |                  |  
|LIABILITIES AND SHAREHOLDERS EQUITY            |  |                  |             |   |                  |  
|Current liabilities:                            |  |                  |             |   |                  |  
|Accounts payable                                |  | $                | 1,656,000   |   |                  | $
|Accrued expenses                                |  |                  | 2,782,000   |   |                  |  
|Accrued settlement of lawsuit                   |  |                  | 875,000     |   |                  |  
|Notes payable                                   |  |                  | 53,000      |   |                  |  
|Current portion of capital lease obligations    |  |                  | 65,000      |   |                  |  
|Deferred revenue                                |  |                  | 5,849,000   |   |                  |  
|                                                |  |                  |             |   |                  |  
|Total current liabilities                       |  |                  | 11,280,000  |   |                  |  
|Capital lease obligations, less current portion |  |                  | 167,000     |   |                  |  
|Deferred revenue                                |  |                  | 92,000      |   |                  |  
|Other long-term liabilities                     |  |                  | 130,000     |   |                  |  
|                                                |  |                  |             |   |                  |  
|Total liabilities                               |  |                  | 11,669,000  |   |                  |  
|Shareholders equity:                           |  |                  |             |   |                  |  
|Common stock                                    |  |                  | 50,264,000  |   |                  |  
|Accumulated deficit                             |  |                  | (47,455,000 | ) |                  |  
|Accumulated other comprehensive loss (gain)     |  |                  | (35,000     | ) |                  |  
|                                                |  |                  |             |   |                  |  
|Total shareholders equity                      |  |                  | 2,774,000   |   |                  |  
|                                                |  |                  |             |   |                  |  
|Total liabilities and shareholders equity      |  | $                | 14,443,000  |   |                  | $
|                                                |  |                  |             |   |                  |  



See accompanying
notes.



4



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##### Table of Contents

Optio Software, Inc.



Consolidated Condensed Statements of Operations



(Unaudited)



|                                                                                      |  | Three Months Ended October 31, |           
|------------------------------------------------------------------------------------- |  | ------------------------------ | ----------
|                                                                                      |  | 2002                           |           
|Revenue:                                                                              |  |                                |           
|License fees                                                                          |  | $                              | 2,577,000 
|Services, maintenance, and other                                                      |  |                                | 4,517,000 
|                                                                                      |  |                                |           
|                                                                                      |  |                                | 7,094,000 
|Costs of revenue (exclusive of depreciation and amortization shown separately below): |  |                                |           
|License fees                                                                          |  |                                | 104,000   
|Services, maintenance, and other                                                      |  |                                | 1,746,000 
|                                                                                      |  |                                |           
|                                                                                      |  |                                | 1,850,000 
|                                                                                      |  |                                |           
|                                                                                      |  |                                | 5,244,000 
|Operating expenses:                                                                   |  |                                |           
|Sales and marketing                                                                   |  |                                | 2,929,000 
|Research and development                                                              |  |                                | 1,015,000 
|General and administrative                                                            |  |                                | 1,529,000 
|Impairment of M2 Systems note receivable                                              |  |                                |          
|Depreciation and amortization                                                         |  |                                | 232,000   
|                                                                                      |  |                                |           
|                                                                                      |  |                                | 5,705,000 
|                                                                                      |  |                                |           
|Loss from operations                                                                  |  |                                | (461,000  
|Other income (expense):                                                               |  |                                |           
|Interest income                                                                       |  |                                | 57,000    
|Interest expense                                                                      |  |                                | (10,000   
|Other                                                                                 |  |                                | (12,000   
|                                                                                      |  |                                |           
|                                                                                      |  |                                | 35,000    
|Loss before income taxes                                                              |  |                                | (426,000  
|Income tax benefit                                                                    |  |                                |          
|                                                                                      |  |                                |           
|Net loss                                                                              |  | $                              | (426,000  
|                                                                                      |  |                                |           
|Net loss per sharebasic and diluted                                                  |  | $                              | (0.02     
|                                                                                      |  |                                |           
|Weighted average shares outstandingbasic and diluted                                 |  |                                | 19,127,498
|                                                                                      |  |                                |           
|Comprehensive loss:                                                                   |  |                                |           
|Net loss                                                                              |  | $                              | (426,000  
|Foreign currency translation adjustment                                               |  |                                | (4,000    
|                                                                                      |  |                                |           
|Comprehensive loss                                                                    |  | $                              | (430,000  
|                                                                                      |  |                                |           



See accompanying
notes.



5



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##### Table of Contents

Optio Software, Inc.



Consolidated Condensed Statements of Operations



(Unaudited)



|                                                                                      |  | Nine Months Ended October 31, |           
|------------------------------------------------------------------------------------- |  | ----------------------------- | ----------
|                                                                                      |  | 2002                          |           
|Revenue:                                                                              |  |                               |           
|License fees                                                                          |  | $                             | 7,983,000 
|Services, maintenance, and other                                                      |  |                               | 13,292,000
|                                                                                      |  |                               |           
|                                                                                      |  |                               | 21,275,000
|Costs of revenue (exclusive of depreciation and amortization shown separately below): |  |                               |           
|License fees                                                                          |  |                               | 362,000   
|Services, maintenance, and other                                                      |  |                               | 6,261,000 
|                                                                                      |  |                               |           
|                                                                                      |  |                               | 6,623,000 
|                                                                                      |  |                               |           
|                                                                                      |  |                               | 14,652,000
|Operating expenses:                                                                   |  |                               |           
|Sales and marketing                                                                   |  |                               | 10,039,000
|Research and development                                                              |  |                               | 3,390,000 
|General and administrative                                                            |  |                               | 5,097,000 
|Impairment of M2 Systems note receivable                                              |  |                               |          
|Depreciation and amortization                                                         |  |                               | 704,000   
|                                                                                      |  |                               |           
|                                                                                      |  |                               | 19,230,000
|                                                                                      |  |                               |           
|Income (loss) from operations                                                         |  |                               | (4,578,000
|Other income (expense):                                                               |  |                               |           
|Interest income                                                                       |  |                               | 179,000   
|Interest expense                                                                      |  |                               | (30,000   
|Other                                                                                 |  |                               | 23,000    
|                                                                                      |  |                               |           
|                                                                                      |  |                               | 172,000   
|Income (loss) before income taxes and loss from discontinued operations               |  |                               | (4,406,000
|Income tax benefit                                                                    |  |                               | 485,000   
|                                                                                      |  |                               |           
|Income (loss) from continuing operations                                              |  |                               | (3,921,000
|Loss from discontinued operations                                                     |  |                               | (43,000   
|                                                                                      |  |                               |           
|Net income (loss)                                                                     |  | $                             | (3,964,000
|                                                                                      |  |                               |           
|Income (loss) per share from continuing operationsbasic                              |  | $                             | (0.21     
|                                                                                      |  |                               |           
|Income (loss) per share from continuing operationsdiluted                            |  | $                             | (0.21     
|                                                                                      |  |                               |           
|Loss per share from discontinued operationsbasic and diluted                         |  | $                             | 0.00      
|                                                                                      |  |                               |           
|Net income (loss) per sharebasic                                                     |  | $                             | (0.21     
|                                                                                      |  |                               |           
|Net income (loss) per sharediluted                                                   |  | $                             | (0.21     
|                                                                                      |  |                               |           
|Weighted average shares outstandingbasic                                             |  |                               | 18,907,112
|                                                                                      |  |                               |           
|Weighted average shares outstandingdiluted                                           |  |                               | 18,907,112
|                                                                                      |  |                               |           
|Comprehensive loss:                                                                   |  |                               |           
|Net income (loss)                                                                     |  | $                             | (3,964,000
|Foreign currency translation adjustment                                               |  |                               | 164,000   
|                                                                                      |  |                               |           
|Comprehensive income (loss)                                                           |  | $                             | (3,800,000
|                                                                                      |  |                               |           



See accompanying
notes.



6



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##### Table of Contents

Optio Software, Inc.



Consolidated Condensed Statement of Shareholders Equity



(Unaudited)



|                                        |  | Common Stock |  | Accumulated Deficit |            |  | Accumulated OtherComprehensive (Loss) Income |             |   | Total Shareholders Equity
|--------------------------------------- |  | ------------ |  | ------------------- | ---------- |  | -------------------------------------------- | ----------- | - | --------------------------
|                                        |  | Shares       |  | Amount              |            |  |                                             
|Balance at February 1, 2003             |  | 19,127,498   |  | $                   | 50,264,000 |  | $                                            | (47,455,000 | ) |                           
|Comprehensive income, net of tax:       |  |              |  |                     |            |  |                                              |             |   |                           
|Net income                              |  |             |  |                     |           |  |                                              | 484,000     |   |                           
|Foreign currency translation adjustment |  |             |  |                     |           |  |                                              |            |   |                           
|                                        |  |              |  |                     |            |  |                                              |             |   |                           
|Comprehensive income                    |  |              |  |                     |            |  |                                              |             |   |                           
|Exercise of stock options               |  | 104,766      |  |                     | 8,000      |  |                                              |            |   |                           
|                                        |  |              |  |                     |            |  |                                              |             |   |                           
|Balance at October 31, 2003             |  | 19,232,264   |  | $                   | 50,272,000 |  | $                                            | (46,971,000 | ) |                           
|                                        |  |              |  |                     |            |  |                                              |             |   |                           



See accompanying
notes.



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##### Table of Contents

Optio Software, Inc.



Consolidated Condensed Statements of Cash Flows



(Unaudited)



|                                                                                     |  | Nine Months Ended October 31, |           
|------------------------------------------------------------------------------------ |  | ----------------------------- | ----------
|                                                                                     |  | 2002                          |           
|Cash flows from operating activities:                                                |  |                               |           
|Net income (loss)                                                                    |  | $                             | (3,964,000
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                               |           
|Depreciation and amortization                                                        |  |                               | 704,000   
|Provision for doubtful accounts                                                      |  |                               | (182,000  
|Impairment of M2 note receivable                                                     |  |                               |          
|Loss on disposal of property and equipment                                           |  |                               | 56,000    
|Non-cash compensation and interest                                                   |  |                               | 5,000     
|Changes in operating assets and liabilities:                                         |  |                               |           
|Accounts receivable                                                                  |  |                               | 1,806,000 
|Prepaid expenses and other current assets                                            |  |                               | (86,000   
|Receivable from insurance claim                                                      |  |                               |          
|Accounts payable                                                                     |  |                               | (281,000  
|Accrued expenses                                                                     |  |                               | (119,000  
|Accrued settlement of lawsuit                                                        |  |                               |          
|Income taxes payable                                                                 |  |                               |          
|Deferred revenue                                                                     |  |                               | (690,000  
|                                                                                     |  |                               |           
|Net cash provided by (used in) operating activities                                  |  |                               | (2,751,000
|Cash flows from investing activities:                                                |  |                               |           
|Proceeds from the sale of marketable securities                                      |  |                               | 210,000   
|Purchases of property and equipment                                                  |  |                               | (240,000  
|Repayment of notes receivable                                                        |  |                               | 180,000   
|Repayments from related parties under notes receivable                               |  |                               | 38,000    
|                                                                                     |  |                               |           
|Net cash (used in) provided by investing activities                                  |  |                               | 188,000   
|Cash flows from financing activities:                                                |  |                               |           
|Payments of notes payable and capital lease obligations                              |  |                               | (64,000   
|Proceeds from exercise of stock options                                              |  |                               | 101,000   
|                                                                                     |  |                               |           
|Net cash provided by (used in) financing activities                                  |  |                               | 37,000    
|Impact of foreign currency rate fluctuations on cash                                 |  |                               | 118,000   
|Net increase (decrease) in cash and cash equivalents                                 |  |                               | (2,408,000
|Cash and cash equivalents at beginning of period                                     |  |                               | 5,378,000 
|                                                                                     |  |                               |           
|Cash and cash equivalents at end of period                                           |  | $                             | 2,970,000 
|                                                                                     |  |                               |           
|Supplemental disclosures of cash flow information:                                   |  |                               |           
|Cash paid/refunded during the year for:                                              |  |                               |           
|Interest paid                                                                        |  | $                             | 8,000     
|                                                                                     |  |                               |           
|Income taxes refunded                                                                |  | $                             | 485,000   
|                                                                                     |  |                               |           



See accompanying
notes.



8



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##### Table of Contents

Optio Software, Inc.

Notes to the Consolidated Condensed Financial Statements

(Unaudited)



1. Description of Business



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



2. Basis of Presentation



Interim
Financial Information



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



The accompanying financial statements
should be read in conjunction with the Companys audited consolidated financial statements for the year ended January 31, 2003, included in the Companys Annual Report on Form 10-K, filed with the Securities and Exchange Commission on May
1, 2003. Results of operations for the three and nine months ended October 31, 2003 are not necessarily indicative of the results for the year ending January 31, 2004.



New Pronouncements



The Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) 144, Accounting for
the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed Of. SFAS 144 supersedes the provisions of APB Opinion No. 30,
Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions with regard to reporting the effects of a disposal of a
segment of a business. The statement provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria required to classify an asset as held-for-sale. Under this statement, more dispositions will
qualify for discontinued operations treatment in the income statement and expected future operating losses from discontinued operations will be displayed in discontinued operations in the period in which the losses are incurred. The standard is
effective for fiscal years beginning after December 15, 2001. Early adoption is allowed. Effective November 1, 2001, the Company adopted SFAS 144. Under the provisions of SFAS 144, the disposal of the Companys Muscato Corporation
(Muscato) and TransLink Solutions Corporation (Translink) components qualified for discontinued operations treatment. As a result, the results of operations of these two components are reflected as discontinued operations in
the Companys consolidated statements of operations.



9



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##### Table of Contents

Optio Software, Inc.

Notes to the Consolidated Condensed Financial Statements

(Unaudited)(Continued)



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based
CompensationTransition and Disclosurean Amendment to SFAS 123. SFAS 148 provides two additional transition methods for entities that adopt the preferable method of accounting for stock based compensation. Further, the statement
requires disclosure of comparable information for all companies regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. These disclosures are now required for interim periods in addition to the
traditional annual disclosure. The amendments to SFAS 123, which provides for additional transition methods are effective for fiscal years ending after December 15, 2002, although earlier application is permitted. The amendments to the disclosure
requirements are required for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 during the fiscal year ended January 31,
2003. The Company did not adopt the fair value methodology of SFAS 148.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances)
because that financial instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The Statement is to be implemented by reporting the cumulative effect of a change in
accounting principle for financial instruments created before the issuance of the date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. On November 7, 2003, the FASB deferred the
classification and measurement provisions of SFAS No. 150 as they apply to certain mandatory redeemable non-controlling interests. This deferral is expected to remain in effect while these provisions are further evaluated by the FASB. The
application of the requirements of SFAS 150 did not have any impact on the financial position, results of operations or cash flows of the Company.



In November 2002, the FASB issued FASB Interpretation (FIN) No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December
15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The application of the requirements of FIN 45 did not have any impact on the Companys
financial position or result of operations.



In January 2003,
the FASB issued FIN No. 46, Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable immediately for
variable interest entities created after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15,
2003. The Company has not identified any variable interest entities. The application of FIN 46 did not have any impact on the Companys consolidated financial statements.



10



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##### Table of Contents

Optio Software, Inc.

Notes to the Consolidated Condensed Financial Statements

(Unaudited)(Continued)



Employee Stock Options



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



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



Pro forma information regarding net income or loss required by SFAS 123 Accounting for Stock-Based Compensation, requires that the information be determined as if the Company had accounted for its employee
stock options granted subsequent to December 31, 1994 under the fair value method. The fair value for these options was estimated at the date of grant using the minimum value method through December 15, 1999, the date of the Companys initial
public offering. For those options granted subsequent to December 15, 1999, the fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for the
three months ended October 31, 2002 and 2003 and the nine months ended October 31, 2002 and 2003: risk-free interest rates of 3.42% and 3.90% for the three months ended October 31, 2002 and October 31, 2003, respectively; risk-free interest rates of
4.66% and 3.51% for the nine months ended October 31, 2002 and October 31, 2003, respectively; no dividend yield; volatility of 170% for the three and nine months ended October 31, 2002 and 162% for the three and nine months ended October 31, 2003;
and an expected life of the options of 7.61 years for the three and nine months ended October 31, 2002 and 7.54 years for the three and nine months ended October 31, 2003.



For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the
options vesting periods. The weighted-average fair value of options granted during the three months ended October 31, 2002 and 2003 equaled $0.25 and $0.77 per share, respectively. The weighted-average fair value of options granted during the
nine months ended October 31, 2002 and 2003 equaled $0.56 and $0.61 per share, respectively. The Companys pro forma information as determined using the fair value method of accounting under SFAS 123, was as follows:



|                                                      |  | Three Months Ended October 31, |         
|----------------------------------------------------- |  | ------------------------------ | --------
|                                                      |  | 2002                           |         
|Net loss as reported                                  |  | $                              | (426,000
|Deduct: Compensation cost using the fair value method |  |                                | (181,000
|                                                      |  |                                |         
|Pro forma net loss                                    |  | $                              | (607,000
|                                                      |  |                                |         
|Net loss per share as reportedbasic and diluted      |  |                                | (0.02   
|Pro forma net loss per sharebasic and diluted        |  |                                | (0.03   



11



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##### Table of Contents

Optio Software, Inc.

Notes to the Consolidated Condensed Financial Statements

(Unaudited)(Continued)



|                                                                 |  | Nine Months Ended October 31, |           
|---------------------------------------------------------------- |  | ----------------------------- | ----------
|                                                                 |  | 2002                          |           
|Net income (loss) as reported                                    |  | $                             | (3,964,000
|Add: Compensation cost reported using the intrinsic value method |  |                               | 12,000    
|Deduct: Compensation cost using the fair value method            |  |                               | (560,000  
|                                                                 |  |                               |           
|Pro forma net loss                                               |  | $                             | (4,512,000
|                                                                 |  |                               |           
|Net income (loss) per share as reportedbasic                    |  |                               | (0.21     
|Net income (loss) per share as reporteddiluted                  |  |                               | (0.21     
|Pro forma net loss per sharebasic and diluted                   |  |                               | (0.24     



3. Discontinued Operations



On March 27, 2000, the Company acquired all the
outstanding shares of Muscato and substantially all of the assets of TransLink, an affiliate of Muscato. Subsequently, on December 4, 2001, the Company sold its Muscato and TransLink business units to M2 Systems Corporation (M2 Systems),
a company owned by certain of the former shareholders of Muscato and TransLink. The stock of Muscato was sold for consideration of $250,000 cash, a $3.25 million promissory note, and the retirement of the long-term notes in the aggregate amount of
$8.9 million in principal and interest related to the original purchase of Muscato. The assets of the TransLink business unit were sold for a $750,000 promissory note. These two notes were subsequently consolidated into a single $3,640,000
promissory note.



Pursuant to the provisions of SFAS No. 144,
the financial statements have been reclassified to reflect the discontinuation of these components. Accordingly, the revenues, costs and expenses of these divested units have been segregated in the consolidated statements of operations. The net
operating results of these segments have been reported as discontinued operations in the consolidated statements of operations.



There were no revenues included in discontinued operations for the three and nine months ended October 31, 2002. There was no pre-tax loss included in the
three months ended October 31, 2002. Pre-tax loss included in discontinued operations for the nine months ended October 31, 2002 was $43,000. There were no discontinued operations for the three and nine months ended October 31, 2003.



4. Net Income (Loss) per Share



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



12



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##### Table of Contents

Optio Software, Inc.

Notes to the Consolidated Condensed Financial Statements

(Unaudited)(Continued)



The following tables sets forth the computation of net income (loss) per share:



|                                                                                              |  | Three months ended October 31, |           
|--------------------------------------------------------------------------------------------- |  | ------------------------------ | ----------
|                                                                                              |  | 2002                           |           
|Net loss                                                                                      |  | $                              | (426,000  
|                                                                                              |  |                                |           
|Weighted average shares outstandingbasic                                                     |  |                                | 19,127,498
|Dilutive stock options                                                                        |  |                                |          
|                                                                                              |  |                                |           
|Weighted average shares outstandingdiluted                                                   |  |                                | 19,127,498
|                                                                                              |  |                                |           
|Net loss per sharebasic and diluted                                                          |  | $                              | (0.02     
|                                                                                              |  |                                |           
|Potentially dilutive stock options, excluded from diluted weighted average shares outstanding |  |                                | 1,378,544 
|                                                                                              |  |                                |           
|                                                                                              | 
|                                                                                              |  | Nine months ended October 31,  |           
|                                                                                              |  | 2002                           |           
|Net income (loss)                                                                             |  | $                              | (3,964,000
|                                                                                              |  |                                |           
|Weighted average shares outstandingbasic                                                     |  |                                | 18,907,112
|Dilutive stock options                                                                        |  |                                |          
|                                                                                              |  |                                |           
|Weighted average shares outstandingdiluted                                                   |  |                                | 18,907,112
|                                                                                              |  |                                |           
|Net income (loss) per sharebasic                                                             |  | $                              | (0.21     
|                                                                                              |  |                                |           
|Net income (loss) per sharediluted                                                           |  | $                              | (0.21     
|                                                                                              |  |                                |           
|Potentially dilutive stock options, excluded from diluted weighted average shares outstanding |  |                                | 1,533,009 
|                                                                                              |  |                                |           



5. Segment and Geographic
Information



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



The Company
previously reported three geographic segments, with the current Other segment representing Australia. Effective September 2002, the Companys Australian office was closed. Segment information for the nine months ended October 31,
2002 has been restated to classify the Australian segment as Other. Revenues are attributable to each segment based on the location of its subsidiary.



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Optio Software, Inc.

Notes to the Consolidated Condensed Financial Statements

(Unaudited)(Continued)



Segment information for the nine months ended October 31, 2002 and 2003 is summarized below.



|Nine Months endedOctober 31, 2002                                      |  | UnitedStates |            |   | Europe |   |           | Other |  |   | Combined |   |  | Eliminations |            |   | Consolidated |  
|---------------------------------------------------------------------- |  | ------------ | ---------- | - | ------ | - | --------- | ----- |  | - | -------- | - |  | ------------ | ---------- | - | ------------ | -
|Revenue from external customers:                                       |  |              |            |   |        |   |           |       |  |   |          |   |  |              |            |   |              |  
|License fees                                                           |  | $            | 6,605,000  |   |        | $ | 1,322,000 |       |  | $ | 56,000   |   |  | $            | 7,983,000  |   |              | $
|Services, maintenance and other                                        |  |              | 11,688,000 |   |        |   | 1,549,000 |       |  |   | 55,000   |   |  |              | 13,292,000 |   |              |  
|Inter-segment revenue                                                  |  |              | 328,000    |   |        |   | 118,000   |       |  |   |         |   |  |              | 446,000    |   |              |  
|                                                                       |  |              |            |   |        |   |           |       |  |   |          |   |  |              |            |   |              |  
|Total revenue                                                          |  |              | 18,621,000 |   |        |   | 2,989,000 |       |  |   | 111,000  |   |  |              | 21,721,000 |   |              |  
|Interest income                                                        |  |              | 178,000    |   |        |   | 1,000     |       |  |   |         |   |  |              | 179,000    |   |              |  
|Interest expense                                                       |  |              | 26,000     |   |        |   |          |       |  |   | 4,000    |   |  |              | 30,000     |   |              |  
|Depreciation and amortization                                          |  |              | 643,000    |   |        |   | 57,000    |       |  |   | 4,000    |   |  |              | 704,000    |   |              |  
|Income tax benefit                                                     |  |              | 485,000    |   |        |   |          |       |  |   |         |   |  |              | 485,000    |   |              |  
|Segment loss before income taxes and loss from discontinued operations |  |              | (3,216,000 | ) |        |   | (922,000  | )     |  |   | (268,000 | ) |  |              | (4,406,000 | ) |              |  
|Segment net loss including loss from discontinued operations           |  |              | (2,774,000 | ) |        |   | (922,000  | )     |  |   | (268,000 | ) |  |              | (3,964,000 | ) |              |  
|                                                                       |  |              |            |   |        |  
|Nine Months endedOctober 31, 2003                                      |  | UnitedStates |            |   | Europe |   |           | Other |  |   | Combined |   |  | Eliminations |            |   | Consolidated |  
|Revenue from external customers:                                       |  |              |            |   |        |   |           |       |  |   |          |   |  |              |            |   |              |  
|License fees                                                           |  | $            | 5,726,000  |   |        | $ | 909,000   |       |  | $ |         |   |  | $            | 6,635,000  |   |              | $
|Services, maintenance and other                                        |  |              | 11,160,000 |   |        |   | 1,799,000 |       |  |   | 8,000    |   |  |              | 12,967,000 |   |              |  
|Inter-segment revenue                                                  |  |              | 217,000    |   |        |   | 83,000    |       |  |   |         |   |  |              | 300,000    |   |              |  
|                                                                       |  |              |            |   |        |   |           |       |  |   |          |   |  |              |            |   |              |  
|Total revenue                                                          |  |              | 17,103,000 |   |        |   | 2,791,000 |       |  |   | 8,000    |   |  |              | 19,902,000 |   |              |  
|Interest income                                                        |  |              | 132,000    |   |        |   |          |       |  |   |         |   |  |              | 132,000    |   |              |  
|Interest expense                                                       |  |              | 13,000     |   |        |   |          |       |  |   |         |   |  |              | 13,000     |   |              |  
|Depreciation and amortization                                          |  |              | 392,000    |   |        |   | 51,000    |       |  |   |         |   |  |              | 443,000    |   |              |  
|Income tax benefit (expense)                                           |  |              | 151,000    |   |        |   | (5,000    | )     |  |   |         |   |  |              | 146,000    |   |              |  
|Segment income (loss) before income taxes                              |  |              | 806,000    |   |        |   | (474,000  | )     |  |   | 6,000    |   |  |              | 338,000    |   |              |  
|Segment net income (loss)                                              |  |              | 957,000    |   |        |   | (479,000  | )     |  |   | 6,000    |   |  |              | 484,000    |   |              |  



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##### Table of Contents

Optio Software, Inc.

Notes to the Consolidated Condensed Financial Statements

(Unaudited)(Continued)



6. Line of Credit



On June 4, 2003, the Company executed a Third Loan Modification Agreement to its Loan Agreement with Silicon Valley Bank, the purpose of which was to add
a reserve of $20,000 against the line of credit for certain cash management services.



7. Legal Proceedings



On June 19, 2001, a
lawsuit styled Wagner, et al v. Optio Software, Inc., was filed in the United States District Court for the Southern District of Ohio, Western Division, Case No. C-1-01-406 and later amended to include a corporate officer as a defendant. The
lawsuit, filed by 19 shareholders of the now bankrupt company known as Prograde Technologies, Inc. (PTI), alleges breach of contract, promissory estoppel and promissory fraud arising out of the termination by Optio of negotiations of a
possible merger with PTI. The plaintiffs were seeking compensatory damages of an unspecified amount, but in excess of $1.0 million, as well as punitive damages in excess of $10.0 million, reimbursement for the plaintiffs attorneys fees
and associated costs and expenses of the lawsuit. Optio counterclaimed against two of the plaintiffs for failure to pay on a guarantee on a promissory note. On July 21, 2003, the parties executed a Settlement Agreement and Mutual General Release.
The settlement included the release by PTIs trustee in bankruptcy of all claims against the plaintiffs, the Company and a Company officer and a non-appealable order approving the release of the trustees claims by the bankruptcy court.
Under the terms of the settlement, Optio paid a total of $875,000 and received immediate reimbursement from its insurer of $750,000. Both parties were required to release all claims each may have in the PTI bankruptcy in exchange for a reciprocal
release from the bankruptcy trustee. The Company had previously recorded a liability for the settlement and a receivable for the amount to be contributed by the insurance carrier, after which settlement was made on July 21, 2003.



8. Note Receivable



As further explained in Notes 3 and 5 of the Notes to Consolidated Financial Statements included in Optios Annual
Report on Form 10-K, Optio holds a note receivable from M2 Systems as consideration for the sale of Muscato and Translink. At October 31, 2003, the principal balance due Optio was $3,658,000. Accrued interest receivable of $10,000 is included in
other current assets.



Under the terms of this note, M2 Systems
was required to make a payment of $100,000 on September 1, 2003. M2 Systems failed to make this payment and Optio formally notified M2 Systems of its failure to pay on September 9, 2003. M2 Systems had thirty days from the date of this notification
to make such payment, or it would be an event of default under the note. M2 Systems made the required payment, including all interest and penalties, on October 8, 2003.



Under the terms of the Note, the next payment required to be made by M2 Systems was $100,000 on December 1, 2003. M2 Systems
failed to make this payment and Optio formally notified M2 Systems of its failure to pay on December 2, 2003. M2 Systems will have thirty days from the date of this notification to make such payment, or it will be an event of default under the note.
Optio intends to take action as allowed under the promissory note and security documents upon an event of default.



M2 Systems failure to make timely payments indicates that it is probable that Optio will be unable to collect all amounts due according to the
contractual terms of the note. The loan is thus considered



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Optio Software, Inc.

Notes to the Consolidated Condensed Financial Statements

(Unaudited)(Continued)



impaired and should be valued at the fair value of the collateral. Management has used its judgment to assess the collateral for the note, including the
technology which could be sold or used, the maintenance contracts which could be sold or supported, and the other assets of the company, including accounts receivable and fixed assets, which could be collected or sold. The collateral was estimated
to have a value of $2.8 million, thus Optio has recorded an impairment charge of $900,000 during the three months ended October 31, 2003. The amount of the note receivable recorded could be materially different under different conditions or using
different assumptions, including the varying assumptions regarding the fair value of the collateral. If M2 Systems defaults on the note and the collateral proves to be of no value to Optio, Optio would incur an additional loss of $2.8 million.



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##### Table of Contents

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



OVERVIEW



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



Optio markets and sells its software and
services throughout the United States, Europe and the Asia Pacific region, through its direct sales force and certified resellers. Optio has offices in the United States, France, the United Kingdom and Germany. Optio previously had an office in
Australia; however, this office was closed in September 2002. Optio also offers consulting services, which provide customers with implementation assistance and training. As of October 31, 2003, Optio had over 5,000 customers worldwide using
Optios software and services. No single customer accounted for 10% or more of Optios revenue for the three and nine months ended October 31, 2003.



Critical Accounting Policies and Use of Estimates



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



Revenue Recognition



Overview



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



License Fees



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



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##### Table of Contents

The Company recognizes revenue using the residual method pursuant to the requirements of SOP No. 97-2, as
amended by SOP No. 98-9. Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as licenses for software products, maintenance, consulting
services or customer training. The determination of fair value is based on objective evidence, which is specific to the Company. The Company limits its assessment of objective evidence for each element to either the price charged when the same
element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or
more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.



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



Services, Maintenance and Other Revenue



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



Note Receivable



Optio holds a note from M2 Systems as consideration for
the sale of Muscato and TransLink. Under the terms of this note, M2 Systems was required to make a payment of $100,000 on September 1, 2003. M2 Systems failed to make this payment and Optio formally notified M2 Systems of its failure to pay on
September 9, 2003. M2 Systems had thirty days from the date of this notification to make such payment, or it will be an event of default. M2 Systems made the required payment, including all interest and penalties, on October 8, 2003.



Under the terms of the note, the next payment required to be made by M2
Systems was $100,000 on December 1, 2003. M2 Systems failed to make this payment and Optio formally notified M2 Systems of its failure to pay on December 2, 2003. M2 Systems will have thirty days from the date of this notification to make such
payment, or it will be an event of default under the note. Optio intends to take action as allowed under the promissory note and security documents upon an event of default.



M2 Systems failure to make timely payments indicates that it is probable that Optio will be unable to collect all
amounts due according to the contractual terms of the note. The loan is thus considered impaired and should be valued at the fair value of the collateral. Management has used its judgment to assess the collateral for the note, including the
technology which could be sold or used, the maintenance contracts which could be sold or supported, and the other assets of the company, including accounts receivable and fixed assets,



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which could be collected or sold. The collateral was estimated to have a value of $2.8 million, thus Optio has recorded an impairment charge of $900,000
during the three months ended October 31, 2003. The amount of the note receivable recorded could be materially different under different conditions or using different assumptions, including the varying assumptions regarding the fair value of the
collateral. If M2 Systems defaults on the note and the collateral proves to be of no value to Optio, Optio would incur an additional loss of $2.8 million.



Accounts Receivable



Optio maintains allowances for doubtful accounts for estimated losses resulting from customers inability to make payments required under their
contracts. The amount of Optios reserve is based on historical experience and Optios specific review and analysis of the receivables outstanding. If the financial condition of Optios customers were to deteriorate, resulting in
their inability to make payments, additional reserves would be required, increasing Optios bad debt expense included in general and administrative expenses.



RESULTS OF OPERATIONS



Three Months Ended October 31, 2003 Compared to Three Months Ended October 31, 2002



Revenues



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



|                                                                            |  | Three MonthsEnded October 31, |   
|--------------------------------------------------------------------------- |  | ----------------------------- | --
|                                                                            |  | 2002                          |   
|Revenue:                                                                    |  |                               |   
|License fees                                                                |  | 36                            | % 
|Services, maintenance and other                                             |  | 64                            |   
|                                                                            |  |                               |   
|Total revenue                                                               |  | 100                           |   
|                                                                            |  |                               |   
|Costs of revenue (excluding depreciation and amortization, included below): |  |                               |   
|License fees                                                                |  | 1                             |   
|Services, maintenance and other                                             |  | 25                            |   
|                                                                            |  |                               |   
|Total cost of revenue                                                       |  | 26                            |   
|                                                                            |  |                               |   
|                                                                            |  | 74                            |   
|Operating expenses:                                                         |  |                               |   
|Sales and marketing                                                         |  | 41                            |   
|Research and development                                                    |  | 14                            |   
|General and administrative                                                  |  | 22                            |   
|Impairment of M2 note receivable                                            |  |                              |   
|Depreciation and amortization                                               |  | 3                             |   
|                                                                            |  |                               |   
|Total operating expenses                                                    |  | 80                            |   
|                                                                            |  |                               |   
|Loss from operations                                                        |  | (6                            | ) 
|Interest and other income                                                   |  |                              |   
|Income tax benefit                                                          |  |                              |   
|                                                                            |  |                               |   
|Net loss                                                                    |  | (6                            | )%
|                                                                            |  |                               |   



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Revenues



Total revenues decreased 10% to $6.4 million from $7.1 million for the three months ended October 31, 2003 and 2002, respectively.



License fees



Revenues from software licenses decreased 20% to $2.1 million from $2.6 million for the three months ended October 31, 2003
and 2002, respectively. Over the previous quarters, Optio has continued to feel the affects of pricing pressure resulting from tighter corporate spending. As a result, Optio has seen a slight decline in its average sale price. This pricing pressure,
combined with a challenging economy, has contributed to the decline in revenue this quarter. As in the first half of fiscal year 2003, healthcare appears to be a market that continues to spend on technology. Optio has seen improvement in this market
with the introduction of our Medex product. Approximately 36% of Optios United States software sales came from the healthcare market during the three months ended October 31, 2003, down from the 46% generated in the first quarter, but up from
the 32% generated in the second quarter, and still above our historical 20-25%. License fee revenues from Optios European division decreased from $437,000 in the three months ended October 31, 2002, representing 17% of total software license
revenue, to $216,000 in the three months ended October 31, 2003, representing 11% of total software license revenue.



Approximately $662,000 of Optios software license revenue during the three months ended October 31, 2003 was derived from partners, such as
resellers, value-added distributors or OEM relationships, representing 30% of license revenue for Optio. During the three months ended October 31, 2002, Optio generated $814,000 of its software license revenue through partners, representing 32% of
Optios license revenue.



Services, maintenance and other



Revenues from services, maintenance and other decreased
to $4.3 million in the three months ended October 31, 2003 from $4.5 million in same period of the prior year. Services revenue decreased to $1.6 million for the three months ended October 31, 2003 from $2.0 million in the three months ended October
31, 2002. As Optios software revenue has declined, Optio has seen less contracted services dollars, resulting from both a smaller average deal size and tighter cost control on the part of Optios customers, thus less implementation
services are purchased. Maintenance revenue increased $200,000 to $2.7 million in the three months ended October 31, 2003 from $2.5 million in the three months ended October 31, 2002. Maintenance revenue continues to increase as Optio adds to its
customer base and increases the price of its annual maintenance fees.



Revenue Mix



Revenues from licenses
represented 32% of total revenue in the three months ended October 31, 2003 and 36% of total revenue in the three months ended October 31, 2002. The decline in the license revenue as a percentage of total revenue is because while the license and
consulting services revenue have declined, Optio has been able to maintain its maintenance revenue, making the license fee revenue a smaller percentage of the whole.



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##### Table of Contents

Costs of Revenues



Total costs of revenues decreased 15% to $1.6 million from $1.9 million in the three months ended October 31, 2003 and 2002, respectively.



Licenses



Costs of revenues from licenses consist of costs related to the packaging and distribution of the products, fees paid for
integration of third-party software products and fees paid to referral partners. Costs of revenues from licenses as a percentage of revenue remained relatively consistent between the three months ended October 31, 2003 and 2002.



Services, maintenance and other



Costs of revenues from services, maintenance and other consist of personnel,
subcontracting and other expenses relating to the cost of providing customer support, education and consulting and implementation services. Costs of revenues from services, maintenance and other for the three months ended October 31, 2003 decreased
13% to $1.5 million from $1.7 million in the three months ended October 31, 2002. The cost of outsourcers, often used in the implementation of Optios products at customer sites, declined $268,000 from $613,000 in the three months ended October
31, 2002 to $345,000 in the three months ended October 31, 2003. With a large emphasis on increasing utilization rates of our internal personnel, Optio has been able to cut labor costs associated with its outside consultants. So, while the headcount
has remained consistent between the quarters, utilization has been boosted, allowing us to decrease the cost of services, maintenance and other.



Operating Expenses



Sales and Marketing



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



Sales and
marketing expenses decreased 28% to $2.1 million from $2.9 million for the three months ended October 31, 2003 and 2002, respectively. Sales and marketing expenses were 33% and 41%, respectively, of total revenue for the same periods. Although
headcount between the two periods declined by only two people, there were savings of $500,000 in commissions and bonuses, primarily due to lower sales salaries and commissions resulting from declining revenues. With a conscious effort to decrease
travel expenses, allowed through the use of technology such as web presentations, there were savings of over $50,000 in travel and related expenses between the two periods. Finally, Optio incurred approximately $90,000 less in marketing expenses in
the three months ended October 31, 2003 than in the three months ended October 31, 2002. The reduction in marketing expenses resulted from a reduced trade show schedule and reduced website maintenance expenses.



Research and Development



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



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Research and development expenses essentially remained unchanged, amounting to $1.0 million for both the
three months ended October 31, 2003 and 2002, respectively. While research and development headcount declined by three between the two periods, increased salaries resulted in a net difference of less than $50,000. Other expenses remained relatively
consistent between the two periods.



General and Administrative



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



General and administrative expenses decreased 30% to $1.1 million from $1.5
million for the three months ended October 31, 2003 and 2002, respectively. These expenses represent 17% and 22%, respectively, of total revenue for the same periods. Optio reduced its general and administrative headcount by four, resulting in
salaries savings of approximately $75,000 between the two periods. In addition, Optios legal fees were reduced by $260,000 between the three moths ended October 31, 2002 and October 31, 2003. These savings were primarily the result of reduced
legal fees incurred in Optios litigation procedures, plus a refund of approximately $75,000 from Optios insurer for legal fees paid in connection with the Prograde litigation. Additional savings of approximately $100,000 were achieved
through reductions in accounting and tax fees, consulting fees, and other expenses.



Impairment of M2 Note Receivable



Optio
currently holds a note receivable from M2 Systems with a principal and interest balance of $3.6 million. Under the terms of the note, M2 was required to make a payment of $100,000 on December 1, 2003. M2 failed to make such payment and, as such,
Optio believes that an impairment charge to write-down the note receivable to the fair value of the collateral which supports the note is necessary. Management estimated that the value of the collateral was $2.8 million, requiring a $900,000
impairment charge in the three months ended October 31, 2003. Optio will continue to evaluate the value of the collateral securing the note receivable.



Depreciation and Amortization



Depreciation and amortization expense decreased to $122,000 from $232,000 for the three months ended October 31, 2003 and 2002, respectively. This
decrease is due to a greater number of Optios fixed assets becoming fully depreciated during the three months ended October 31, 2003.



Interest Income



Interest income decreased to $41,000 from $57,000 in the three months ended October 31, 2003 and 2002, respectively, primarily the result of lower
interest rates.



Interest Expense



Interest expense decreased to $5,000 from $10,000 in the three months ended
October 31, 2003 and 2002, respectively. Interest expense primarily represents the interest paid on Optios capital leases.



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Nine Months Ended October 31, 2003 Compared to Nine Months Ended October 31, 2002



Revenues



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



|                                                                            |  | Nine MonthsEndedOctober 31, |   
|--------------------------------------------------------------------------- |  | --------------------------- | --
|                                                                            |  | 2002                        |   
|Revenue:                                                                    |  |                             |   
|License fees                                                                |  | 38                          | % 
|Services, maintenance and other                                             |  | 62                          |   
|                                                                            |  |                             |   
|Total revenue                                                               |  | 100                         |   
|                                                                            |  |                             |   
|Costs of revenue (excluding depreciation and amortization, included below): |  |                             |   
|License fees                                                                |  | 2                           |   
|Services, maintenance and other                                             |  | 29                          |   
|                                                                            |  |                             |   
|Total cost of revenue                                                       |  | 31                          |   
|                                                                            |  |                             |   
|                                                                            |  | 69                          |   
|Operating expenses:                                                         |  |                             |   
|Sales and marketing                                                         |  | 47                          |   
|Research and development                                                    |  | 16                          |   
|General and administrative                                                  |  | 24                          |   
|Impairment of M2 note receivable                                            |  |                            |   
|Depreciation and amortization                                               |  | 3                           |   
|                                                                            |  |                             |   
|Total operating expenses                                                    |  | 90                          |   
|                                                                            |  |                             |   
|Income (loss) from operations                                               |  | (21                         | ) 
|Interest and other income                                                   |  | 1                           |   
|Income tax benefit                                                          |  | 2                           |   
|                                                                            |  |                             |   
|Income (loss) from continuing operations                                    |  | (18                         | ) 
|Income (loss) from discontinued operations                                  |  |                            |   
|                                                                            |  |                             |   
|Net income (loss)                                                           |  | (18                         | %)
|                                                                            |  |                             |   



Revenues



Total revenues decreased 8% to $19.6 million from $21.2 million for the nine
months ended October 31, 2003 and 2002, respectively.



License fees



Revenues from software licenses decreased 17% to $6.6
million from $8.0 million for the nine months ended October 31, 2003 and 2002, respectively. Management believes that the two primary reasons for the decline in revenues from license fees over the previous year are the continued weak economy and a
decline in Optios average selling price. In recent quarters, Optio has experienced pricing pressures as companies continue to tighten capital spending, resulting in a slightly declining average selling price. While many companies continue to
implement cost control measures, Optio has seen a slight increase in spending in the healthcare market, primarily surrounding Optios new product introduced in January 2004, Medex. Approximately 37% of Optios United States software sales
came from the healthcare market during the nine months ended October 31, 2003, higher than our historical 20-25%. License fee revenues from Optios European division decreased from $1,322,000 in the nine months ended October 31, 2002,
representing 17% of total software license revenue, to $909,000 in the nine months ended October 31, 2003, representing 14% of total software license revenue.



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Approximately $2.3 million of Optios software license revenue during the nine months ended October
31, 2003 was derived from partners, such as resellers, value-added distributors or OEM relationships, representing 35% of license revenue for Optio. During the nine months ended October 31, 2002, Optio generated $2.5 million of its software license
revenue through partners, representing 31% of Optios license revenue.



Services, maintenance and other



Revenues from
services, maintenance and other decreased to $13.0 million in the nine months ended October 31, 2003 from $13.3 million in same period of the prior year. Services revenue decreased to $5.0 million for the nine months ended October 31, 2003 from $6.0
million in the nine months ended October 31, 2002. Optios services revenue declined as a result of declining license revenue, creating fewer services engagements. Maintenance revenue increased $700,000 to $8.0 million in the nine months ended
October 31, 2003 from $7.3 million in the nine months ended October 31, 2002. Maintenance revenue continues to increase as Optio adds to its customer base and increases the price of its annual maintenance fees.



Revenue Mix



Revenues from licenses represented 34% and 38% of total revenue for the nine months ended October 31, 2003 and 2002,
respectively. As Optios license revenue began to decline, maintenance revenue, and to some extent services revenue, became a greater percentage of total revenue.



Costs of Revenues



Total costs of revenues decreased 26% to $4.9 million from $6.6 million in the nine months ended October 31, 2003 and 2002, respectively.



Licenses



Costs of revenues from licenses consist of costs related to the packaging and distribution of the products, fees paid for
integration of third-party software products and fees paid to referral partners. Costs of revenues from licenses as a percentage of revenue remained consistent between the nine months ended October 31, 2003 and 2002.



Services, maintenance and other



Costs of revenues from services, maintenance and other consist of personnel,
subcontracting and other expenses relating to the cost of providing customer support, education and consulting and implementation services. Costs of revenues from services, maintenance and other for the nine months ended October 31, 2003 decreased
27% to $4.6 million from $6.3 million in the nine months ended October 31, 2002. With a large emphasis on increasing utilization rates of our outsourcers and personnel, Optio has been able to cut labor costs associated with its consulting
department. The cost of outsourcers declined from $1.6 million in the nine months ended October 31, 2002 to $1.1 million in the nine months ended October 31, 2003. In addition, Optio down-sized its internal consulting and support staff from a high
of 58 employees in the nine months ended October 31, 2002 to 43 employees as of October 31, 2003, resulting in approximately $400,000 in salary savings. During fiscal year 2003, management and other administrative positions were eliminated to boost
utilization, thus significantly increasing severance costs during the nine months ended October 31, 2002. Finally, with a decreased headcount, overhead and other general expenses, such as travel expenses, have seen a decrease of over $650,000
compared to the nine months ended October 31, 2002.



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Operating Expenses



Sales and Marketing



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



Sales and marketing expenses decreased 32% to $6.9 million from $10.0 million for the nine months ended October 31, 2003 and 2002, respectively. Sales and
marketing expenses were 35% and 47%, respectively, of total revenue for the same periods. Optios sales and marketing staff was reduced to a low of 41 employees during the nine months ended October 31, 2003 from a high of 58 employees in the
nine months ended October 31, 2002, resulting in salary savings of approximately $1.4 million. In addition, the nine months ended October 31, 2002 included an additional $90,000 of severance expenses over the nine months ended October 31, 2003. In
addition to salary savings realized by reduced staff, Optio realized cost savings from having fewer employees, including reduced travel expenses and lower commissions, equating to approximately $690,000 in savings between the two periods. Finally,
Optio eliminated approximately $210,000 of advertising and marketing expenses related to trade shows and other advertising, approximately $200,000 in sales and marketing activities related to its Australian operation that was closed, and
approximately $85,000 in sales training expenses between the nine months ending October 31, 2002 and the nine months ended October 31, 2003.



Research and Development



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



Research and development expenses decreased 12% to
$3.0 million for the nine months ended October 31, 2003 from $3.4 million for the nine months ended October 31, 2002. During the nine months ended October 31, 2002, Optio made use of outsourcers that had assisted with the development of its
MedexFlex, OptioFax 4.0 and e.ComIntegrate 7.7 products in an effort to speed their introduction to the market. This use of outsourcers created an additional $285,000 of expense during those nine months. No outsourcers were used during the nine
months ended October 31, 2003. In addition, the research and development staff has decreased in size through attrition, however increased salaries resulted in salary savings of only $186,000.



General and Administrative



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



General and administrative expenses decreased 34% to $3.4 million from $5.1
million for the nine months ended October 31, 2003 and 2002, respectively. These expenses represent 17% and 24%, respectively, of total revenue for the same periods. Optio reduced its general and administrative staff resulting in approximately
$500,000 in salary savings between the two periods. In addition, primarily as a result of reduced legal fees incurred in ongoing litigation and a refund from Optios insurer of legal fees paid in excess of our policy related to the Prograde
litigation, Optio significantly reduced legal and accounting and auditing fees between the two periods, resulting in approximately $580,000 in savings. Finally, with a concerted effort to



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terminate unnecessary business expenses, Optio was able to save over $200,000 in office expenses between the two periods.



Impairment of M2 Note Receivable



Optio currently holds a note receivable from M2 Systems Corporation
(M2) with a principle and interest balance of $3.6 million. Under the terms of the note, M2 was required to make a payment of $100,000 on December 1, 2003. M2 failed to make such payment and, as such, Optio believed that an impairment
charge to write-down the note receivable to the fair value of the collateral which supports the note was necessary. Management estimated that the value of the collateral was $2.8 million, requiring a $900,000 impairment charge in the three months
ended October 31, 2003.



Depreciation and Amortization



Depreciation and amortization expense decreased to $443,000 from $704,000
for the nine months ended October 31, 2003 and 2002, respectively. This decrease is due to a greater number of Optios fixed assets becoming fully depreciated during the nine months ended October 31, 2003.



Interest Income



Interest income decreased to $132,000 from $179,000 in the nine months ended October 31, 2003 and 2002, respectively,
primarily the result of lower interest rates.



Interest Expense



Interest expense decreased to $13,000 from $30,000 in the
nine months ended October 31, 2003 and 2002, respectively. Interest expense primarily represents the interest paid on Optios capital leases.



Income Tax Benefit



The income tax benefit for the nine months ended October 31, 2003 primarily represents a refund of approximately $160,000 received by Optio as a result of
a tax law change allowing it to take advantage of greater tax loss carrybacks. This refund was partially offset by approximately $10,000 in income taxes paid for Optios foreign operations. The income tax benefit for the nine months ended
October 31, 2002 represents a tax refund of $530,000 received by Optio as a result of similar tax law changes. This refund was partially offset by $45,000 in income taxes paid for Optios foreign operations.



LIQUIDITY AND CAPITAL RESOURCES



Optio had $4.4 million and $3.0 million in cash and cash equivalents at
October 31, 2003 and 2002, respectively.



The following table
sets forth certain selected statements of cash flow information for the nine months ended October 31, 2003:



|Net cash provided by operations           |  | $ | 547,000 |  
|----------------------------------------- |  | - | ------- | -
|Net cash used in investing activities     |  |   | (14,000 | )
|Net cash used in financing activities     |  |   | (92,000 | )
|Net increase in cash and cash equivalents |  |   | 472,000 |  



Cash provided by
operations was primarily the result of $1.4 million in net income, including a $151,000 income tax refund, plus a $443,000 add-back of non-cash depreciation and amortization expense, offset primarily by changes in working capital resulting in a $1.1
million outflow of cash. The major component of such working capital changes was the Companys use of funds to pay down accounts payable and accrued expenses by approximately $2.8 million, including $875,000 paid for the settlement of one of
Optios lawsuits. This was partially offset by a settlement reimbursement of $750,000 received from Optios insurance company. In addition, Optios prepaids and other assets decreased by $662,000, primarily resulting from the
repayment of approximately $186,000 in interest on Optios note receivable from M2. Finally, Optio collected



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$642,000 on its accounts receivable. In investing activities, Optio received $83,000 in payments on a receivable from an officer and $14,000 in principal on
the note receivable from M2. These receipts were offset by disbursements of $112,000 for the purchase of property and equipment in the ordinary course of business. Optios financing activities included payments of capital lease obligations of
$101,000, offset by receipts of $9,000 from the exercise of stock options.



On April 30, 2003, Optio extended the line of credit with its bank through April 19, 2004. The line of credit bears interest at prime rate, subject to increase based on Optios performance relative to certain
financial ratios. Optio may borrow up to $4.0 million, or such lesser amount as may be determined based on the level of accounts receivable. Accounts receivable, equipment, general intangibles and other assets as defined in the agreement
collateralize the line of credit. The agreement contains various covenants, including liquidity and EBITDA requirements and restrictions on dividends. During fiscal year 2004, Optio estimates that it will have approximately $2.0 million available
for borrowings under this line of credit based upon Optios historical accounts receivable balance.



The Company holds a note receivable from M2 Systems as consideration for the sale of Muscato and TransLink. The payment schedule of the note requires four
quarterly installments of $100,000, including interest calculated at the prime rate (4.25% as of January 31, 2003), through January 31, 2004, four quarterly payments of $115,000, including interest, through January 31, 2005, and eleven quarterly
payments of $120,000 through October 31, 2007. The balance of the note, plus any additional accrued interest, is to be paid in the quarter ending January 31, 2008.



Management believes that the existing cash and cash equivalents, together with Optios line of credit, will provide
adequate cash to fund its anticipated cash needs at least through the next twelve months. Optio has no current plans for significant capital expenditure or acquisitions and is focusing on returning to and maintaining profitability. Although not
anticipated, a dramatic decrease in demand for Optios products or services, or a dramatic change in technology related to Optios products or services offered, could have a negative impact on Optios liquidity. This risk may include
the potential for Optio to not meet its debt covenant requirements, making any borrowings under the line of credit unavailable.



NEW PRONOUNCEMENTS



The FASB issued SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which supersedes SFAS 121, Accounting for the
Impairment of Long-Lived Assets and of Long-Lived Assets to be Disposed Of. SFAS 144 supersedes the provisions of APB Opinion No. 30, Reporting the Results of OperationsReporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions with regard to reporting the effects of a disposal of a segment of a business. The statement provides a single accounting model for long-lived assets to be disposed of and
significantly changes the criteria required to classify an asset as held-for-sale. Under this statement, more dispositions will qualify for discontinued operations treatment in the income statement and expected future operating losses from
discontinued operations will be displayed in discontinued operations in the period in which the losses are incurred. The standard is effective for fiscal years beginning after December 15, 2001. Early adoption is allowed. Effective November 1, 2001,
the Company adopted SFAS 144. Under the provisions of SFAS 144, the disposal of the Companys Muscato and TransLink components qualified for discontinued operations treatment. As a result, the results of operations of these two components are
reflected as discontinued operations in the Companys consolidated statements of operations.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based CompensationTransition and Disclosurean Amendment to SFAS
123. SFAS 148 provides two additional transition



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methods for entities that adopt the preferable method of accounting for stock based compensation. Further, the statement requires disclosure of comparable
information for all companies regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. These disclosures are now required for interim periods in addition to the traditional annual disclosure. The
amendments to SFAS 123, which provide for additional transition methods are effective for fiscal years ending after December 15, 2002, although earlier application is permitted. The amendments to the disclosure requirements are required for
financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The Company adopted the disclosure provisions of SFAS No. 148 during the fiscal year ended January 31, 2003. The Company did not adopt
the fair value methodology of SFAS 148.



In May 2003, the FASB
issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement establishes standards for how an issuer classifies and measures in its statement of financial position
certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. Many of such instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. The Statement is to be implemented by reporting the cumulative effect of a change in accounting
principle for financial instruments created before the issuance of the date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. On November 7, 2003 the FASB deferred the
classification and measurement provisions of SFAS No. 150 as they apply to certain mandatory redeemable non-controlling interests. This deferral is expected to remain in effect while these provisions are further evaluated by the FASB. The
application of the requirements of SFAS 150 did not have any impact on the financial position, results of operations or cash flows of the Company.



In November 2002, the FASB issued FIN No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the
recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The application of the requirements of FIN 45 did not have any impact on the Companys financial position or
result of operations.



In January 2003, the FASB issued FIN No.
46, Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin No. 51, Consolidated Financial Statements, to certain entities in which equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is applicable immediately for variable interest
entities created after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after December 15, 2003. The Company has
not identified any variable interest entities and does not expect FIN 46 to have any effect on its consolidated financial statements.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.



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



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risk. Optios interest income and expense is sensitive to changes in the general level of U.S. interest rates. Based on Optios cash equivalents
balance and the nature of its outstanding debt, Optio believes its exposure to interest rate risk is not material.



ITEM 4. CONTROLS AND PROCEDURES.



As
of October 31, 2003, Optio, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of the
Companys disclosure controls and procedures (the Evaluation). Based upon the Evaluation, our Chief Executive Officer and Chief Financial Officer concluded that Optios disclosure controls and procedures are effective in
ensuring that material information relating to Optio, including its consolidated subsidiaries, is made known to them by others within the organization, particularly during the period in which this quarterly report was being prepared. There were no
significant changes in Optios internal controls or in other factors that could significantly affect these controls subsequent to the date of the Evaluation.



PART IIOTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS



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



On June 19, 2001, a lawsuit styled Wagner, et al v. Optio Software, Inc., was filed in the United States District Court for the Southern District of Ohio, Western Division, Case No. C-1-01-406 and later amended to
include a corporate officer as a defendant. The lawsuit, filed by 19 shareholders of the now bankrupt company known as Prograde Technologies, Inc. (PTI), alleged breach of contract, promissory estoppel and promissory fraud arising out of
the termination by Optio of negotiations of a possible merger with PTI. The plaintiffs were seeking compensatory damages of an unspecified amount, but in excess of $1.0 million, as well as punitive damages in excess of $10.0 million, reimbursement
for the plaintiffs attorneys fees and associated costs and expenses of the lawsuit. Optio counterclaimed against two of the plaintiffs for failure to pay on a guarantee on a promissory note. On July 21, 2003, the parties executed a
Settlement Agreement and Mutual General Release. The settlement included the release by PTIs trustee in bankruptcy of all claims against the plaintiffs, the Company and a Company officer and a non-appealable order approving the release of the
trustees claims by the bankruptcy court. Under the terms of the settlement, Optio paid a total of $875,000 and received immediate reimbursement from its insurer of $750,000. Both parties were required to release all claims each may have in the
PTI bankruptcy in exchange for a reciprocal release from the bankruptcy trustee. The Company had previously recorded a liability for the settlement and a receivable for the amount to be contributed by the insurance carrier, after which settlement
was made on July 21, 2003.



On November 13, 2001, a lawsuit
styled Kevin Dewey vs. Optio Software, Inc., et. al. was filed in the United States District Court for the Southern District of New York. The complaint was filed against the underwriters in Optios initial public offering as well as Optio and
certain officers and directors of Optio, by a single plaintiff purportedly on behalf of persons purchasing Optios common stock between December 14, 1999 and December 6, 2000 and seeks class action status. The complaint includes allegations of
violations of (i) Section 11 of the Securities Act of 1933 by all named defendants, (ii) Section 12(a)(2) of the Securities Act of 1933 by the underwriter defendants, (iii) Section 15 of the Securities Act of 1933 by the individual defendants, and
(iv) Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the underwriter defendants. The complaint alleges that Optios prospectus was materially false and misleading because it failed to disclose,
among other things, that: (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters



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allocated to those investors material portions of a restricted number of Optio shares issued in connection with the Optio initial public offering; and (ii)
the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate Optio shares to those customers in the Optio initial public offering in exchange for which the customers agreed to purchase additional Optio
shares in the aftermarket at pre-determined prices. Optio believes the lawsuit is without merit. Thus, Optio intends to defend vigorously against the plaintiffs claims. The complaint seeks unspecified amounts as compensatory damages as a
result of Optios alleged actions, as well as punitive damages and reimbursement for the plaintiffs attorneys fees and associated costs and expenses of the lawsuit. Optio is currently engaged in settlement negotiations between its
insurance carrier and the plaintiffs.



On April 8, 2003, a
lawsuit styled Donald K. Dunaway v. Optio Software, Inc. was filed in the Circuit Court of the Eighteenth Judicial Circuit for Seminole County, Florida. The compliant was filed by a former employee of Optio claiming that he is entitled to certain
unpaid commissions earned while employed at Optio. The lawsuit was removed to Federal District Court in the Middle District of Florida, Orlando Division by Optio. The compliant claims the amount in controversy is in excess of $15,000, but does not
specify any specific damage amount. The plaintiff is seeking compensatory, actual, special and consequential damages as a result of Optios alleged actions, as well as reimbursement of plaintiffs attorneys fees, prejudgment interest
and the costs of the action. Optio believes the lawsuit is without merit and will defend it vigorously.



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



ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS



None.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



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



None.



ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



(a)
Exhibits



|31.1 |  | Certification by C. Wayne Cape, Chief Executive Officer, Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.  
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|31.2 |  | Certification by Caroline Bembry, Chief Financial Officer, Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.



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|32.1 |  | Certification by C. Wayne Cape, Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.32.2
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|32.2 |  | Certification by Caroline Bembry, Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.  
|     | 
|99.1 |  | Safe Harbor Compliance Statements for Forward Looking Statements.                                                                                                 



(b) Reports on Form 8-K



| | (a) | A form 8-K was filed on August 27, 2003 to furnish the Companys second quarter earnings press release dated August 27, 2003.
| | --- | -----------------------------------------------------------------------------------------------------------------------------



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SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 8thday of December 2003.



OPTIO SOFTWARE, INC.By:

/s/    C. WAYNE CAPEC. Wayne Cape President and Chief Executive Officer




By:

/s/    CAROLINE BEMBRYCaroline Bembry Chief Financial Officer




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