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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



(Mark One)

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



| |  | For the fiscal year ended January 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 or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                              
|3015 Windward Plaza, Windward Fairways II, Atlanta, Georgia    |  | 30005                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



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



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Securities registered pursuant to Section 12(b) of the Act:



None



Securities registered pursuant to Section 12(g) of the Act:



Common Stock, no par value

(Title of Class)



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. ̈



Indicate by check mark whether the registrant is an
accelerated filer (as defined in Rule 12b-2 of the Act).  Yes ̈No  x



The aggregate
market value of the voting stock held by nonaffiliates of the Registrant, based upon the closing sale price for the Common Stock on July 31, 2002 as reported by the Nasdaq SmallCap Market, was approximately $2,571,720. The shares of Common Stock
held by each officer and director and by each person known to the Registrant who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.



There were 19,157,498 shares of the Registrants common stock outstanding as of April 29, 2003.



DOCUMENTS INCORPORATED BY REFERENCE



Parts of the Registrants Definitive Proxy Statement on Schedule 14A for its 2003 Annual Meeting of Stockholders are incorporated by
reference in Part III of this Annual Report on Form 10-K. The Proxy Statement will be filed within 120 days of the end of the fiscal year covered by this Annual Report on Form 10-K.



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OPTIO SOFTWARE, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED
JANUARY 31, 2003

TABLE OF CONTENTS



|         |  |                                                                                                |  | Page
|-------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|PART I   |  |                                                                                               
|        
|Item 1.  |  | Business                                                                                       |  | 2   
|Item 2.  |  | Properties                                                                                     |  | 14  
|Item 3.  |  | Legal Proceedings                                                                              |  | 14  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                            |  | 15  
|        
|PART II  |  |                                                                                               
|        
|Item 5.  |  | Market for Registrants Common Equity and Related Shareholder Matters                          |  | 16  
|Item 6.  |  | Selected Financial Data                                                                        |  | 17  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 18  
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                     |  | 28  
|Item 8.  |  | Financial Statements and Supplementary Data                                                    |  | 28  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           |  | 28  
|        
|PART III |  |                                                                                               
|        
|Item 10. |  | Directors and Executive Officers of the Registrant                                             |  | **  
|Item 11. |  | Executive Compensation                                                                         |  | **  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters |  | **  
|Item 13. |  | Certain Relationships and Related Transactions                                                 |  | **  
|Item 14. |  | Controls and Procedures                                                                        |  | 29  
|        
|PART IV  |  |                                                                                               
|        
|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                               |  | 29  



** The information
required by Items 10, 11, 12 and 13 of Part III is hereby incorporated by reference from the Registrants Definitive Proxy Statement on Schedule 14A to be filed not more than 120 days after January 31, 2003.





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FORWARD-LOOKING STATEMENTS



In addition to historical information, this Annual Report 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, 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 99.3 to this Annual Report on Form 10-K. 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 Quarterly Reports on Form 10-Q 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
Annual Report on Form 10-K. 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.



PART I



Item 1.Business



Optio Software, Inc. (Optio), founded in 1981 as a Georgia corporation, provides infrastructure software and services that enhance the form, content, availability and distribution of business critical information. Our
software allows information stored within or created by an organizations wide range of enterprise systems, applications or databases to be captured, transformed and customized in formats according to the business needs of an
organizations customers, suppliers and partners and then delivered to the appropriate destination, including print, fax, e-mail, wireless devices and the web. Optios software also allows information to be transformed into a wide variety
of formats, languages and standards and enables customers to create customized documents, according to the customers own individual requirements. For example, customers can use our software to create and deliver customized business documents
(invoices, purchase orders, packing slips, etc.) and business-to-business transactions around the globe by web, e-mail, fax or print. Optios solutions are non-intrusive and can be deployed without modifying the software or the business
processes that created the original information. We reduce the cost and complexity of document-centric business processes while extending the value of existing technology investments.



We engage primarily in the development, sale and support of software that enchances the form, content,
availability and distribution of business critical information of companies located principally in the United States, Europe and the Asia Pacific region. Optio was founded in 1981 and in Optios first 18 years, Optios primary business
consisted of providing software and services that addressed organizations needs for customized information delivered via print, fax and e-mail to users of enterprise and healthcare applications. In August 1998, Optio acquired Optio Software
Europe, S.A., a software product distributor in Europe, providing Optios first entry into the European markets. Optio Software, Asia Pacific was established in May 1999, but subsequently closed in September 2002.



In addition to continuing its distributed output management
solutions, in 1999 Optio began pursuing the e-business market created by the evolution of the internet. In September, 1999, Optio introduced the first of its e.ComSeries of products, e.ComPresent, the browser-based software allowing document
presentation to the web. In December 1999, Optio completed its initial public offering, raising $47.0 million in capital. In March 2000, Optio



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introduced its second product in the e.ComSeries of products, e.ComIntegrate. Also in March 2000, Optio
purchased Muscato Corporation and TransLink Solutions Corporation, further expanding its breadth into the e-commerce market. Muscato offered a product, e.ComEngine which enabled the real-time exchange of information between dissimilar formats and
protocols. Unfortunately, Optio was unsuccessful in the integration of these two companies and subsequently disposed of the two companies and the e.ComEngine product in December 2001. With the disposal of Muscato and Translink, Optio has focused on
expanding its core products, enhancing them to provide additional functionality for document output management and information archive and retrieval.



Wholly-Owned Subsidiaries



Optio currently has two wholly-owned foreign subsidiaries, Optio Software Europe, S.A. (Optio Europe) and Optio Software, Asia
Pacific, only one of which is active. Optio Europe, a software product distributor in Europe, was acquired in August 1998. This acquisition provided entry into European markets. Optio Europe is directly involved in the sales, marketing and support
activities for Optios products throughout mainland Europe (including Germany) and the United Kingdom through its wholly-owned subsidiaries Optio Software Deutschland GmbH (Optio Germany), formed in December 2002, and Optio Software
UK, Pvt. Limited (Optio UK). The office of Optio Software, Asia Pacific (Optio Australia) was closed in September 2002.



Segment Information



Optio 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 Optio in the United States. The accounting policies, as described in the summary of
significant accounting policies in Optios financial statements, 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 four geographic segments, with
the current Europe segment representing two segments, France and the United Kingdom and the current Other segment representing Australia. Segment information for the years ended January 31, 2001 and 2002 has been restated to combine the
previous France and United Kingdom segments into the Europe segment and to classify the Australian segment as Other.



Segment information for the years ended January 31, 2001, 2002 and 2003 is summarized below.



|Year ended January 31, 2001                                           |  | United States |             |   | Europe |   | Other     |  |   | Combined |   |  | Eliminations |             |   | Consolidated |  
|--------------------------------------------------------------------- |  | ------------- | ----------- | - | ------ | - | --------- |  | - | -------- | - |  | ------------ | ----------- | - | ------------ | -
|Revenue from external customers:                                      |  |               |             |   |        |   |           |  |   |          |   |  |              |             |   |              |  
|License fees                                                          |  | $             | 12,022,000  |   |        | $ | 1,803,000 |  | $ | 206,000  |   |  | $            | 14,031,000  |   |              | $
|Services, maintenance and other                                       |  |               | 14,409,000  |   |        |   | 1,791,000 |  |   | 82,000   |   |  |              | 16,282,000  |   |              |  
|Intersegment revenue                                                  |  |               | 429,000     |   |        |   | 190,000   |  |   |         |   |  |              | 619,000     |   |              |  
|                                                                      |  |               |             |   |        |   |           |  |   |          |   |  |              |             |   |              |  
|Total revenue                                                         |  |               | 26,860,000  |   |        |   | 3,784,000 |  |   | 288,000  |   |  |              | 30,932,000  |   |              |  
|Interest income                                                       |  |               | 972,000     |   |        |   |          |  |   | 1,000    |   |  |              | 973,000     |   |              |  
|Interest expense                                                      |  |               | 28,000      |   |        |   | 2,000     |  |   |         |   |  |              | 30,000      |   |              |  
|Depreciation and amortization                                         |  |               | 1,069,000   |   |        |   | 38,000    |  |   | 6,000    |   |  |              | 1,113,000   |   |              |  
|Income tax expense                                                    |  |               | 229,000     |   |        |   | 110,000   |  |   |         |   |  |              | 339,000     |   |              |  
|Segment net income (loss) including loss from discontinued operations |  |               | (14,211,000 | ) |        |   | 80,000    |  |   | (977,000 | ) |  |              | (15,108,000 | ) |              |  
|Total segment assets including assets of discontinued operations      |  |               | 55,366,000  |   |        |   | 3,271,000 |  |   | 277,000  |   |  |              | 58,914,000  |   |              |  
|Expenditures for long-lived assets                                    |  |               | 26,297,000  |   |        |   | 69,000    |  |   | 50,000   |   |  |              | 26,416,000  |   |              |  





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|Year ended January 31, 2002                                  |  | United States |             |   | Europe |   |            | Other |  |   | Combined |   |  | Eliminations |             |   | Consolidated |  
|------------------------------------------------------------ |  | ------------- | ----------- | - | ------ | - | ---------- | ----- |  | - | -------- | - |  | ------------ | ----------- | - | ------------ | -
|Revenue from external customers:                             |  |               |             |   |        |   |            |       |  |   |          |   |  |              |             |   |              |  
|License fees                                                 |  | $             | 10,655,000  |   |        | $ | 1,816,000  |       |  | $ | 121,000  |   |  | $            | 12,592,000  |   |              | $
|Services, maintenance and other                              |  |               | 16,138,000  |   |        |   | 1,976,000  |       |  |   | 114,000  |   |  |              | 18,228,000  |   |              |  
|Intersegment revenue                                         |  |               | 454,000     |   |        |   | 187,000    |       |  |   |         |   |  |              | 641,000     |   |              |  
|                                                             |  |               |             |   |        |   |            |       |  |   |          |   |  |              |             |   |              |  
|Total revenue                                                |  |               | 27,247,000  |   |        |   | 3,979,000  |       |  |   | 235,000  |   |  |              | 31,461,000  |   |              |  
|Interest income                                              |  |               | 231,000     |   |        |   | 42,000     |       |  |   |         |   |  |              | 273,000     |   |              |  
|Interest expense                                             |  |               | 91,000      |   |        |   | 12,000     |       |  |   |         |   |  |              | 103,000     |   |              |  
|Depreciation and amortization                                |  |               | 1,325,000   |   |        |   | 81,000     |       |  |   | 11,000   |   |  |              | 1,417,000   |   |              |  
|Income tax expense                                           |  |               |            |   |        |   | 15,000     |       |  |   |         |   |  |              | 15,000      |   |              |  
|Segment net loss including loss from discontinued operations |  |               | (27,708,000 | ) |        |   | (290,000   | )     |  |   | (428,000 | ) |  |              | (28,426,000 | ) |              |  
|Total segment assets                                         |  |               | 19,084,000  |   |        |   | 3,380,000  |       |  |   | 288,000  |   |  |              | 22,752,000  |   |              |  
|Expenditures for long-lived assets                           |  |               | 287,000     |   |        |   | 79,000     |       |  |   | 7,000    |   |  |              | 373,000     |   |              |  
|                                                            
|Year ended January 31, 2003                                  |  | United States |             |   | Europe |   |            | Other |  |   | Combined |   |  | Eliminations |             |   | Consolidated |  
|Revenue from external customers:                             |  |               |             |   |        |   |            |       |  |   |          |   |  |              |             |   |              |  
|License fees                                                 |  | $             | 8,580,000   |   |        | $ | 1,809,000  |       |  | $ | 56,000   |   |  | $            | 10,445,000  |   |              | $
|Services, maintenance and other                              |  |               | 15,217,000  |   |        |   | 2,098,000  |       |  |   | 64,000   |   |  |              | 17,379,000  |   |              |  
|Intersegment revenue                                         |  |               | 470,000     |   |        |   | 180,000    |       |  |   |         |   |  |              | 650,000     |   |              |  
|                                                             |  |               |             |   |        |   |            |       |  |   |          |   |  |              |             |   |              |  
|Total revenue                                                |  |               | 24,267,000  |   |        |   | 4,087,000  |       |  |   | 120,000  |   |  |              | 28,474,000  |   |              |  
|Interest income                                              |  |               | 230,000     |   |        |   | 2,000      |       |  |   | 1,000    |   |  |              | 233,000     |   |              |  
|Interest expense                                             |  |               | 47,000      |   |        |   |           |       |  |   | 4,000    |   |  |              | 51,000      |   |              |  
|Depreciation and amortization                                |  |               | 835,000     |   |        |   | 81,000     |       |  |   | 4,000    |   |  |              | 920,000     |   |              |  
|Income tax benefit                                           |  |               | (472,000    | ) |        |   | (106,000   | )     |  |   |         |   |  |              | (578,000    | ) |              |  
|Segment net loss including loss from discontinued operations |  |               | (3,435,000  | ) |        |   | (1,150,000 | )     |  |   | (257,000 | ) |  |              | (4,842,000  | ) |              |  
|Total segment assets                                         |  |               | 14,985,000  |   |        |   | 2,689,000  |       |  |   | 133,000  |   |  |              | 17,807,000  |   |              |  
|Expenditures for long-lived assets                           |  |               | 219,000     |   |        |   | 48,000     |       |  |   | 1,000    |   |  |              | 268,000     |   |              |  



Optios foreign operations generated revenue from licenses and services to customers of $4.0 million the year ended January 31, 2003, representing 15% of total revenue compared to $4.0 million in the year ended January 31, 2002,
representing 13% of total revenue and revenue of $3.9 million in the year ended January 31, 2001, representing 13% of total revenue.



Risks Inherent in Foreign Operations



Optios international operations pose additional risks to its operations as a result of the following factors:



| |  |  | potential losses or gains from currency fluctuations as a result of transactions and expenses being denominated in foreign currencies;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increased financial accounting, administrative and reporting burdens and complexities;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | potentially adverse tax consequences;
| | - |  | -------------------------------------



| |  |  | compliance with a wide variety of complex foreign laws and treaties;
| | - |  | --------------------------------------------------------------------



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| |  |  | adverse changes in economic conditions of foreign countries, caused by various sources, including economic instability and disputes; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reduced protection for intellectual property rights in some countries.
| | - |  | ----------------------------------------------------------------------



Industry



Organizations are increasingly being driven to increase the cost-effectiveness of their existing systems and overall productivity of the
organization by sharing vital business information, in the proper format, to the proper users. Their objectives are to enhance the form, content, availability and distribution of the information, thus reducing the cost and complexity of
document-centric processes. To achieve these objectives, organizations must deliver focused, business-ready information derived from a multitude of sources across the enterprise, to employees, customers, suppliers and strategic partners. In
addition, many organizations are embracing e-business to enhance their productivity and cost-savings. Organizations are attempting to maximize the value of their business processes by using the Internet to conduct business electronically and reach a
large number of geographically dispersed users across the extended enterprise. Some examples of e-business applications include the electronic distribution of information related to the procurement of goods and services, presentation of bills and
collection of payments over the Internet and the viewing of reports and other company information utilizing web browsers. Specifically, this environment has created the need for a comprehensive software solution that gathers information on a
real-time basis from multiple sources, including enterprise, legacy and custom applications, external databases and files; enhances the information to improve its suitability for business purposes; customizes and formats the information to meet
business objectives; and provides timely delivery of the information formats to the appropriate destinations, including the Internet, e-mail, printers, faxes and wireless devices.



This need has created a market for software that performs cost effective management of the transformation and
delivery of information from various enterprise computing systems. The Gartner Group defines the markets that provide software solutions described above as the Distributed Output Management (DOM) Market and the Integrated Document
Archive and Retrieval Systems (IDARS) Market. In a report dated August 15, 2002, Gartner forecasts these two market segments will converge by the end of 2005. In a report dated November 1, 2001, Gartner estimates the combined DOM/IDARS
market size to be $1.6 billion in 2001 growing to $3.9 billion in 2005. Management estimates that Optio has approximately 1.9% of this combined market.



Technology



Optios suite of products is used to enhance business critical documents and information. They provide an organizations systems
and applications the ability to share information, transfer documents and conduct business transactions with customers, suppliers and employees, in the proper format, with the appropriate content and at the time and location required. Optios
software contains components for: communicating with Optios visual design software; collecting, transforming, and routing information from other enterprise application programs or databases; performing calculations and other types of data
transformations; formatting the information into human-readable documents, e-business documents or database transactions; distributing information to a wide variety of digital destinations including web servers, fax servers, e-mail servers,
alphanumeric pagers, printers, document archives and e-commerce application servers; maintaining and executing recipient specified rules for information notification and document delivery; and securely controlling the distribution and processing of
information between multiple computers within the same network and over the Internet.



Optios software supports many industry standards for file, message and document formats, document delivery methods and data access from enterprise databases and other data sources. Optios
software also supports many of the proprietary formats for data, documents and information produced by the software of third parties with whom Optio has strategic relationships and other common enterprise application software vendors. For example,
e-business documents may be extracted from existing enterprise application output and transformed into XML, Adobe PDF and many other standard electronic document formats.



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Technical Advantages



Optios technology provides customers with the following advantages:



| |  |  | Transparency. Optios technology works with the existing hardware/software infrastructure and business processes of an enterprise and is transparent and
non-intrusive to the user.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Preservation of Application Business Logic. Enterprise applications use many business rules to validate and control business information. Optios
software works directly with the information produced by the execution of these business rules, which preserves the value and integrity of the original application business logic and security and maintains the consistency of the information.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ability to Work With Time Sensitive Data. Optios software works with business data as it is generated, not only after it has been stored in a database.
Applications can therefore process time sensitive information much more effectively, getting the right information to the right person at the right time.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Powerful Language. Optios proprietary Document Customization Language, the programming language that allows for documents or other output to be
customized to the users needs, enables Optios software to address many complicated business information processing problems requiring large volumes of data. This same language allows Optios software to address many problems in the
areas of e-business and information delivery that other programming languages and application servers cannot.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Ease of Use. The visual design approach used by Optio DesignStudio harnesses the power of Optios Document Customization Language and puts it into the
hands of less technical users without limiting access to the power of our technology.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Scope of Solution. Optios software can handle a wide variety of information sources, document formats and digital destinations, without requiring third
party software.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Secure Internet Architecture. Optios software utilizes custom developed technology built on industry standards that allows our software to securely
distribute and control the processing of information on the Internet.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Strategic Initiatives



Optios objective is to be a global innovator and leading provider of solutions that enhance the form, content, availability and distribution of business critical information. We are dedicated to helping our customers achieve
long term success by reducing the cost and complexity of their document-centric business processes while extending the value of existing technology investments. To achieve these objectives, Optio intends to:



| |  |  | Enhance Product Offerings. Optio will continue to invest in research and development to improve and enhance its existing software offerings designed to solve
a greater range of problems for its customers. Specifically, Optio intends to enhance its software offerings to increase scalability of Optios products as well as ease-of-use and vendor specific integration features. Management believes that
maintaining and enhancing its software is important to its ability to expand its market share, retain existing customers and acquire new customers. Optios research and development expenditures for the years ending January 31, 2001, 2002 and
2003 were $4.4 million, $4.5 million, and $4.3 million respectively, indicating a continued commitment to research and development activities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Deepen Existing Strategic Relationships and Expand to a Limited Number of Core Strategic Partners. Optios strategic partners include resellers, referral
agents and implementation partners, allowing Optio to generate additional sales opportunities. In September 2001, Optio announced the revamping of its partnership program. The new program provides for better business planning and larger scale
integration with partners. With expanded benefits to the partners such as marketing and sales support, customer service, consulting service, and product development support, the program now includes the flexibility to mold the program to match the
individual partners needs, thus increasing revenues to the partner and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Optio. The new program has three levels, basic, certified and strategic, and represents
relationships that include referral agents, distributors, value-added resellers and OEM relationships. The basic level uses a simple sales and marketing structure with partners with limited resources. The certified level adds the advantage of
advanced technical support and consulting opportunities. For those partners that want to sell Optio solutions as a stand-alone product, or embed Optios technology into their applications, a strategic relationship can be entered into, offering
rewards and marketing resources for partners that exceed revenue goals. During 2001 and 2002, Optio had over twenty-five partners signed up under the new partnership program, including McKesson Corporation, DataRoad and Carolina System Solutions,
Inc. Optio intends to strengthen these relationships, build revenues and customer value through enhanced support of these partners. Optio also intends to expand the new partnership program, but with a focus on a limited number of core strategic
partners. Our objectives are to create partnerships that will introduce us into specific growth markets. For example, in April 2003, Optio entered into separate partnerships with both QAD, Inc. and Lexmark International, Inc., who will actively
market Optios products into the QAD, Inc. and Lexmark International, Inc. user base. Optio intends to continue to expand its relationships with organizations that can introduce Optios products to markets not extensively served by Optio.



| |  |  | Re-energize our Healthcare Market.Sales to healthcare organizations have typically represented approximately 20% of Optios total revenues. With new
regulations affecting the healthcare industry, specifically the Health Insurance Portability and Accountability Act (HIPAA), healthcare organizations must select products from software vendors with features that help ensure the secure
transfer of patient information. With the introduction of Optios MedexTMsuite of products, Optio was able to
address our customers HIPAA-compliance concerns such as audit logging, content filtering, patient privacy and confidentiality. Subsequent to the successful first customer shipment of this product in January 2003, Optio has initiated marketing
activities to healthcare organizations with the goal of extending our base of customers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expand Worldwide Sales. Management continues to believe that international markets represent a significant growth opportunity as organizations seek global
document management and e-business solutions. Optio currently has a direct sales presence in North America, the United Kingdom, France, and Germany. Optio intends to increase market share in these markets by introducing products that provide greater
compatibility with international ERP systems. In addition, Optio plans to engage local resellers and system integrators and establish joint marketing agreements with software companies in all geographic locations Optio believes are strategic.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Leverage Optios Significant Customer Base. Management believes Optios base of over 4,600 customers provides a significant opportunity for
additional sales of current and future software, as well as ongoing maintenance revenue. A majority of Optios customers have not yet purchased Optios full suite of software or currently only use Optios software in specific business
units or locations. Management believes that Optio can sell more extensively into this customer base by expanding these partial deployments into enterprise-wide implementations as well as by cross-selling additional software, including newly
released versions, and services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Products



Software



Optios software enables the cost-effective, efficient
delivery of highly customized information across the extended enterprise. Our software is divided into two suites: the Optio Enterprise Suite and the Optio Healthcare Suite.



The Optio Enterprise Suite is designed to meet the needs of the general business marketplace. The Optio
Healthcare Suite is tailored to the special needs of the healthcare marketplace.



In each case, Optios customers may purchase the entire suite or may purchase one or more of the software products that make up the suite. Typically, customers buy either Optio e.ComIntegrate®or Optio MedFormsTM(or more recently Optio MedExFlexTM) as well as one or more other
components of the applicable suite. In August 2001, Optio unveiled its e.ComIntegrate product packages. The Optio e.ComIntegrate solution sets are geared to companies of



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different sizes, with varying functional needs across industries. The program offers tiered solution sets
which include Optios server technology, e.ComIntegrate, and design tool, Design Studio, along with services and training to implement the solution. As advanced functions are required, customers can add support for XML, double-byte characters
and presenting documents and reports to the web. Other components of the suite of products may include OptioFax, our fax server product or Optio e.ComPresent, our web accessible document repository. Most of the revenue derived from the enterprise
suite is attributable to Optio e.ComIntegrate, and most of the revenue derived from the healthcare suite is attributable to Optio MedForms.



The Optio Enterprise Suite



|                             
|-----------------------------
|Optio e.ComIntegrate®        
|                             
|OptioDCS                     
|                             
|Optio e.ComPresent           
|                             
|Optio DesignStudio           
|                             
|OptioFax                     
|                             
|Optio Enterprise ProcessPACKS





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|The Optio Healthcare Suite                  
|--------------------------------------------
|                                            
|Optio MedForms                             
|                                            
|Optio MedExFlex®                            
|                                            
|Optio e.ComPresent, e.ComIntegrate, OptioFax
|                                            
|Optio Healthcare ProcessPACKS               



Services



Consulting. Optios consulting
services provide customers with expertise and assistance in evaluating, planning and implementing Optios software products. To ensure a successful implementation of Optios software products, consultants assist customers with the
evaluation, planning and design process, the initial installation of a system, the integration of Optios software products with the customers existing enterprise computing applications and ongoing training and upgrades. Management
believes that consulting services enable rapid implementation of Optios software products, ensures success with the Optio solution, strengthens the customer relationship and adds to Optios industry-specific knowledge base.



While consulting services are optional, substantially all of
Optios customers utilize these services to facilitate the rapid implementation of the software. These services are billed on an hourly or daily basis that varies based on the type of service provided.



Optio employs its own staff of consultants, systems analysts
and technical personnel devoted to assisting customers in all phases of systems implementation, including evaluation, planning and design, customer-specific configuring of modules and on-site implementation or conversion from existing systems. In
addition, Optio utilizes third party consultants, such as those from major systems integrators, to assist in certain implementations. For the year ended January 31, 2002, Optio outsourced approximately 37% of its services business, while maintaining
a staff of 33 employees. However, during the year ended January 31, 2003, Optio anticipated slightly reduced services revenue coinciding with its declining software revenue. In addition, Optio revised its strategy to focus on higher utilization
rates of its internal employees. These factors allowed the company to reduce its internal consulting services staff to 15 employees. During the year ended January 31, 2003, Optios services business was approximately equal to that of the prior
year, forcing us to utilize more external resources for services. For the year ended January 31, 2003, Optio outsourced approximately 50% of its services business. Separately, six additional employees are training staff dedicated to internal,
customer and partner training as well as to development of curriculum materials for training programs.



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Maintenance.



Optio offers a comprehensive maintenance
program that provides customer telephone support, as well as timely software updates and designated upgrades offering increased functionality and technology advances. Optio offers these services for a fee equal to a percentage of the current
software license fee per annum. As of January 31, 2003, a majority of Optios customers had subscribed to the comprehensive maintenance support program.



Research and Development



Overview



To maintain Optios competitive position, we must continually enhance our current products and introduce new features or
functionality to address customers needs to make document and output management more efficient and cost effective. During the year ended January 31, 2003, Optio spent $4.3 million, or 15% of revenues, on research and development activities,
consistent with prior years. Although Optios overall expenses have been reduced over the previous two years, Optio was committed to continue to invest heavily in its research and development activities, resulting in improved products and
competitive position.



Product development
activities for the year ended January 31, 2003 were focused on (i) the creation of new products, including Optios MedEx product, (ii) the enhancement of existing products, including the introduction of Optios newest version of
e.ComPresent 2.0 and OptioFax 4.0, and (iii) broadening the base of platforms upon which Optios products can be supported, including the introduction of e.ComIntegrate on Windows 2000 and Linux. In addition, there was much focus on the
integration of Optios products with new international ERP vendors, which will support our strategy of expanding our international sales.



Future Product Development Activities



Product development activities for the following year are focused on supporting Optios strategic initiatives. A brief overview of
new feature development, new product development and maintenance releases are described below.



New Feature Development



In general, Optio intends to offer new features focused on the increased scalability of Optios products as well as ease-of-use and vendor specific integration features. For example, Optio intends
to develop new capabilities in e.ComIntegrate, e.ComPresent and Design Studio which will include new features to allow better integration with specific ERP vendors.



New Product Development



A series of new product development initiatives were begun in the fiscal year ended January 31, 2003 for release in the current and
following years. Brief overviews of these initiatives are described below.



Healthcare Initiatives



A number of additional initiatives will be undertaken to create a suite of healthcare products based on the foundations of the existing products with tailored functionality for the healthcare market. An example of this is
the expansion of audit logging capability used in the Optio MedExFlex software into other related products, making them capable of enabling support for HIPAA regulations.



Enterprise Content Management



Development will be focused on improving and enabling our core product lines to take advantage of the
changing market in the content management industry. Examples are improved print server capabilities, security, electronic signatures and long term archive.



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Maintenance Releases



On going maintenance releases were accomplished in several products and sub products. These releases were
primarily to repair software defects or to modify products to accommodate changes to partner software design and to upgrade vendor supported application programming interfaces. Optio will continue to produce maintenance releases as required.



Retirement



In the future, Optio intends to no longer offer or support
some of our existing products and the operating systems on which they operate. We are in the process of developing migration paths for our customers on these products and intend to retire certain products once the migration path is defined and
communicated to our customer base.



Sales and Marketing



During the year ended January 31, 2003,
approximately 70% of Optios software revenue was generated through Optios direct sales force. With Optios increased focus on sales through partners, Optio realized a greater percentage of sales through its reseller/partner network,
up to 30% of license revenue over the previous years 20% of license revenue. As of January 31, 2003, Optio had 32 sales representatives and sales support staff, divided into teams that:



| |  |  | directly market to potential customers based on geographic regions in the manufacturing, retail and distribution industry as well as other market segments;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | directly market to potential customers in the healthcare industry; and
| | - |  | ----------------------------------------------------------------------



| |  |  | sell to resellers and distributors.
| | - |  | -----------------------------------



As of January 31, 2003, Optios international sales organization, focused on Europe, was comprised of eight sales representatives.



Optios marketing activities during the
year ended January 31, 2003 have typically focused on trade shows where we are able to demonstrate our products and their capabilities. Other marketing processes have included direct mail and electronic media campaigns as well as distribution of
product brochures and other literature to inform new and existing customers about our new product offerings.



Strategic Relationships



Optio has strategic relationships with third parties that help market, sell, implement, support and enhance Optios solutions that include:



Distributor Relationships. Optio has relationships with
distributors who market and resell Optios software. These distributors may also provide education, implementation and customization services for their customers. Optios major distributors include Harvest Technology and Deloitte
Consulting Product Services LLC.



Value-Added
Reseller Relationships.Optio has relationships with resellers that market and resell Optios software as a component of their own solutions and who often provide software-related education, implementation and customization services as
well. These resellers have their own software solutions that typically address a specific market sector and utilize Optios software to enhance the functionality of their own solution. Optios software is sold along with their own
solutions under the Optio brand name. Optios major value-added resellers include Dataroad, Corning Data Services, Inc., McKesson Corporation and Source 4 Healthcare Solutions Group.



OEM Relationships.Certain companies may choose to embed Optios software within their software
and re-label the software with their own name. Because resellers who embed or include Optios products within their solutions



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provide substantially all of the sales and marketing efforts and the initial support services with respect
to this embedded software, they receive price discounts on Optios software.



Referral Relationships. Optio has established relationships with over 25 partners including QAD, Inc., McKesson Corporation, Carolina System Solutions, Inc. and Lexmark International, Inc., to
refer prospects to Optio that may have an interest in licensing Optios solution. As part of a defined process, Optio validates that it is not currently working with that prospect and if Optio secures a licensing agreement with that prospect
within a fixed period of time, Optio will pay a referral fee to the referring partner.



Implementation Relationships. Optio has active relationships with 10 consulting organizations to provide value added services that assist customers in implementing Optios software. Optio
trains and tests these organizations consultants to install and use Optios software and certify them once they have demonstrated their proficiency in delivering complete solutions that meet the needs of the customers.



Vendor Relationships. Optio has relationships with
major ERP and healthcare software vendors where Optio has demonstrated that its solutions are compatible with their applications and provide complimentary functionality. These vendors include Oracle Corporation, J.D. Edwards, McKesson Corporation
and Baan. In most cases, Optios products are certified as to their compatibility with these vendors. As a result, these vendors will include descriptions of Optio products key features and benefits in their directories which are
published periodically and on their web sites. Optio can also feature their logos in its advertising and promotional materials, participate in vendor sponsored trade shows, marketing programs and other events. In the past, these vendor relationships
have resulted in significant revenues and Optio expects that they will continue to do so in the foreseeable future.



Customers



Optios customers consist of enterprises across a broad spectrum of industries, however healthcare, manufacturing, retail and
distribution customers represent approximately 60% of Optios customers. Other customer industry types include technology, banks, financial institutions and the public sector. As of January 31, 2003, we licensed our products for use by more
than 4,600 customers.



No single customer
accounted for 10% or more of Optios total revenue during the years ended January 31, 2001, 2002 or 2003.



Competition



The market for Optios software and services is intensely competitive, quickly evolving and subject to rapid technological change. Management expects competition to intensify in the future. Optios potential
competitors vary in size and in the scope and breadth of the products and services offered. Our competitors fit into two separate categories. The first is custom software developers. The second is comprised of distributed output management solutions
from organizations such as Accelio Corporation (acquired by Adobe Corporation), AFP Technology (Formscape), CreateForm, Dazel/Hewlett Packard, StreamServe, Standard Register, Cypress, FormFast, and Evergreen.



Management believes that Optio is differentiated relative to
its competitors due to its softwares ability to combine capabilities including information customization, distributed output management, information integration and exchange and e-business enablement in one solution. Management believes that,
to the best of its knowledge, none of Optios competitors provides all of this functionality in a single solution. Management believes that Optio also competes on the basis of its softwares ability to operate across multiple operating
systems. With respect to the Optio Healthcare Suite, management believes that Optio compares favorably to its competitors because Optio offers a vertically oriented solution to address the needs of the healthcare marketplace, including new HIPAA
regulation concerns.



Management believes that
the principal competitive factors present in Optios market include: product performance, quality, functionality and features; cost of solution; customer service; core technology; ease of implementation; and value derived from solution.
Although management believes that Optios products and services currently compete favorably with respect to each of these factors, Optios market is evolving rapidly. Optio may not be able to maintain its competitive position against
current and potential competitors.



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Intellectual Property



Optio distributes its products under
software license agreements, which generally grant clients perpetual licenses to use, rather than own, Optios products. These licenses contain various provisions protecting our ownership and the confidentiality of the underlying technology.
The software is protected from unauthorized use through electronic activation keys tied to the system on which the software is licensed to operate. The source code, or the intellectual property underlying Optios software, is protected as a
trade secret and as unpublished copyrighted work.



Optio protects its proprietary rights by relying on copyright, trade secret, trademark, confidentiality procedures and contractual provisions. Some of Optios software, documentation and other written materials are protected
under the federal copyright law. Optio has registered Optio and its accompanying logo, as well as its products names such as e.ComIntegrate as trademarks in the United States and in certain countries in which Optio
sells its products. Optio has used the Optio trademark in the European Economic Community since 1997, but has not registered the mark there. During 1999, Optio was made aware of an EEC registration of a mark similar to Optios which
was filed after Optio began using the mark. Optio has received notice from a company in the United Kingdom that has alleged it uses a logo similar to the Optio mark. No assurance can be given that Optio will be able to register the
Optio mark in these markets or that the existing EEC registration or United Kingdom use will not ultimately have an adverse affect on Optios ability to use its Optio marks in those markets. Optio also relies on trade
secret laws of the State of Georgia and the states in which it does business to protect its software designs and other proprietary information. In addition, non-disclosure agreements contained in employment contracts protect Optios proprietary
information from disclosure by current and former employees.



Optio has not applied for any U.S. patents. It is possible that Optio may not develop proprietary products or technologies that are patentable, that any patent issued to Optio may not provide Optio with any competitive advantages, or
that the patents of others will seriously harm our ability to do business.



Despite Optios efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of Optios products or to obtain and use information that Optio regards as
proprietary. Policing unauthorized use of Optios products is difficult, and while Optio is unable to determine the extent to which piracy of Optios software products exists, software piracy can be expected to be a persistent problem. In
addition, the laws of some foreign countries do not protect Optios proprietary rights to as great an extent as do the laws of the United States. Optios means of protecting its proprietary rights may not be adequate and Optios
competitors may independently develop similar technology, duplicate Optios products or design around patents issued to Optio or Optios other intellectual property.



There has been a substantial amount of litigation in the software and Internet industries regarding
intellectual property rights. It is possible that in the future third parties may claim that Optio or its current or potential future products infringe their intellectual property. Management expects that software product developers and providers of
e-commerce solutions will increasingly be subject to infringement claims as the number of products and competitors in the industry grows and the functionality of products in different industry segments overlaps. Any claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment delays or require Optio to enter into royalty or licensing agreements. Royalty or licensing agreements, if required, may not be available on terms acceptable to Optio or at
all, which could seriously harm our business.



Employees



As of January
31, 2003, Optio had 145 employees. No employees are covered by any collective bargaining agreements. Optio considers its relationships with its employees to be good.





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Executive Officers of the
Registrant



As of the date of this report,
the executive officers of Optio and certain information about them are as follows:



|Name             |  | Age |  | Position                                                                 
|---------------- |  | --- |  | -------------------------------------------------------------------------
|C. Wayne Cape    |  | 49  |  | President, Chief Executive Officer and Chairman of the Board of Directors
|Paul OCallaghan |  | 47  |  | Senior Vice President of Sales                                           
|Terry Kraft      |  | 49  |  | Senior Vice President of Product Development                             
|Daryl G. Hatton  |  | 41  |  | Chief Technology Officer                                                 
|Caroline Bembry  |  | 32  |  | Vice President of Finance                                                



C.
Wayne Cape,the founder of Optio, served as Chief Executive Officer and President of Optio from its inception in 1981 through June 2001 and again since February 2003. Mr. Cape has acted as a member of Optios Board of Directors since the
companys inception and became Chairman of the Board in September 1999. Prior to launching Optio, Mr. Cape was an employee at Digital Communication Associates from 1974 to 1981 where he served in a variety of technical, sales and regional sales
management positions.



Paul
OCallaghan has served as Senior Vice President of Sales since February 2003. He also previously held this position from May 2001 to July 2001. Prior to joining Optio, from June 2000 to May 2001, Mr. OCallaghan served as SVP Sales and
Services for Idapta, Inc. a B2B solutions company providing electronic trading exchanges to major consortium organizations. From 1998 to 2000 Mr. OCallaghan was Vice President of Sales for startup XACCT Technologies, which delivered
internet-based, IP mediation software solutions to telecommunications industry leaders. Mr. OCallaghan has also served in senior executive positions with Cisco Systems, IMNET Systems and Network Systems Corporation.



Terry Kraft has served as Senior Vice President of
Product Development since November 2001. Prior to joining Optio, Mr. Kraft served as Vice President and General Manager for the Wireless and Calling Card Division of Glenayre Technologies, Inc. from 1998 to 2001. From 1997 to 1998, Mr. Kraft served
in a key technology and management role with Comverse Network Systems, Inc., an enhanced voice application services company.



Daryl G. Hatton has served as Chief Technology Officer for Optio since February 1997. From October 1993 to February 1997, he served
as director of research for Optio. From 1988 through 1993, Mr. Hatton was a co-founder and president of Pacific Genesys Development, Inc., a Canadian corporation in the electronic forms software development industry, which was acquired by Optio in
1993. Prior to that, Mr. Hatton was Vice President of Product Development for Modatech Systems, Inc., a publicly traded software developer of sales force automation solutions.



Caroline Bembry has served as Optios Vice President of Finance since December 2002. From
November 1999 to December 2002, she served as the Controller of Optio. Prior to joining Optio, Ms. Bembry was Assistant Corporate Controller for WebMD Medical Manager from June 1997 to November 1999. Prior to WebMD Medical Manager, Ms. Bembry held
positions with Coopers & Lybrand LLP. She is certified as a CPA in Florida.



Item 2. Properties



Optios principal corporate offices are located in approximately 62,000 square feet at 3015 Windward Plaza, Windward Fairways II, Atlanta, Georgia. The term of this lease is through December 31, 2006. Sales offices are also
located in France and the United Kingdom, providing us with an additional 7,000 square feet.



Optio leases all of its properties with remaining terms between one and four years. Management believes that its facilities are adequate for its current needs and that suitable additional space will be
available as required.



Item 3. Legal Proceedings



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



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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. The parties have agreed in principle to a settlement, which will result in the dismissal of
the lawsuit. This settlement is contingent upon the release by PTIs trustee in bankruptcy of all claims against the plaintiffs and the Company and the approval of that release by the bankruptcy court. Under the terms of the proposed
settlement, Optio will pay a total of $875,000 within ten days of the bankruptcy courts final non-appealable order approving the release of the trustees claims and will receive immediate reimbursement from its insurer of $750,000. Both
parties must release all claims each may have in the PTI bankruptcy in exchange for a reciprocal release from the bankruptcy trustee. The company has recorded a liability for the settlement and a receivable for the amount to be contributed by the
insurance carrier in the financial statements dated January 31, 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 the Optios prospectus was
materially false and misleading because it failed to disclose, among other things, that: (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to
those investors material portions of the 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.



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



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



Optio held a Special Meeting of Shareholders on December 30, 2002. There were present at the Special Meeting, in person or by proxy, holders of 17,545,411 shares of common stock entitled to
vote. At the Special Meeting, the shareholders were asked to approve the grant of authority to the Board of Directors to amend Optios Amended and Restated Articles of Incorporation to effect a reverse stock split of Optios common stock
at one of the following ratios: one-for-five, one-for-six, one-for-seven, one-for-eight, one-for-nine, or one-for-ten, with authority being granted to the Board of Directors (i) to determine whether to effect or abandon the amendment prior to filing
and (ii) if the determination was made to effect the amendment, then to determine, in the discretion of the Board of Directors, which specific ratio shall be included in the amendment to effect the reverse stock split. The resolution was rejected,
with 7,437,429 affirmative votes, 10,107,982 votes against, and no abstentions.



PART II



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Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED SHAREHOLDER MATTERS



Market Information



On December 15, 1999, Optios common stock began trading on the Nasdaq National Market under the symbol OPTO until June 19, 2002, when Optios common stock began trading on
the Nasdaq SmallCap Market. Effective January 8, 2003, Optio failed to meet the qualifications for listing on the Nasdaq SmallCap Market and began trading on the Over-the-Counter Bulletin Board under the symbol OPTO.OB. On April 29,
2003, the closing price of the common stock on the Over-the-Counter Bulletin Board was $0.42.



The following table reflects the range of high and low bid prices of Optios common stock by quarter, for the two most recent fiscal years. Bid prices reflect inter dealer prices without retail
mark-up, mark-down or commissions.



|                               |  | High |      | Low
|------------------------------ |  | ---- | ---- | ---
|Quarter Ended January 31, 2003 |  | $    | 0.73 |    
|Quarter Ended October 31, 2002 |  | $    | 0.70 |    
|Quarter Ended July 31, 2002    |  | $    | 0.50 |    
|Quarter Ended April 30, 2002   |  | $    | 0.85 |    
|Quarter Ended January 31, 2002 |  | $    | 1.16 |    
|Quarter Ended October 31, 2001 |  | $    | 0.85 |    
|Quarter Ended July 31, 2001    |  | $    | 0.84 |    
|Quarter Ended April 30, 2001   |  | $    | 2.00 |    



Holders



As of April 29, 2003, there were
approximately 92 holders of record of Optios common stock.



Dividends



Optio did not
pay any dividends during the years ended January 31, 2001, 2002 or 2003. Optio intends to retain all of its earnings to finance the expansion of its business and for general corporate purposes and does not anticipate paying any cash dividends on its
common stock for the foreseeable future.



Changes in
Securities and Use of Proceeds



On December
15, 1999, Optios registration statement for its initial public offering of its Common Stock was declared effective by the Securities and Exchange Commission, Registration No. 333-89181. The net proceeds from the offering to Optio after
deducting the discounts, commissions, fees and expenses were approximately $47.0 million. Approximately $1.2 million of the proceeds were used for the repayment of our indebtedness to three former shareholders incurred in connection with the
repurchase of their common stock in December 1998. In March 2000, $20 million of the proceeds were used for the acquisition of all of the capital stock of Muscato Corporation and an additional $5 million was used to acquire the assets of TransLink
Solutions Corporation. For further discussion, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations  Discontinued Operations. In August 2000, Optio invested $2.2 million in
ec-Hub, Inc. (formerly ecIndX, Inc.), a supply chain collaboration vendor, in exchange for a minority interest in the company. For further discussion, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations  Investment in ec-Hub. In December 2000, Optio issued a note in the amount of $400,000 to a company that was considered a potential strategic investment. Subsequent to January 31, 2001, this company filed for bankruptcy
and the $400,000 was fully reserved as uncollectible. The remaining $14.3 million was used for general working capital purposes.



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Item 6. SELECTED FINANCIAL DATA



The following table sets forth the selected historical financial data of Optio. The selected financial data should be read together with the financial statements and related notes and the section of this Form 10-K entitled
Managements Discussion and Analysis of Financial Condition and Results of Operations. The selected financial data as of and for the years ended January 31, 1999, 2000, 2001, 2002, and 2003 have been derived from the audited
financial statements of Optio.



|                                                                                     |  | Year Ended January 31, |       
|------------------------------------------------------------------------------------ |  | ---------------------- | ------
|                                                                                     |  | 1999                   |       
|Statement of Operations Data (in thousands):                                         |  |                        |       
|Revenue:                                                                             |  |                        |       
|License fees                                                                         |  | $                      | 12,014
|Services, maintenance and other                                                      |  |                        | 7,525 
|                                                                                     |  |                        |       
|Total revenue                                                                        |  |                        | 19,539
|Costs of revenue (exclusive of depreciation and amortization show separately
below): |  |                        |       
|License fees                                                                         |  |                        | 913   
|Services, maintenance and other                                                      |  |                        | 4,089 
|                                                                                     |  |                        |       
|Total cost of revenue                                                                |  |                        | 5,002 
|Operating expenses:                                                                  |  |                        |       
|Sales and marketing                                                                  |  |                        | 7,534 
|Research and development                                                             |  |                        | 2,530 
|General and administrative                                                           |  |                        | 2,884 
|Depreciation and amortization                                                        |  |                        | 941   
|                                                                                     |  |                        |       
|Total operating expenses                                                             |  |                        | 13,889
|Income (loss) from operations                                                        |  |                        | 648   
|Other income (expense):                                                              |  |                        |       
|Interest income                                                                      |  |                        | 104   
|Interest expense                                                                     |  |                        | (257  
|Write-down of ec-Hub investment                                                      |  |                        |      
|Other                                                                                |  |                        | (46   
|                                                                                     |  |                        |       
|Income (loss) before income taxes and loss from discontinued operations              |  |                        | 449   
|Income tax expense (benefit)                                                         |  |                        | 99    
|                                                                                     |  |                        |       
|Income (loss) from continuing operations                                             |  |                        | 350   
|Loss from discontinued operations                                                    |  |                        |      
|                                                                                     |  |                        |       
|Net income (loss)                                                                    |  | $                      | 350   
|                                                                                     |  |                        |       
|Income (loss) per share from continuing operations  basic                           |  | $                      | 0.00  
|                                                                                     |  |                        |       
|Income (loss) per share from continuing operations  diluted                         |  | $                      | 0.03  
|                                                                                     |  |                        |       
|Loss per share from discontinued operations  basic and diluted                      |  | $                      | 0.00  
|                                                                                     |  |                        |       
|Net income (loss) per share  basic                                                  |  | $                      | 0.03  
|                                                                                     |  |                        |       
|Net income (loss) per share  diluted                                                |  | $                      | 0.02  
|                                                                                     |  |                        |       
|Weighted average shares outstanding  basic                                          |  |                        | 12,825
|                                                                                     |  |                        |       
|Weighted average shares outstanding  diluted                                        |  |                        | 17,305
|                                                                                     |  |                        |       
|                                                                                    
|                                                                                     |  | At January 31,         |       
|                                                                                     |  | 1999                   |       
|Balance Sheet Data (in thousands):                                                   |  |                        |       
|Cash and cash equivalents                                                            |  | $                      | 1,129 
|Working capital (deficiency)                                                         |  |                        | (1,650
|Total assets                                                                         |  |                        | 10,738
|Long-term obligations                                                                |  |                        | 1,208 
|Shareholders equity                                                                 |  |                        | 9     



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Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following discussion should be read in conjunction with the financial statements and related notes thereto and Item 6. Selected
Financial Data appearing elsewhere in this report.



OVERVIEW



Optio is
engaged primarily in the development, sale and support of infrastructure software that enhances the form, content, availability and delivery 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 and Europe, and in the Asia Pacific region, through its
direct sales force and certified resellers. Optio also offers consulting services, which provide customers with implementation assistance and training. As of January 31, 2002, Optio had over 4,600 customers worldwide using Optios software and
services. No single customer accounted for 10% or more of Optios revenue for the years ended January 31, 2001, 2002, or 2003.



Critical Accounting Policies and Use of Estimates



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



Revenue Recognition



Overview



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



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



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exist for one or more delivered elements, then revenue is recognized using the residual method. Under the
residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.



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



Services, Maintenance
and Other Revenue



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



Notes Receivable



Optio holds notes from M2 Systems as consideration for the
sale of Muscato and TransLink. Optios management has assessed the notes to be fully collectible. Management assessed the collateral of the notes, including the technology which could be sold or used, and the proven success of the shareholders
of the acquirer in its evaluation of the collectibility of the notes. M2 Systems has a limited operating history. The credit risk with respect to the notes is partially limited as the notes are secured by all outstanding shares of M2 Systems
common stock and its assets, including cash, accounts receivable, fixed assets, and intangible assets. The amount of the notes receivable recorded could be materially different under different conditions or using different assumptions, including the
assumption that repayment of the notes could be dependent upon the future successful operations of M2. If M2 Systems defaults on the notes and the collateral for the amount due proves to be of no value to Optio, Optio would incur a loss of $3.8
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.



Other Accounting Policies



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



Costs of Revenue. Costs of revenue from license fees consist of costs relating to the manufacturing, packaging and distribution of software and related documentation and third party license and
referral fees. Costs of revenue from services, maintenance and other consists of personnel, outsourced consultants and direct expenses relating to the cost of providing consulting, implementation, training, technical support and allocable overhead.
Costs of revenue from services will vary depending on the mix of services performed internally by Optio staff and services performed externally by third party consultants.



Sales and Marketing. Sales and marketing expenses consist primarily of sales and marketing personnel
compensation and benefits, direct expenditures such as travel, trade shows, direct mail, online marketing, advertising and promotion, and allocable overhead.



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Research
and Development. Research and development expenses consist primarily of salaries, benefits, equipment and allocable overhead for software engineers, pre-production quality assurance personnel, program managers and technical writers. Research and
development expenses also include expenses associated with independent contractors which Optio uses to augment its research and development efforts. Research and development expenses relate to activities performed prior to commercial production of a
product. To date Optio has not capitalized any development costs because Optios short development cycle has historically resulted in only immaterial amounts of development costs that were eligible for capitalization.



General and Administrative. General and administrative
expenses consist primarily of salaries, benefits and related costs for executive, finance, administrative and human resource functions. General and administrative expenses also include legal, audit and other professional fees and allocable overhead.



Depreciation and Amortization.
Depreciation and amortization expenses consist of depreciation of property and equipment and amortization of intangible assets related to acquisitions in 2001 and 2002.



Discontinued Operations.On March 27, 2000, Optio acquired all the outstanding shares of Muscato
Corporation (Muscato) and substantially all of the assets of TransLink Solutions Corporation (TransLink), an affiliate of Muscato. The consideration paid for the shares of Muscato was $28.0 million, of which $20.0 million was
paid in cash. Optio issued promissory notes for the remaining $8.0 million, which were due and payable on March 27, 2030. The purchase price for the assets acquired from TransLink was $5.0 million in cash. Each of the acquisitions was accounted for
as a purchase transaction for financial accounting purposes.



On December 4, 2001, Optio sold its Muscato and TransLink business units to M2 Systems Corporation (M2 Systems), a company owned by certain of the former shareholders of Muscato. The stock of Muscato was sold for
consideration of $250,000 cash, a $3.25 million promissory note, and the retirement of the promissory 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.



Pursuant to the provisions of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, 144, the financial statements have been reclassified to reflect the
discontinuation of these components. Accordingly, the revenues, costs and expenses, assets and liabilities of these components have been segregated in the consolidated balance sheets and statements of operations. The net operating results of these
components have been reported as discontinued operations in the consolidated statements of operations. The net assets and liabilities of these divested units have been reported as assets of discontinued operations and liabilities of discontinued
operations in the consolidated balance sheet.



The estimated loss at October 31, 2001 on these two transactions was $10.9 million and was recorded as an impairment of intangible assets in the quarter ended October 31, 2001. The impairment of intangible assets has been classified
in the loss from discontinued operations on the consolidated statements of operations. The subsequent actual gain on the sale of $413,000 was recorded in the quarter ended January 31, 2002 and is classified in the loss from discontinued operations
on the consolidated statements of operations.



Investment in
ec-Hub



In the year ended January 31, 2001,
Optio invested $2.0 million in ec-Hub, Inc. (formerly ecIndX, Inc.), a supply chain collaboration vendor, in exchange for a minority interest in the company. An additional $209,000 of costs incurred related to making the investment were added to the
basis of the investment. In conjunction with the investment, ec-Hub, Inc. entered into Optios standard software license agreement to purchase $1.0 million in software and related services.



During the year ended January 31, 2002, Optio continually
assessed the value of its investment in ec-Hub. In April 2001, Optio wrote down its investment in ec-Hub by $200,000 to reflect the value of Optios percentage of ownership based upon the price per share paid by a recent investor. In January
2002, Optio wrote down the investment an additional $2,009,000, resulting in a $0 value of the investment. Optio based this write down on several factors including business changes that took place at ec-Hub during the fourth quarter of 2002,
ec-Hubs financial performance,



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Optios assessment of the companys future viability, the value of Optios new percentage
of ownership following the merger of ecIndX into ec-Hub, and valuations of other companies similar to ec-Hub.



Foreign Currencies



The financial position and results of operations of the Companys foreign subsidiaries are measured generally using local currencies as the functional currencies, including the British pound, the
Euro and the Australian dollar. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year-end. Income and expense items are translated at average exchange rates for the year. The
resulting translation adjustments are recorded in the foreign currency translation adjustment account. The effects of changes in foreign currency exchange rates have had minimal affect on the Companys financial results to date.



RESULTS OF OPERATIONS



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



|                                                                 |  | Year Ended January 31, |   
|---------------------------------------------------------------- |  | ---------------------- | --
|                                                                 |  | 2001                   |   
|Revenue:                                                         |  |                        |   
|License fees                                                     |  | 46                     | % 
|Services, maintenance and other                                  |  | 54                     |   
|                                                                 |  |                        |   
|Total revenue                                                    |  | 100                    |   
|                                                                 |  |                        |   
|Costs of revenue:                                                |  |                        |   
|License fees                                                     |  | 2                      |   
|Services, maintenance and other                                  |  | 40                     |   
|                                                                 |  |                        |   
|Total cost of revenue                                            |  | 42                     |   
|                                                                 |  |                        |   
|Gross profit                                                     |  | 58                     |   
|Operating expenses:                                              |  |                        |   
|Sales and marketing                                              |  | 57                     |   
|Research and development                                         |  | 14                     |   
|General and administrative                                       |  | 19                     |   
|Depreciation and amortization                                    |  | 4                      |   
|                                                                 |  |                        |   
|Total operating expenses                                         |  | 94                     |   
|                                                                 |  |                        |   
|Income (loss) from operations                                    |  | (36                    | ) 
|Interest and other income (expense)                              |  | 3                      |   
|                                                                 |  |                        |   
|Income before income taxes and loss from discontinued operations |  | (33                    | ) 
|Income tax expense (benefit)                                     |  | 1                      |   
|                                                                 |  |                        |   
|Income (loss) from continuing operations                         |  | (34                    | ) 
|Loss from discontinued operations                                |  | (16                    | ) 
|                                                                 |  |                        |   
|Net income (loss)                                                |  | (50                    | )%
|                                                                 |  |                        |   



Revenue



Total revenue decreased 10% to $27.8
million in 2003 from $30.8 million in 2002 and increased 2% to $30.8 million in 2002 from $30.3 million in 2001. The decrease in revenues in 2003 resulted from a $2.2 million decrease in license revenue and an $800,000 decrease in services,
maintenance and other revenue. The increase in revenue in 2002 resulted from a $1.4 million decrease in license revenue and a $1.9 million increase in services, maintenance and other revenue.



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License fee
revenue decreased 17% to $10.4 million in 2003 from $12.6 million in 2002 and decreased 10% to $12.6 million in 2002 from $14.0 million in 2001.



Optios foreign operations generated revenue from licenses to customers of $1.9 million in the year ended January 31, 2003,
representing 18% of total license revenue, compared to $1.9 million in the year ended January 31, 2002, representing 15% of total license revenue. Optios foreign license revenue for the year ended January 31, 2001 was $2.0 million,
representing 14% of total license revenue.



License fee revenue decreased from 2002 to 2003, and similarly from 2001 to 2002, due to the continued weakness in the economy and delayed decisions by most IT managers. Many companies have put technology spending on hold as they
await an improvement in economic conditions. In the year ended January 31, 2002, many of Optios partners such as J.D. Edwards and Oracle saw declines in their software sales. This continued through the year ended January 31, 2003. Optio is
often referred into sales from its partners, or is included as part of the initial sale of the partners products. While only a portion of Optios revenues are gained through referrals from these partners, as their sales decline, Optio has
seen a decline in referrals and add-on revenue in both 2002 and 2003.



During the year ended January 31, 2003, approximately 30% of Optios license revenue came through its reseller relationships, while during the year ended January 31, 2002, approximately 20% of Optios license
revenue was generated by its resellers. This increase in the percentage of sales through resellers was primarily the result of Optios commitment to expanding its partnership program to core strategic partners, including the signing of
several large resellers such as Deloitte Consulting Product Services and IBM Global Services.



Revenue from services, maintenance and other decreased 5% to $17.4 million in 2003 from $18.2 million in 2002 and increased 12% to $18.2 million in 2002 from $16.3 million in 2001. While maintenance
revenue increased 20% to $9.8 million in 2003 from $8.2 million in 2002, services revenue decreased 24% to $7.6 million in 2003 from $10.0 million in 2002. Optios maintenance revenue increased in both 2002 and 2003 due to its continued growth
in and preservation of our customer base, coupled with slightly increased maintenance rates. A decline in demand for services to implement Optios products from slowing sales resulted in a $2.4 million decline in services revenue.



Alternatively, while license revenue decreased during the year
ended January 31, 2002, services, maintenance and other increased due to the following factors:



| |  |  | Maintenance revenue increased $0.8 million, or 12% due to the growth in Optios customer base; and
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Consulting services revenue increased $1.2 million because the increased functionality of Optios products lends itself to encourage customers to purchase
additional services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



License fee
revenue constituted 38%, 41%, and 46% of total revenue in 2003, 2002 and 2001, respectively. Services and other revenue constituted 27%, 33%, and 30% of total revenue in 2003, 2002 and 2001, respectively. Maintenance revenue constituted 35%, 26%,
and 24% of total revenue in 2003, 2002, and 2001, respectively. Over the previous two fiscal years, software license revenue decreased as a result of a decline in sales of new products due to a slower economic environment. This caused Optios
sales mix to trend towards the more stable services and maintenance revenue. The sales mix has shifted towards maintenance revenue as Optios customer base grew through customer retention, yet license fees and services revenue declined.



Costs of Revenue



License fees.Costs of revenue from license fees
increased 6% to $549,000 in 2003 from $519,000 in 2002 and decreased 14% to $519,000 in 2002 from $607,000 in 2001. The increase in costs of revenue from license fees in 2003 resulted primarily from a $70,000 increase in royalties paid for the
inclusion of other companies products within Optio products. This increase was offset by a $40,000 decline in commissions paid to referral agents. The decrease in costs of revenue from license fees in 2002 was primarily the result of decreased
sales through independent agents and thus, a decrease in independent agent fees. These fees decreased from $446,000 in 2001 to $182,000 in 2002 and further to $140,000 in 2003. Costs of revenue from license fees represented 5% of total license
revenue in 2003, 4% in 2002, and 4% in 2001.



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Services,
Maintenance and Other.Costs of revenue from services, maintenance and other decreased 25% to $7.8 million in 2003 from $10.4 million in 2002 and decreased 15% to $10.4 million in 2002 from $12.2 million in 2001. Over the previous two years,
Optio has downsized its consulting services and support staff by 22 employees, largely in an effort to appropriately staff the organization to match revenues and to boost utilization of its internal staff. With a focus on redefining the role of the
consultants, and reassigning all non-implementation tasks, Optio has seen a significant improvement in utilization of its consultants. Optio had 43, 65 and 98 consulting and support employees at January 31, 2003, 2002 and 2001, respectively. In
addition, the decrease in expenses 2002 was due primarily to the fact that Optio used fewer outsourced consultants, which have a higher cost than Optios own internal personnel. In the past, Optio had outsourced approximately 65% of its
consulting services; however, in the fiscal year ending January 31, 2002, Optio decreased that rate to approximately 37%. During the year ended January 31, 2003, Optio began to see a rise in its use of outsourcers, primarily a result of the number
of consulting projects exceeding expectations and the need for the expertise of select outsourcers. Optio ended the year with approximately 50% of its services revenues being generated through outsourcers, a trend which Optio expects to continue.



Costs of revenue from services, maintenance and
other represented 45%, 57%, and 75% of total services, maintenance and other revenue in 2003, 2002 and 2001, respectively.



Operating Expenses



Sales and Marketing. Sales and marketing expenses decreased 19% to $12.8 million in 2003 from $15.9 million in 2002 and decreased
8% to $15.9 million in 2002 from $17.2 million in 2001. During the year ended January 31, 2003, Optio decreased its sales and marketing staff from 70 employees at January 31, 2002 to 45 employees at January 31, 2003. Optio had previously decreased
its sales and marketing staff from 107 employees as of January 31, 2001 to 70 employees at January 31, 2002. Over the course of the previous two years, Optio made a significant effort to reduce its marketing expenses. Optio was selective with the
number of tradeshows it attended, based upon the return on investment seen in the past with these shows. In addition, Optio further reduced costs by eliminating some advertising space in magazines, canceling its 2001 User Group Conference and
reducing the amount of printed literature or video programs based upon need. Overall, these programs reduced Optios marketing costs from $3.1 million in 2001 to $1.9 million in 2002 to $900,000 in 2003.



Research and Development. Research and development
expenses decreased 5% to $4.3 million in 2003 from $4.5 million in 2002 and increased 2% to $4.5 million in 2002 from $4.4 million in 2001. During the year ended January 31, 2003, Optio reduced its research and development staff to 39 employees,
down from 50 employees in the two previous years. Despite the significant decrease the research and development organization, Optio incurred expenses of $300,000 associated with consultants hired to assist with the completion of the OptioFax 4.0 and
the MedexFlex product. OptioFax 4.0 was released in June 2002 and MedexFlex was released in January 2003, at which time the use of the outside consultants ceased. Other development efforts by the research and development group included the
introduction of e.comPresent 2.0.



In the year
ending January 31, 2004, Optio intends to offer new product features focused on the increased scalability of Optios products as well as ease-of-use and vendor specific integration features. For example, Optio intends to develop new
capabilities in e.ComIntegrate, e.ComPresent and Design Studio which will include new features to allow better integration with specific ERP vendors. Optio anticipates that the costs of this development will approximate the costs expended during the
year ended January 31, 2003.



General and
Administrative. General and administrative expenses decreased 9% to $7.0 million in 2003 from $7.6 million in 2002 and increased 31% to $7.6 million in 2002 from $5.8 million in 2001. The decrease in general and administrative expenses during
2003 primarily resulted from i) a $1.85 million decrease in bad debt expense to $266,000 in 2003 from $2.1 million in 2002, which included the write-off of a note receivable from a shareholder of approximately $750,000 and the write-off of one
significant customers account receivable in the amount of $650,000, offset by (ii) an increase in legal fees from $600,000 in 2002 to $1.3 million in 2003 caused by legal fees incurred in ongoing litigation, (iii) an increase in premiums for
directors and officers insurance of $400,000. The increase in general and administrative expenses during 2002 primarily resulted from (i) the write-off of the one significant customer account and the note from a shareholder, and (ii) severance
charges totaling over $570,000.



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Depreciation and Amortization. Depreciation and amortization expenses decreased 35% to $920,000 in 2003 from $1.4 million in 2002 and increased 27% to $1.4 million in 2002 from $1.1 million in 2001. The decrease in 2003 was
due to slowing of capital expenditures and a greater percentage of Optios assets becoming fully depreciated. The increase in 2002 was principally due to an increase in depreciation expense due to increased capital expenditures. Depreciation
and amortization expenses represented 3%, 5%, and 4% of total revenue in 2003, 2002 and 2001, respectively.



Interest and Other Income (Loss).



Interest and other income increased to $226,000 in 2003 from a loss of $2.2 million in 2002 and decreased to a loss of $2.2 million in 2002 from a gain of $985,000 in 2001. Optio earned $233,000 in
interest income in 2003, primarily from interest on the M2 notes receivable. Optio incurred interest expense on its line of credit and capital leases of $51,000. The significant loss in 2002 was primarily due to the write-down of Optios
investment in ec-Hub of $2.2 million, as described above. In addition, Optios interest income decreased from $973,000 in the year ended January 31, 2001 to $273,000 in the year ended January 31, 2002 as a result of Optios use of
approximately $25.0 million in cash during the year ended 2001 for the purchase of Muscato and TransLink, resulting in significantly reduced interest earnings. Optio also experienced increased interest expense during 2002 as a result of borrowings
on its line of credit. Finally, Optio sold marketable securities and recorded an other than temporary decline in fair value of other marketable securities during the year ended January 31, 2002 for a loss of $163,000, which was recorded in the year
ended January 31, 2002 in other expense.



Income Taxes



The income tax benefit in the year ended
January 31, 2003 represents a tax refund of $530,000 received by Optio as a result of a tax law change allowing it to take advantage of greater tax loss carrybacks. In addition, Optios French operations recognized a $89,000 tax benefit for tax
loss carrybacks. This refund and carryback benefit was partially offset by $41,000 in income taxes paid for Optios other foreign operations. Income tax expense decreased to $15,000 in 2002 from $339,000 in 2001. Note 8 to the Consolidated
Financial Statements details differences between Optios effective income tax rate and the statutory rate. Despite Optios consolidated loss for fiscal year 2002, Optios European operations generated profits, accounting for the
income tax expense for each year.



Discontinued Operations



Discontinued operations includes the net
revenues, costs and expenses of Muscato and TransLink as described in Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations, Overview, Discontinued Operations. Revenue included in discontinued operations for the
years ended January 31, 2001 and 2002 was $6,517,000 and $4,637,000, respectively. There was no revenue included in discontinued operations for the year ended January 31, 2003. Pre-tax loss included in discontinued operations for the years ended
January 31, 2001, 2002 and 2003 was $4,739,000, $16,679,000 and $132,000, respectively.



Liquidity and Capital Resources



At January 31, 2003 and 2002, Optio had $3.9 million and $5.4 million, respectively, of cash and cash equivalents.



The following table sets forth certain selected statements of cash flow information for the periods presented:



|                                                    |  | Year Ended January 31, |            
|--------------------------------------------------- |  | ---------------------- | -----------
|                                                    |  | 2001                   |            
|Net cash used in operations                         |  | $                      | (8,730,000 
|Net cash provided by (used in) investing activities |  |                        | (29,134,000
|Net cash provided by (used in) financing activities |  |                        | (16,000    
|Net decrease in cash and cash equivalents           |  |                        | (38,078,000



Cash
used in operating activities for 2003 resulted primarily from a net loss of $4.8 million, offset by the add back of non-cash depreciation of $876,000, and changes in working capital which resulted in a $1.7 million in-flow of cash. The major
components of such working capital changes were a decrease in accounts receivable of $2.3 million,



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resulting from better than anticipated collections during the fourth quarter of 2003 and an overall
decrease in revenues, an increase in accrued expenses of $466,000, offset by an increase in a receivable from Optios insurance carrier of $750,000 and a decrease in deferred revenue of $419,000.



Cash used in operating activities from 2002 resulted primarily
from the net loss of $28.4 million, offset by non-cash charges of $21.7 million, including depreciation and amortization of $7.4 million, loss on the impairment of goodwill of $10.9 million and the write-down of Optios investment in ec-Hub of
$2.2 million, and changes in working capital which resulted in a $3.1 million in-flow of cash. The major components of such working capital changes were a $2.0 million decrease in accounts receivable, a $1.3 million decrease in accounts payable and
a $1.4 million tax refund received by Optio in the year ended January 31, 2002.



Cash used in operating activities for 2001 resulted primarily from the net loss of $15.1 million, offset by non-cash charges of $9.8 million, including depreciation and amortization of $7.3 million and
the tax benefit of stock options exercised of $1.2 million, and changes in working capital which resulted in a $3.4 million use of cash. The major components of such working capital changes were a $1.8 million decrease in accrued expenses, including
those assumed in the purchase of Muscato, and a $1.5 million change from income taxes payable to income taxes receivable.



Cash provided by investing activities during 2003 included $210,000 from the sales of marketable securities and $181,000 from collections
on the M2 notes receivable, offset by the purchase of approximately $268,000 in property and equipment in the ordinary course of business.



Optio used $77,000 of cash in investing activities during the year ending January 31, 2002. These activities included the purchase of
property and equipment of $366,000, offset by the proceeds from the sale of Muscato and Translink of $237,000 and proceeds from the sale of marketable securities of $68,000. Cash used in investing activities for 2001 represented $1.5 million in
purchases of property and equipment, $2.2 million paid for a strategic investment in ec-Hub, Inc., and $25.0 million paid for the acquisition of Muscato and TransLink.



Cash provided by financing activities during 2003 included the receipt of $101,000 from the exercise of stock
options, offset by the payment of $82,000 on the companys capital leases. Cash flows provided by financing activities during 2002 included $559,000 of proceeds from the exercise of stock options, offset by payments on capital leases and other
debt of $184,000. Cash used in financing activities for 2001 included payments of $274,000 on debt and capital leases, offset by proceeds received of $258,000 for the exercise of stock options.



As of January 31, 2003, Optio had notes payable of $53,000 to
two individuals, payable upon demand. Optio also had general capital lease obligations amounting to $232,000.



Optios commitments as of January 31, 2003 consisted primarily of obligations under capital and operating leases. Future minimum
lease payments under capital and operating leases consist of the following at January 31, 2003:



|2004 |  | $1,483,000
|---- |  | ----------
|2005 |  | 1,428,000 
|2006 |  | 1,330,000 
|2007 |  | 1,137,000 
|     |  |           
|     |  | $5,378,000
|     |  |           



During
the year ended January 31, 2003, Optio had a $5.0 million line of credit agreement with a bank, which terminated effective April 19, 2003. The line of credit bore interest at prime rate (4.25% at January 31, 2003), subject to increase based on
Optios performance relative to certain financial ratios. Optio could borrow up to $5.0 million, or such lesser amount as may be determined based on such ratios. Accounts receivable, equipment, general intangibles and other assets as defined in
the agreement collateralize the line of credit. The agreement contained various covenants, including liquidity and tangible net worth requirements and restrictions on dividends. As of January 31, 2003, Optio was in compliance with the required
financial ratios. There were no borrowings under the line of credit as of January 31, 2003.



On April 30, 2003, Optio extended the line of credit with this 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,



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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. 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 the 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 its core business to 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.



Optio does not have any off-balance sheet financing arrangements or any relationships with structured finance or special purpose entities. Other than our non-cancelable operating leases for office space and
equipment, we do not have any contractual obligations that would impact our liquidity.



Related Party Transactions



Optio has a note receivable from a shareholder, Wayne Cape (who is also and officer and director), for general personal purposes of $127,000 and $90,000 in the aggregate at January 31, 2002 and 2003, respectively. Included in the
balance as of January 31, 2002 were notes for $35,000, which bore interest at rates ranging from 9.5% to 10% with the principal and interest thereon due upon demand. The remaining advances did not accrue interest and were due upon demand. The notes
receivable were classified as long-term as of January 31, 2002, as the shareholders were not required to repay the balances within the next fiscal year. During the year ended January 31, 2003, these notes were consolidated into one note receivable
in the amount of $87,300 which bore interest at a rate of 9% per annum. Under this note, payments of $1,000 per month were due from February 28, 2002 through December 31, 2002 and subsequent monthly payments of $12,300 through July 15, 2003. In
addition, Optio has a note receivable from another shareholder, Charles Carey, for general purposes of $10,000 and $5,000 at January 31, 2002 and 2003, respectively. The note bears interest at prime plus 1% per annum. As of January 31, 2003, the
notes were classified as current as the notes require payments within the next fiscal year. There have been no changes to the terms of the notes subsequent to July 31, 2002.



During the year ended January 31, 1999, Optio advanced $525,000 for general personal purposes to David
Dunn-Rankin, who was a director of Optio and who held options to purchase 500,000 shares of Optios common stock. An additional $75,000 was advanced to Mr. Dunn-Rankin during the year ended January 31, 2000. At January 31, 2001 and 2002,
$600,000 was owed to Optio from Mr. Dunn-Rankin as a result of these advances. Such advances were secured by the options held by Mr. Dunn-Rankin. The note bore interest at 9% per annum. The advances were due and expected to be repaid October 31,
2001. Mr. Dunn-Rankin defaulted on the loan due to non-payment, and the Company believed that repayment of the loan was unlikely. The full amount of the loan was reserved as uncollectible as of January 31, 2002.



Effective March 31, 2002, Optio entered into a Release
and Settlement Agreement with David Dunn-Rankin, whereby, in consideration for (i) Mr. Dunn-Rankins relinquishing his rights to an option to purchase 500,000 shares of Optios common stock and (ii) his resignation as a member of
Optios Board of Directors, Optio released Mr. Dunn-Rankin from his obligation to repay loans made to him by Optio in the aggregate principal and interest amount of $740,000.



Effective February 11, 2003, the Company entered into a Separation Agreement with Warren Neuburger, the
Companys former President and Chief Executive Officer. The Separation Agreement called for separation payments of $33,300 to be paid within eight days of the execution of the agreement and for an additional $270,000 to be paid in 24



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equal installments over the following year. The total separation payments of $303,300 were recorded as
severance expense in the year ended January 31, 2003 due to the fact that employment terminated as of that date.



New Accounting Pronouncements



In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations (SFAS 141) and No. 142,
Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 eliminates the pooling-of-interests method of accounting for business combinations and also changes the criteria to recognize intangible assets apart from goodwill. Under
SFAS 142, goodwill and indefinite lived intangible assets are no longer amortized, but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite
life will continue to be amortized over their useful lives. Companies are required to immediately adopt the amortization provisions of SFAS 142 as it relates to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill
and intangible assets acquired prior to July 1, 2001, companies are required to adopt SFAS 142 in their fiscal year beginning after December 15, 2001. Optio adopted SFAS 142 in accordance with the provisions of the statement on February 1, 2002.
SFAS 142 may not be applied retroactively. The adoption of SFAS 142 did not have a material affect on Optios financial position or results of operations as Optio does not currently have goodwill or other intangible assets.



The Financial Accounting Standards Board 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, Optio adopted SFAS 144. Under the provisions of SFAS 144, the disposal of Optio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 Optios consolidated statements of operations.



In July 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the
liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The application of the requirements of SFAS 146 did not have any impact on the Companys financial position or result
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 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 does not intend to adopt the fair value methodology provisions of SFAS No. 148.



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.



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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 prior to January 31, 2003, the provisions of FIN 46 are applicable no later than July 1, 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 7A. 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 foreign operations, Optio believes its exposure to foreign currency fluctuations is not a material 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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



See the Index to Financial Statements on page F-1. The supplementary data is included in Part IV, Item 15.



Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



On January 16, 2003, Ernst & Young LLP (Ernst & Young) resigned as auditors of Optio. The reports of Ernst & Young
on Optios financial statements for the fiscal years ended January 31, 2001 and January 31, 2002, did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting
principles. A copy of the resignation letter from Ernst & Young referenced above was delivered to the Board of Directors of Optio and to its Audit Committee. Following review of such letter, the Board of Directors and the Audit Committee
approved the resignation of Ernst & Young.



In connection with the audits of Optios financial statements for each of the fiscal years ended January 31, 2001 and January 31, 2002, and in the subsequent interim periods, there were no disagreements with Ernst & Young on
any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures which, if not resolved to the satisfaction of Ernst & Young, would have caused Ernst & Young to make reference to such matter in
connection with its report. During the two most recent fiscal years and through the date of Ernst & Youngs resignation there have been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)).



Optio has furnished Ernst & Young with a copy of the
foregoing disclosure and requested Ernst & Young to furnish it with a letter addressed to the Securities and Exchange Commission stating whether or not it agrees with the foregoing statements. A copy of the letter of Ernst & Young to the
Securities and Exchange Commission is filed as an Exhibit to Optios Report on Form 8-K filed January 24, 2003.



Optios Board of Directors, upon the recommendation of the Audit Committee, engaged BDO Seidman, LLP (BDO) as of March
14, 2003 as its independent public accountants for its fiscal year ended January 31, 2003. During the two most recent fiscal years and through the date of engagement, Optio did not consult with BDO on items regarding either: (1) the application of
accounting principles to a specified transaction, either completed or proposed; or the type of audit opinion that might be rendered on Optios financial statements; or (2) any matter that was either the subject of a disagreement with
Optios former auditor or a reportable event under SEC rules and regulations.



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PART III



The information required by Items 10, 11,
12, and 13 of Part III is hereby incorporated by reference from the Registrants Definitive Proxy Statement on Schedule 14A to be filed not more than 120 days after the year ended January 31, 2003.



Item 14. CONTROLS AND PROCEDURES



Within the 90-day period prior to the date of this report, Optio, under the supervision and with the participation of our management, including our Chief Executive Officer and Vice President of Finance (chief accounting 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 Vice President of Finance
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 annual 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 IV



Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K



(a) (1)

Financial Statements - see index on Page F-1 herein.(a) (2)

Schedule II - Valuation and Qualifying Accounts - See page F-24 herein.Other financial statements and schedules are not presented because they are either not required or the information
required by such financial statements or schedules is presented elsewhere.(a) (3)

The exhibits filed as part of this Report as required by Item 601 of Regulation S-K are included in the Index to
Exhibits at page E-1 included elsewhere in this report.(b)

Reports on Form 8-K.




On January 24, 2003, Optio filed a Form 8-K to report the resignation of Ernst & Young LLP as the companys auditors.





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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 1st day of May, 2003.



OPTIO SOFTWARE, INC.By:

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






Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.



|Signature                             |  | Title                                                                                                      |  | Date       
|------------------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | -----------
|                                     
|/s/    C. WAYNE
CAPEC.
Wayne Cape     |  | President and Chief Executive Officer and Chairman of the Board of Directors (Principal
Executive Officer) |  | May 1, 2003
|                                     
|/s/    CAROLINE
BEMBRYCaroline Bembry |  | Vice President of Finance and Secretary (Principal Financial and Accounting
Officer)                       |  | May 1, 2003
|                                     
|/s/    BARRON
HUGHESBarron Hughes     |  | Director                                                                                                   |  | May 1, 2003
|                                     
|/s/    MITCHEL
LASKEYMitchel Laskey   |  | Director                                                                                                   |  | May 1, 2003
|                                     
|/s/    JAMES
FELCYNJames
Felcyn       |  | Director                                                                                                   |  | May 1, 2003
|                                     
|/s/    DAVID
LEACHDavid
Leach         |  | Director                                                                                                   |  | May 1, 2003
|                                     
|/s/    STEVEN
KAYESteven
Kaye         |  | Director                                                                                                   |  | May 1, 2003
|                                     
|/s/    RONALD
DIENERRonald Diener     |  | Director                                                                                                   |  | May 1, 2003
|                                     
|/s/    ROBERT
BECKRobert
Beck         |  | Director                                                                                                   |  | May 1, 2003



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CERTIFICATION

Pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



I, C. Wayne Cape, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Optio Software, Inc.;
|-- |  | ------------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 1, 2003



/s/    C. WAYNE
CAPEC. Wayne CapeChief Executive Officer




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CERTIFICATION

Pursuant to 18 U.S.C. Section 1350,

as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002



I, Caroline Bembry, certify that:



|1. |  | I have reviewed this annual report on Form 10-K of Optio Software, Inc.;
|-- |  | ------------------------------------------------------------------------



|2. |  | Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3. |  | Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4. |  | The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:
|-- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report
(the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | The registrants other certifying officers and I have disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee
of registrants board of directors (or persons performing the equivalent functions):
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process, summarize
and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



|6. |  | The registrants other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Date: May 1, 2003



/s/    CAROLINE
BEMBRYCaroline BembryVice President of Finance




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Optio
Software, Inc.

Index to Consolidated Financial Statements





|                                                                                                    |  | Page Number
|--------------------------------------------------------------------------------------------------- |  | -----------
|                                                                                                   
|Report of Independent Certified Public Accountants                                                  |  | F-2        
|                                                                                                   
|Report of Independent Auditors                                                                      |  | F-3        
|                                                                                                   
|Consolidated Balance Sheets as of January 31, 2002 and 2003                                         |  | F-4        
|                                                                                                   
|Consolidated Statements of Operations for the years ended January 31, 2001, 2002 and
2003           |  | F-5        
|                                                                                                   
|Consolidated Statements of Shareholders Equity for the years ended January 31,
2001, 2002 and 2003 |  | F-6        
|                                                                                                   
|Consolidated Statements of Cash Flows for the years ended January 31, 2001, 2002 and
2003           |  | F-7        
|                                                                                                   
|Notes to Consolidated Financial Statements                                                          |  | F-8        



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##### Table of Contents



Report of Independent
Certified Public Accountants



To the Board of Directors and Shareholders of

Optio Software, Inc.



We have audited the accompanying consolidated balance sheet of Optio Software,
Inc. and subsidiaries (the Company) as of January 31, 2003 and the related statements of operations, shareholders equity and cash flows for the year then ended. We have also audited the financial statement schedule for the year
ended January 31, 2003 listed in Item 15(a). These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.



We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement and schedule presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Optio
Software, Inc. and subsidiaries as of January 31, 2003, and the results of their operations and cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.



Also, in our opinion, the 2003 schedule presents fairly, in all material
respects, the information set forth therein.



As discussed in
Note 2, during 2003 the Company adopted the provisions of SFAS No. 142, Goodwill and Other Intangible Assets.



|                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------
|/S/    BDO SEIDMAN, LLP Atlanta, Georgia April 18, 2003, except for Notes 5, 6 and 16, as to which date is April 30, 2003



F-2



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##### Table of Contents



Report of
Independent Auditors



The
Board of Directors and Shareholders

Optio Software, Inc.



We have audited the accompanying consolidated balance sheet of
Optio Software, Inc. as of January 31, 2002, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the two years in the period ended January 31, 2002. Our audits also included the financial
statement schedule listed in the Index at Item 15(a) for the two years in the period ended January 31, 2002. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion
on these financial statements and schedule based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Optio Software, Inc. at January 31, 2002, and the consolidated results of its operations and its cash flows for each of the two years in the period ended January 31, 2002, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.



/S/    ERNST & YOUNG
LLP




Atlanta, Georgia

March 7, 2002



F-3



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##### Table of Contents



OPTIO
SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                 |  | January 31, |            
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | -----------
|                                                                                                                                 |  | 2002        |            
|ASSETS                                                                                                                           |  |             |            
|Current assets:                                                                                                                  |  |             |            
|Cash and cash equivalents                                                                                                        |  | $           | 5,378,000  
|Marketable securities                                                                                                            |  |             | 205,000    
|Accounts receivable, less allowance for doubtful accounts of $927,000 and $720,000,
respectively                                 |  |             | 6,383,000  
|Prepaid expenses and other current assets                                                                                        |  |             | 811,000    
|Receivable on insurance claim                                                                                                    |  |             |           
|Notes receivable from related party                                                                                              |  |             |           
|Current portion of notes receivable from M2                                                                                      |  |             | 360,000    
|                                                                                                                                 |  |             |            
|Total current assets                                                                                                             |  |             | 13,137,000 
|Property and equipment, net                                                                                                      |  |             | 1,570,000  
|Note receivable and advances to shareholders                                                                                     |  |             | 127,000    
|Notes receivable from M2, less current portion                                                                                   |  |             | 3,640,000  
|Other                                                                                                                            |  |             | 128,000    
|                                                                                                                                 |  |             |            
|Total assets                                                                                                                     |  | $           | 18,602,000 
|                                                                                                                                 |  |             |            
|                                                                                                                                
|LIABILITIES AND SHAREHOLDERS
EQUITY                                                                                             |  |             |            
|Current liabilities:                                                                                                             |  |             |            
|Accounts payable                                                                                                                 |  | $           | 1,329,000  
|Accrued expenses                                                                                                                 |  |             | 3,425,000  
|Accrued settlement of lawsuit                                                                                                    |  |             |           
|Current portion of notes payable                                                                                                 |  |             | 53,000     
|Current portion of capital lease obligations                                                                                     |  |             | 91,000     
|Deferred revenue                                                                                                                 |  |             | 6,115,000  
|                                                                                                                                 |  |             |            
|Total current liabilities                                                                                                        |  |             | 11,013,000 
|Capital lease obligations, less current portion                                                                                  |  |             | 224,000    
|Deferred revenue                                                                                                                 |  |             | 111,000    
|Other long-term liabilities                                                                                                      |  |             |           
|                                                                                                                                 |  |             |            
|Total liabilities                                                                                                                |  |             | 11,348,000 
|Commitments and contingencies                                                                                                    |  |             |            
|Shareholders equity:                                                                                                            |  |             |            
|Preferred stock, no par value; 20,000,000 shares authorized, none issued or
outstanding                                          |  |             |           
|Common stock, no par value: 100,000,000 shares authorized; 18,582,398 and 19,127,498
shares issued and outstanding, respectively |  |             | 50,171,000 
|Accumulated deficit                                                                                                              |  |             | (42,613,000
|Unamortized stock compensation                                                                                                   |  |             | (13,000    
|Accumulated other comprehensive loss                                                                                             |  |             | (291,000   
|                                                                                                                                 |  |             |            
|Total shareholders equity                                                                                                       |  |             | 7,254,000  
|                                                                                                                                 |  |             |            
|Total liabilities and shareholders equity                                                                                       |  | $           | 18,602,000 
|                                                                                                                                 |  |             |            



See
accompanying notes to consolidated financial statements.



F-4



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##### Table of Contents



OPTIO
SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                     |  | Year Ended January 31, |            
|------------------------------------------------------------------------------------ |  | ---------------------- | -----------
|                                                                                     |  | 2001                   |            
|Revenue:                                                                             |  |                        |            
|License fees                                                                         |  | $                      | 14,031,000 
|Services, maintenance, and other                                                     |  |                        | 16,282,000 
|                                                                                     |  |                        |            
|                                                                                     |  |                        | 30,313,000 
|Cost of revenue (exclusive of depreciation and amortization shown separately
below): |  |                        |            
|License fees                                                                         |  |                        | 607,000    
|Services, maintenance, and other                                                     |  |                        | 12,178,000 
|                                                                                     |  |                        |            
|                                                                                     |  |                        | 12,785,000 
|Operating expenses:                                                                  |  |                        |            
|Sales and marketing                                                                  |  |                        | 17,235,000 
|Research and development                                                             |  |                        | 4,392,000  
|General and administrative                                                           |  |                        | 5,803,000  
|Depreciation and amortization                                                        |  |                        | 1,113,000  
|                                                                                     |  |                        |            
|                                                                                     |  |                        | 28,543,000 
|                                                                                     |  |                        |            
|Loss from operations                                                                 |  |                        | (11,015,000
|                                                                                    
|Other income (expense):                                                              |  |                        |            
|Interest income                                                                      |  |                        | 973,000    
|Interest expense                                                                     |  |                        | (30,000    
|Write-down of ec-Hub investment                                                      |  |                        |           
|Other                                                                                |  |                        | 42,000     
|                                                                                     |  |                        |            
|                                                                                     |  |                        | 985,000    
|                                                                                     |  |                        |            
|Loss before income taxes and loss from discontinued operations                       |  |                        | (10,030,000
|Income tax expense (benefit)                                                         |  |                        | 339,000    
|                                                                                     |  |                        |            
|Loss from continuing operations                                                      |  |                        | (10,369,000
|Loss from discontinued operations                                                    |  |                        | (4,739,000 
|                                                                                     |  |                        |            
|Net loss                                                                             |  | $                      | (15,108,000
|                                                                                     |  |                        |            
|Loss per share from continuing operations  basic and diluted                        |  | $                      | (0.59      
|                                                                                     |  |                        |            
|Loss per share from discontinued operations  basic and diluted                      |  | $                      | (0.27      
|                                                                                     |  |                        |            
|Net loss per share  basic and diluted                                               |  | $                      | (0.86      
|                                                                                     |  |                        |            
|Weighted average shares outstanding  basic and diluted                              |  |                        | 17,474,852 
|                                                                                     |  |                        |            



See
accompanying notes to consolidated financial statements.



F-5



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##### Table of Contents



OPTIO
SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY



|                                                                                    |  | Common Stock |  |        | Retained Earnings (Accumulated Deficit) |   |  | Accumulated Other Comprehensive (Loss) Income |             |   | Unamortized Stock Compensation |   |          | Total Shareholders Equity | 
|----------------------------------------------------------------------------------- |  | ------------ |  | ------ | --------------------------------------- | - |  | --------------------------------------------- | ----------- | - | ------------------------------ | - | -------- | -------------------------- | 
|                                                                                    |  | Shares       |  | Amount |                                         |   |  |                                               |            
|Balance at February 1, 2000                                                         |  | 17,133,640   |  | $      | 48,362,000                              |   |  | $                                             | 921,000     |   |                                | $ | 12,000   |                            | 
|Comprehensive loss, net of tax:                                                     |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Net loss                                                                            |  |             |  |        |                                        |   |  |                                               | (15,108,000 | ) |                                |   |         |                            | 
|Foreign currency translation adjustment                                             |  |             |  |        |                                        |   |  |                                               |            |   |                                |   | (168,000 | )                          | 
|Unrealized loss on marketable securities available for sale                         |  |             |  |        |                                        |   |  |                                               |            |   |                                |   | (110,000 | )                          | 
|                                                                                    |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Comprehensive loss                                                                  |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Costs of issuance of common stock in initial public offering                        |  |             |  |        | (29,000                                 | ) |  |                                               |            |   |                                |   |         |                            | 
|Issuance of common stock from the exercise of stock options and related tax
benefit |  | 507,392      |  |        | 1,470,000                               |   |  |                                               |            |   |                                |   |         |                            | 
|Amortization of deferred compensation                                               |  |             |  |        |                                        |   |  |                                               |            |   |                                |   |         |                            | 
|Change in deferred compensation related to stock option terminations                |  |             |  |        | (246,000                                | ) |  |                                               |            |   |                                |   |         |                            | 
|                                                                                    |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Balance at January 31, 2001                                                         |  | 17,641,032   |  | $      | 49,557,000                              |   |  | $                                             | (14,187,000 | ) |                                | $ | (266,000 | )                          | 
|Comprehensive loss, net of tax:                                                     |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Net loss                                                                            |  |             |  |        |                                        |   |  |                                               | (28,426,000 | ) |                                |   |         |                            | 
|Foreign currency translation adjustment                                             |  |             |  |        |                                        |   |  |                                               |            |   |                                |   | (85,000  | )                          | 
|Realized loss on marketable securities available for sale                           |  |             |  |        |                                        |   |  |                                               |            |   |                                |   | 145,000  |                            | 
|Unrealized loss on marketable securities available for sale                         |  |             |  |        |                                        |   |  |                                               |            |   |                                |   | (85,000  | )                          | 
|                                                                                    |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Comprehensive loss                                                                  |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Reversal of costs of issuance of common stock in initial public offering            |  |             |  |        | 95,000                                  |   |  |                                               |            |   |                                |   |         |                            | 
|Issuance of common stock from the exercise of stock options                         |  | 941,366      |  |        | 559,000                                 |   |  |                                               |            |   |                                |   |         |                            | 
|Deferred compensation related to stock option modifications                         |  |             |  |        | 8,000                                   |   |  |                                               |            |   |                                |   |         |                            | 
|Amortization of deferred compensation                                               |  |             |  |        |                                        |   |  |                                               |            |   |                                |   |         |                            | 
|Change in deferred compensation related to stock option terminations                |  |             |  |        | (48,000                                 | ) |  |                                               |            |   |                                |   |         |                            | 
|                                                                                    |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Balance at January 31, 2002                                                         |  | 18,582,398   |  | $      | 50,171,000                              |   |  | $                                             | (42,613,000 | ) |                                | $ | (291,000 | )                          | 
|Comprehensive loss, net of tax:                                                     |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Net loss                                                                            |  |             |  |        |                                        |   |  |                                               | (4,842,000  | ) |                                |   |         |                            | 
|Foreign currency translation adjustment                                             |  |             |  |        |                                        |   |  |                                               |            |   |                                |   | 256,000  |                            | 
|                                                                                    |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Comprehensive loss                                                                  |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Issuance of common stock from the exercise of stock options                         |  | 545,100      |  |        | 101,000                                 |   |  |                                               |            |   |                                |   |         |                            | 
|Amortization of deferred compensation                                               |  |             |  |        |                                        |   |  |                                               |            |   |                                |   |         |                            | 
|Change in deferred compensation related to stock option terminations                |  |             |  |        | (8,000                                  | ) |  |                                               |            |   |                                |   |         |                            | 
|                                                                                    |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 
|Balance at January 31, 2003                                                         |  | 19,127,498   |  | $      | 50,264,000                              |   |  | $                                             | (47,455,000 | ) |                                | $ | (35,000  | )                          | 
|                                                                                    |  |              |  |        |                                         |   |  |                                               |             |   |                                |   |          |                            | 



See
accompanying notes to consolidated financial statements.



F-6



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##### Table of Contents



OPTIO
SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                          |  | Year Ended January 31, |            
|----------------------------------------------------------------------------------------- |  | ---------------------- | -----------
|                                                                                          |  | 2001                   |            
|Operating activities                                                                      |  |                        |            
|Net loss                                                                                  |  | $                      | (15,108,000
|Adjustments to reconcile net loss to net cash provided by (used in) operating
activities: |  |                        |            
|Depreciation                                                                              |  |                        | 1,052,000  
|Amortization of goodwill and other intangible assets                                      |  |                        | 6,266,000  
|Provision for doubtful accounts                                                           |  |                        | 624,000    
|Write-down of ec-Hub, Inc. (formerly ecIndX, Inc.) investment                             |  |                        |           
|Loss on impairment of goodwill                                                            |  |                        |           
|Gain on the sale of Muscato and Translink                                                 |  |                        |           
|(Gain) loss on sale of marketable securities                                              |  |                        | (10,000    
|Loss (gain) on sale of property and equipment                                             |  |                        | (14,000    
|Non-cash compensation and interest                                                        |  |                        | 734,000    
|Deferred income taxes                                                                     |  |                        | (101,000   
|Tax benefit of exercise of stock options                                                  |  |                        | 1,212,000  
|Change in assets and liabilities (exclusive of acquisitions):                             |  |                        |            
|Accounts receivable                                                                       |  |                        | 364,000    
|Receivable on insurance claim                                                             |  |                        |           
|Prepaid expenses and other assets                                                         |  |                        | (663,000   
|Accounts payable                                                                          |  |                        | 823,000    
|Accrued expenses and accrued settlement of lawsuit                                        |  |                        | (1,751,000 
|Income taxes payable                                                                      |  |                        | (1,541,000 
|Deferred revenue                                                                          |  |                        | (617,000   
|                                                                                          |  |                        |            
|Net cash used in operating activities                                                     |  |                        | (8,730,000 
|                                                                                         
|Investing activities                                                                      |  |                        |            
|Purchase of marketable securities                                                         |  |                        | (120,000   
|Proceeds from sale of marketable securities                                               |  |                        |           
|Purchases of property and equipment                                                       |  |                        | (1,527,000 
|Proceeds from sale of property and equipment                                              |  |                        | 14,000     
|Payments from (advances to) shareholders                                                  |  |                        | (3,000     
|Payments from M2 note receivable                                                          |  |                        |           
|Advances to unrelated party                                                               |  |                        | (400,000   
|Investment in ec-Hub, Inc. (formerly ecIndX, Inc.)                                        |  |                        | (2,209,000 
|Proceeds from the divestiture of Muscato and Translink, net of cash sold                  |  |                        |           
|Acquisition of business, net of cash acquired                                             |  |                        | (24,889,000
|                                                                                          |  |                        |            
|Net cash provided by (used in) investing activities                                       |  |                        | (29,134,000
|                                                                                         
|Financing activities                                                                      |  |                        |            
|Payments of notes payable to related parties and capital lease
obligations                |  |                        | (274,000   
|Proceeds from exercise of stock options                                                   |  |                        | 258,000    
|                                                                                          |  |                        |            
|Net cash provided by (used in) financing activities                                       |  |                        | (16,000    
|Impact of foreign currency rate fluctuations on cash                                      |  |                        | (198,000   
|                                                                                          |  |                        |            
|Net decrease in cash and cash equivalents                                                 |  |                        | (38,078,000
|Cash and cash equivalents at beginning of year                                            |  |                        | 46,826,000 
|                                                                                          |  |                        |            
|Cash and cash equivalents at end of year                                                  |  | $                      | 8,748,000  
|                                                                                          |  |                        |            
|                                                                                         
|Supplemental cash flow information:                                                       |  |                        |            
|Cash paid for interest                                                                    |  | $                      | 25,000     
|                                                                                          |  |                        |            
|Cash paid for income taxes                                                                |  | $                      | 569,000    
|                                                                                          |  |                        |            



See
accompanying notes to consolidated financial statements



F-7



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





1. Description of
Business



Optio Software, Inc. (the
Company) provides infrastructure software and services that enhance the form, content, availability and distribution 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. Summary of Significant Accounting Policies



Principles of Consolidation



The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.



Use of
Estimates



The preparation of financial
statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.



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.



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.





F-8



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





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



Services, Maintenance and Other Revenue



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



Long-Lived Assets



Prior to the adoption of Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144) in November 1, 2001, the Company assessed the value of its long-lived assets, including goodwill, under Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and
of Long-Lived Assets to be Disposed Of (SFAS 121). As required by these standards, the Company continually monitors events and changes in circumstances that would indicate the carrying amounts of property, equipment, and intangible
assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of the respective asset by determining whether the carrying value of such asset will be recovered through undiscounted
future cash flows. Should the Company determine that the carrying values of the respective assets are not recoverable, the Company would record a charge to reduce the carrying values of such assets to their fair values.



During the year ended January 31, 2002, the Company recorded
charges to reduce the carrying value of its goodwill related to two previous acquisitions. On December 4, 2001, the Company sold its Muscato Corporation and TransLink Solutions Corporation components. The estimated loss at October 31, 2001 on these
two transactions was $10.9 million and was recorded as an impairment of intangible assets in the quarter ended October 31, 2001. The impairment of intangible assets has been classified in the loss from discontinued operations (see Note 3) on the
consolidated statement of operations. The subsequent actual gain on the sale of $413,000 was recorded in the quarter ended January 31, 2002 and is classified in the loss from discontinued operations on the consolidated statement of operations.



Research and Development and Software Development Costs



Under the criteria set forth in Statement
of Financial Accounting Standards (SFAS) No. 86, Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise Marketed, development costs incurred in the research and development of new software products are
expensed as incurred until technological feasibility in the form of a working model has been established at which time such costs are capitalized and recorded at the lower of unamortized cost or net realizable value. The costs incurred subsequent to
the establishment of a working model but prior to general release of the product have not been significant. To date, the Company has not capitalized any costs related to the development of software for external use.



Advertising Costs



Advertising costs are expensed in the period incurred. Total
advertising expense amounted to approximately $3,076,000, $1,874,000 and $901,000 during the years ended January 31, 2001, 2002 and 2003, respectively.



Shipping Fees and Handling Costs



In accordance with Emerging Issues Task Force 00-10, the Company records all shipping fees and handling costs associated with transporting
the licensed software to customers as cost of sales.



F-9



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Cash and Cash
Equivalents



The Company considers all
highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents at January 31, 2003 consisted primarily of investments in money market funds. The carrying amounts of the Companys
investments in cash equivalents approximate their fair values due to the short maturities of these instruments.



Marketable Securities



The Companys investments in marketable securities are classified as available-for-sale and are carried at fair value. Unrealized holding gains and losses on these investments are reported as a
separate component of accumulated other comprehensive income, which is included in shareholders equity, and are not reported in earnings until realized or until a decline in fair value below cost is deemed to be other than temporary. At
January 31, 2002, the Company recognized a loss of $145,000 on its investment in stocks held for sale based on an other than temporary decline in the market value of investment. The aggregate costs of marketable securities held as of
January 31, 2002 was $403,000, but after the other than temporary decline write-down, the carrying value was approximately $205,000. These securities were sold for approximately their carrying value in March 2002. There were no investments held
at January 31, 2003.



Property and Equipment



Property and equipment are stated at cost.
Depreciation expense is calculated over the estimated useful lives of the related assets (generally three to seven years) using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes. Amortization
of assets recorded under capital leases is included in depreciation expense. Leasehold improvements are depreciated using the straight-line method over the shorter of the terms of the related leases or the respective useful lives of the assets.



Property and equipment at January 31, 2002 and
2003 consisted of the following:



|                              |  | January 31, |           
|----------------------------- |  | ----------- | ----------
|                              |  | 2002        |           
|Equipment                     |  | $           | 2,711,000 
|Furniture and fixtures        |  |             | 558,000   
|Purchased software            |  |             | 954,000   
|Leasehold improvements        |  |             | 314,000   
|                              |  |             |           
|                              |  |             | 4,537,000 
|Less accumulated depreciation |  |             | (2,967,000
|                              |  |             |           
|Net property and equipment    |  | $           | 1,570,000 
|                              |  |             |           



Costs of Revenue



Costs of revenue from license fees consist
of costs relating to the manufacturing, packaging and distribution of software and related documentation and third party license and referral fees. Costs of revenue from services, maintenance and other consists of personnel, outsourced consultants
and direct expenses relating to the cost of providing consulting, implementation, training, technical support and allocable overhead.



Amortization of Goodwill and Other Intangible Assets



The Company previously had goodwill, representing the excess of cost over the fair value of net tangible assets acquired. Goodwill was
amortized using the straight-line method over five years. The Company currently has no goodwill or intangible assets.



The Company adopted SFAS 142, Goodwill and Other Intangible Assets on February 1, 2002. SFAS 142 requires, among other things,
that companies no longer amortize goodwill, but instead test goodwill for impairment annually. Additionally, intangibles with indefinite useful lives should no longer be amortized, but rather be tested for impairment in accordance with guidance in
SFAS 142. As of the date of adoption, the Company no longer held any goodwill or other intangible assets, however in previous reporting periods, the Company did hold goodwill, which was



F-10



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



being amortized in accordance with then existing accounting standards. The following tables present a
reconciliation of net income and basic and diluted loss per share, adjusted to exclude goodwill amortization, net of income taxes :



|                                          |  | January 31, |            
|----------------------------------------- |  | ----------- | -----------
|                                          |  | 2001        |            
|Reported net loss                         |  | $           | (15,108,000
|Amortization of goodwill                  |  |             | 6,226,000  
|                                          |  |             |            
|Adjusted net loss                         |  | $           | (8,882,000 
|                                          |  |             |            
|Reported basic and diluted loss per share |  |             | (0.86      
|Amortization of goodwill                  |  |             | 0.35       
|                                          |  |             |            
|Adjusted basic and diluted loss per share |  |             | (0.51      
|                                          |  |             |            



The
above table does not purport to be a pro forma presentation and does not reflect any additional impairment charge that might have been incurred had the goodwill not been amortized.



Income Taxes



Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for tax purposes. Such amounts are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse.



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 loss and net 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 years ended January 31, 2001, 2002 and 2003: risk-free interest rates of 6.16%, 5.20% and 4.66%
respectively; no dividend yield; volatility of 165% for 2001, 182% for 2002 and 168% for 2003; and an expected life of the options of 7.29 for 2001 and 2002 and 7.40 years for 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 years ended January 31, 2001, 2002 and 2003 equaled $8.07, $0.76, and $0.55 per shares, respectively. The Companys pro forma information as
determined using the fair value method of accounting of SFAS 123, was as follows:



|                                                                 |  | Year Ended January 31, |            
|---------------------------------------------------------------- |  | ---------------------- | -----------
|                                                                 |  | 2001                   |            
|Net loss as reported                                             |  | $                      | (15,108,000
|Add: Compensation cost reported using the intrinsic value method |  |                        | 89,000     
|Deduct: Compensation cost using the fair value method            |  |                        | (4,216,000 
|                                                                 |  |                        |            
|Pro forma net loss                                               |  |                        | (19,235,000
|                                                                 |  |                        |            
|Net loss per share as reported  basic and diluted               |  |                        | (0.86      
|Pro forma net loss per share  basic and diluted                 |  |                        | (1.10      



The
Company recorded deferred compensation of $373,000 during the year ended January 31, 2000 in connection with grants of employee share purchase options with exercise prices lower than the deemed fair market value



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



per share of the Companys common stock on the date of grant. Such amounts were amortized over
the period in which the options vest, generally three to four years, and accordingly, $89,000, $29,000 and $4,000 in compensation expense was recognized in the year ended January 31, 2001, 2002 and 2003, respectively.



The Company recorded deferred compensation of $8,000 during
the year ended January 31, 2002 in connection with the modification of the terms of options granted to a particular employee. Such amount was amortized over the period in which the options are exercisable and accordingly, $8,000 in compensation
expense was recognized in the year ended January 31, 2003.



Non-cash Transactions



Non-cash activities during the year ended January 31, 2003 included the reduction of the Notes Receivable from M2 Corporation by offsetting amounts due from the Company to M2 Corporation due to negotiated purchase price adjustments
in the amount of $179,000. Non-cash transactions during the year ended January 31, 2002 included the acquisition of equipment through a capital lease in the amount of $404,000 for telephone and video conferencing equipment and furniture and fixtures
for the Companys headquarters. Non-cash financing activities during the year ended January 31, 2001 included the acquisition of equipment through a capital lease in the amount of $167,000 for equipment used in the development of the
Companys software.



Comprehensive Loss



Comprehensive loss represents net loss plus the results of
certain shareholders equity changes not reflected in the consolidated statements of operations. The items in comprehensive loss relate principally to foreign currency translation and unrealized gains and losses on marketable securities.



Translation of Foreign Currencies



The financial position and results of operations of the
Companys foreign subsidiaries are measured generally using local currencies as the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rate in effect at each year-end. Income and
expense items are translated at average exchange rates for the year. The resulting translation adjustments are recorded in the foreign currency translation adjustment account.



New Accounting Pronouncements



The Financial Accounting Standards Board 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 July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or
disposal activities that are initiated after December 31, 2002. The application of the requirements of SFAS 146 did not have any impact on the Companys financial position or result 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 methods for entities that adopt the preferable method of accounting for stock
based compensation. Further, the statement requires disclosure of



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 does not intend to adopt the fair value methodology of SFAS 148.



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 prior to January 31, 2003, the provisions of FIN 46 are applicable no later than July 1, 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.



Fiscal Year



The Company maintains a fiscal year ending January
31st. References to 2003, 2002 and 2001 represent the years ending January 31, 2003, 2002 and 2001,
respectively.



3. Discontinued Operations



On March 27, 2000, the Company acquired all the outstanding
shares of Muscato Corporation (Muscato) and substantially all of the assets of TransLink Solutions Corporation (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.



Pursuant to the provisions of SFAS 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.



In the year ended January 31, 2002, the Company recognized a gain on the sale of Muscato and TransLink in the amount of $413,000, after
recording an impairment charge on intangible assets of $10.9 million. This gain and the impairment charge have been included in the loss from discontinued operations in the consolidated statements of operations.



Revenue included in discontinued operations for the
years ended January 31, 2001 and 2002 was $6,517,000 and $4,637,000, respectively. There was no revenue included in discontinued operations for the year ended January 31, 2003. Net loss included in discontinued operations for the years ended January
31, 2001, 2002 and 2003 was $4,739,000, $16,679,000 and $132,000, respectively.



4. Financial Instruments



Concentration of Credit Risk



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, trade accounts receivable and notes receivable.



The Company maintains cash and cash equivalents at various
financial institutions. Company policy is designed to limit exposure at any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Companys
investment strategy. Cash equivalents at January 31, 2003 of $3,902,000 represented investments in money market funds.



Concentrations of credit risk with respect to trade accounts receivable are generally limited due to the large number of entities
comprising the Companys customer base; however, the Company generates up to 20% of its revenues from healthcare organizations, with the remainder generated by a wide array of industries. The Company performs periodic credit evaluations of its
customers financial condition and generally does not require collateral. Receivables generally are due within 30 days, and management records estimates of expected credit losses. Bad debt expense for the years ended January 31, 2001, 2002, and
2003 amounted to $1,513,000, $2,186,000 and $266,000, respectively. Materially different amounts of bad debt expense and allowance for doubtful accounts could be reported under different conditions or using different assumptions.



The Company holds notes receivable from M2 Systems as
consideration for the sale of Muscato and TransLink. The Company has assessed the collectibility of the note receivable and believes the note to be fully collectible. The credit risk with respect to the notes receivable is partially limited as the
note is secured by all outstanding shares of M2 Systems common stock and its assets. The balance of the note receivable recorded could be materially different under different conditions or using different assumptions. If M2 Systems defaults on
the notes and the collateral for the amount due proves to be of no value to the Company, the Company would incur a loss of $3.8 million.



Fair Values



The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable, notes receivable,
accounts payable and long-term debt approximate their fair values. The fair values of marketable equity securities are based on quoted market prices.



5. Notes Receivable



As further explained in Note 3, the Company held notes receivable from M2 systems as consideration for the sale of Muscato and Translink.
At January 31, 2003, the principal balance due the Company on the notes is $3,672,000. Accrued interest receivable of $169,000 is included in other current assets.



As described in Note 16, on April 30, 2003, the Company executed a Settlement and Release Agreement with M2
Systems covering the remainder of the indemnification claims made by M2 Systems. In exchange for M2 Systems agreement to release the Company from such claims, the Company amended the promissory notes related to the TransLink and Muscato
divestiture, calling for a modified payment schedule of a combined note. The modified payment schedule of the combined 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. The Company has reflected the modified payment plan in the Consolidated Balance Sheet ended January 31, 2003. Interest will be calculated each quarter on the then outstanding balance and the
installment payments will be allocated to interest first, with the remaining allocated to principal. The amount presented as the current portion of the notes receivable from M2 represents an estimate of installment payments expected to be allocated
to principal during the year ending January 31, 2004, at the current prime rate.



6. Capital Leases and Lines of Credit



The Company leases telecommunications, computer equipment and vehicles under capital leases. Assets under capital leases included in property and equipment are as follows:





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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                              |  | January 31, |        
|----------------------------- |  | ----------- | -------
|                              |  | 2002        |        
|Equipment                     |  | $           | 404,000
|Less accumulated amortization |  |             | (79,000
|                              |  |             |        
|                              |  | $           | 325,000
|                              |  |             |        



Future minimum lease
payments under capital leases consist of the following at January 31, 2003:



|2004                                        |  | $ | 91,000  |  
|------------------------------------------- |  | - | ------- | -
|2005                                        |  |   | 89,000  |  
|2006                                        |  |   | 89,000  |  
|                                            |  |   |         |  
|Total minimum lease payments                |  |   | 269,000 |  
|Less amounts representing interest          |  |   | (37,000 | )
|                                            |  |   |         |  
|Present value of net minimum lease payments |  |   | 232,000 |  
|Less current portion                        |  |   | (65,000 | )
|                                            |  |   |         |  
|                                            |  | $ | 167,000 |  
|                                            |  |   |         |  



On April 14, 2000, the Company entered into a line of credit with a bank under which it could borrow up to $10,000,000, limited by the amount of liquid capital, including cash and securities maintained by the Company, through
April 14, 2001. The line of credit bore interest at LIBOR plus 1.75% (5.856% at January 31, 2001). This line was collateralized by the Companys accounts receivable. The agreement contained customary events of default and covenants including
certain financial ratios and restrictions on dividends. There were no borrowings outstanding under the line at January 31, 2001. This line of credit was terminated on March 29, 2001.



On March 29, 2001, the Company entered into a line of credit agreement with a bank for a $5.0 million line of
credit. The line of credit bore interest at prime rate plus 0.50% and was collateralized by accounts receivable, equipment, general intangibles and other assets as defined in the agreement. The Company could borrow up to the lesser of $5,000,000 or
70% of the Companys eligible receivables, as defined in the agreement. The agreement contained various covenants, including tangible net worth and earnings before interest, taxes, depreciation and amortization requirements and restrictions on
dividends. As of January 31, 2002, the Company was not in compliance with the required financial ratios and was in default on the line of credit. There were no borrowings outstanding under the line of credit at January 31, 2002. The line of credit
was terminated on March 29, 2002.



On April 25,
2002, Optio entered into a new line of credit agreement with a bank for a line of credit of up to $5,000,000 million. The line of credit bore interest at prime rate (4.25% at January 31, 2003), subject to increase based on Optios performance
relative to certain financial ratios. Optio could borrow up to $5,000,000 million, or such lesser amount as may be determined based on such ratios. Accounts receivable, equipment, general intangibles and other assets as defined in the agreement
collateralize the line of credit. The agreement contained various covenants, including liquidity and tangible net worth requirements and restrictions on dividends. As of January 31, 2003, the Company was in compliance with all debt covenants. The
line of credit expired on April 25, 2003. As of January 31, 2003, there were no borrowings under the line of credit.



On April 30, 2003, Optio extended the line of credit with this 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. Optio has estimated
that approximately $2.0 million is available for borrowings based upon Optios historical accounts receivable balance.



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





7. Operating Leases



The Company leases office space and
equipment under operating leases. Rent expense under the Companys operating leases was approximately $1,858,000, $1,830,000 and $1,821,000 during the years ended January 31, 2001, 2002, and 2003, respectively.



Future minimum lease payments under noncancellable operating
leases, with initial terms of at least one year at the time of inception, are as follows at January 31, 2003:



|2004 |  | $ | 1,392,000
|---- |  | - | ---------
|2005 |  |   | 1,339,000
|2006 |  |   | 1,241,000
|2007 |  |   | 1,137,000
|     |  |   |          
|     |  | $ | 5,109,000
|     |  |   |          



8. Income Taxes



The provisions for income taxes are
summarized below:



|          |  | Year Ended January 31, |         
|--------- |  | ---------------------- | --------
|          |  | 2001                   |         
|Current:  |  |                        |         
|Federal   |  | $                      | (150,000
|State     |  |                        | (17,000 
|Foreign   |  |                        | 203,000 
|          |  |                        |         
|          |  |                        | 36,000  
|Deferred: |  |                        |         
|Federal   |  |                        | 271,000 
|State     |  |                        | 32,000  
|          |  |                        |         
|          |  |                        | 303,000 
|          |  |                        |         
|Total     |  | $                      | 339,000 
|          |  |                        |         



Pre-tax
loss attributable to foreign and domestic operations is summarized below:



|                      |  | Year Ended January 31, |            
|--------------------- |  | ---------------------- | -----------
|                      |  | 2001                   |            
|U.S. operations       |  | $                      | (13,982,000
|French operations     |  |                        | (448,000   
|German operations     |  |                        |           
|U.K. operations       |  |                        | 638,000    
|Australian operations |  |                        | (977,000   
|                      |  |                        |            
|                      |  | $                      | (14,769,000
|                      |  |                        |            



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





A
reconciliation of the provision for income taxes to the statutory federal income tax rate is as follows:



|                                                                   |  | Year Ended January 31, |           
|------------------------------------------------------------------ |  | ---------------------- | ----------
|                                                                   |  | 2001                   |           
|Statutory rate of 34% applied to pre-tax income (loss)             |  | $                      | (5,021,000
|State income taxes, net of Federal tax effect                      |  |                        | (487,000  
|Foreign taxes                                                      |  |                        | 18,000    
|Research and development tax credits                               |  |                        |          
|Meals and entertainment expense                                    |  |                        | 69,000    
|Change in valuation allowance                                      |  |                        | 4,060,000 
|Change in enacted tax laws                                         |  |                        |          
|Bases differences in assets of discontinued operations             |  |                        |          
|Tax benefit from employee options recorded in shareholders equity |  |                        | 1,212,000 
|Goodwill amortization                                              |  |                        | 725,000   
|Other, net                                                         |  |                        | (237,000  
|                                                                   |  |                        |           
|                                                                   |  | $                      | 339,000   
|                                                                   |  |                        |           



Deferred
income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Companys deferred
tax assets and liabilities are as follows:



|                                      |  | January 31, |            
|------------------------------------- |  | ----------- | -----------
|                                      |  | 2002        |            
|Deferred income tax assets:           |  |             |            
|Goodwill amortization                 |  | $           |           
|Net operating loss carryforwards      |  |             | 7,010,000  
|Capital loss carryforwards            |  |             | 5,767,000  
|Payroll related accruals              |  |             | 179,000    
|Allowance for doubtful accounts       |  |             | 620,000    
|Research and development credits      |  |             |           
|Reserve for ec-Hub                    |  |             | 839,000    
|Other, net                            |  |             |           
|Valuation allowance                   |  |             | (14,204,000
|                                      |  |             |            
|Total deferred income tax assets      |  |             | 211,000    
|Deferred income tax liabilities:      |  |             |            
|Other, net                            |  |             | 211,000    
|                                      |  |             |            
|Total deferred income tax liabilities |  |             | 211,000    
|                                      |  |             |            
|Net deferred tax asset                |  | $           |           
|                                      |  |             |            



For
financial reporting purposes, at January 31, 2002 and 2003, a valuation allowance has been recognized to reduce the net deferred income tax assets to zero. The Company has not recognized any benefit from the future use of the deferred tax assets
because managements evaluation of all the available evidence in assessing the realizability of the tax benefits of such loss carryforwards indicates that the underlying assumptions of the future profitable operations contain risks that do not
provide sufficient assurance to recognize such tax benefits currently.





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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
Company has approximately $22.5 million of net operating loss carryforwards, approximately $15.2 million of capital loss carryforwards and $1.1 million of research and development credit carryforwards for federal income tax purposes that expire in
2022, 2009 and 2023, respectively. In addition, at January 31, 2003, the Company had net operating loss carryforwards of approximately $1.5 million and $1.2 million resulting from its operations in Australia and France, respectively. For financial
reporting purposes, a valuation allowance has been established to offset the deferred tax assets related to these carryforwards. The net operating loss carryforwards may be subject to certain limitations in the event of a chance of ownership of the
Company.



9. Stock Options



Effective January 1, 1997, the Company adopted a stock
incentive plan (the Plan) for employees and key persons that provides for the issuance of stock incentives covering up to 12,500,000 shares of common stock. The Plan provides for the grant of incentive stock options, non-qualified stock
options, restricted stock awards and stock appreciation rights. The terms and conditions of stock incentives granted under the Plan, including the number of shares, the exercise price and the time at which such options become exercisable are
determined by the Board of Directors. The term of options granted under the Plan may not exceed 10 years and generally vest over periods ranging from three to five years. Prior to the adoption of the Plan, options which had no termination period
were granted to certain officers and selected employees.



On October 15, 1999, the Company adopted a Directors Stock Option Plan for directors of the Company who are not officers or employees of the Company. The Directors Plan provides for issuance of options to purchase the
Companys common stock at an exercise price equal to fair market value on the date of grant and expiring 10 years after issuance. The options will become fully vested as of the date of issuance.



A summary of stock option activity is as follows:



|                                        |  | Number of Shares |   |  | Exercise Price Per Share |  | Weighted Average Exercise Price
|--------------------------------------- |  | ---------------- | - |  | ------------------------ |  | -------------------------------
|Outstanding options at January 31, 2000 |  | 9,588,420        |   |  | $0.01    $10.00         |  | $0.72                          
|Options granted                         |  | 1,830,494        |   |  | $0.875  $17.563         |  | $8.07                          
|Options exercised                       |  | (507,392         | ) |  | $0.10    $  1.70        |  | $0.51                          
|Options canceled/forfeited              |  | (868,579         | ) |  | $0.80    $17.563        |  | $6.44                          
|                                        |  |                  |   |  |                          |  |                                
|Outstanding options at January 31, 2001 |  | 10,042,943       |   |  | $0.01    $17.563        |  | $1.57                          
|Options granted                         |  | 2,150,027        |   |  | $0.40    $  1.875       |  | $0.77                          
|Options exercised                       |  | (941,336         | ) |  | $0.03    $  0.80        |  | $0.59                          
|Options canceled/forfeited              |  | (2,388,581       | ) |  | $0.53    $17.563        |  | $2.82                          
|                                        |  |                  |   |  |                          |  |                                
|Outstanding options at January 31, 2002 |  | 8,863,053        |   |  | $0.01    $17.00         |  | $1.15                          
|Options granted                         |  | 847,901          |   |  | $0.24    $  0.82        |  | $0.56                          
|Options exercised                       |  | (545,100         | ) |  | $0.03    $  0.20        |  | $0.19                          
|Options canceled/forfeited              |  | (1,962,354       | ) |  | $0.25    $17.00         |  | $1.72                          
|                                        |  |                  |   |  |                          |  |                                
|Outstanding options at January 31, 2003 |  | 7,203,500        |   |  | $0.01    $16.00         |  | $0.98                          
|                                        |  |                  |   |  |                          |  |                                
|Exercisable options at January 31, 2001 |  | 6,312,400        |   |  | $0.01    $10.00         |  | $0.56                          
|                                        |  |                  |   |  |                          |  |                                
|Exercisable options at January 31, 2002 |  | 6,178,462        |   |  | $0.01    $17.00         |  | $0.84                          
|                                        |  |                  |   |  |                          |  |                                
|Exercisable options at January 31, 2003 |  | 6,114,231        |   |  | $0.01    $16.00         |  | $0.87                          
|                                        |  |                  |   |  |                          |  |                                



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
following table summarizes information concerning options outstanding and exercisable as of January 31, 2003:



|                 |  | Options Outstanding |  | Options Exercisable                        
|---------------- |  | ------------------- |  | -------------------------------------------
|Exercise Prices  |  | Number Outstanding  |  | Weighted Average Remaining Contractual Life
|$0.002  $ 0.10  |  | 1,504,900           |  | N/A                                        
|$0.24    $ 1.00 |  | 5,019,280           |  | 6.53                                       
|$1.031  $ 2.00  |  | 452,709             |  | 7.26                                       
|$3.031  $10.00  |  | 133,555             |  | 7.15                                       
|$12.50  $17.00  |  | 93,056              |  | 7.00                                       
|                 |  |                     |  |                                            
|                 |  | 7,203,500           |  | 6.61                                       
|                 |  |                     |  |                                            



The
Company has reserved 12,147,908 shares of common stock for issuance upon exercise of stock options under the Stock Incentive Plan, 1,774,900 shares of common stock for issuance upon exercise of stock options outside of the Stock Incentive Plan and
300,000 shares of common stock for issuance upon exercise of stock options under the Directors Stock Option Plan.



During the year ended January 31, 2001, the holders of certain non-qualified options covering 350,000 shares of the Companys common
stock exercised such options. As a result, the Company recorded a tax benefit of $1.2 million in common stock.



10. Investment in ec-Hub, Inc.



During the year ended January 31, 2001, the Company invested $2.0 million in ec-Hub, Inc. (formerly ecIndX, Inc.), a supply chain collaboration vendor, in exchange for a minority interest in the
company. An additional $209,000 of costs incurred related to making the investment were added to the basis of the investment. In conjunction with the investment, ec-Hub entered into the Companys standard software license agreement to purchase
$1.0 million in software and related services.



The Company continually assessed the value of its investment in ec-Hub. In April 2001, the Company wrote down its investment in ec-Hub by $200,000 to reflect the value of the Companys investment based upon the price per share
paid by a recent investor. In January of 2002, the Company wrote down the investment an additional $2,009,000, resulting in a carrying value of the investment equaling $0. The Company based this mark down on several factors including business
changes that took place at ec-Hub during the fourth quarter of 2002, the Companys assessment of ec-Hubs viability for the future, ec-Hubs financial performance, the value of the Companys new percentage of ownership following
the merger of ecIndX into ec-Hub, and valuations of other companies similar to ec-Hub.



11. Employee Benefit Plan



The Company has a combined profit sharing and 401(k) plan (the Plan) that covers substantially all employees meeting specified age and length-of-service requirements. The Company may make a discretionary matching
contribution each year. The Company recognized expense related to the Plan of approximately $291,000, $465,000 and $308,000 during the years ended January 31, 2001, 2002 and 2003, respectively.



12. Related Party Transactions



The Company has notes receivable and advances to shareholders
for general personal purposes of $127,000 and $90,000 at January 31, 2002 and 2003, respectively. Included in the balance as of January 31, 2002 were notes for $35,000, which bore interest at rates ranging from 9.5% to 10% with the principal and
interest thereon due upon demand. The remaining advances did not accrue interest and were due upon demand. The advances and notes receivable were classified as long-term as of January 31, 2002, as the shareholders were not required to repay the
balances within the next fiscal year. During the year ended January 31, 2003, these notes were consolidated into one note receivable in the amount of $87,300 which bore interest at a rate of 9% per annum. Under this note, payments of $1,000 per
month were due from February 28, 2002 through December 31, 2002



F-19



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



and subsequent monthly payments of $12,300 through July 15, 2003. The advances and notes receivable
were classified as long-term as of January 31, 2002, as the shareholders were not required to repay the balances within the next fiscal year. As of January 31, 2003, the note was classified as current as the note requires payment through June 30,
2003.



During the year ended January 31, 1999,
the Company advanced $525,000 for general personal purposes to David Dunn-Rankin, who was a director of the Company and who held options to purchase 500,000 shares of the Companys common stock. An additional $75,000 was advanced to Mr.
Dunn-Rankin during the year ended January 31, 2000. At January 31, 2001 and 2002, $600,000 was owed to the Company from Mr. Dunn-Rankin as a result of these advances. Such advances were secured by the options held by Mr. Dunn-Rankin. The note bore
interest at 9% per annum. The advances were due and expected to be repaid October 31, 2001. Mr. Dunn-Rankin defaulted on the loan due to non-payment, and the Company believed that repayment of the loan was unlikely. The full amount of the loan was
been reserved as uncollectible as of January 31, 2002.



Effective March 31, 2002, the Company entered into a Release and Settlement Agreement with David Dunn-Rankin, whereby, in consideration for (i) Mr. Dunn-Rankins relinquishing his rights to an option to purchase 500,000
shares of the Companys common stock and (ii) his resignation as a member of the Companys Board of Directors, the Company released Mr. Dunn-Rankin from his obligation to repay loans made to him by the Company in the aggregate principal
and interest amount of $740,000.



Effective
February 11, 2003, the Company entered into a Separation Agreement with Warren Neuburger, the Companys former President and Chief Executive Officer. The Separation Agreement called for separation payments of $33,300 to be paid within eight
days of the execution of the agreement and for an additional $270,000 to be paid in 24 equal installments over the following year. The total separation payments of $303,300 were recorded as severance expense in the year ended January 31, 2003 due to
the fact that employment terminated as of that date.



13. Loss
Per Share



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.



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



|                                                                                              |  | Year ended January 31, |            
|--------------------------------------------------------------------------------------------- |  | ---------------------- | -----------
|                                                                                              |  | 2001                   |            
|Loss                                                                                          |  | $                      | (15,108,000
|                                                                                              |  |                        |            
|Weighted average shares outstanding  basic                                                   |  |                        | 17,474,852 
|Effect of dilutive stock options                                                              |  |                        |           
|                                                                                              |  |                        |            
|Weighted average shares outstanding  diluted                                                 |  |                        | 17,474,852 
|                                                                                              |  |                        |            
|Loss per share  basic and diluted                                                            |  | $                      | (0.86      
|                                                                                              |  |                        |            
|Potentially dilutive stock options, excluded from diluted weighted average shares
outstanding |  |                        | 8,183,564  
|                                                                                              |  |                        |            



14. 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 assets of discontinued operations related to Muscato and TransLink as of January 31, 2001 are included in the United States segment.



F-20



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





The
Company previously reported four geographic segments, with the current Europe segment representing two segments, France and the United Kingdom and the current Other segment representing Australia. Effective September 2002, the
Companys Australian office was closed. Segment information for the years ended January 31, 2001 and 2002 has been restated to combine the previous France and United Kingdom segments into the Europe segment and to classify the Australian
segment as Other. Revenues are attributable to each segment based on the location of its subsidiary.



Segment information for the years ended January 31, 2001, 2002 and 2003 is summarized below.



|Year ended January 31, 2001                                                     |  | United States |             |   | Europe |   | Other     |  |   | Combined |   |  | Eliminations |             |   | Consolidated |  
|------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ------ | - | --------- |  | - | -------- | - |  | ------------ | ----------- | - | ------------ | -
|Revenue from external customers:                                                |  |               |             |   |        |   |           |  |   |          |   |  |              |             |   |              |  
|License fees                                                                    |  | $             | 12,022,000  |   |        | $ | 1,803,000 |  | $ | 206,000  |   |  | $            | 14,031,000  |   |              | $
|Services, maintenance and other                                                 |  |               | 14,409,000  |   |        |   | 1,791,000 |  |   | 82,000   |   |  |              | 16,282,000  |   |              |  
|Intersegment revenue                                                            |  |               | 429,000     |   |        |   | 190,000   |  |   |         |   |  |              | 619,000     |   |              |  
|                                                                                |  |               |             |   |        |   |           |  |   |          |   |  |              |             |   |              |  
|Total revenue                                                                   |  |               | 26,860,000  |   |        |   | 3,784,000 |  |   | 288,000  |   |  |              | 30,932,000  |   |              |  
|Interest income                                                                 |  |               | 972,000     |   |        |   |          |  |   | 1,000    |   |  |              | 973,000     |   |              |  
|Interest expense                                                                |  |               | 28,000      |   |        |   | 2,000     |  |   |         |   |  |              | 30,000      |   |              |  
|Depreciation and amortization                                                   |  |               | 1,069,000   |   |        |   | 38,000    |  |   | 6,000    |   |  |              | 1,113,000   |   |              |  
|Income tax expense                                                              |  |               | 229,000     |   |        |   | 110,000   |  |   |         |   |  |              | 339,000     |   |              |  
|Segment income (loss) before income taxes and loss from discontinued
operations |  |               | (9,243,000  | ) |        |   | 190,000   |  |   | (977,000 | ) |  |              | (10,030,000 | ) |              |  
|Segment net income (loss) including loss from discontinued operations           |  |               | (14,211,000 | ) |        |   | 80,000    |  |   | (977,000 | ) |  |              | (15,108,000 | ) |              |  
|Total segment assets including assets of discontinued operations                |  |               | 55,366,000  |   |        |   | 3,271,000 |  |   | 277,000  |   |  |              | 58,914,000  |   |              |  
|Expenditures for long-lived assets                                              |  |               | 26,297,000  |   |        |   | 69,000    |  |   | 50,000   |   |  |              | 26,416,000  |   |              |  



|Year ended January 31, 2002                                            |  | United States |             |   | Europe |   |           | Other |  |   | Combined |   |  | Eliminations |             |   | Consolidated |  
|---------------------------------------------------------------------- |  | ------------- | ----------- | - | ------ | - | --------- | ----- |  | - | -------- | - |  | ------------ | ----------- | - | ------------ | -
|Revenue from external customers:                                       |  |               |             |   |        |   |           |       |  |   |          |   |  |              |             |   |              |  
|License fees                                                           |  | $             | 10,655,000  |   |        | $ | 1,816,000 |       |  | $ | 121,000  |   |  | $            | 12,592,000  |   |              | $
|Services, maintenance and other                                        |  |               | 16,138,000  |   |        |   | 1,976,000 |       |  |   | 114,000  |   |  |              | 18,228,000  |   |              |  
|Intersegment revenue                                                   |  |               | 454,000     |   |        |   | 187,000   |       |  |   |         |   |  |              | 641,000     |   |              |  
|                                                                       |  |               |             |   |        |   |           |       |  |   |          |   |  |              |             |   |              |  
|Total revenue                                                          |  |               | 27,247,000  |   |        |   | 3,979,000 |       |  |   | 235,000  |   |  |              | 31,461,000  |   |              |  
|Interest income                                                        |  |               | 231,000     |   |        |   | 42,000    |       |  |   |         |   |  |              | 273,000     |   |              |  
|Interest expense                                                       |  |               | 91,000      |   |        |   | 12,000    |       |  |   |         |   |  |              | 103,000     |   |              |  
|Depreciation and amortization                                          |  |               | 1,325,000   |   |        |   | 81,000    |       |  |   | 11,000   |   |  |              | 1,417,000   |   |              |  
|Income tax expense                                                     |  |               |            |   |        |   | 15,000    |       |  |   |         |   |  |              | 15,000      |   |              |  
|Segment loss before income taxes and loss from discontinued operations |  |               | (11,029,000 | ) |        |   | (275,000  | )     |  |   | (428,000 | ) |  |              | (11,732,000 | ) |              |  
|Segment net loss including loss from discontinued operations           |  |               | (27,708,000 | ) |        |   | (290,000  | )     |  |   | (428,000 | ) |  |              | (28,426,000 | ) |              |  
|Total segment assets                                                   |  |               | 19,084,000  |   |        |   | 3,380,000 |       |  |   | 288,000  |   |  |              | 22,752,000  |   |              |  
|Expenditures for long-lived assets                                     |  |               | 287,000     |   |        |   | 79,000    |       |  |   | 7,000    |   |  |              | 373,000     |   |              |  





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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)





|Year ended January 31, 2003                                            |  | United States |            |   | Europe |   |            | Other |  |   | Combined |   |  | Eliminations |            |   | Consolidated |  
|---------------------------------------------------------------------- |  | ------------- | ---------- | - | ------ | - | ---------- | ----- |  | - | -------- | - |  | ------------ | ---------- | - | ------------ | -
|Revenue from external customers:                                       |  |               |            |   |        |   |            |       |  |   |          |   |  |              |            |   |              |  
|License fees                                                           |  | $             | 8,580,000  |   |        | $ | 1,809,000  |       |  | $ | 56,000   |   |  | $            | 10,445,000 |   |              | $
|Services, maintenance and other                                        |  |               | 15,217,000 |   |        |   | 2,098,000  |       |  |   | 64,000   |   |  |              | 17,379,000 |   |              |  
|Intersegment revenue                                                   |  |               | 470,000    |   |        |   | 180,000    |       |  |   |         |   |  |              | 650,000    |   |              |  
|                                                                       |  |               |            |   |        |   |            |       |  |   |          |   |  |              |            |   |              |  
|Total revenue                                                          |  |               | 24,267,000 |   |        |   | 4,087,000  |       |  |   | 120,000  |   |  |              | 28,474,000 |   |              |  
|Interest income                                                        |  |               | 230,000    |   |        |   | 2,000      |       |  |   | 1,000    |   |  |              | 233,000    |   |              |  
|Interest expense                                                       |  |               | 47,000     |   |        |   |           |       |  |   | 4,000    |   |  |              | 51,000     |   |              |  
|Depreciation and amortization                                          |  |               | 835,000    |   |        |   | 81,000     |       |  |   | 4,000    |   |  |              | 920,000    |   |              |  
|Income tax benefit                                                     |  |               | (472,000   | ) |        |   | (106,000   | )     |  |   |         |   |  |              | (578,000   | ) |              |  
|Segment loss before income taxes and loss from discontinued operations |  |               | (3,775,000 | ) |        |   | (1,256,000 | )     |  |   | (257,000 | ) |  |              | (5,288,000 | ) |              |  
|Segment net loss including loss from discontinued operations           |  |               | (3,435,000 | ) |        |   | (1,150,000 | )     |  |   | (257,000 | ) |  |              | (4,842,000 | ) |              |  
|Total segment assets                                                   |  |               | 14,985,000 |   |        |   | 2,689,000  |       |  |   | 133,000  |   |  |              | 17,807,000 |   |              |  
|Expenditures for long-lived assets                                     |  |               | 219,000    |   |        |   | 48,000     |       |  |   | 1,000    |   |  |              | 268,000    |   |              |  



15. Quarterly
Financial Results (Unaudited)



Summarized
unaudited quarterly results for the years ended January 31, 2002 and 2003 are as follows:



|For the year ended January 31, 2002                                 |  | First Quarter |        |   | Second Quarter |   |        | Third Quarter |  |   | Fourth Quarter |  
|------------------------------------------------------------------- |  | ------------- | ------ | - | -------------- | - | ------ | ------------- |  | - | -------------- | -
|Revenue                                                             |  | $             | 7,036  |   |                | $ | 8,030  |               |  | $ | 8,250          |  
|Cost of revenue, exclusive of depreciation and amortization         |  |               | 3,503  |   |                |   | 2,642  |               |  |   | 2,160          |  
|Loss from continuing operations before interest and taxes           |  |               | (4,601 | ) |                |   | (2,189 | )             |  |   | (835           | )
|Loss from discontinued operations                                   |  |               | (1,856 | ) |                |   | (1,849 | )             |  |   | (12,546        | )
|Net loss                                                            |  |               | (6,577 | ) |                |   | (4,021 | )             |  |   | (13,357        | )
|Net loss per share from continuing operations  basic and diluted   |  | $             | (0.26  | ) |                | $ | (0.12  | )             |  | $ | (0.04          | )
|Net loss per share from discontinued operations  basic and diluted |  | $             | (0.10  | ) |                | $ | (0.10  | )             |  | $ | (0.68          | )
|Net loss per share basic and diluted                                |  | $             | (0.36  | ) |                | $ | (0.22  | )             |  | $ | (0.72          | )
|                                                                   
|For the year ended January 31, 2003                                 |  | First Quarter |        |   | Second Quarter |   |        | Third Quarter |  |   | Fourth Quarter |  
|Revenue                                                             |  | $             | 6,795  |   |                | $ | 7,386  |               |  | $ | 7,094          |  
|Cost of revenue, exclusive of depreciation and amortization         |  |               | 2,454  |   |                |   | 2,319  |               |  |   | 1,850          |  
|Loss from continuing operations before interest and taxes           |  |               | (2,363 | ) |                |   | (1,754 | )             |  |   | (461           | )
|Loss from discontinued operations                                   |  |               | (34    | ) |                |   | (9     | )             |  |   |               |  
|Net loss                                                            |  |               | (2,302 | ) |                |   | (1,236 | )             |  |   | (426           | )
|Net loss per share from continuing operations  basic and diluted   |  | $             | (0.12  | ) |                | $ | (0.07  | )             |  | $ | (0.02          | )
|Net loss per share from discontinued operations  basic and diluted |  | $             | (0.00  | ) |                | $ | (0.00  | )             |  | $ | (0.00          | )
|Net loss per share basic and diluted                                |  | $             | (0.12  | ) |                | $ | (0.07  | )             |  | $ | (0.02          | )



16. Contingencies



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 of a promissory note. The parties have agreed in principle to a settlement, which will result in the dismissal of the lawsuit. This
settlement is contingent upon the release by PTIs trustee in bankruptcy of all claims against the plaintiffs and the Company and the approval of that release by the bankruptcy court. Under the terms of the proposed settlement, Optio will pay a
total of $875,000 within ten days of the bankruptcy courts final non-appealable order approving the release of the trustees claims and will receive immediate reimbursement from its insurer of $750,000. Both parties must release all
claims each may have in the PTI bankruptcy in exchange for a reciprocal release from the bankruptcy trustee. The company has recorded a liability for the settlement and a receivable for the amount to be contributed by the insurance carrier in the
financial statements dated January 31, 2003.



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##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



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 the Companys initial public offering as well as Optio and certain officers and directors of Optio
Software, Inc., by a single plaintiff purportedly on behalf of persons purchasing the Company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. Management believes the lawsuit is without merit. Thus, the Company intends to defend vigorously against the plaintiffs claims. The
complaint seeks unspecified amounts as compensatory damages as a result of the Company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.



M2 Systems Corporation, purchaser of the Companys Muscato and TransLink business units, is claiming certain purchase price
adjustments and breaches of representations and warranties by the Company relating to the accounts receivable, fixed assets and business transferred. M2 Systems demanded approximately $3.3 million as a purchase price adjustment and indemnification
for the Companys alleged breaches of representations and warranties. Effective September 13, 2002, M2 Systems and Optio Software, Inc. entered into a settlement and release agreement covering the purchase price adjustment claims made by M2
Systems. In exchange for M2 Systems agreement to release the Company from such claims, the Company has agreed to a purchase price adjustment in the amount of $193,945. In December 2002, M2 Systems and the Company entered into a settlement,
release and satisfaction agreement covering certain of the indemnification claims made by M2 Systems. In exchange for the release, the Company accepted an amount, net of claims of $89,000, of $1,000 on the December 4, 2002 payment due under the
TransLink note. In total, approximately $179,000 of the purchase price adjustments were applied against the M2 note, with the remainder paid in cash. The settlement and release agreement does not resolve any other claims M2 Systems has made against
Optio Software, Inc. On April 30, 2003, the Company executed a Settlement and Release Agreement with M2 Systems covering the remainder of the indemnification claims made by M2 Systems. In exchange for M2 Systems agreement to release the
Company from such claims, the Company has amended the promissory notes related to the TransLink and Muscato divestiture, calling for a modified payment schedule of a combined note. The modified payment schedule of the combined 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.



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##### Table of Contents

Optio Software, Inc.

Schedule II - Valuation and Qualifying Accounts



|                                                           |  | Balance at Beginning of Period |         | Charged to Costs and Expenses |   | Acquired/ (Divested) Reserves |  |   | Deductions |   |  | Balance at End of Period
|---------------------------------------------------------- |  | ------------------------------ | ------- | ----------------------------- | - | ----------------------------- |  | - | ---------- | - |  | ------------------------
|Year ended January 31, 2001Allowance for doubtful accounts |  | $                              | 286,000 |                               | $ | 917,000                       |  | $ | 221,000    |   |  | $                       
|Year ended January 31, 2002Allowance for doubtful accounts |  | $                              | 823,000 |                               | $ | 1,408,000                     |  | $ | (101,000   | ) |  | $                       
|Year ended January 31, 2003Allowance for doubtful accounts |  | $                              | 927,000 |                               | $ | 266,000                       |  |   |           |   |  | $                       
|                                                           |  |                                |         |                               |   |                               |  |   |            |   |  |                         



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##### Table of Contents



EXHIBIT
INDEX



|2.1 |  | Stock Purchase Agreement dated as of March 27, 2000, by and among Optio Software, Inc., Muscato Corporation, the Shareholders of Muscato Corporation, Michael A.
Muscato and Nicholas Muscato (incorporated by reference to Exhibit 2.1 to Form 8-K filed April 10, 2000).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2.2 |  | Asset Purchase Agreement dated as of March 27, 2000, by and among Optio Software, Inc., TransLink Solutions Corporation, the Shareholders of TransLink Solutions
Corporation, Michael A. Muscato and Nicholas Muscato (incorporated by reference to Exhibit 2.2 to Form 8-K filed April 10, 2000).
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3.1 |  | Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Form S-1 filed October 15, 1999).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------



|3.2 |  | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Form S-1 filed October 15, 1999).
|--- |  | ----------------------------------------------------------------------------------------------------------------------------



|4.1 |  | See Exhibits 3.1 and 3.2 for provisions of the Amended and Restated Articles of Incorporation and Amended and Restated Bylaws of the Registrant defining rights of
the holders of Common Stock of the Registrant (incorporated by reference to Exhibit 4.1 to Form S-1 filed October 15, 1999).
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.1 |  | Form of Option Grant Agreement prior to adoption of the Optio Software, Inc. Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to Form S-8 filed June
9, 2000).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.2 |  | Optio Software, Inc. Stock Incentive Plan dated as of January 1, 1997 (incorporated by reference to Exhibit 10.1 to Form S-1 filed October 15, 1999).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



|10.3 |  | Optio Software, Inc. Outside Director Stock Option Plan dated as of October 13, 1999 (incorporated by reference to Exhibit 10.2 to Form S-1 filed October 15, 1999).
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.4 |  | Sublease Agreement by and between HBO & Company and Optio Software, Inc. dated March 22, 1999 (incorporated by reference to Exhibit 10.4 to Form S-1 filed
October 15, 1999).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.5 |  | Promissory Note by and between Optio Software, Inc. and David DunnRankin dated October 13, 1999 (incorporated by reference to Exhibit 10.9 to Form S-1/A filed
November 19, 1999).
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.6 |  | Stock Option Pledge and Security Agreement by and between Optio Software, Inc. and David DunnRankin dated October 13, 1999 (incorporated by reference to
Exhibit 10.10 to Form S-1/A filed November 19, 1999).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.7 |  | Release and Settlement Agreement, by and between Optio Software, Inc. and David Dunn-Rankin dated as of March 31, 2002 (incorporated by reference to Exhibit 10.23 to
Form 10-K filed May 1, 2002).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.8 |  | Promissory Note by and between Optio Software, Inc. and C. Wayne Cape dated December 31, 1998 (incorporated by reference to Exhibit 10.11 to Form S-1/A filed
November 19, 1999).
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.9 |  | Amended and Restated Promissory Note by and between Optio Software, Inc. and C. Wayne Cape dated February 1, 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------



|10.10 |  | Credit Agreement dated as of April 14, 2000, by and among Optio Software, Inc., as Borrower, and First Union National Bank, as Lender (incorporated by reference to
Exhibit 10.12 to Form 10-K filed April 28, 2000).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.11 |  | Amendment to Credit Agreement dated as of April 14, 2000, by and among Optio Software, Inc., as Borrower, and First Union National Bank, as Lender (incorporated by
reference to Exhibit 10.1 to Form 10-Q filed December 15, 2000).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|10.12 |  | Loan and Security Agreement, dated as of March 29, 2001, by and between Optio Software, Inc., as Borrower and Branch Banking and Trust Company, as Lender
(incorporated by reference to Exhibit 10.15 to Form 10-K filed May 1, 2001).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.13 |  | Revolving Credit Promissory Note by and between Optio Software, Inc. and Branch Banking and Trust Company dated March 29, 2001 (incorporated by reference to Exhibit
10.16 to Form 10-K filed May 1, 2001).
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.14 |  | Employment Agreement between Optio Software, Inc. and Warren K. Neuburger, dated as of May 7, 2001 (incorporated by reference to Exhibit 10.1 to Form 10-Q filed June
14, 2001).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.15 |  | Amended and Restated Employment Agreement by and between Optio Software, Inc. and Warren K. Neuberger, dated as of June 10, 2002 (incorporated by reference to
Exhibit 10.1. to Form 10-Q filed June 14, 2002).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.16 |  | Separation and Release Letter Agreement, dated as of February 11, 2003, by and between Optio Software, Inc. and Warren K. Neuburger.
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------



|10.17 |  | Transition Services Agreement between C. Wayne Cape and Optio Software, Inc. (incorporated by reference to Exhibit 10.1 to Form 10-Q filed September 14, 2001).
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.18 |  | Stock Purchase Agreement, dated December 4, 2001, by and between Optio Software, Inc. and M2 Systems Corporation (incorporated by reference to Exhibit 10.1 to Form
10-Q filed December 14, 2001).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.19 |  | Agreement for Sale and Purchase of Assets, dated as of December 4, 2001, by and between Optio Software, Inc. and M2 Systems Corporation (incorporated by reference to
Exhibit 10.2 to Form 10-Q filed December 14, 2001).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.20 |  | M2 Systems Corporation $3,250,000 Non-Negotiable Promissory Note (incorporated by reference to Exhibit 10.3 to Form 10-Q filed December 14, 2001).
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



|10.21 |  | M2 Systems Corporation $750,000 Non-Negotiable Promissory Note (incorporated by reference to Exhibit 10.4 to Form 10-Q filed December 14, 2001).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



|10.22 |  | M2 Systems Corporation $3,640,000 Amended, Restated and Consolidated Promissory Note.
|----- |  | -------------------------------------------------------------------------------------



|10.23 |  | Loan and Security Agreement, dated as of April 25, 2002, by and between Silicon Valley Bank and Optio Software, Inc. (incorporated by reference to Exhibit 10.24 to
Form 10-K filed May 1, 2002).
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.24 |  | First Loan Modification Agreement, dated as of September 12, 2002, by and between Silicon Valley Bank and Optio Software, Inc. (incorporated by reference to Exhibit
10.1. to Form 10-Q filed September 13, 2002).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.25 |  | Second Loan Modification Agreement, dated as of April 24, 2003, by and between Silicon Valley Bank and Optio Software, Inc.
|----- |  | ---------------------------------------------------------------------------------------------------------------------------



|10.26 |  | Employment Agreement, dated as of February 1, 2002, by and between Optio Software, Inc. and Harvey A. Wagner (incorporated by reference to Exhibit 10.2 to Form 10-Q
filed June 14, 2002).
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10.27 |  | Consulting Agreement, dated as of March 17, 2003, by and between Steven E. Kaye and Optio Software, Inc.
|----- |  | --------------------------------------------------------------------------------------------------------



|16.1 |  | Letter from Ernst & Young LLP to the Securities and Exchange Commission, dated January 24, 2003 (incorporated by reference to Exhibit 16.1 to Form 8-K filed
January 24, 2003).
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|21.1 |  | List of Subsidiaries.
|---- |  | ---------------------



|23.1 |  | Consent of BDO Seidman, LLP.
|---- |  | ----------------------------



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##### Table of Contents



|23.2 |  | Consent of Ernst & Young LLP.
|---- |  | -----------------------------



|99.1 |  | Certification by CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | ------------------------------------------------------------------------------------------------------------------------------



|99.2 |  | Certification by Vice President of Finance pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



|99.3 |  | Safe Harbor Compliance Statement for Forward-Looking Statements.
|---- |  | ----------------------------------------------------------------



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