##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



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, 2005



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



---



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



---



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)



---



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, 2004 as reported by the Over-the-Counter Bulletin Board, was approximately $12,654,837. 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 21,262,039 shares of the
Registrants common stock outstanding as of April 15, 2005.



DOCUMENTS INCORPORATED BY REFERENCE



Parts of
the Registrants Definitive Proxy Statement on Schedule 14A for its 2005 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.



---



---

##### Table of Contents

OPTIO SOFTWARE, INC.

ANNUAL REPORT ON FORM 10-K

FOR THE YEAR ENDED JANUARY 31, 2005

TABLE OF CONTENTS



|         |  |                                                                                                              |  |      |  
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ---- | -
|         |  |                                                                                                              |  | Page |  
|PART I   |  |                                                                                                              | 
|Item 1.  |  | Business                                                                                                     |  | 2    |  
|Item 2.  |  | Properties                                                                                                   |  | 16   |  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 16   |  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 18   |  
|         | 
|PART II  |  |                                                                                                              | 
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |  | 18   |  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 18   |  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 20   |  
|Item 7A. |  | Quantitative and Qualitative Disclosures about Market Risk                                                   |  | 31   |  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 32   |  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 32   |  
|Item 9A. |  | Controls and ProceduresEvaluation and Disclosure Controls and Procedures                                    |  | 32   |  
|Item 9B. |  | Other Information                                                                                            |  | 32   |  
|         | 
|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. |  | Principal Accountant Fees and Services                                                                       |  | *    | *
|         | 
|PART IV  |  |                                                                                                              | 
|         |  |                                                                                                             
|Item 15. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                             |  | 33   |  

---

|** | The information required by Items 10, 11, 12, 13 and 14 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, 2005.
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 1 -



---

##### Table of Contents

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, integration of acquired entities, market demand for Optios products and services, relationships with Optios strategic marketing
alliances, and competition. These forward-looking statements include, among others, those statements including the words expects, anticipates, intends, believes and similar language. Optios
actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, risks associated with Optios reliance on strategic
marketing and reseller relationships, collectibility of accounts receivable and notes receivable (specifically, the note receivable from M2 Systems Corporation), fluctuations in operating results because of acquisitions or dispositions, failure to
integrate new products and newly acquired companies, diversion of management resources relating to acquisitions, reduction in cash reserves relating to acquisitions, challenges relating to acquisitions and the possibility that this may cause Optio
to no longer be profitable, the negative effect on Optios earnings relating to the amortization or potential write-down of acquired assets or goodwill, failure to retain the business relationships with existing customers from acquisitions,
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 cash flows and company performance, disputes regarding
Optios intellectual property, risks relating to the delisting of Optios stock, possible adverse results of pending or future litigation, or risks associated with Optios international operations. These and additional factors are set
forth in Safe Harbor Compliance Statement for Forward-Looking Statements included as Exhibit 99.1 to this 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. (the Company or Optio), founded in 1981 as a Georgia corporation, provides infrastructure software and services that enhance the form, content, distribution and availability 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 intelligently captured, transformed and customized in formats according to the business
needs of an organizations customers, suppliers and partners. The information is then delivered to the appropriate destinations, which include print, fax, e-mail, wireless devices, the web or archive. 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, based on their specific business 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. In addition Optios solutions can also accept inbound documents from
third parties such as suppliers and customers, capture and store their image for later retrieval, extract transactional data and inject them into operational workflows or integrate their data into a companys enterprise systems. 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 for companies located principally in the United States and European regions. 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. The type of solution that provides this functionality was traditionally known as a
distributed output management solution.



- 2 -



---

##### Table of Contents

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 was subsequently closed in September 2002.



In addition to 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, Optio e.ComPresentTM, a browser-based software solution 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 introduced its second product in the
e.ComSeries of products, Optio e.ComIntegrate®.
Also in March 2000, Optio purchased Muscato Corporation (Muscato) and TransLink Solutions Corporation (Translink), further expanding its breadth into the e-commerce market. Muscato offered a product, e.ComEngine, which
enabled the real-time exchange of information between systems utilizing 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. Since the disposal of Muscato and Translink, Optio has focused on expanding its core products and increasing the capability of its integrated solutions.



Most recently, Optio has focused on expanding from managing output only to
managing the lifecycle of transactional documents. Optio has focused its development on features and functionality that enhance a customers ability to manage documents. In 2003, Optio introduced Optio Print ManagerTM, enabling reliable print delivery and a centralized management console for accessing printers and monitoring their status. In
2004, Optio introduced Optio Imaging SolutionsTM, its intelligent data capture, imaging and web-accessible archive
solution that allows documents to be scanned, indexed and archived according a customers defined needs, as well as extracts transactional data and integrates it with enterprise systems. To address the needs of our healthcare market, in August
2004, Optio acquired VertiSoft Corporation (VertiSoft), bringing with it the Optio QuickRecord SuiteTMof products. These products automate the collection and distribution of healthcare documents, whether they be printed documents collected through scanning and indexing, on-line forms or data streams; create a central repository with web-enabled
access by medical personnel or financial services; and provide physicians with the ability to electronically sign patient care documents with the products e-signature capability.



Internet Website



Optios Internet website can be found at www.optiosoftware.com. Optio makes available free of charge or through our internet website our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, our proxy statement and Forms 3, 4 and 5 filed by directors and executive officers and amendments to those reports as soon as reasonably practicable after such
material is filed or furnished to the Securities and Exchange Commission (the SEC). They may be accessed by clicking on the Investor Relations page under Company on our home page, and then by clicking on SEC
Filings. That is a direct link to Optios SEC filings on the SEC website which is at www.sec.gov. Additionally, Optios Code of Ethics for Financial Officers may also be found on the Optio website. From time to time, corporate
governance materials on our website may be updated to comply with rules issued by the SEC or as desirable to promote the effective governance of Optio. In addition, amendments to the Code of Ethics and any grant of a waiver from a provision of the
Code of Ethics requiring disclosure under applicable SEC rules will be disclosed on our website. Any stockholder wishing to receive, without charge, a copy of any of the Optio SEC filings or Code of Ethics materials should write to the Secretary,
Optio Software, Inc., 3015 Windward Plaza, Windward Fairways II, Atlanta, Georgia 30005.



The reference to our website address does not constitute incorporation by reference of the information contained on the website and should not be construed as part of this annual report.



Wholly-Owned Subsidiaries



Optio currently has two wholly-owned foreign subsidiaries, Optio Software
Europe, S.A. (Optio Europe) and VertiSoft Limited (VertiSoft UK). Optio Europe, a software product distributor in Europe, was acquired in August 1998, providing an entry into European markets. Optio Europe is directly
involved in the sales, marketing and support



- 3 -



---

##### Table of Contents

activities for Optios products throughout mainland Europe 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). VertiSoft UK is directly involved in the sales and marketing activities for certain
customers acquired with VertiSoft. VertiSoft UK was acquired as a subsidiary of VertiSoft. VertiSoft merged into Optio on September 15, 2004. Optio previously had a wholly-owned foreign subsidiary in Australia, Optio Software, Asia Pacific
(Optio Australia), which was closed in September 2002, and legally terminated in December 2004. The Company continues to market in the Asian Pacific region through resellers.



Segment Information



Optio is organized around geographic areas. Optios U.S. operations and European operations, which includes Optio Europe and VertiSoft UK, represent
Optios current two reportable segments. Optios former Australian subsidiary is classified as Other. The foreign locations principally function as distributors of products developed by Optio in the United States. Optio
attributes revenue to its operating segments based upon the location of the subsidiary originating the sale, which is typically the geographic location where the software is installed. 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.



Segment information for the years ended January 31, 2003, 2004 and 2005 is
summarized below.



|                                                                       |  |               |            |   |        |   |            |       |  |   |          |   |  |              |            |   |              |   |            |   |  |   |            |  
|---------------------------------------------------------------------- |  | ------------- | ---------- | - | ------ | - | ---------- | ----- |  | - | -------- | - |  | ------------ | ---------- | - | ------------ | - | ---------- | - |  | - | ---------- | -
|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 |   |              | $ |           |   |  | $ | 10,445,000 |  
|Services, maintenance and other                                        |  |               | 15,217,000 |   |        |   | 2,098,000  |       |  |   | 64,000   |   |  |              | 17,379,000 |   |              |   |           |   |  |   | 17,379,000 |  
|Intersegment revenue                                                   |  |               | 470,000    |   |        |   | 180,000    |       |  |   |         |   |  |              | 650,000    |   |              |   | (650,000   | ) |  |   |           |  
|                                                                       |  |               |            |   |        |   |            |       |  |   |          |   |  |              |            |   |              |   |            |   |  |   |            |  
|Total revenue                                                          |  |               | 24,267,000 |   |        |   | 4,087,000  |       |  |   | 120,000  |   |  |              | 28,474,000 |   |              |   | (650,000   | ) |  |   | 27,824,000 |  
|Interest income                                                        |  |               | 230,000    |   |        |   | 2,000      |       |  |   | 1,000    |   |  |              | 233,000    |   |              |   |           |   |  |   | 233,000    |  
|Interest expense                                                       |  |               | 47,000     |   |        |   |           |       |  |   | 4,000    |   |  |              | 51,000     |   |              |   |           |   |  |   | 51,000     |  
|Depreciation and amortization                                          |  |               | 835,000    |   |        |   | 81,000     |       |  |   | 4,000    |   |  |              | 920,000    |   |              |   |           |   |  |   | 920,000    |  
|Income tax benefit                                                     |  |               | (472,000   | ) |        |   | (106,000   | )     |  |   |         |   |  |              | (578,000   | ) |              |   |           |   |  |   | (578,000   | )
|Segment loss before income taxes and loss from discontinued operations |  |               | (3,775,000 | ) |        |   | (1,256,000 | )     |  |   | (257,000 | ) |  |              | (5,288,000 | ) |              |   |           |   |  |   | (5,288,000 | )
|Segment net loss including loss from discontinued operations           |  |               | (3,435,000 | ) |        |   | (1,150,000 | )     |  |   | (257,000 | ) |  |              | (4,842,000 | ) |              |   |           |   |  |   | (4,842,000 | )
|Total segment assets                                                   |  |               | 15,735,000 |   |        |   | 2,689,000  |       |  |   | 133,000  |   |  |              | 18,557,000 |   |              |   | (4,114,000 | ) |  |   | 14,443,000 |  
|Expenditures for long-lived assets                                     |  |               | 219,000    |   |        |   | 48,000     |       |  |   | 1,000    |   |  |              | 268,000    |   |              |   |           |   |  |   | 268,000    |  
|                                                                       |  |               |            |   |        |  
|Year ended January 31, 2004                                            |  | United States |            |   | Europe |   |            | Other |  |   | Combined |   |  | Eliminations |            |   | Consolidated |  
|Revenue from external customers:                                       |  |               |            |   |        |   |            |       |  |   |          |   |  |              |            |   |              |   |            |   |  |   |            |  
|License fees                                                           |  | $             | 8,476,000  |   |        | $ | 1,729,000  |       |  |   |         |   |  | $            | 10,205,000 |   |              | $ |           |   |  | $ | 10,205,000 |  
|Services, maintenance and other                                        |  |               | 14,633,000 |   |        |   | 2,469,000  |       |  |   | 8,000    |   |  |              | 17,110,000 |   |              |   |           |   |  |   | 17,110,000 |  
|Intersegment revenue                                                   |  |               | 481,000    |   |        |   | 133,000    |       |  |   |         |   |  |              | 614,000    |   |              |   | (614,000   | ) |  |   |           |  
|                                                                       |  |               |            |   |        |   |            |       |  |   |          |   |  |              |            |   |              |   |            |   |  |   |            |  
|Total revenue                                                          |  |               | 23,590,000 |   |        |   | 4,331,000  |       |  |   | 8,000    |   |  |              | 27,929,000 |   |              |   | (614,000   | ) |  |   | 27,315,000 |  
|Interest income                                                        |  |               | 171,000    |   |        |   |           |       |  |   |         |   |  |              | 171,000    |   |              |   |           |   |  |   | 171,000    |  
|Interest expense                                                       |  |               | 17,000     |   |        |   |           |       |  |   |         |   |  |              | 17,000     |   |              |   |           |   |  |   | 17,000     |  
|Depreciation and amortization                                          |  |               | 489,000    |   |        |   | 64,000     |       |  |   |         |   |  |              | 553,000    |   |              |   |           |   |  |   | 553,000    |  
|Income tax expense (benefit)                                           |  |               | (205,000   | ) |        |   | 3,000      |       |  |   |         |   |  |              | (202,000   | ) |              |   |           |   |  |   | (202,000   | )
|Segment income (loss) before income taxes                              |  |               | 1,623,000  |   |        |   | (460,000   | )     |  |   | 6,000    |   |  |              | 1,169,000  |   |              |   |           |   |  |   | 1,169,000  |  
|Segment net income (loss)                                              |  |               | 1,828,000  |   |        |   | (463,000   | )     |  |   | 6,000    |   |  |              | 1,371,000  |   |              |   |           |   |  |   | 1,371,000  |  
|Total segment assets                                                   |  |               | 15,648,000 |   |        |   | 3,088,000  |       |  |   | 87,000   |   |  |              | 18,823,000 |   |              |   | (4,577,000 | ) |  |   | 14,246,000 |  
|Expenditures for long-lived assets                                     |  |               | 157,000    |   |        |   | 7,000      |       |  |   |         |   |  |              | 164,000    |   |              |   |           |   |  |   | 164,000    |  



- 4 -



---

##### Table of Contents

|                                          |  |               |            |        |   |           |       |  |          |   |              |   |            |              |   |            |   |  |   |           
|----------------------------------------- |  | ------------- | ---------- | ------ | - | --------- | ----- |  | -------- | - | ------------ | - | ---------- | ------------ | - | ---------- | - |  | - | ----------
|Year ended January 31, 2005               |  | United States |            | Europe |   |           | Other |  | Combined |   | Eliminations |   |            | Consolidated
|Revenue from external customers:          |  |               |            |        |   |           |       |  |          |   |              |   |            |              |   |            |   |  |   |           
|License fees                              |  | $             | 8,050,000  |        | $ | 2,125,000 |       |  | $        |  |              | $ | 10,175,000 |              | $ |           |   |  | $ | 10,175,000
|Subscription fees                         |  |               | 894,000    |        |   | 36,000    |       |  |          |  |              |   | 930,000    |              |   |           |   |  |   | 930,000   
|Services, maintenance and other           |  |               | 14,467,000 |        |   | 2,795,000 |       |  |          |  |              |   | 17,262,000 |              |   |           |   |  |   | 17,262,000
|Intersegment revenue                      |  |               | 447,000    |        |   | 202,000   |       |  |          |  |              |   | 649,000    |              |   | (649,000   | ) |  |   |          
|                                          |  |               |            |        |   |           |       |  |          |   |              |   |            |              |   |            |   |  |   |           
|Total revenue                             |  |               | 23,858,000 |        |   | 5,158,000 |       |  |          |  |              |   | 29,016,000 |              |   | (649,000   | ) |  |   | 28,367,000
|Interest income                           |  |               | 182,000    |        |   | 5,000     |       |  |          |  |              |   | 187,000    |              |   |           |   |  |   | 187,000   
|Interest expense                          |  |               | 12,000     |        |   |          |       |  |          |  |              |   | 12,000     |              |   |           |   |  |   | 12,000    
|Depreciation and amortization             |  |               | 596,000    |        |   | 17,000    |       |  |          |  |              |   | 613,000    |              |   |           |   |  |   | 613,000   
|Income tax expense                        |  |               | 83,000     |        |   | 12,000    |       |  |          |  |              |   | 95,000     |              |   |           |   |  |   | 95,000    
|Segment income (loss) before income taxes |  |               | 2,132,000  |        |   | (384,000  | )     |  |          |  |              |   | 1,748,000  |              |   |           |   |  |   | 1,748,000 
|Segment net income (loss)                 |  |               | 2,049,000  |        |   | (396,000  | )     |  |          |  |              |   | 1,653,000  |              |   |           |   |  |   | 1,653,000 
|Total segment assets                      |  |               | 16,892,000 |        |   | 3,690,000 |       |  |          |  |              |   | 20,582,000 |              |   | (3,087,000 | ) |  |   | 17,495,000
|Expenditures for long-lived assets        |  |               | 425,000    |        |   | 45,000    |       |  |          |  |              |   | 470,000    |              |   |           |   |  |   | 470,000   



Optios European
operations generated revenue from licenses, subscription fees and services to customers, excluding intersegment revenue, of $5.0 million in the year ended January 31, 2005, representing 17% of total revenue, compared to $4.2 million in the year
ended January 31, 2004, representing 15% of total revenue and compared to $4.0 million the year ended January 31, 2003, representing 15% 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, including employment laws;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | 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 enhance the cost-effectiveness of their existing systems and overall productivity of the organization by
sharing vital business information, in the proper format, with the proper users. Their objective is to improve the efficiency of mission-critical business processes such as procurement, manufacturing, warehousing, shipping, invoicing and
collections, patient registration and billing, and patient care. This objective can be met by enhancing the form, content, distribution and availability of documents and content that enable these processes,



- 5 -



---

##### Table of Contents

thus reducing their cost and complexity and improving overall efficiency. 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, healthcare, 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; provides timely and reliable delivery of the information
formats to the appropriate destinations, including the Internet, e-mail, printers, faxes and wireless devices; and provides a universal, web-enabled access point for all documents and information. Most business relationships pair buyers and sellers,
providers and consumers, and care givers and patients in a series of interactions or transactions over a period of time. As a result these parties tend to exchange information in the form of documents and this has created the need for solutions that
will accept documents created by other organizations, scan and capture their image, extract relevant data and integrate it into a companys enterprise systems.



These needs have 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 (Gartner) 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. Gartner forecasts these two market segments will converge by the end of 2005. Gartner described DOM and IDARS as part of a more comprehensive market that is known as the Content
Management (CM) Market. On March 11, 2005, Gartner further noted that they believed that IDARS will cease to be a stand-alone market and will become an integral component of a CM suite by 2007. The Meta Group stated in a report dated
January 7, 2004 that this same market, which they call Enterprise Content Management (ECM) will grow to $9.3 billion (software and services) by 2007. This represents a compound annual growth rate of 15%.



Further research conducted by the Company through its Customer Advisory Board
(CAB) indicates that extending the current solution set to manage more of the documents and business processes (e.g. inbound and outbound documents relating to procurement processes) would be of value. This approach, which is known
collectively as business process management, is a further extension of the Content Management market and per International Data Corporations figures quoted in a May 2004 article in Information Week, grew to over $1 billion dollars in 2004; a
growth rate of more than 100%.



Technology



Optios suite of products is used to enhance business critical
documents and information, their subsequent distribution and the integration of corresponding documents received from other organizations into an organizations business processes. It provides an organizations systems and applications
with 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.



- 6 -



---

##### Table of Contents

Certain components of Optios technology have been developed by other manufacturers. In some cases,
these other manufacturers, known as Original Equipment Manufacturers (OEM), have granted Optio a license to embed their technology within Optios products for re-licensing to end-users. In other cases, Optio has a value-added
reseller agreement in place, which allows Optio to resell the manufacturers product as a part of Optios own solution set. These agreements provide for a minimum two or three-year contractual commitment; however, the contract may be
terminated by either party thereafter with ninety days written notice. Termination of these agreements could have a material impact upon Optios product offerings, strategic initiatives and results of operations.



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 DesignStudioTMharnesses 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 transform and exchange vital business information. Optio is 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:



| |  |  | Continue the Expansion to Solutions that Optimize an Organizations Document-Driven Processes.In fiscal year 2004, Optio set forth its strategy to expand from managing
output only, to managing the lifecycle of transactional documents. This meant that Optio might expand its product offering from products that enhance the flow of information from systems to people, to products that enhance the flow of
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



- 7 -



---

##### Table of Contents

information between systems and people. In other words, improved document formats and
distribution may no longer be the sole intended result. Instead, documents may become interactive; presenting, collecting and validating information with the user. During fiscal year 2004, Optio introduced its Optio Imaging Solutions, just one
example of how Optio has broadened its integrated solution to include features and functionality that enhance an organizations ability to manage documents. Optio may continue to expand its products to deliver high-value document driven features and
functionality.



| |  |  | Build Upon the Subscription-Based Revenue Model in our Healthcare Market.With the purchase of VertiSoft in August 2004, Optio acquired a subscription-based revenue model
requiring customers to pay monthly fees over multi-year contracts, providing a more stable revenue recognition pattern. Optio may offer this subscription-based contract model for all of its healthcare products in an attempt to drive the
subscription-based revenues in this market.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Continue to Strengthen our Healthcare, European, and Indirect Revenue.One of Optios strategic objectives in previous years was to re-energize our healthcare market.
The introduction of Optios MedExTMsuite of products enabled Optio to increase its healthcare license sales in
fiscal year 2004 to approximately 30% of Optios total domestic revenues from 20% of Optios total domestic revenues in fiscal year 2003. In fiscal year 2005, Optio acquired VertiSoft, adding QuickRecord, a web-enabled product allowing
access for all patient documents and information whether they originate as printed documents, online forms, scanned documents or data streams. Optio believes that by continuing to provide enhancements to our existing products, broadening our product
base either through acquisition, development or partnering, and focusing on improvements in sales execution, we may continue to strengthen our healthcare market.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Additionally, during fiscal year 2004, one of Optios initiatives was to extend our US relationships with certain
strategic partners to our European subsidiary. In doing so, our European revenues grew from 15% of total revenues in the year ended January 31, 2004 to 17% of total revenue in the year ended January 31, 2005. Optio believes that continuing its
efforts in extending these partner relationships will aid in the growth of our European revenues. Finally, Optio believes that by continuing to manage and develop our reseller and other strategic partner relationships, we may strengthen our indirect
revenue.



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 MedEx as well as one or more other components of the applicable suite.
The Optio e.ComIntegrate solution sets are geared to companies of different sizes, with varying functional needs across industries. Optio offers tiered solution sets that include Optios server technology, Optio e.ComIntegrate, and design tool,
Optio DesignStudio, 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 OptioFaxTM, our fax server product; Optio e.ComPresent, our web accessible document
repository; Optio Print Manager, our application providing assured delivery and printer definition management; and Optio Imaging Solutions, our intelligent data capture, image and archive solution. 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 Medex.



- 8 -



---

##### Table of Contents

The Optio Enterprise Suite



|                         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------------------ |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Optio e.ComIntegrate®    |  | Optios e.ComIntegrate is the foundation of the Optio Enterprise Suite and it provides the software infrastructure to enable business-to-business transformation, and distribution of
critical information. It builds on the strength of Optios core technologies. Customers can add additional modules such as inbound and outbound processing of XML, enabling organizations to integrate operations and participate in e-marketplaces
utilizing XML dialects such as CBL, cXML or ebXML, Double-Byte languages and Binary Large Object (BLOB). Organizations seeking to XML-enable their existing applications can map standard purchase orders, invoices, and shipping advice
documents without requiring enterprise application modifications.
|                         | 
|OptioDCS                |  | OptioDCS is the precursor to Optio e.ComIntegrate and it provides the baseline capabilities for the creation of documents from application print streams. It captures information from enterprise,
legacy and other applications by monitoring transactions and output such as print streams. It then performs calculations and other data transformations, formats business information and delivers it to printers, fax servers, e-mail servers, web
servers, document archives and e-commerce servers. This product serves our reseller base of customers only, and targets customers needing reduced functionality.                                                                                                                               
|                         | 
|Optio e.ComPresent      |  | E-business software that provides secure, browser-based presentation of customized information. Information can be grouped in pre-defined or user-specified folders for easy access. All
information is fully indexed and supports familiar Internet search techniques. Users are alerted to the publication of new or updated information with subscription-based notifications that arrive via e-mail, pager, fax or printer. Optio e.ComPresent
facilitates the delivery of customized information to support e-business initiatives like report distribution, information portals, online bill presentment and self-service applications.                                                                                                         
|                         | 
|Optio DesignStudio      |  | Windows based software that allows users to model the map of information from applications, databases and files, create business rules and conditional logic to automate processing of the
information, and then model the network of destinations to which the information is delivered. The Optio Products Suite then processes, in real time, the design files it creates.                                                                                                                                                                                                                                                                                                                                                                         
|                         | 
|OptioFax                |  | Software that transmits and receives information using electronic fax standards and protocols to support business requirements for distributing enterprise information.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                         | 
|OptioReprint            |  | Software that allows the user to browse, view and reprint recently submitted print jobs. OptioReprint allows you to quickly and easily reprint a document, set of documents or portion of a
document to any printer without reconfiguring or returning to the original application.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                         | 
|Optio Print Manager     |  | Provides reliable delivery of business critical documents and information across the entire enterprise printing infrastructure. In addition, it allows for the management of the printing
infrastructure, load balancing of print jobs, provides failover capability and measures the performance of the print assets from a central management console.                                                                                                                                                                                                                                                                                                                                                                                              
|                         | 
|Optio Imaging Solutions |  | Automatically reads, indexes and extracts information  including table and line item data - from even unfamiliar, unstructured or semi-structured documents and business correspondence;
then automatically indexes and stores images in a centralized, web-accessible archive.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



- 9 -



---

##### Table of Contents

|                                                                                                               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Optio Enterprise ProcessPACKS                                                                                  |  | Substantially complete generic document templates for common forms such as purchase orders and checks, which facilitate the design of the information customization and delivery requirements for
popular enterprise resource planning (ERP) applications like Oracle, QAD, PeopleSoft and others.                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                              
|The Optio Healthcare Suite                                                                                    
|                                                                                                               | 
|Optio MedForms                                                                                                |  | Forms the foundation of the Optio Healthcare Suite and is targeted to meet the specialized requirements of healthcare enterprises. It captures information from healthcare information systems by
monitoring transactions and output such as print streams. It then performs calculations and other data transformations, formats patient, clinical, diagnostic and business information and delivers it to printers, fax servers, e-mail servers, web
servers and document archives.                                                                                                                                                                               
|                                                                                                               | 
|Optio MedEx                                                                                                   |  | Built on the foundation of Optio MedForms, but includes the HIPAA-SmartTMTechnology which securely routes documents based on HL7 messages to various devices, and addresses HIPAA concerns such as audit logging, content filtering, and patient privacy and confidentiality. It also provides routing,
reorganization and reproduction of healthcare information on demand, allowing users throughout a healthcare organization to quickly and easily generate patient documents without expensive embossers or preprinted labels, and provides temporary
storage and access to patient information when primary healthcare systems are inoperative or unavailable.
|                                                                                                               | 
|Optio QuickRecord Intelligent Hub                                                                             |  | Consolidates documents into a logical view by patient for shared access throughout the enterprise. It also provides modular capabilities for accessing, delivering and completing the patient
record  providing the basis for a complete composite patient view.                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                               | 
|Optio QuickChart®                                                                                              |  | Intranet and remote access via the Internet. Give physicians and caregivers secure 24/7 self-service to all patient documents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                               | 
|Optio QuickDelivery                                                                                           |  | Automated document delivery of critical documents to point of need.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                               | 
|Optio QuickScan                                                                                               |  | Desktop imaging for scanning paper documents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                               | 
|Optio QuickSign                                                                                               |  | Electronic signature authentication for physicians.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                               | 
|Optio e.ComPresent, Optio e.ComIntegrate, OptioFax, OptioReprint, Optio Print Manager, Optio Imaging Solutions |  | Equivalent in functionality to that listed for the Optio Enterprise Suite, but targeted to the healthcare market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                               | 
|Optio Healthcare ProcessPACKS                                                                                  |  | Substantially complete generic document templates for common functions which facilitate the design of the information customization and delivery requirements for specific areas of healthcare
operations such as Admissions, Discharge and Transfer, Patient Accounting and Business Office and Diagnostic Clinic.                                                                                                                                                                                                                                                                                                                                                 



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



- 10 -



---

##### Table of Contents

training and upgrades. Management believes that consulting services enable rapid implementation of Optios software
products, ensure success with the Optio solution, strengthen the customer relationship and add 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. During the years ended January 31, 2003 and 2004, Optio focused on higher utilization rates of its internal employees, allowing the company to reduce its internal consulting services staff to 15
employees from 33 in fiscal year 2002. For the year ended January 31, 2003, Optio outsourced approximately 50% of its services business, a trend that continued into the year ended January 31, 2004. During the year ended January 31, 2005, Optio
continued to reduce its internal consulting staff to 12 employees. In addition, select employees within the consulting services organization were given opportunities elsewhere within the company, requiring us to rehire their positions and train the
new employee. This required us to increase our use of outsourcers during fiscal year 2005. Separately, seven additional employees are dedicated as training staff for internal, customer and partner training, as well as to developing curriculum
materials for training programs.



In September 2004, Optio
announced the introduction of Rapid Document Design (RDD), a new toolkit that allows Optios consulting services personnel to streamline and accelerate implementations by allowing organizations to quickly deploy high volumes of
documents. Optios RDD facility enables organizations to leverage their investment in existing forms and documents by converting them directly into granular, editable documents for use in Optio DesignStudio. RDD can utilize both electronic
documents created by applications such as Microsoft Word or existing printed documents that can be scanned in and automatically converted. RDD may effectively reduce document layout times by up to 90 percent.



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, 2005, a majority of Optios
customers had subscribed to the comprehensive maintenance support program. However, for customers who pay on a subscription basis, the maintenance fee is included in their subscription payment.



Research and Development



Overview



To maintain Optios competitive position, Optio must continually enhance its current products and introduce new
features or functionality to address customers needs to make document and output management more efficient and cost effective. Product development activities for the year ended January 31, 2005 were focused on (i) enhancements and functional
improvements to Optios MedEx product, (ii) a new release of Optio Print Manager, version 2.0, (iii) the introduction of the Optio XML Solution Kit, (iv) a new release of Optio e.ComPresent, (v) the re-architecture of Optios core design
and platform technology, the foundation of its products, (vi) a new release of the QuickRecord Suite and (vii) the continued integration of Optios products with international ERP vendors. During the year ended January 31, 2005, Optio spent
$4.6 million, or 16% of revenues, on research and development activities, an increase from the $4.1 million, or 15% of revenues, spent in the prior year. Optio has estimated that during the year ended January 31, 2005, personnel time spent on the
above projects, and thus the associated percentage of the total $4.6 million spent on research and development, was divided as follows: 8% allocated to the improvements of Optio e.ComPresent; 54% allocated to the modification and improvements to
Optios core technology; 2% to the continued integration of Optios products with ERP vendors; 22% allocated to enhancements to Optio MedEx; 1% allocated to the introduction of version 2.0 of Optio Print Manager; 11% allocated to a new
release of the QuickRecord Suite; and 2% allocated to the introduction of Optio XML Solution Kits.



- 11 -



---

##### Table of Contents

Current development projects as of January 31, 2005 include (i) continuing enhancements to MedEx that
include key customer features and performance improvements, scheduled for release in the second quarter of 2006, (ii) a QuickRecord release which includes community health record initiatives, scheduled for release in the third quarter of 2006, (iii)
an e.ComPresent release including enhanced features and improvements, also scheduled for release in the second quarter of 2006, (iv) the next generation of DesignStudio and e.ComIntegrate using the re-architected core technology, scheduled for
release in the fourth quarter of 2006 and (v) continued integration of Optios products with international ERP vendors.



All of Optios research and development employees are located in the US. The products sold by Optio are developed in the US and distributed to
Optios foreign segments for resale.



Future Product Development
Activities



In addition to completing the current
development projects discussed above, product development activities for fiscal year 2006 and following are focused on supporting Optios strategic initiatives. In general, Optio intends to offer new features focused on improving business
processes, partner alignment and seamless integration with partners, creating application transparency.



A major initiative for the year ending January 31, 2006 is the release of the re-architected core and design platform technology, allowing for greater
ease of integration of features across Optios products and platforms, expansion of the Optio Imaging Solutions, and the release of new versions of both of Optios primary healthcare products, Optio MedEx and Optio QuickRecord. Finally,
Optio will continue to produce maintenance releases to repair software defects, to modify products to accommodate changes to partner software design or to upgrade vendor supported application programming interfaces.



Retirement



In the future, Optio intends to no longer offer or support certain older versions of our existing products and the operating
systems on which they operate. Optio is in the process of developing migration paths for our customers on these products and intends 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, 2005, approximately 74% of Optios software revenue was generated through
Optios direct sales force, compared to 69% in the year ended January 31, 2004. Optio had 32, 37 and 36 US sales representatives and sales support staff as of January 31, 2003, 2004, and 2005, respectively. Optios US sales representatives
are divided into teams that:



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



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



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



Optios international sales organization, focused on Europe, was composed of 8, 10, and 11 sales representatives as of January 31, 2003, 2004 and
2005, respectively.



The percentage of Optios license
revenues generated through its worldwide reseller network decreased in the year ended January 31, 2005 to 26% of total revenues, from 31% of license revenue in the year ended January 31, 2004. This decrease was primarily the result of contracts with
a smaller average sales prices through Optios healthcare resellers during the fiscal year 2005.



- 12 -



---

##### Table of Contents

Optios marketing activities during the year ended January 31, 2005 were principally focused on
trade shows and webinars where we were able to demonstrate our products and their capabilities. Other marketing processes 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, Lexmark International, Inc. and Deloitte Consulting Product Services LLC.



Independent Software Vendor/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 Daly.Commerce, Inc., Epicor, SunGuard Pentamation Inc. and Strategic Information Group. During fiscal year 2005, Optio and McKesson Corporation, who had been Optios largest healthcare reseller,
terminated their relationship, subject to a twelve month termination period; however, this termination is not expected to have a significant impact on Optios revenues.



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 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 30 partners including QAD, Inc., Carolina System Solutions, Inc. and Appshop, 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
certifies 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, QAD, Inc. and SAP. 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 that are published periodically and on their web sites. Optio can also feature the vendors logos in its advertising and promotional
materials and 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, 2005, Optio licensed its products for use by more than 5,000 customers.



- 13 -



---

##### Table of Contents

No single customer accounted for 10% or more of Optios total revenue during the years ended January
31, 2003, 2004 or 2005.



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 potential
competitors fit into three separate categories. The first is custom software developers. The second is comprised of distributed output management, imaging or print management solutions from organizations such as Adobe Systems Incorporated, AFP
Technology (Formscape), Bottomline Technologies, The Hewlett Packard Company, StreamServe, McKesson Corporation, Standard Register, Cypress Corporation (now owned by ASG Software Solutions), FormFast, and Evergreen. Lastly, the ERP or healthcare
software vendor partners with which Optio typically partners may enhance their own software products to include functionality currently handled by Optio, thus directly competing with Optio.



Some ERP vendors have begun to recognize their end-users requirement
for better output from their ERP applications. Thus, select ERP vendors have begun to include minimal functionality to address their customer needs and now compete with Optios core technology. This has put pressure on Optio to expand our
offerings to address the full range of business process solutions and document management, as opposed to simply output management, which we believe is a differentiating factor.



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, print management, imaging and e-business enablement to one integrated solution. Management believes that, to the best of its
knowledge, none of Optios competitors provides all of this functionality in a single integrated 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 with 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 use; and value derived from the 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 and it may not be able to maintain its competitive position against current and potential
competitors.



Intellectual Property



Optio distributes its products under software license agreements, which
generally grant clients perpetual or subscription-based 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 majority of
Optios software products are 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 products names such as Optio 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, although an application has been filed. 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. Two oppositions have been filed against Optios attempt to register the mark in the EEC. 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 effect 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.



- 14 -



---

##### Table of Contents

Optio has not applied for any U.S. patents, however, it did acquire a patent in the acquisition of
VertiSoft, patent number 5,437,024, which relates to a method for distributing reports. 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 on 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 overlap.
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



Optio had 145, 153 and 167
employees as of January 31, 2003, 2004 and 2005, respectively. No employees are covered by any collective bargaining agreements. Optio considers its relationships with its employees to be good.



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    |  | 51  |  | President, Chief Executive Officer and Chairman of the Board of Directors
|Paul OCallaghan |  | 49  |  | Senior Vice President of Sales                                           
|Terry Kraft      |  | 51  |  | Senior Vice President of Technical Services                              
|Steve Kaye       |  | 52  |  | Senior Vice President of Marketing and Product Management                
|Donald French    |  | 55  |  | Senior Vice President of Research and Development                        
|Daryl G. Hatton  |  | 43  |  | Chief Technology Officer                                                 
|Caroline Bembry  |  | 34  |  | Chief Financial Officer                                                  



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



- 15 -



---

##### Table of Contents

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 Technical Services since February 2005. From November 2001 to February 2005, Mr. Kraft served as
the Senior Vice President of Product Development of Optio. 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.



Steve Kaye has served as Senior Vice President of Marketing and Product Management since January 2004. From July 2003 to January 2004, Mr. Kaye
served as Senior Vice President of Marketing. Since September 2002 and prior to joining Optio, Mr. Kaye served as a consultant to various public and private companies. From November 2000 until September 2002, Mr. Kaye was employed by Lombardi
Software, Inc., as Vice President of Global Alliances. From May 1999 until November 2000, Mr. Kaye served as Senior Vice President of Marketing and Business Development for Optio. From February 1998 until April 1999, Mr. Kaye served as Vice
President of Marketing for Softlab, Inc. Previously, Mr. Kaye served in executive positions with KnowledgeWare and Deloitte Consulting.



Donald French has served as Senior Vice President of Research and Development since February 2005. Previously, Mr. French served as the
Companys Senior Vice President of Product Development  Healthcare Products from August 2004, when he joined the Company with the acquisition of VertiSoft. Mr French was the founder and president of VertiSoft in 1988, a healthcare pioneer
in clinical document management systems. Prior to that, Mr. French founded Epic Development, a company based upon the concept of streamlining information access and distribution for physicians and hospital administrators. Mr. French originally
became involved in healthcare solutions as the founder of FMG Corp., established in 1978. Prior to establishing FMG Corp., he was instrumental in developing the Tandy TRS-80 microcomputer, as well as other software and hardware for Radio Shack.



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
Chief Financial Officer since August 2003. From December 2002 to August 2003, she served as the Vice President of Finance of Optio and 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 Optio with an additional 7,000 square feet.



Optio leases all of its properties with remaining terms between one and two 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



On June
19, 2001, a lawsuit styled Wagner, et al v. Optio Software, Inc., was filed in the United States District Court for the Southern District of Ohio, Western Division, Case No. C-1-01-406 and later amended to include a corporate officer as a defendant.
The lawsuit, filed by 19 shareholders of the now bankrupt company known as Prograde Technologies, Inc. (PTI), alleged breach of contract, promissory estoppel and promissory fraud arising out of the termination by Optio of negotiations of
a possible merger with PTI. The plaintiffs were seeking compensatory damages



- 16 -



---

##### Table of Contents

of an unspecified amount, but in excess of $1.0 million, as well as punitive damages in excess of $10.0 million,
reimbursement for the plaintiffs attorneys fees and associated costs and expenses of the lawsuit. Optio counterclaimed against two of the plaintiffs for failure to pay on a guarantee on a promissory note. On July 21, 2003, the parties
executed a Settlement Agreement and Mutual General Release. The settlement included the release by PTIs trustee in bankruptcy of all claims against the plaintiffs, the Company and a Company officer and a non-appealable order approving the
release of the trustees claims by the bankruptcy court. Under the terms of the settlement, Optio paid a total of $875,000 and received immediate reimbursement from its insurer of $750,000. Both parties were required to release all claims each
may have in the PTI bankruptcy in exchange for a reciprocal release from the bankruptcy trustee. The Company had previously recorded a liability for the settlement and a receivable for the amount to be contributed by the insurance carrier, after
which settlement was made on July 21, 2003.



On April 8, 2003,
a lawsuit styled Donald K. Dunaway v. Optio Software, Inc. was filed in the Circuit Court of the Eighteenth Judicial Circuit for Seminole County, Florida. Optio removed the lawsuit to Federal District Court in the Middle District of Florida, Orlando
Division. The complaint was filed by a former employee of Optio claiming that he was entitled to certain unpaid commissions earned while employed at Optio. The plaintiff was seeking compensatory, actual, special and consequential damages as a result
of Optios alleged actions, as well as reimbursement of plaintiffs attorneys fees, prejudgment interest and the costs of the action. The lawsuit was settled on January 15, 2004 for approximately $86,000. Optio recorded the
settlement in its financial statements for the year ended January 31, 2004.



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, 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. Optio is a co-defendant with approximately 300 other issuers in this suit. The complaint includes allegations of violations of (i) Section 11 of the Securities Act of 1933 by all named defendants, (ii)
Section 12(a)(2) of the Securities Act of 1933 by the underwriter defendants, (iii) Section 15 of the Securities Act of 1933 by the individual defendants, and (iv) Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder by the underwriter defendants. The complaint alleges that Optios prospectus was materially false and misleading because it failed to disclose, among other things, that: (i) the underwriters had solicited and received excessive and
undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of a limited 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. 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. A proposal to settle the claims against Optio and other companies and individual defendants in the litigation was conditionally accepted by Optio. The completion of the settlement is subject to a number
of conditions, including Court approval. The Court preliminarily approved the settlement on February 15, 2005, subject to certain modifications which are currently pending approval by the defendants. Under the settlement, the plaintiffs will dismiss
and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in the action. Optio may still have yet undetermined exposure to the
underwriters pursuant to indemnification provisions in the underwriting agreement entered into at the time of the initial public offering. Under the guaranty, all the insurers for all the issuers will be required to pay an amount equal to $1.0
billion less any amounts ultimately collected by the plaintiffs from the underwriter defendants in all the cases.



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.



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



- 17 -



---

##### Table of Contents

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



None.



PART II



Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



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 15, 2005, the closing price of the common stock on the Over-the-Counter Bulletin Board was $1.12.



The following table reflects the range of high and low sale 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, 2005 |  | $    | 1.44 |     | $ | 1.05
|Quarter Ended October 31, 2004 |  | $    | 1.31 |     | $ | 0.80
|Quarter Ended July 31, 2004    |  | $    | 1.60 |     | $ | 1.10
|Quarter Ended April 30, 2004   |  | $    | 1.85 |     | $ | 1.24
|Quarter Ended January 31, 2004 |  | $    | 1.53 |     | $ | 1.05
|Quarter Ended October 31, 2003 |  | $    | 1.45 |     | $ | 0.75
|Quarter Ended July 31, 2003    |  | $    | 0.95 |     | $ | 0.38
|Quarter Ended April 30, 2003   |  | $    | 0.49 |     | $ | 0.30



Holders



As of April 15, 2005, there were approximately 110 holders of record of
Optios common stock.



Dividends



Optio did not pay any dividends during the years ended January 31, 2003,
2004 or 2005. 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. In addition,
Optios line of credit contains a covenant that prohibits the payment of dividends.



Recent Sales of Unregistered Securities



None.



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, 2001, 2002, 2003, 2004 and 2005 have been derived from the audited
financial statements of Optio.



- 18 -



---

##### Table of Contents

|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------ | - |  | -------- | ------ | - |  | - | ------ | -
|                                                                                      |  | Year Ended January 31, |        
|                                                                                      |  | 2001                   |         |   | 2002 |   |         | 2003 |  |   | 2004   |   |  | 2005 (a) |       
|Statement of Operations Data (in thousands, except per share data):                   |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Revenue:                                                                              |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|License fees                                                                          |  | $                      | 14,031  |   |      | $ | 12,592  |      |  | $ | 10,445 |   |  | $        | 10,205 |   |  | $ | 10,175 |  
|Subscription fees                                                                     |  |                        |        |   |      |   |        |      |  |   |       |   |  |          |       |   |  |   | 930    |  
|Services, maintenance and other                                                       |  |                        | 16,282  |   |      |   | 18,228  |      |  |   | 17,379 |   |  |          | 17,110 |   |  |   | 17,262 |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Total revenue                                                                         |  |                        | 30,313  |   |      |   | 30,820  |      |  |   | 27,824 |   |  |          | 27,315 |   |  |   | 28,367 |  
|Costs of revenue (exclusive of depreciation and amortization shown separately below): |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|License fees                                                                          |  |                        | 607     |   |      |   | 519     |      |  |   | 549    |   |  |          | 436    |   |  |   | 650    |  
|Services, maintenance and other                                                       |  |                        | 12,178  |   |      |   | 10,395  |      |  |   | 7,808  |   |  |          | 6,358  |   |  |   | 5,891  |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Total cost of revenue                                                                 |  |                        | 12,785  |   |      |   | 10,914  |      |  |   | 8,357  |   |  |          | 6,794  |   |  |   | 6,541  |  
|Operating expenses:                                                                   |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Sales and marketing                                                                   |  |                        | 17,235  |   |      |   | 15,915  |      |  |   | 12,821 |   |  |          | 9,448  |   |  |   | 10,957 |  
|Research and development                                                              |  |                        | 4,392   |   |      |   | 4,487   |      |  |   | 4,278  |   |  |          | 4,078  |   |  |   | 4,616  |  
|General and administrative                                                            |  |                        | 5,803   |   |      |   | 7,626   |      |  |   | 6,962  |   |  |          | 4,572  |   |  |   | 4,120  |  
|Impairment of M2 note receivable                                                      |  |                        |        |   |      |   |        |      |  |   |       |   |  |          | 900    |   |  |   |       |  
|Depreciation and amortization                                                         |  |                        | 1,113   |   |      |   | 1,417   |      |  |   | 920    |   |  |          | 553    |   |  |   | 613    |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Total operating expenses                                                              |  |                        | 28,543  |   |      |   | 29,445  |      |  |   | 24,981 |   |  |          | 19,551 |   |  |   | 20,306 |  
|Income (loss) from operations                                                         |  |                        | (11,015 | ) |      |   | (9,539  | )    |  |   | (5,514 | ) |  |          | 970    |   |  |   | 1,520  |  
|Other income (expense):                                                               |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Interest income                                                                       |  |                        | 973     |   |      |   | 273     |      |  |   | 233    |   |  |          | 171    |   |  |   | 187    |  
|Interest expense                                                                      |  |                        | (30     | ) |      |   | (103    | )    |  |   | (51    | ) |  |          | (17    | ) |  |   | (12    | )
|Write-down of ec-Hub investment                                                       |  |                        |        |   |      |   | (2,209  | )    |  |   |       |   |  |          |       |   |  |   |       |  
|Other                                                                                 |  |                        | 42      |   |      |   | (154    | )    |  |   | 44     |   |  |          | 45     |   |  |   | 53     |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Income (loss) before income taxes and loss from discontinued operations               |  |                        | (10,030 | ) |      |   | (11,732 | )    |  |   | (5,288 | ) |  |          | 1,169  |   |  |   | 1,748  |  
|Income tax expense (benefit)                                                          |  |                        | 339     |   |      |   | 15      |      |  |   | (578   | ) |  |          | (202   | ) |  |   | 95     |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Income (loss) from continuing operations                                              |  |                        | (10,369 | ) |      |   | (11,747 | )    |  |   | (4,710 | ) |  |          | 1,371  |   |  |   | 1,653  |  
|Loss from discontinued operations                                                     |  |                        | (4,739  | ) |      |   | (16,679 | )    |  |   | (132   | ) |  |          |       |   |  |   |       |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Net income (loss)                                                                     |  | $                      | (15,108 | ) |      | $ | (28,426 | )    |  | $ | (4,842 | ) |  | $        | 1,371  |   |  | $ | 1,653  |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Income (loss) per share from continuing operations  basic                            |  | $                      | (0.59   | ) |      | $ | (0.64   | )    |  | $ | (0.25  | ) |  | $        | 0.07   |   |  | $ | 0.08   |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Income (loss) per share from continuing operations  diluted                          |  | $                      | (0.59   | ) |      | $ | (0.64   | )    |  | $ | (0.25  | ) |  | $        | 0.06   |   |  | $ | 0.07   |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Loss per share from discontinued operations  basic and diluted                       |  | $                      | (0.27   | ) |      | $ | (0.90   | )    |  | $ | (0.01  | ) |  | $        | 0.00   |   |  | $ | 0.00   |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Net income (loss) per share  basic                                                   |  | $                      | (0.86   | ) |      | $ | (1.54   | )    |  | $ | (0.26  | ) |  | $        | 0.07   |   |  | $ | 0.08   |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Net income (loss) per share  diluted                                                 |  | $                      | (0.86   | ) |      | $ | (1.54   | )    |  | $ | (0.26  | ) |  | $        | 0.06   |   |  | $ | 0.07   |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Weighted average shares outstanding  basic                                           |  |                        | 17,475  |   |      |   | 18,419  |      |  |   | 18,963 |   |  |          | 19,191 |   |  |   | 20,097 |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Weighted average shares outstanding  diluted                                         |  |                        | 17,475  |   |      |   | 18,419  |      |  |   | 18,963 |   |  |          | 21,313 |   |  |   | 23,544 |  
|                                                                                      |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|                                                                                      | 
|                                                                                      |  | At January 31,         |        
|                                                                                      |  | 2001                   |         |   | 2002 |   |         | 2003 |  |   | 2004   |   |  | 2005     |       
|Balance Sheet Data (in thousands):                                                    |  |                        |         |   |      |   |         |      |  |   |        |   |  |          |        |   |  |   |        |  
|Cash and cash equivalents                                                             |  | $                      | 8,736   |   |      | $ | 5,378   |      |  | $ | 3,902  |   |  | $        | 5,328  |   |  | $ | 5,433  |  
|Working capital (deficiency)                                                          |  |                        | 9,837   |   |      |   | 2,124   |      |  |   | (1,560 | ) |  |          | 1,448  |   |  |   | 1,474  |  
|Total assets                                                                          |  |                        | 55,838  |   |      |   | 18,602  |      |  |   | 14,443 |   |  |          | 14,246 |   |  |   | 17,495 |  
|Long-term obligations                                                                 |  |                        | 8,261   |   |      |   | 224     |      |  |   | 297    |   |  |          | 188    |   |  |   | 92     |  
|Shareholders equity                                                                  |  |                        | 35,047  |   |      |   | 7,254   |      |  |   | 2,774  |   |  |          | 4,287  |   |  |   | 7,927  |  

---

|(a) | Includes the results of operations of VertiSoft since acquisition, for the period August 10, 2004 to January 31, 2005.
|--- | ----------------------------------------------------------------------------------------------------------------------



- 19 -



---

##### Table of Contents

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, delivery and availability of business critical information. Optios primary business consists of providing software and services that address organizations needs for document output
management, forms automation, print management and imaging solutions in the enterprise and healthcare industries.



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, 2005, Optio had over 5,000 customers worldwide using Optios software and services. No single
customer accounted for 10% or more of Optios revenue for the years ended January 31, 2003, 2004, or 2005.



Management Summary



For the year ending January 31, 2005, Optio had several strategic and financial goals, including (i) continuing to re-energize our healthcare market, (ii)
focusing on key partners to enhance revenues, especially in Europe, Middle East, and Asia (EMEA) and in our indirect reseller market, (iii) broadening our integrated solution portfolio via licensing, development or acquisition, and (vi)
maintaining a balanced focus on Company profitability and revenue growth.



Optios management believes that the consolidation of the large enterprise resource planning (ERP) vendors has impacted Optio during the year ended January 31, 2005. Historically, Optios primary
partners have been J.D. Edwards and Oracle Corporation. During fiscal year 2004, J.D. Edwards, was acquired by PeopleSoft. In an effort to show our continued commitment to this market, Optio obtained its PeopleSoft integration certificate in March
2004. As anticipated, customers in the former J.D. Edwards and PeopleSoft user base, or prospects, were unsettled with the pending acquisition by Oracle, causing continued softness in this market. This consolidation of the ERP vendors caused some
uncertainty that tended to delay new purchases and as a result Optios domestic direct, new customer sales decreased by approximately $800,000. Conversely, sales to existing customers increased more than $900,000 as a result of the introduction
of broader, value-added solutions and the quality of our ongoing relationships.



Optio was able to continue its partner focus, build upon its relationships, and continue to generate revenues in these areas. Optio was able to capitalize on its Oracle marketplace, as well as build upon its
relationship with QAD. With continued efforts in the Oracle space, including the installation of Optios software in Oracles own demonstration center and Optios selection by Oracle for its Oracle Partner Financing Initiative,
Optios revenues from Oracle end-users grew to over 30% of Optios domestic license revenues. In addition, in October 2004, Optio announced its addition to QADs worldwide solution center, an information center used by QADs
global sales force. Further, Optio contracted with QADs two largest resellers, RCM Technologies, Inc. and Strategic Information Group, to resell Optios own products as well.



During the year ended January 31, 2005, Optio continued its efforts in expanding the partnerships enjoyed by our domestic
operations, especially with the large ERP vendors, to our EMEA operations. In addition, our EMEA operations focused on partnering with key resellers in the area, especially Germany, to increase revenue. As a result, license revenues from our
European operations increased to $2.1 million in the year ended January 31, 2005, from $1.7 million in the year ended January 31, 2004.



Optio introduced Optio MedEx in January 2003, which allowed us to begin the process of re-energizing our healthcare market and improve revenue from our
healthcare market in the year ended January 31, 2004, which increased to 31% of total domestic revenues from 20% in the prior year. While healthcare perpetual license revenues declined approximately $900,000 year over year, Optio did focus on
improving the overall quality of its healthcare products, installed new sales management and expanded the expertise of its sales team. These actions enabled us to concentrate on expanding our healthcare focus and position us to consider acquisitions
and their subsequent integration.



- 20 -



---

##### Table of Contents

To further address the needs of the healthcare market, Optio acquired VertiSoft Corporation
(VertiSoft) in August 2004, bringing to Optio a healthcare electronic document management system. Not only did this acquisition supply the technology needed to address healthcare providers needs, it also introduced a
subscription-based revenue model to Optios customers. Under this licensing model, customers pay a monthly subscription fee for the use and support of the software over a multi-year contract, thus providing a reliable and recurring revenue
pattern for the Company. Subscription based licensing contracts contributed $930,000 in revenue during the year ended January 31, 2005.



The acquisition of VertiSoft, which provided the healthcare electronic document management system, represents just one example of how Optio broadened its
integrated solution during the year ended January 31, 2005. In addition, Optio introduced Optio Imaging Solutions, an intelligent data capture, imaging and archive solution. The introduction of these solutions, along with the introduction of Optio
Print Manager during fiscal year 2004, contributed significantly to the revenue growth within our customer base. As mentioned previously, our ability to sell additional products to existing customers allowed Optio to increase revenues to existing
customers by $900,000 domestically.



In summary, total revenues
remained relatively consistent between the years ended January 31, 2004 and 2005, even though Optio increased revenues in its EMEA operations, increased revenues to its existing customer base and added the VertiSoft subscription-based revenue model.
Growth in our installed base, subscription fees and EMEA license revenues were offset by softness in perpetual license fees of healthcare products and new, direct sales to ERP customers. To maintain profitability, Optio has continued to focus on
cost control, while beginning conservative, yet prudent, reinvestment in research and development and sales and marketing.



During 2005, Optio began to increase its expenditures in the sales and marketing area and the research and development area in an effort to build for
future revenue growth. Sales and marketing expenses increased 16% over the previous year, which included an increase in direct marketing expenses, growth in our EMEA sales organization, especially in Germany, and an increase in marketing personnel.
In addition, Optio continued to increase its research and development efforts, especially in regards to products that serve the healthcare market, by adding five of the former VertiSoft employees to its team. Research and development expenses, as a
percentage of total revenue, increased to 16% in 2005 from 15% in 2004. Despite these investments, Optio continued to control costs in its general and administrative areas, decreasing its legal, insurance, bad debt and other administrative expenses,
allowing it to achieve income from operations of approximately $1.5 million in 2005.



Critical Accounting Policies and Use of Estimates



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



Revenue Recognition



Overview



The
Companys revenue consists of perpetual license fees of the Companys software products, maintenance, consulting services, customer training and subscription fees covering the licensing of the Companys software products and
maintenance. 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 by SOP No. 98-9, Software
Revenue Recognition, With Respect to Certain Transactions, and the Securities and Exchange Commissions Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements, as amended by SAB 104,
Revenue Recognition.



License Fees



The Company licenses its products through its direct sales force and
indirectly through resellers. In general,



- 21 -



---

##### Table of Contents

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 significant uncertainties surrounding product acceptance, the fees are fixed or 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
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.



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.



Subscription Revenue



The Company also licenses certain of its products in the
form of a subscription service contract, typically ranging from three to five years. Subscription revenue, which includes a license of the software product, technical support and future unspecified enhancements to the software product, is recognized
on a daily basis over the agreement period.



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 revenue in all periods presented.



Note Receivable



Optio holds a note from M2 Systems Corporation (M2 Systems) as partial consideration for the sale of Muscato and
TransLink. Under the terms of this note, M2 Systems was required to make payments of $100,000 each on September 1, 2003 and December 1, 2003 and a payment of $115,000 on June 1, 2004. M2 Systems failed to make these payments on their respective due
dates; however, payment was made prior to an event of default. The payments of $115,000 due on September 1, 2004, December 1, 2004 and March 1, 2005, were made when due.



During the third quarter of 2004, as a result of M2 Systems failure to make timely payments, management determined that this
was an indication that it was probable that Optio would be unable to collect all amounts due according to the contractual terms of the note. At that time, the loan was considered impaired and was written down to the assessed fair value of the
collateral. As of October 31, 2003, the collateral, including technology, accounts receivable, fixed assets and the discounted net cash flows of maintenance contracts was estimated to have an approximate fair value



- 22 -



---

##### Table of Contents

of $2.8 million, substantially less than the $3.7 million note receivable balance as of October 31, 2003. Thus Optio
recorded an impairment charge of $900,000 during the year ended January 31, 2004. Optio continues to reassess the value of the collateral on an ongoing basis. The amount of the note receivable recorded could be materially different under different
conditions or using different assumptions, including the varying assumptions regarding the fair value of the collateral. In Optios assessment of the collateral, varying assumptions, including the length of time of which customers would
continue on maintenance, resulted in estimates of the value of the collateral ranging from $1.8 million to $3.5 million, which could have resulted in an impairment charge ranging from $200,000 to $1.9 million. If M2 Systems defaults on the note and
the collateral proves to be of no value to Optio, Optio would incur an additional loss of approximately $2.4 million.



On September 15, 2004 Optio notified M2 Systems of certain non-monetary defaults under the M2 Systems Note. M2 Systems disputes these defaults. Optio has
not accelerated the indebtedness under the M2 Systems Note and the parties are negotiating to modify the current loan documents to address the alleged defaults by M2 Systems.



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. Management reviews its accounts receivable on a regular basis to determine if any such
amounts may be potentially uncollectible. The Company includes any balances that are determined to be uncollectible, along with a general reserve at varying percentages of 3% to 20%, in its overall allowance for doubtful accounts. Based on
managements best estimate, it believes the Companys allowance for doubtful accounts is adequate as presented; however, the amount of the reserve could be different under different conditions or using varying assumptions. If the
percentage of the general reserve were to increase by 1%, an additional $50,000 reserve would be required. 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.



Impairment Assessments



Optio adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, on February 1, 2002. This standard requires that goodwill no longer be amortized and instead be tested for
impairment on a periodic basis.



Pursuant to SFAS 142, Optio is
required to test goodwill for impairment upon adoption and annually or more often if events or changes in circumstances indicate that the asset might be impaired. SFAS 142 provides for a two-stage approach to determining whether and by how much
goodwill has been impaired. The first stage requires a comparison of the fair value of the reporting unit, in our case, the former VertiSoft business, to its net book value. If the fair value is greater than book value, no impairment is deemed to
have occurred. If the fair value is less than book value, then the second stage must be completed to determine the amount, if any, of actual impairment. Optio has selected August 1 as its annual impairment testing date for its goodwill. August 1,
2005 will be Optios first annual testing date.



The
process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment decisions. In estimating our fair value, we will make estimates and judgments about future revenues and cash flows. Our forecasts will
be based upon assumptions that are consistent with the plans and estimates we are using to manage our business. Changes in these estimates could change our conclusion regarding impairment of goodwill and potentially result in a non-cash goodwill
impairment charge for all or a portion of the goodwill balance as of January 31, 2005. For long-lived assets, accounting standards dictate that assets become impaired when the undiscounted future cash flows expected to be generated by them are less
than their carrying amounts. When that occurs, the affected assets are written down to their estimated fair value.



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 and the Euro. 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



- 23 -



---

##### Table of Contents

items are translated at average exchange rates for the year. The resulting translation adjustments are recorded in the
foreign currency translation adjustment account. Optio and its subsidiaries conduct their business locally, thus the effects of changes in foreign currency exchange rates have had a minimal effect on the Companys results of operations 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, |   
|                                                                 |  | 2003                   |    |  | 2004 |   |  | 2005 |  
|Revenue:                                                         |  |                        |    |  |      |   |  |      |  
|License fees                                                     |  | 38                     | %  |  | 37   | % |  | 36   | %
|Subscription fees                                                |  |                       |    |  |     |   |  | 3    |  
|Services, maintenance and other                                  |  | 62                     |    |  | 63   |   |  | 61   |  
|                                                                 |  |                        |    |  |      |   |  |      |  
|Total revenue                                                    |  | 100                    |    |  | 100  |   |  | 100  |  
|                                                                 |  |                        |    |  |      |   |  |      |  
|Costs of revenue:                                                |  |                        |    |  |      |   |  |      |  
|License fees                                                     |  | 2                      |    |  | 2    |   |  | 2    |  
|Services, maintenance and other                                  |  | 28                     |    |  | 23   |   |  | 21   |  
|                                                                 |  |                        |    |  |      |   |  |      |  
|Total costs of revenue                                           |  | 30                     |    |  | 25   |   |  | 23   |  
|                                                                 |  |                        |    |  |      |   |  |      |  
|Gross profit                                                     |  | 70                     |    |  | 75   |   |  | 77   |  
|Operating expenses:                                              |  |                        |    |  |      |   |  |      |  
|Sales and marketing                                              |  | 46                     |    |  | 35   |   |  | 39   |  
|Research and development                                         |  | 15                     |    |  | 15   |   |  | 16   |  
|General and administrative                                       |  | 25                     |    |  | 17   |   |  | 15   |  
|Impairment of M2 note receivable                                 |  |                       |    |  | 3    |   |  |     |  
|Depreciation and amortization                                    |  | 3                      |    |  | 2    |   |  | 2    |  
|                                                                 |  |                        |    |  |      |   |  |      |  
|Total operating expenses                                         |  | 89                     |    |  | 72   |   |  | 72   |  
|                                                                 |  |                        |    |  |      |   |  |      |  
|Income (loss) from operations                                    |  | (19                    | )  |  | 3    |   |  | 5    |  
|Interest and other income (expense)                              |  |                       |    |  | 1    |   |  | 1    |  
|                                                                 |  |                        |    |  |      |   |  |      |  
|Income before income taxes and loss from discontinued operations |  | (19                    | )  |  | 4    |   |  | 6    |  
|Income tax benefit                                               |  | 2                      |    |  | 1    |   |  |     |  
|                                                                 |  |                        |    |  |      |   |  |      |  
|Income (loss) from continuing operations                         |  | (17                    | )  |  | 5    |   |  | 6    |  
|Loss from discontinued operations                                |  |                       |    |  |     |   |  |     |  
|                                                                 |  |                        |    |  |      |   |  |      |  
|Net income (loss)                                                |  | (17                    | )% |  | 5    | % |  | 6    | %
|                                                                 |  |                        |    |  |      |   |  |      |  



Revenue



Total revenue increased 4% to $28.4 million in 2005 from $27.3 million in
2004 and decreased 2% to $27.3 million in 2004 from $27.8 million in 2003. The increase in revenues in 2005 was primarily the result of the addition of $930,000 in subscription fees acquired with VertiSoft and an increase of $152,000 in maintenance
and other fees. The decrease in revenues in 2004 consisted of a $240,000 decrease in license revenue and a $269,000 decrease in services, maintenance and other revenue.



License fees revenue remained consistent at $10.2 million in both 2005 and 2004. License fee revenue decreased 2% to $10.2
million in 2004 from $10.4 million in 2003.



Optios
license revenues from its European operations increased 23% to $2.1 million in 2005 from $1.7 million in 2004. This increase was primarily the result of Optios continued efforts to build upon our existing ERP partner relationships in EMEA and
to form new reseller relationships, especially in Germany. Optios foreign license revenue for the year ended January 31, 2003 was $1.9 million, representing 18% of total license revenue.



- 24 -



---

##### Table of Contents

While license fee revenue grew in EMEA during 2005, overall license fee revenues remained consistent from
2004 to 2005. Within Optios domestic operations, sales of Optios products to new customers were somewhat impacted by the ERP industry consolidation, causing delays in decisions and causing sales to new customers to decline by
approximately $800,000. However, sales of newly introduced and additional products to existing customers of approximately $900,000 helped to provide an overall increase in Optios ERP license revenues. In addition, Optios domestic
non-healthcare, indirect partner sales increased by $200,000 in 2005 from 2004. This increase was offset by a reduction in Optios healthcare license revenues of approximately $900,000. Healthcare license revenues were negatively impacted due
to the turnover of the majority of the members of the healthcare sales team.



License fee revenue declined $240,000 from 2003 to 2004. In early fiscal year 2004, Optio continued to feel the impact of a challenging economy and pricing pressures from competitors, resulting in a slight decline in
Optios average sale price during the first three quarters of fiscal year 2004. However, during the fourth quarter of fiscal year 2004, Optio was able to capitalize on an improving economic environment and new products introduced during the
year, allowing Optio to exceed its average sale price in any of the previous quarters in 2003 or 2004 and achieve a 74% increase in license revenues over the previous quarter. Optio sold one license in the fourth quarter of fiscal year 2004 that
represented greater than 10% of that quarters license revenue.



Revenue from services, maintenance and other increased 1% to $17.3 million in 2005 from $17.1 million in 2004 and decreased 2% to $17.1 million in 2004 from $17.4 million in 2003. While maintenance revenue increased 6% to $11.4 million in
2005 from $10.8 million in 2004 and increased 9% to $10.8 million in 2004 from $9.8 million in 2003, services revenue decreased 7% to $5.9 million in 2005 from $6.3 million 2004 and decreased 17% to $6.3 million in 2004 from $7.6 million in 2003.
Optios maintenance revenue increased in both 2004 and 2005 due to its continued growth in and preservation of its customer base, coupled with slightly increased maintenance rates. The performance of the services (incidental to the performance
of the software), and thus recognition of the revenue, typically follows the license sale by one to three months. Thus continuing slowed license sales in the first three quarters of fiscal year 2004, and to a lesser extent, downward pricing
pressure, were the cause of the $1.3 million decline in services revenue in 2004. Optio was involved in large consulting engagements in fiscal year 2004 with specific large integrators, contributing an additional $340,000 to services revenue, thus
accounting for the largest portion of the decrease in services revenue between 2004 and 2005. In addition, during 2005, Optio experienced greater ease of implementation for some of its products, requiring less services and slightly reducing services
revenue.



Optio added a new revenue source in the form of
subscription revenue as a result of the acquisition of VeritSoft in August 2004. For the year ended January 31, 2005, the subscription revenue totaled $930,000.



License fee revenue constituted 36%, 37%, and 38% of total revenue in 2005, 2004, and 2003, respectively. Subscription fees were new in fiscal year
2005 and constituted 3% of total revenue in 2005. Services and other revenue constituted 21%, 23%, and 27% of total revenue in 2005, 2004, and 2003, respectively. Maintenance revenue constituted 40%, 40%, and 35% of total revenue in 2005, 2004, and
2003, respectively. In 2005, with the introduction of subscription fee revenues, license fee revenues and services revenue as a percentage of the total declined, while revenues in total remained constant between 2005 and 2004. Maintenance revenue,
however, increasing 6% over the previous years revenues, was consistent at 40% of total revenues. In 2004, software license revenue and its associated services revenue as percentages of total revenue decreased as a result of a decline in sales
due to a slower economic environment. The composition of the Companys revenues shifted from license fee and services revenues towards an increased mix of maintenance revenues, as Optios customer base grew.



Costs of Revenue



License fees.Costs of revenue from license fees, which excludes depreciation and amortization shown separately and
discussed below, increased 49% to $650,000 in 2005 from $436,000 in 2004, and decreased 21% to $436,000 in 2004 from $549,000 in 2003. Royalties paid for the inclusion of other companies products within Optios products, as well as
commissions paid to referral agents, remained relatively consistent between 2003 and 2004. However, in 2004, Optio received a $100,000 credit from one referral agent, thus decreasing the total costs of revenue from license fees for 2004. In 2005,
commissions paid to referral agents increased $145,000. This increase was due to a credit of $100,000 applied from the single referral agent in 2004. There was no such credit received in 2005. Royalties paid to Optios partners increased
$65,000 in 2005 from 2004. Costs of revenue from license fees represented 6% of total license revenue in 2005, 4% in 2004, and 5% in 2003.



- 25 -



---

##### Table of Contents

Services, Maintenance and Other.Costs of revenue from services, maintenance and other decreased
7% to $5.9 million in 2005 from $6.4 million in 2004 and decreased 19% to $6.4 million in 2004 from $7.8 million in 2003. The costs of outsourcers increased only $50,000 between 2005 and 2004. However, as a result of utilization efficiencies and
improvements in product design and training, Optios internal headcount for its support department declined during the second quarter of fiscal year 2004, which level it maintained during fiscal year 2005, saving approximately $175,000 in
costs. In addition, 2004 includes approximately $200,000 of expense related to the Companys bonus program, while 2005 does not include any bonus charge, as the Company determined that no bonuses would be paid for fiscal year 2005.



Optio ended 2003 with approximately 50% of its services revenues being
generated through outsourcers, a trend which continued into 2004. Even though the use of outsourcers represented 50% of Optios revenues in 2003 and 2004, an increase over 2002, services revenues declined significantly in both 2003 and 2004,
allowing for the overall cost of outsourcers to decline from $2.1 million in 2003 to $1.4 million in 2004. In addition, Optio downsized its internal consulting and support staff from 43 employees as of January 31, 2003 to 41 as of
January 31, 2004. Finally, a decreased headcount allowed for overhead and other general expenses, such as travel expenses, to decrease approximately $500,000 from 2003 to 2004.



Costs of revenue from services, maintenance and other represented 34%, 37%, and 45% of total services, maintenance and other
revenue in 2005, 2004, and 2003, respectively.



Operating Expenses



Sales and Marketing. Sales and marketing expenses
increased 16% to $11.0 million in 2005 from $9.4 million in 2004 and decreased 26% to $9.4 million in 2004 from $12.8 million in 2003. In 2005, the increase in sales and marketing expenses resulted primarily from (i) a $150,000 increase in direct
marketing expenses such as tradeshows and marketing literature, (ii) increased marketing headcount, increasing salaries by approximately $100,000, (iii) increased commissions and bonuses of approximately $300,000 due to the mix of sales employees
qualifying for quarterly bonuses and increased commission rates, (iv) increased consulting fees of approximately $50,000, (v) increased travel and related expenses of approximately $250,000, (vi) severance costs incurred in EMEA of approximately
$150,000, resulting from the termination of five employees, (vii) and having Optios German sales office open for a full year, contributing an additional $350,000 to expenses.



The decrease in sales and marketing expenses from 2003 to 2004 resulted from (i) reduced marketing projects, (ii)
fluctuations in headcount and severance, (iii) reduced travel expenses, (iv) reduced commissions, (v) reduced training expenses, and (vi) the closure of Optios Australian office. In 2004, 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, reducing the
amount of printed literature or video programs based upon need, and implementing lower cost per lead activities such as webinars. Overall, these programs reduced Optios marketing costs from $900,000 in 2003 to $670,000 in 2004. While Optio
reduced its marketing expenditures overall, it concentrated on lower cost per lead activities, allowing Optio to achieve a greater return on investment with no significant negative impact on revenues. Not until the last quarter of 2004 did Optio
begin increasing its marketing expenditures, including increasing its marketing staff.



Because the average headcount in 2003, 54, was greater than the average headcount in 2004, 49, salaries expense was greater in the year ending January 31, 2003 as well. The reduction in salaries and severance from the
year ended January 31, 2003 and 2004 represented a $1.1 million savings to Optio in fiscal year 2004. As of January 31, 2004, Optio had increased its sales and marketing staff to 53 in an effort to increase marketing and business development
activities.



As a result of the reduction in headcount in 2004,
coupled with a concerted effort to control expenses, Optio was able to reduce such expenses as travel, training and commissions. Optio reduced travel expenses from $1.4 million in 2003 to $840,000 in 2004, the majority of which relates to the sales
and marketing departments. In 2004, Optio also reduced training expenses by approximately $230,000 from 2003. In addition, Optio reduced commission and bonuses for sales from $2.0 million in 2003 to $1.6 million in 2004, as a result of the reduction
in headcount, revising the compensation plans and reduced revenues. Finally, Optio was able to achieve incremental savings of approximately $300,000 in 2004 by closing its Australian office.



- 26 -



---

##### Table of Contents

Research and Development. Research and development expenses consist primarily of salaries,
employee-related benefit costs and consulting fees incurred in association with the development of our products. Costs incurred for the research and development of new software products are expensed as incurred until such time that technological
feasibility, in the form of a working model, is established at which time such costs are capitalized. The costs incurred subsequent to the establishment of a working model but prior to general release of the product have not been significant.



Research and development expenses increased 13% to $4.6
million in 2005 from $4.1 million in 2004 and decreased 5% to $4.1 million in 2004 from $4.3 million in 2003. The increase in research and development expense in 2005 was primarily the result of additional salaries of approximately $450,000, mostly
representing the addition of the VertiSoft employees in August 2004. Other research and development expenses related to the addition of the VertiSoft employees increased approximately $50,000. Offsetting this increase, 2004 includes approximately
$200,000 of expense related to the Companys bonus program, while 2005 does not include any bonus charge, as the Company determined that no bonuses would be paid for fiscal year 2005. Finally, in 2005, Optio incurred approximately $120,000 in
consulting fees related to the development of future products.



Optios research and development staff remained relatively consistent between 2003 and 2004, with 39 and 40 employees, respectively. However, in 2003, Optio incurred expenses of $300,000 associated with consultants hired to assist with
the completion of the OptioFax 4.0 and the Optio MedEx product. OptioFax 4.0 was released in June 2002 and Optio MedEx was released in January 2003, at which time the use of the outside consultants ceased.



Our planned research and development activities for fiscal 2006 are discussed
more fully in Part I, Item 1 Business, Research and Development.



General and Administrative. General and administrative expenses decreased 10% to $4.1 million in 2005 from $4.6 million in 2004 and decreased 34% to $4.6 million in 2004 from $7.0 million in 2003. The decrease in general and
administrative expenses in 2005 resulted from: (i) reduced legal fees of $250,000, the result of fewer litigation issues, (ii) reduced insurance premiums of $325,000, resulting from the settlement of litigation, the Companys improved financial
performance, as well as other factors, (iii) reduced bonuses, due to the Company making the determination that bonuses would not be paid during 2005, of $100,000, and (iv) reduced bad debt expense of $200,000. These savings were offset by (i)
increased salaries of approximately $225,000 as a result of certain executives being on the payroll for the full twelve months of fiscal year 2005, compared to only six months in fiscal year 2004, and (ii) increased costs related to the trip
sponsored by the Company for employees meeting certain goals of approximately $100,000.



The decrease in general and administrative expenses during 2004 from 2003 resulted from: (i) reduced legal fees of $600,000 after the settlement of Optios Prograde litigation and the proposed settlement of
Optios shareholder lawsuit; (ii) a reduction of salary expense of approximately $500,000 resulting from the inclusion of a full years salary of the Companys former president, as well as severance charges, while current year
salaries only included six months of the Companys current president, (iii) savings of $161,000 in accounting and auditing fees; (iv) savings of $160,000 in recruiting fees; (v) the exclusion of $180,000 in legal settlements, primarily the
settlement of the Prograde litigation; and (vi) savings of over $200,000 in other office expenses between the two periods.



Impairment of M2 Note Receivable.Optio holds a note from M2 Systems as partial consideration for the sale of Muscato and TransLink. During the
third quarter of 2004, as a result of M2 Systems failure to make timely payments, management determined that this was an indication that it was probable that Optio would be unable to collect all amounts due according to the contractual terms of the
note. At that time, the loan was considered impaired and was written down to the assessed fair value of the collateral. As of October 31, 2003, the collateral, including technology, accounts receivable, fixed assets and the discounted net cash flows
of maintenance contracts was estimated to have an approximate fair value of $2.8 million, substantially less than the $3.7 million note receivable balance as of October 31, 2003. Thus Optio recorded an impairment charge of $900,000 during the year
ended January 31, 2004. No such impairment charge was required during the year ended January 31, 2005.



Depreciation and Amortization. Depreciation and amortization expenses increased 11% to $613,000 in 2005 from $553,000 in 2004 and decreased 40% to
$553,000 in 2004 from $920,000 in 2003. The increase in 2005 was due to



- 27 -



---

##### Table of Contents

the addition of $208,000 in amortization of intangibles associated with the VertiSoft acquisition, offset by a decrease
in deprecation of $150,000 resulting from a greater percentage of Optios assets becoming fully depreciated. The decrease in 2004 was due to slowing of capital expenditures and a greater percentage of Optios assets becoming fully
depreciated. Depreciation and amortization expenses represented 2%, 2%, and 3% of total revenue in 2005, 2004, and 2003, respectively. Amortization expense for the year ended January 31, 2006 is expected to be approximately $325,000.



Interest and Other Income (Expense)



Interest and other income increased 15% to $228,000 in 2005 from $199,000 in
2004 and decreased 12% to $199,000 in 2004 from $226,000 in 2003. Optio earned interest income of $187,000 in 2005, $171,000 in 2004 and $233,000 in 2003, primarily from interest on the M2 Systems notes receivable. Optio incurred interest expense on
its capital leases of $12,000 in 2005 and $17,000 in 2004. In 2003, Optio incurred interest expense on its line of credit and capital leases of $51,000.



Income Taxes



The income tax expense of $95,000 in 2005 is largely due to foreign and state taxes that were not sheltered by our available net operating loss
carryforwards. At January 31, 2005, the Company had recorded an approximate $20,000 deferred tax liability associated with a temporary difference between the book and tax treatment of the approximate $1.7 million of goodwill acquired in the
Vertisoft acquisition. Such goodwill is deductible for tax purposes over its estimated 15-year useful life, whereas for book purposes it is not amortized but rather evaluated for impairment on an annual basis in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets. Due to the indeterminate reversal period of the underlying cumulative difference for book purposes, the associated deferred tax liability has not been netted against the Companys deferred tax assets
for purposes of estimating its deferred tax valuation allowance at January 31, 2005. Rather the associated deferred tax liability has been recorded at its gross value until such time that the related temporary difference reverses for book purposes,
if ever. Optio will continue to record such deferred tax liability associated with this temporary difference in future periods and thus incur income tax expense.



The income tax benefit in the year ended January 31, 2004 represents a tax refund from Canada and select states resulting
from amended tax returns filed to use tax loss carrybacks to offset prior year taxable income. The income tax benefit in the year ended January 31, 2003 represents a federal 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, in 2003 Optios French operations recognized an $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. Note 8 to the Consolidated Financial Statements details the differences between Optios effective income tax rate and the statutory rate.



Discontinued Operations



On March 27, 2000, Optio acquired all the outstanding shares of Muscato and substantially all of the assets of 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, 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,
the financial statements have been reclassified to reflect the discontinuation of these components. Accordingly, the revenues, costs and expenses of these components have been segregated in the consolidated statements of operations. The net
operating results of these components have been reported as discontinued operations in the consolidated statements of operations.



- 28 -



---

##### Table of Contents

There was no revenue included in discontinued operations for the years ended January 31, 2003, 2004 or
2005. Net loss from discontinued operations for the year ended January 31, 2003 was $132,000. There was no net income or loss from discontinued operations for the years ended January 31, 2004 or 2005.



Liquidity and Capital Resources



At January 31, 2005 and 2004, Optio had $5.4 million and $5.3 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, |           
|                                                     |  | 2003                   |            |   | 2004 |   |           | 2005 | 
|Net cash provided by (used in) operations            |  | $                      | (1,836,000 | ) |      | $ | 1,464,000 |      |  | $ | 1,389,000 |  
|Net cash provided by (used in) investing activities  |  |                        | 161,000    |   |      |   | 7,000     |      |  |   | (493,000  | )
|Net cash provided by (used in) financing activities  |  |                        | 19,000     |   |      |   | (96,000   | )    |  |   | (882,000  | )
|Net increase (decrease) in cash and cash equivalents |  |                        | (1,476,000 | ) |      |   | 1,426,000 |      |  |   | 105,000   |  



Cash provided by
operating activities in 2005 resulted primarily from net income of $1.7 million, adjusted for the add-back of depreciation and amortization expense of $613,000, then offset by changes in working capital which resulted in a $944,000 use of cash, for
a total of $1.4 million cash provided by operating activities. The major components of the working capital decrease were a decrease in accounts receivable of $738,000 and a decrease in accrued expenses of $1.4 million. The $738,000 decrease in
accounts receivable was primarily the result of improved collections procedures achieved through dedicating an employee to the collections effort, resulting in an improvement in Optios days sales outstanding from 62 as of January 31,
2004 to 56 as of January 31, 2005. Optios accrued expenses declined primarily as a result of the pay-out of approximately $600,000 of the Companys 2004 year-end bonuses and approximately $700,000 of accrued expenses, including severance,
assumed in the VertiSoft acquisition.



Cash provided by
operating activities in 2004 resulted primarily from net income of $1.4 million, adjusted for the add-back of the loss on impairment of the M2 note receivable of $900,000 and depreciation and amortization expense of $553,000, offset by changes in
working capital which resulted in a $1.5 million use of cash. The major components of such working capital changes were an increase in accounts receivable of $1.2 million, the receipt of the $750,000 insurance reimbursement previously in
receivables, a $407,000 reduction in pre-paid expenses, a $680,000 reduction in accounts payable and a $1.1 million reduction in accrued expenses, including the Prograde settlement of $875,000. Optios accounts receivable increased primarily
due to the significant increase in license sales in the fourth quarter of 2004, including one large receivable for $575,000. Prepaid expenses and other assets declined as a result of savings in areas such as prepaid insurance premiums and the
reduction of other receivables. Finally, in 2004, accounts payable and accrued expenses declined as a result of the payment of the Prograde settlement of $875,000, the pay-out of severance in excess of $500,000 and an improvement in Optios
timing of payment of invoices as a result of our improved financial position.



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, 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 investing activities during 2005 included the purchase of
$470,000 in property and equipment for general business purposes, the payment of $348,000 for the acquisition of VertiSoft, offset by the receipt of $325,000 on the M2 note receivable.



Cash provided by investing activities during 2004 included the repayment of an officers note of $85,000 and payments
on the M2 note receivable of $86,000, offset by purchases of equipment of $164,000.



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.



Cash used in financing activities in 2005 included the payment of $1.2 million on notes payable and capital leases, primarily those assumed in the VertiSoft acquisition, offset by proceeds from the exercise of stock options of $279,000.



- 29 -



---

##### Table of Contents

Cash used in financing activities in 2004 included the payment on notes payable and capital leases of
$123,000, offset by the receipt of $27,000 in proceeds from the exercise of stock options. 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.



As of January 31, 2005,
Optios debt consisted of capital lease obligations of $93,000.



Optios only material long-term contractual obligations as of January 31, 2005 consisted primarily of obligations under capital and operating leases as indicated below:



|                                       |  |                       |           |                 |   |           |  |   |          
|-------------------------------------- |  | --------------------- | --------- | --------------- | - | --------- |  | - | ---------
|                                       |  | Payment Due by Period
|Contractual Obligations                |  | Total                 |           | Less than 1Year |   | 1-3 Years
|Capital Lease Obligations              |  | $                     | 93,000    |                 | $ | 86,000    |  | $ | 7,000    
|Operating Lease Obligations            |  | $                     | 2,933,000 |                 | $ | 1,579,000 |  | $ | 1,354,000
|Obligations Under Employment Contracts |  | $                     | 770,000   |                 | $ | 470,000   |  | $ | 300,000  
|                                       |  |                       |           |                 |   |           |  |   |          
|Total                                  |  | $                     | 3,796,000 |                 | $ | 2,135,000 |  | $ | 1,661,000
|                                       |  |                       |           |                 |   |           |  |   |          



On April 8, 2004,
Optio extended its existing line of credit through April 19, 2005. Subsequently, on April 27, 2005, Optio extended the line of credit again through April 19, 2006. 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 eligible accounts receivable. Currently, Optio has estimated that approximately $2.0
million would be available for borrowings based upon Optios historical accounts receivable balance. 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 earnings before interest, taxes, depreciation and amortization (EBITDA) requirements and restrictions on dividends. On December 4, 2003, the line of credit was amended,
effective from April 30, 2003, to modify the calculation of certain financial ratios to exclude any impairment charges related to the M2 Systems note receivable. As of January 31, 2004 and 2005, Optio was in compliance with the required financial
ratios, however, subsequent to year-end, Optio was in violation of the required financial covenants and was in default on the line of credit. The bank issued a waiver of non-compliance on April 22, 2005. There were no borrowings under the line of
credit as of January 31, 2005.



The Company holds a note
receivable from M2 Systems as partial 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 (4.0% and 5.25% as of
January 31, 2004 and 2005, respectively), 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. Should the note become uncollectible, Optios liquidity would be negatively impacted by the amount of the remaining installment payments, as reflected above.



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 intends to expand its product line, which may require acquisitions of companies or products
that enhance our product line. As a result, Optio may attempt to raise additional funds through equity or debt financing. There can be no assurance that Optio will be able to raise additional funds on favorable terms, or at all. 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.



- 30 -



---

##### Table of Contents

Off-Balance Sheet Financing



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 capital and 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, Charles Carey, for general
purposes of $5,000 at January 31, 2004 and 2005, respectively. The note bears interest at prime plus 1% per annum. As of January 31, 2005, the note was classified as current as the note requires payment within the next fiscal year. There have been
no changes to the terms of the notes subsequent to July 31, 2002.



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.



The Company purchased VertiSoft in August 2004. Barron Hughes, a member of the Companys Board of Directors, served as the former Chief Financial Officer of VertiSoft until its acquisition by the Company. In
accordance with the purchase agreement, Mr. Hughes was paid severance pay of $165,000. In addition, VertiSoft had a note payable to Mr. Hughes in the amount of $138,000. Effective with the the acquisition closing, the Company immediately repaid Mr.
Hughes the full amount of the note payable. Further, in connection with the acquisition, Mr. Hughes was issued options to purchase 96,975 shares of the Common Stock of the Company.



Robert Beck, a member of the Companys Board of Directors, is the President and owner of Sales Builders, Inc. During
the year ended January 31, 2004, the Company hired Sales Builders, Inc. to provide sales training to its employees. Fees paid to Sales Builders, Inc. under this arrangement totaled $44,000.



New Accounting Pronouncements



In December 2004, the FASB issued SFAS No. 123R, Share Based Payment,
a revision of SFAS 123, Stock Based Compensation. The Statement supersedes APB 25, Accounting for Stock Issued to Employees. This Statement requires a public entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the awardthe requisite service period (usually
the vesting period). This Statement eliminates the alternative to use APB 25s intrinsic value method of accounting that was provided in SFAS No. 123 as originally issued. As of the required effective date, all public entities record
compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding as of the date of adoption. SFAS 123R was originally effective for fiscal periods beginning after June 15, 2005.
On April 14, 2005, the Securities and Exchange Commission delayed the effective date, and as such, the Company will be required to implement the provisions of SFAS No. 123R in its fiscal quarter ending April 30, 2006. It is expected that the
adoption of this Statement will have a material impact on the financial position and results of operations of the Company.



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



- 31 -



---

##### Table of Contents

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



None.



Item 9A. CONTROLS AND PROCEDURES  EVALULATION AND DISCLOSURE CONTROLS AND PROCEDURES



Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange
Act Rule 13a-15(e)) as of January 31, 2005 and have concluded that, as of such date, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported with the time periods specified in the Commissions rules and forms.



The Companys management, including the Chief Executive Officer and the Chief Financial Officer, does not expect that the Companys disclosure
controls or the Companys internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are
met. Further, the design of a control system must reflect the fact that there are constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and may not be
detected. We will conduct periodic evaluations of our internal controls to enhance, where necessary, our procedures and controls.



Changes in Internal Controls



There were no significant changes in our internal controls over financial reporting that occurred during the quarter that ended January 31, 2005, that
have materially affected, or are reasonably like to materially affect, our internal controls over financial reporting.



Item 9B. OTHER INFORMATION



None.



PART III



The information
required by Items 10, 11, 12, 13 and 14 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, 2005.



- 32 -



---

##### Table of Contents

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 S-1 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 December 10, 2004, Optio filed a Form 8-K to furnish Optios third quarter press release dated December 9, 2004.



On December 27, 2004, Optio filed a Form 8-K to report that Optio had entered
into letter agreements with five executive officers providing for certain benefits to these executive officers upon a change of control of the Company. The executive officers who entered into a letter agreement were Paul OCallaghan, Terry
Kraft, Daryl Hatton, Steve Kaye and Caroline Bembry.



- 33 -



---

##### Table of Contents

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 29th day of April, 2005.



OPTIO SOFTWARE, INC.By:

/s/ C. Wayne CapeC. Wayne CapePresident 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 Cape   |  | President and Chief Executive Officer and Chairman of the Board of Directors       |  | April 29, 2005
|C. Wayne Cape       |  | (Principal Executive Officer)                                                      |  |               
|                    |  |                                                                                   
|/s/ Caroline Bembry |  | Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) |  | April 29, 2005
|Caroline Bembry     |  |                                                                                    | 
|                    |  |                                                                                   
|/s/ Barron Hughes   |  | Director                                                                           |  | April 29, 2005
|Barron Hughes       |  |                                                                                    |  |               
|                    |  |                                                                                   
|/s/ David Leach     |  | Director                                                                           |  | April 29, 2005
|David Leach         |  |                                                                                    |  |               
|                    |  |                                                                                   
|/s/ Ronald Diener   |  | Director                                                                           |  | April 29, 2005
|Ronald Diener       |  |                                                                                    |  |               
|                    |  |                                                                                   
|/s/ Robert Beck     |  | Director                                                                           |  | April 29, 2005
|Robert Beck         |  |                                                                                    |  |               



- 34 -



---

##### Table of Contents

Optio Software, Inc.

Index to Consolidated Financial Statements



|                                                                                                    |  |           
|--------------------------------------------------------------------------------------------------- |  | ----------
|                                                                                                    |  | PageNumber
|Report of Independent Registered Public Accounting Firm                                             |  | F-2       
|Consolidated Balance Sheets as of January 31, 2004 and 2005                                         |  | F-3       
|Consolidated Statements of Operations for the years ended January 31, 2003, 2004 and 2005           |  | F-4       
|Consolidated Statements of Shareholders Equity for the years ended January 31, 2003, 2004 and 2005 |  | F-5       
|Consolidated Statements of Cash Flows for the years ended January 31, 2003, 2004 and 2005           |  | F-6       
|Notes to Consolidated Financial Statements                                                          |  | F-7       



F-1



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm



To the Board of Directors and Shareholders of

Optio Software, Inc.:



We have audited the accompanying consolidated balance sheets of Optio Software, Inc. and subsidiaries (the Company) as of
January 31, 2004 and 2005 and the related statements of operations, shareholders equity and cash flows for each of the three years in the period ended January 31, 2005. We have also audited the financial statement schedule listed in the
accompanying 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 audits.



We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform our audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and schedule, 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 audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Optio Software, Inc. and subsidiaries as of January 31, 2004 and 2005, and the results of their
operations and cash flows for each of the three years in the period ended January 31, 2005 in conformity with accounting principles generally accepted in the United States of America.



Also, in our opinion, the schedule for the year ended January 31, 2005 presents fairly, in all material respects, the information set forth
therein.



/s/ BDO Seidman, LLP



Atlanta, Georgia

April 12, 2005, except for Note 6

which is as of April 27, 2005



F-2



---

##### Table of Contents

OPTIO SOFTWARE, INC.

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                 |  |             |             |   |      |   |             |  
|-------------------------------------------------------------------------------------------------------------------------------- |  | ----------- | ----------- | - | ---- | - | ----------- | -
|                                                                                                                                 |  | January 31, |            
|                                                                                                                                 |  | 2004        |             |   | 2005 |  
|ASSETS                                                                                                                           |  |             |             |   |      |   |             |  
|Current assets:                                                                                                                  |  |             |             |   |      |   |             |  
|Cash and cash equivalents                                                                                                        |  | $           | 5,328,000   |   |      | $ | 5,433,000   |  
|Accounts receivable, less allowance for doubtful accounts of $579,000 and $509,000, respectively                                 |  |             | 5,293,000   |   |      |   | 4,734,000   |  
|Prepaid expenses and other current assets                                                                                        |  |             | 283,000     |   |      |   | 425,000     |  
|Notes receivable from related party                                                                                              |  |             | 5,000       |   |      |   | 5,000       |  
|Current portion of notes receivable from M2                                                                                      |  |             | 310,000     |   |      |   | 353,000     |  
|                                                                                                                                 |  |             |             |   |      |   |             |  
|Total current assets                                                                                                             |  |             | 11,219,000  |   |      |   | 10,950,000  |  
|Property and equipment, net                                                                                                      |  |             | 541,000     |   |      |   | 668,000     |  
|Notes receivable from M2, net of impairment reserve of $900,000, less current portion                                            |  |             | 2,376,000   |   |      |   | 2,008,000   |  
|Goodwill                                                                                                                         |  |             |            |   |      |   | 1,748,000   |  
|Other intangibles, net                                                                                                           |  |             |            |   |      |   | 2,030,000   |  
|Other                                                                                                                            |  |             | 110,000     |   |      |   | 91,000      |  
|                                                                                                                                 |  |             |             |   |      |   |             |  
|Total assets                                                                                                                     |  | $           | 14,246,000  |   |      | $ | 17,495,000  |  
|                                                                                                                                 |  |             |             |   |      |   |             |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                             |  |             |             |   |      |   |             |  
|Current liabilities:                                                                                                             |  |             |             |   |      |   |             |  
|Accounts payable                                                                                                                 |  | $           | 812,000     |   |      | $ | 932,000     |  
|Accrued expenses                                                                                                                 |  |             | 2,627,000   |   |      |   | 2,000,000   |  
|Current portion of capital lease obligations                                                                                     |  |             | 76,000      |   |      |   | 86,000      |  
|Deferred revenue                                                                                                                 |  |             | 6,256,000   |   |      |   | 6,458,000   |  
|                                                                                                                                 |  |             |             |   |      |   |             |  
|Total current liabilities                                                                                                        |  |             | 9,771,000   |   |      |   | 9,476,000   |  
|Capital lease obligations, less current portion                                                                                  |  |             | 87,000      |   |      |   | 7,000       |  
|Deferred revenue                                                                                                                 |  |             |            |   |      |   | 2,000       |  
|Other long-term liabilities                                                                                                      |  |             | 101,000     |   |      |   | 83,000      |  
|                                                                                                                                 |  |             |             |   |      |   |             |  
|Total liabilities                                                                                                                |  |             | 9,959,000   |   |      |   | 9,568,000   |  
|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; 19,261,144 and 20,854,265 shares issued and outstanding,
respectively |  |             | 50,291,000  |   |      |   | 52,240,000  |  
|Accumulated deficit                                                                                                              |  |             | (46,084,000 | ) |      |   | (44,431,000 | )
|Accumulated other comprehensive income                                                                                           |  |             | 80,000      |   |      |   | 118,000     |  
|                                                                                                                                 |  |             |             |   |      |   |             |  
|Total shareholders equity                                                                                                       |  |             | 4,287,000   |   |      |   | 7,927,000   |  
|                                                                                                                                 |  |             |             |   |      |   |             |  
|Total liabilities and shareholders equity                                                                                       |  | $           | 14,246,000  |   |      | $ | 17,495,000  |  
|                                                                                                                                 |  |             |             |   |      |   |             |  



See accompanying
notes to consolidated financial statements.



F-3



---

##### Table of Contents

OPTIO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                      |  | Year Ended January 31, |           
|                                                                                      |  | 2003                   |            |   | 2004 |   |            | 2005 | 
|Revenue:                                                                              |  |                        |            |   |      |   |            |      |  |   |            |  
|License fees                                                                          |  | $                      | 10,445,000 |   |      | $ | 10,205,000 |      |  | $ | 10,175,000 |  
|Subscription fees                                                                     |  |                        |           |   |      |   |           |      |  |   | 930,000    |  
|Services, maintenance, and other                                                      |  |                        | 17,379,000 |   |      |   | 17,110,000 |      |  |   | 17,262,000 |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|                                                                                      |  |                        | 27,824,000 |   |      |   | 27,315,000 |      |  |   | 28,367,000 |  
|                                                                                      |  |                        |           
|Costs of revenue (exclusive of depreciation and amortization shown separately below): |  |                        |            |   |      |   |            |      |  |   |            |  
|License fees                                                                          |  |                        | 549,000    |   |      |   | 436,000    |      |  |   | 650,000    |  
|Services, maintenance, and other                                                      |  |                        | 7,808,000  |   |      |   | 6,358,000  |      |  |   | 5,891,000  |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|                                                                                      |  |                        | 8,357,000  |   |      |   | 6,794,000  |      |  |   | 6,541,000  |  
|                                                                                      |  |                        |           
|Operating expenses:                                                                   |  |                        |            |   |      |   |            |      |  |   |            |  
|Sales and marketing                                                                   |  |                        | 12,821,000 |   |      |   | 9,448,000  |      |  |   | 10,957,000 |  
|Research and development                                                              |  |                        | 4,278,000  |   |      |   | 4,078,000  |      |  |   | 4,616,000  |  
|General and administrative                                                            |  |                        | 6,962,000  |   |      |   | 4,572,000  |      |  |   | 4,120,000  |  
|Impairment of M2 note receivable                                                      |  |                        |           |   |      |   | 900,000    |      |  |   |           |  
|Depreciation and amortization                                                         |  |                        | 920,000    |   |      |   | 553,000    |      |  |   | 613,000    |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|                                                                                      |  |                        | 24,981,000 |   |      |   | 19,551,000 |      |  |   | 20,306,000 |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Income (loss) from operations                                                         |  |                        | (5,514,000 | ) |      |   | 970,000    |      |  |   | 1,520,000  |  
|                                                                                      |  |                        |           
|Other income (expense):                                                               |  |                        |            |   |      |   |            |      |  |   |            |  
|Interest income                                                                       |  |                        | 233,000    |   |      |   | 171,000    |      |  |   | 187,000    |  
|Interest expense                                                                      |  |                        | (51,000    | ) |      |   | (17,000    | )    |  |   | (12,000    | )
|Other                                                                                 |  |                        | 44,000     |   |      |   | 45,000     |      |  |   | 53,000     |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|                                                                                      |  |                        | 226,000    |   |      |   | 199,000    |      |  |   | 228,000    |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Income (loss) before income taxes and loss from discontinued operations               |  |                        | (5,288,000 | ) |      |   | 1,169,000  |      |  |   | 1,748,000  |  
|Income tax expense (benefit)                                                          |  |                        | (578,000   | ) |      |   | (202,000   | )    |  |   | 95,000     |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Income (loss) from continuing operations                                              |  |                        | (4,710,000 | ) |      |   | 1,371,000  |      |  |   | 1,653,000  |  
|Loss from discontinued operations                                                     |  |                        | (132,000   | ) |      |   |           |      |  |   |           |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Net income (loss)                                                                     |  | $                      | (4,842,000 | ) |      | $ | 1,371,000  |      |  | $ | 1,653,000  |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Income (loss) per share from continuing operations  basic                            |  | $                      | (0.25      | ) |      | $ | 0.07       |      |  | $ | 0.08       |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Income (loss) per share from continuing operations  diluted                          |  | $                      | (0.25      | ) |      | $ | 0.06       |      |  | $ | 0.07       |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Income (loss) per share from discontinued operations  basic and diluted              |  | $                      | (0.01      | ) |      | $ |           |      |  | $ |           |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Net income (loss) per share - basic                                                   |  | $                      | (0.26      | ) |      | $ | 0.07       |      |  | $ | 0.08       |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Net income (loss) per share - diluted                                                 |  | $                      | (0.26      | ) |      | $ | 0.06       |      |  | $ | 0.07       |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Weighted average shares outstanding  basic                                           |  |                        | 18,962,662 |   |      |   | 19,190,661 |      |  |   | 20,096,877 |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Weighted average shares outstanding  diluted                                         |  |                        | 18,962,662 |   |      |   | 21,313,286 |      |  |   | 23,544,398 |  
|                                                                                      |  |                        |            |   |      |   |            |      |  |   |            |  



See accompanying
notes to consolidated financial statements.



F-4



---

##### Table of Contents

OPTIO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY



|                                                                      |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   |            |  
|--------------------------------------------------------------------- |  | ------------ |  | ------ | ------------------- | - |  | --------------------------------------------- | ----------- | - | ------------------------------ | - | -------- | ------------------------- |  | - | ------- | - |  | - | ---------- | -
|                                                                      |  | Common Stock |  |        | Accumulated Deficit |   |  | Accumulated Other Comprehensive Income (Loss) |             |   | Unamortized Stock Compensation |   |          | TotalShareholders Equity | 
|                                                                      |  | Shares       |  | Amount |                     |   |  |                                               |            
|Balance at January 31, 2002                                           |  | 18,582,398   |  | $      | 50,171,000          |   |  | $                                             | (42,613,000 | ) |                                | $ | (291,000 | )                         |  | $ | (13,000 | ) |  | $ | 7,254,000  |  
|Comprehensive loss, net of tax:                                       |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   |            |  
|Net loss                                                              |  |             |  |        |                    |   |  |                                               | (4,842,000  | ) |                                |   |         |                           |  |   |        |   |  |   | (4,842,000 | )
|Foreign currency translation adjustment                               |  |             |  |        |                    |   |  |                                               |            |   |                                |   | 256,000  |                           |  |   |        |   |  |   | 256,000    |  
|                                                                      |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   |            |  
|Comprehensive loss                                                    |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   | (4,586,000 | )
|Issuance of common stock from the exercise of stock options           |  | 545,100      |  |        | 101,000             |   |  |                                               |            |   |                                |   |         |                           |  |   |        |   |  |   | 101,000    |  
|Amortization of deferred compensation                                 |  |             |  |        |                    |   |  |                                               |            |   |                                |   |         |                           |  |   | 12,000  |   |  |   | 12,000     |  
|Change in deferred compensation related to stock option terminations  |  |             |  |        | (8,000              | ) |  |                                               |            |   |                                |   |         |                           |  |   | 1,000   |   |  |   | (7,000     | )
|                                                                      |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   |            |  
|Balance at January 31, 2003                                           |  | 19,127,498   |  | $      | 50,264,000          |   |  | $                                             | (47,455,000 | ) |                                | $ | (35,000  | )                         |  | $ |        |   |  | $ | 2,774,000  |  
|Comprehensive income, net of tax:                                     |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   |            |  
|Net income                                                            |  |             |  |        |                    |   |  |                                               | 1,371,000   |   |                                |   |         |                           |  |   |        |   |  |   | 1,371,000  |  
|Foreign currency translation adjustment                               |  |             |  |        |                    |   |  |                                               |            |   |                                |   | 115,000  |                           |  |   |        |   |  |   | 115,000    |  
|                                                                      |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   |            |  
|Comprehensive income                                                  |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   | 1,486,000  |  
|Issuance of common stock from the exercise of stock options           |  | 133,646      |  |        | 27,000              |   |  |                                               |            |   |                                |   |         |                           |  |   |        |   |  |   | 27,000     |  
|                                                                      |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   |            |  
|Balance at January 31, 2004                                           |  | 19,261,144   |  | $      | 50,291,000          |   |  | $                                             | (46,084,000 | ) |                                | $ | 80,000   |                           |  | $ |        |   |  | $ | 4,287,000  |  
|Comprehensive income, net of tax:                                     |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   |            |  
|Net income                                                            |  |             |  |        |                    |   |  |                                               | 1,653,000   |   |                                |   |         |                           |  |   |        |   |  |   | 1,653,000  |  
|Foreign currency translation adjustment                               |  |             |  |        |                    |   |  |                                               |            |   |                                |   | 38,000   |                           |  |   |        |   |  |   | 38,000     |  
|                                                                      |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   |            |  
|Comprehensive income                                                  |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   | 1,691,000  |  
|Issuance of common stock from the exercise of stock options           |  | 403,121      |  |        | 279,000             |   |  |                                               |            |   |                                |   |         |                           |  |   |        |   |  |   | 279,000    |  
|Issuance of common stock in connection with the VertiSoft acquisition |  | 1,190,000    |  |        | 1,309,000           |   |  |                                               |            |   |                                |   |         |                           |  |   |        |   |  |   | 1,309,000  |  
|Stock options issued in connection with the VertiSoft acquisition     |  |             |  |        | 361,000             |   |  |                                               |            |   |                                |   |         |                           |  |   |        |   |  |   | 361,000    |  
|                                                                      |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   |            |  
|Balance at January 31, 2005                                           |  | 20,854,265   |  |        | 52,240,000          |   |  | $                                             | (44,431,000 | ) |                                | $ | 118,000  |                           |  | $ |        |   |  | $ | 7,927,000  |  
|                                                                      |  |              |  |        |                     |   |  |                                               |             |   |                                |   |          |                           |  |   |         |   |  |   |            |  



See accompanying
notes to consolidated financial statements.



F-5



---

##### Table of Contents

OPTIO SOFTWARE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                   |  |                        |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                                   |  | Year Ended January 31, |           
|                                                                                                   |  | 2003                   |            |   | 2004 |   |            | 2005 | 
|Operating activities                                                                               |  |                        |            |   |      |   |            |      |  |   |            |  
|Net income (loss)                                                                                  |  | $                      | (4,842,000 | ) |      | $ | 1,371,000  |      |  | $ | 1,653,000  |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                        |            |   |      |   |            |      |  |   |            |  
|Depreciation                                                                                       |  |                        | 876,000    |   |      |   | 528,000    |      |  |   | 405,000    |  
|Amortization of other intangible assets                                                            |  |                        | 44,000     |   |      |   | 25,000     |      |  |   | 208,000    |  
|Provision for doubtful accounts                                                                    |  |                        | 266,000    |   |      |   | 265,000    |      |  |   | 67,000     |  
|Loss on impairment of M2 note receivable                                                           |  |                        |           |   |      |   | 900,000    |      |  |   |           |  
|Loss on sale of property and equipment                                                             |  |                        | 70,000     |   |      |   | 3,000      |      |  |   |           |  
|Non-cash compensation and interest                                                                 |  |                        | 5,000      |   |      |   |           |      |  |   |           |  
|Change in assets and liabilities (exclusive of acquisitions):                                      |  |                        |            |   |      |   |            |      |  |   |            |  
|Accounts receivable                                                                                |  |                        | 2,314,000  |   |      |   | (1,195,000 | )    |  |   | 738,000    |  
|Receivable on insurance claim                                                                      |  |                        | (750,000   | ) |      |   | 750,000    |      |  |   |           |  
|Prepaid expenses and other assets                                                                  |  |                        | (59,000    | ) |      |   | 407,000    |      |  |   | (89,000    | )
|Accounts payable                                                                                   |  |                        | 193,000    |   |      |   | (680,000   | )    |  |   | (76,000    | )
|Accrued expenses and accrued settlement of lawsuit                                                 |  |                        | 466,000    |   |      |   | (1,132,000 | )    |  |   | (1,354,000 | )
|Income taxes payable                                                                               |  |                        |           |   |      |   |           |      |  |   | 3,000      |  
|Deferred revenue                                                                                   |  |                        | (419,000   | ) |      |   | 222,000    |      |  |   | (166,000   | )
|                                                                                                   |  |                        |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) operating activities                                                |  |                        | (1,836,000 | ) |      |   | 1,464,000  |      |  |   | 1,389,000  |  
|                                                                                                   |  |                        |           
|Investing activities                                                                               |  |                        |            |   |      |   |            |      |  |   |            |  
|Proceeds from sale of marketable securities                                                        |  |                        | 210,000    |   |      |   |           |      |  |   |           |  
|Purchases of property and equipment                                                                |  |                        | (268,000   | ) |      |   | (164,000   | )    |  |   | (470,000   | )
|Payments from (advances to) shareholders                                                           |  |                        | 38,000     |   |      |   | 85,000     |      |  |   |           |  
|Payments from M2 note receivable                                                                   |  |                        | 181,000    |   |      |   | 86,000     |      |  |   | 325,000    |  
|Purchase of VertiSoft                                                                              |  |                        |           |   |      |   |           |      |  |   | (348,000   | )
|                                                                                                   |  |                        |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) investing activities                                                |  |                        | 161,000    |   |      |   | 7,000      |      |  |   | (493,000   | )
|                                                                                                   |  |                        |           
|Financing activities                                                                               |  |                        |            |   |      |   |            |      |  |   |            |  
|Payments of notes payable and capital lease obligations                                            |  |                        | (82,000    | ) |      |   | (123,000   | )    |  |   | (1,161,000 | )
|Proceeds from exercise of stock options                                                            |  |                        | 101,000    |   |      |   | 27,000     |      |  |   | 279,000    |  
|                                                                                                   |  |                        |            |   |      |   |            |      |  |   |            |  
|Net cash provided by (used in) financing activities                                                |  |                        | 19,000     |   |      |   | (96,000    | )    |  |   | (882,000   | )
|Impact of foreign currency rate fluctuations on cash                                               |  |                        | 180,000    |   |      |   | 51,000     |      |  |   | 91,000     |  
|                                                                                                   |  |                        |            |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash and cash equivalents                                               |  |                        | (1,476,000 | ) |      |   | 1,426,000  |      |  |   | 105,000    |  
|Cash and cash equivalents at beginning of year                                                     |  |                        | 5,378,000  |   |      |   | 3,902,000  |      |  |   | 5,328,000  |  
|                                                                                                   |  |                        |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents at end of year                                                           |  | $                      | 3,902,000  |   |      | $ | 5,328,000  |      |  | $ | 5,433,000  |  
|                                                                                                   |  |                        |            |   |      |   |            |      |  |   |            |  
|Supplemental cash flow information:                                                                |  |                        |            |   |      |   |            |      |  |   |            |  
|Cash paid for interest                                                                             |  | $                      | 35,000     |   |      | $ | 37,000     |      |  | $ | 14,000     |  
|                                                                                                   |  |                        |            |   |      |   |            |      |  |   |            |  
|Net cash paid for income taxes (income taxes refunded)                                             |  | $                      | (578,000   | ) |      | $ | (202,000   | )    |  | $ | 63,000     |  
|                                                                                                   |  |                        |            |   |      |   |            |      |  |   |            |  



See accompanying
notes to consolidated financial statements



F-6



---

##### 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, distribution and availability of business critical information. The Company markets primarily to companies located principally in the United States and Europe. The industry in which the Company
operates is subject to rapid change due to development of new technologies and products.



2. 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 perpetual license fees for the Companys software products, maintenance, consulting services, customer training and subscription fees which cover licensing of the Companys software products and
maintenance. 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 (SAB) No. 101, Revenue Recognition in Financial Statements,as amended by SAB 104,
Revenue Recognition.



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 significant uncertainties surrounding product acceptance, the fees are fixed or 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 based upon a percentage of list price or a contractually negotiated fixed fee. The
Company does not grant its resellers the right of return.



The
Company recognizes license 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-7



---

##### 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.



Subscription fees



The Company also licenses certain of its products in the form of a
subscription service contract, typically ranging from 3 to 5 years. Subscription revenue, which includes a license of the software product, technical support and future unspecified enhancements to the software product, is recognized on a daily basis
over the agreement period once the product has been installed.



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



The Company continually monitors events and changes in circumstances that would indicate the carrying amounts of notes
receivable, 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.



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 $901,000,
$669,000 and $822,000 during the years ended January 31, 2003, 2004 and 2005, respectively.



Shipping Fees and Handling Costs



In accordance with Emerging Issues Task Force 00-10, Accounting for Shipping and Handling Charges,the Company records all shipping fees and handling costs associated with transporting the licensed software to
customers as costs of revenue. The revenues associated with customer billings for these charges is reported as services, maintenance and other revenue.





F-8



---

##### 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, 2005 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.



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, 2004 and 2005 consisted of the following:



|                                               |  |             |            |   |      |   |            |  
|---------------------------------------------- |  | ----------- | ---------- | - | ---- | - | ---------- | -
|                                               |  | January 31, |           
|                                               |  | 2004        |            |   | 2005 |  
|Equipment                                      |  | $           | 2,183,000  |   |      | $ | 2,399,000  |  
|Furniture and fixtures                         |  |             | 521,000    |   |      |   | 604,000    |  
|Purchased software                             |  |             | 1,010,000  |   |      |   | 1,204,000  |  
|Leasehold improvements                         |  |             | 294,000    |   |      |   | 298,000    |  
|                                               |  |             |            |   |      |   |            |  
|                                               |  |             | 4,008,000  |   |      |   | 4,505,000  |  
|Less accumulated depreciation and amortization |  |             | (3,467,000 | ) |      |   | (3,837,000 | )
|                                               |  |             |            |   |      |   |            |  
|Net property and equipment                     |  | $           | 541,000    |   |      | $ | 668,000    |  
|                                               |  |             |            |   |      |   |            |  



Accrued Expenses



Accrued expenses as of January 31, 2004 and 2005 included the following:



|                                          |  |             |           |      |   |          
|----------------------------------------- |  | ----------- | --------- | ---- | - | ---------
|                                          |  | January 31,
|                                          |  | 2004        |           | 2005
|Accrued commissions and bonuses           |  | $           | 994,000   |      | $ | 442,000  
|Accrued sales taxes                       |  |             | 537,000   |      |   | 299,000  
|Accrued payroll and payroll related taxes |  |             | 254,000   |      |   | 354,000  
|Other                                     |  |             | 842,000   |      |   | 905,000  
|                                          |  |             |           |      |   |          
|Total accrued expenses                    |  | $           | 2,627,000 |      | $ | 2,000,000
|                                          |  |             |           |      |   |          



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.



Goodwill and Other Intangible Assets



The Company acquired goodwill and other intangible assets in connection with with the acquisition of VertiSoft Corporation (VertiSoft) in
August 2004. Under the purchase method of accounting pursuant to SFAS 141, the total purchase price was allocated to the acquired entitys net tangible and intangible assets based on their estimated fair values as of the date of the completion
of the acquisition. Any excess of the purchase price over the fair value of the net tangible assets/liabilities and identifiable intangible assets acquired was recorded as goodwill. In accordance with SFAS 142, goodwill and intangible assets with
indefinite lives resulting from business combinations have not been amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present) while identifiable intangible assets with finite lives are
amortized over their estimated useful lives. In the event that the



F-9



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Companys management determines that the value of goodwill or intangible assets has become impaired, the Company will incur an accounting charge for the amount of impairment during the fiscal quarter in which the
determination is made. The Company has selected August 1 as its annual impairment testing date for its goodwill.



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. Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.



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 information is provided to demonstrate 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, 2003, 2004 and 2005: risk-free interest rates of 4.66%, 3.48% and 3.96% respectively; no
dividend yield; volatility of 168% for 2003, 158% for 2004 and 145% for 2005; and an expected life of the options of 7.40 years for 2003, 7.51 years for 2004 and 7.11 for 2005.



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, 2003, 2004 and 2005 equaled $0.55, $0.55 and $1.19 per share, respectively. The Companys pro forma information as determined
using the fair value method of accounting under SFAS 123, was as follows:



|                                                                 |  |                        |            |   |      |   |           |      |  |   |           |  
|---------------------------------------------------------------- |  | ---------------------- | ---------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                 |  | Year Ended January 31, |           
|                                                                 |  | 2003                   |            |   | 2004 |   |           | 2005 | 
|Net income (loss) as reported                                    |  | $                      | (4,842,000 | ) |      | $ | 1,371,000 |      |  | $ | 1,653,000 |  
|Add: Compensation cost reported using the intrinsic value method |  |                        | 12,000     |   |      |   |          |      |  |   |          |  
|Deduct: Compensation cost using the fair value method            |  |                        | (1,124,000 | ) |      |   | (703,000  | )    |  |   | (395,000  | )
|                                                                 |  |                        |            |   |      |   |           |      |  |   |           |  
|Pro forma net income (loss)                                      |  | $                      | (5,954,000 | ) |      | $ | 668,000   |      |  | $ | 1,258,000 |  
|                                                                 |  |                        |            |   |      |   |           |      |  |   |           |  
|Net income (loss) per share as reported  basic                  |  |                        | (0.26      | ) |      |   | 0.07      |      |  |   | 0.08      |  
|Net income (loss) per share as reported  diluted                |  |                        | (0.26      | ) |      |   | 0.06      |      |  |   | 0.07      |  
|Pro forma net income (loss) per share  basic                    |  |                        | (0.31      | ) |      |   | 0.03      |      |  |   | 0.06      |  
|Pro forma net income (loss) per share  diluted                  |  |                        | (0.31      | ) |      |   | 0.03      |      |  |   | 0.05      |  



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 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, $4,000 in compensation expense was recognized in the year ended January 31, 2003.



F-10



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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 became 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 activities during the year ended January 31, 2005 consisted of certain assets and liabilities
assumed with the acquisition of VertiSoft discussed more fully in Note 13.



Comprehensive Income (Loss)



Comprehensive
income (loss) represents net income (loss) plus the results of certain shareholders equity changes not reflected in the consolidated statements of operations. The items in comprehensive income (loss) relate principally to foreign currency
translation adjustments.



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



In December 2004, the FASB issued SFAS No. 123R, Share Based Payment, a revision of SFAS 123, Stock Based Compensation. The Statement
supersedes APB 25, Accounting for Stock Issued to Employees. This Statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the
award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the awardthe requisite service period (usually the vesting period). This Statement eliminates the alternative to use
APB 25s intrinsic value method of accounting that was provided in SFAS No. 123 as originally issued. As of the required effective date, all public entities record compensation expense (as previous awards continue to vest) for the unvested
portion of previously granted awards that remain outstanding as of the date of adoption. SFAS 123R was originally effective for fiscal periods beginning after June 15, 2005. On April 14, 2005, the Securities and Exchange Commission delayed the
effective date, and as such, the Company will be required to implement the provisions of SFAS No. 123R in its fiscal quarter ending April 30, 2006. It is expected that the adoption of this Statement will have a material impact on the financial
position and results of operations of the Company.



Fiscal Year



The Company maintains a fiscal year ending January
31st. References to 2005, 2004 and 2003 represent the years ending January 31, 2005, 2004 and 2003, respectively.



Reclassifications



Certain prior year amounts have been changed to conform with the current
year presentation.



3. Discontinued Operations



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



F-11



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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.



There was no revenue included in
discontinued operations for the years ended January 31, 2003, 2004 or 2005. Net loss from discontinued operations for the year ended January 31, 2003 was $132,000. There was no net income or loss from discontinued operations for the years ended
January 31, 2004 or 2005.



4. Notes Receivable



As described in Note 3, the Company holds a note receivable from M2 Systems
as partial consideration for the sale of Muscato and Translink. At January 31, 2004, the gross principal balance due the Company on the note is $3,261,000. Accrued interest receivable of $22,000 is included in other current assets.



As described in Note 17, 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
(4.0% and 5.25% as of January 31, 2004 and 2005, respectively), 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. Interest is calculated each quarter on the then outstanding balance and the installment payments are allocated first to interest, with
the remaining balance allocated to principal. The amount presented as the current portion of the note receivable from M2 represents an estimate of installment payments expected to be allocated to principal during the year ending January 31, 2006,
based on the current prime rate.



During the third quarter of
2004, as a result of M2 Systems failure to make timely payments, management determined that this was an indication that it was probable that Optio would be unable to collect all amounts due according to the contractual terms of the note. At that
time, the loan was considered impaired and was written down to the assessed fair value of the collateral. As of October 31, 2003, the collateral, including technology, accounts receivable, fixed assets and the discounted net cash flows of
maintenance contracts was estimated to have an approximate fair value of $2.8 million, substantially less than the $3.7 million note receivable balance as of October 31, 2003. Thus Optio recorded an impairment charge of $900,000 during the year
ended January 31, 2004. The amount of the note receivable recorded could be materially different under different conditions or using different assumptions, including the varying assumptions regarding the fair value of the collateral. If M2 Systems
defaults on the note and the collateral proves to be of no value to the Company, the Company would incur an additional loss of $2.4 million. The Company has the right to receive the quarterly financial statements of M2 Systems and Muscato and has
certain audit rights as to the collateral for the note; therefore, the Company will periodically assess the value of the collateral and the note, as reflected on the Companys financial statements. No such impairment charge was required during
the year ended January 31, 2005.



On September 15, 2004 Optio
notified M2 Systems of certain non-monetary defaults under the M2 Systems Note. M2 Systems disputes these defaults. Optio has not accelerated the indebtedness under the M2 Systems Note and the parties are negotiating to modify the current loan
documents to address the alleged defaults by M2 Systems.



5. Financial
Instruments



Concentration of Credit Risk



Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents, 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, 2005 of $4.1 million represented investments in
money market funds.



F-12



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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 between 20% and 35% of its domestic revenues from healthcare organizations, with the remainder, including its international revenues, generated by a wide array of industries. In addition,
the Company generates portions of its revenues from the end-users of large enterprise resource planning (ERP) system vendors such as Oracle Corporation and QAD, Inc. Over 30% of the Companys domestic license revenues may be
generated from the end-users of a single ERP vendor at any given point in time. 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. Management reviews its accounts receivable on a regular basis to determine if any such amounts may be potentially uncollectible. The Company includes any balances that are
determined to be uncollectible, along with a general reserve, in its overall allowance for doubtful accounts. After all attempts to collect a receivable have failed the receivable is written off against the allowance. Based on managements best
estimate it believes the Companys allowance for doubtful accounts is adequate as presented. Historically, the Company has not experienced significant losses related to receivables from groups or customers in any particular industry or
geographic area. Bad debt expense for the years ended January 31, 2003, 2004 and 2005 amounted to $266,000, $265,000 and $67,000, respectively. Materially different amounts of bad debt expense and allowance for doubtful accounts could be reported
under different conditions or using different assumptions.



As
further explained in Note 4, the Company holds a note receivable from M2 Systems as partial consideration for the sale of Muscato and TransLink. This note was written down to its net realizable value during the third quarter of 2004 based upon
managements assessment of the fair value of the underlying collateral. The amount of the note receivable recorded could be materially different under different conditions or using different assumptions, including the varying assumptions
regarding the fair value of the collateral. If M2 Systems defaults on the note and the collateral proves to be of no value to the Company, the Company would incur an additional loss of $2.4 million.



Fair Values



The carrying amounts reported in the consolidated balance sheets for cash and cash equivalents, accounts receivable and note
receivable approximate their fair values. The fair value estimates were based on market information available to management as of January 31, 2005. The Company does not have financial instruments with off-balance sheet risk.



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:



|                              |  |             |          |   |      |   |          |  
|----------------------------- |  | ----------- | -------- | - | ---- | - | -------- | -
|                              |  | January 31, |         
|                              |  | 2004        |          |   | 2005 |  
|Equipment                     |  | $           | 404,000  |   |      | $ | 404,000  |  
|Less accumulated amortization |  |             | (241,000 | ) |      |   | (321,000 | )
|                              |  |             |          |   |      |   |          |  
|                              |  | $           | 163,000  |   |      | $ | 83,000   |  
|                              |  |             |          |   |      |   |          |  



Future minimum lease payments under
capital leases consist of the following at January 31, 2005:



|                                            |  |   |         |  
|------------------------------------------- |  | - | ------- | -
|2006                                        |  | $ | 91,000  |  
|2007                                        |  |   | 9,000   |  
|                                            |  |   |         |  
|Total minimum lease payments                |  |   | 100,000 |  
|Less amounts representing interest          |  |   | (7,000  | )
|                                            |  |   |         |  
|Present value of net minimum lease payments |  |   | 93,000  |  
|Less current portion                        |  |   | (86,000 | )
|                                            |  |   |         |  
|                                            |  | $ | 7,000   |  
|                                            |  |   |         |  



F-13



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



For the years ended January 31, 2003, 2004 and 2005, the Company had a line of credit of up to $4.0 million. The line of credit expired on April 19, 2006
and bore interest at the prime rate (4.0% and 5.25% at January 31, 2004 and 2005, respectively), subject to increase based on the Companys performance relative to certain financial ratios. Subsequently, on April 27, 2005, Optio extended
the line of credit through April 19, 2006. Optio may borrow up to $4.0 million, or such lesser amount as may be determined based on the level of accounts receivable. The Company has estimated that approximately $2.0 million would be available for
borrowings based upon the Companys historical accounts receivable balance. 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. On December 4, 2003, the line of credit was amended, effective from April 30, 2003, to modify the calculation of certain financial ratios to exclude any impairment
charges related to the M2 Systems note receivable. As of January 31, 2004 and 2005, Optio was in compliance with the required financial ratios, however, subsequent to year-end, Optio was in violation of the required financial covenants and was in
default on the line of credit. The bank issued a waiver of non-compliance on April 22, 2005. There were no borrowings under the line of credit as of January 31, 2004 and 2005.



7. Operating Leases



The Company leases office space and equipment under operating leases. Rent expense under the Companys operating leases was approximately $1,821,000,
$ 1,447,000 and $1,443,000 during the years ended January 31, 2003, 2004, and 2005, 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, 2005:



|     |  |   |          
|---- |  | - | ---------
|2006 |  | $ | 1,579,000
|2007 |  |   | 1,354,000
|     |  |   |          
|     |  | $ | 2,933,000
|     |  |   |          



8. Income Taxes



The provisions for income taxes are summarized below:



|          |  |                        |          |   |      |   |          |      |  |   |       
|--------- |  | ---------------------- | -------- | - | ---- | - | -------- | ---- |  | - | ------
|          |  | Year Ended January 31,
|          |  | 2003                   |          |   | 2004 |   |          | 2005
|Current:  |  |                        |          |   |      |   |          |      |  |   |       
|Federal   |  | $                      | (530,000 | ) |      | $ | (6,000   | )    |  | $ | 41,000
|State     |  |                        |         |   |      |   | (164,000 | )    |  |   | 22,000
|Foreign   |  |                        | (48,000  | ) |      |   | (32,000  | )    |  |   | 12,000
|          |  |                        |          |   |      |   |          |      |  |   |       
|          |  |                        | (578,000 | ) |      |   | (202,000 | )    |  |   | 75,000
|          |  |                        |         
|Deferred: |  |                        |          |   |      |   |          |      |  |   |       
|Federal   |  |                        |         |   |      |   |         |      |  |   | 16,000
|State     |  |                        |         |   |      |   |         |      |  |   | 4,000 
|          |  |                        |          |   |      |   |          |      |  |   |       
|          |  |                        |         |   |      |   |         |      |  |   | 20,000
|          |  |                        |          |   |      |   |          |      |  |   |       
|Total     |  | $                      | (578,000 | ) |      | $ | (202,000 | )    |  | $ | 95,000
|          |  |                        |          |   |      |   |          |      |  |   |       



F-14



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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



|                      |  |                        |            |   |      |   |           |      |  |   |           |  
|--------------------- |  | ---------------------- | ---------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                      |  | Year Ended January 31, |           
|                      |  | 2003                   |            |   | 2004 |   |           | 2005 | 
|U.S. operations       |  | $                      | (3,907,000 | ) |      | $ | 1,623,000 |      |  | $ | 2,050,000 |  
|                      |  |                        |           
|French operations     |  |                        | (867,000   | ) |      |   | (492,000  | )    |  |   | (392,000  | )
|German operations     |  |                        | (182,000   | ) |      |   | (92,000   | )    |  |   | (73,000   | )
|U.K. operations       |  |                        | (207,000   | ) |      |   | 124,000   |      |  |   | 68,000    |  
|Australian operations |  |                        | (257,000   | ) |      |   | 6,000     |      |  |   |          |  
|                      |  |                        |            |   |      |   |           |      |  |   |           |  
|                      |  | $                      | (5,420,000 | ) |      | $ | 1,169,000 |      |  | $ | 1,653,000 |  
|                      |  |                        |            |   |      |   |           |      |  |   |           |  



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



|                                                       |  |                        |            |   |      |   |          |      |  |   |          |  
|------------------------------------------------------ |  | ---------------------- | ---------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|                                                       |  | Year Ended January 31, |           
|                                                       |  | 2003                   |            |   | 2004 |   |          | 2005 | 
|Statutory rate of 34% applied to pre-tax income (loss) |  | $                      | (1,843,000 | ) |      | $ | 397,000  |      |  | $ | 595,000  |  
|State income taxes, net of Federal tax effect          |  |                        | (179,000   | ) |      |   | (116,000 | )    |  |   | 17,000   |  
|Research and development tax credits                   |  |                        | (430,000   | ) |      |   | (154,000 | )    |  |   | (351,000 | )
|Meals and entertainment expense                        |  |                        | 19,000     |   |      |   | 15,000   |      |  |   | 20,000   |  
|Change in valuation allowance                          |  |                        | 2,385,000  |   |      |   | (306,000 | )    |  |   | (186,000 | )
|Change in enacted tax laws                             |  |                        | (530,000   | ) |      |   | (38,000  | )    |  |   |         |  
|                                                       |  |                        |            |   |      |   |          |      |  |   |          |  
|                                                       |  | $                      | (578,000   | ) |      | $ | (202,000 | )    |  | $ | 95,000   |  
|                                                       |  |                        |            |   |      |   |          |      |  |   |          |  



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, |            
|                                      |  | 2004        |             |   | 2005 |  
|Deferred income tax assets:           |  |             |             |   |      |   |             |  
|Goodwill amortization                 |  | $           | 283,000     |   |      | $ | 248,000     |  
|Depreciation                          |  |             | 76,000      |   |      |   | 41,000      |  
|Net operating loss carryforwards      |  |             | 8,520,000   |   |      |   | 8,004,000   |  
|Capital loss carryforwards            |  |             | 6,115,000   |   |      |   | 6,115,000   |  
|Payroll related and other accruals    |  |             | 153,000     |   |      |   | 212,000     |  
|Allowance for doubtful accounts       |  |             | 567,000     |   |      |   | 555,000     |  
|Research and development credits      |  |             | 600,000     |   |      |   | 951,000     |  
|Reserve for ec-Hub                    |  |             | 533,000     |   |      |   | 533,000     |  
|Other, net                            |  |             | 61,000      |   |      |   | 63,000      |  
|Valuation allowance                   |  |             | (16,908,000 | ) |      |   | (16,722,000 | )
|                                      |  |             |             |   |      |   |             |  
|Total deferred income tax assets      |  |             |            |   |      |   |            |  
|Deferred income tax liabilities:      |  |             |             |   |      |   |             |  
|Goodwill amortization                 |  |             |            |   |      |   | (20,000     | )
|                                      |  |             |             |   |      |   |             |  
|Total deferred income tax liabilities |  |             |            |   |      |   | (20,000     | )
|                                      |  |             |             |   |      |   |             |  
|Net deferred tax liability            |  | $           |            |   |      | $ | (20,000     | )
|                                      |  |             |             |   |      |   |             |  



At January 31, 2005,
the Company had recorded an approximate $20,000 deferred tax liability associated with a temporary difference between the book and tax treatment of the approximate $1.7 million of goodwill acquired in the Vertisoft acquisition. Such goodwill is
deductible for tax purposes over its estimated 15-year useful life, whereas for book purposes it is not amortized but rather evaluated for impairment on an annual basis in accordance with SFAS No. 142,



F-15



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Goodwill and Other Intangible Assets. Due to the indeterminate reversal period of the underlying cumulative difference for book purposes, the associated deferred tax liability has not been netted against the
Companys deferred tax assets for purposes of estimating its deferred tax valuation allowance at January 31, 2005. Rather, the associated deferred tax liability has been recorded at its gross value until such time that the related temporary
difference reverses for book purposes, if ever. This amount is included in accrued expenses at January 31, 2005.



For financial reporting purposes, at January 31, 2004 and 2005, 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.



The Company has approximately $35.2 million of net operating loss carryforwards, approximately $15.2 million of capital loss
carryforwards and $951,000 of research and development credit carryforwards for federal income tax purposes that expire in various years through 2024, 2006 and 2024, respectively. In addition, at January 31, 2005, the Company had net operating loss
carryforwards of approximately $2.3 million resulting from its European operations. 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 change of ownership of the Company.



No deferred taxes have been provided on temporary differences related to investments in foreign subsidiaries because these investments are considered to
be permanent. We do not believe it is practicable to determine the amount of these unrecognized deferred taxes at this time.



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.



F-16



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



A summary of stock option activity is as follows:



|                                        |  |                 |   |  |                          |      |                               |   |  |   |       |  |   |     
|--------------------------------------- |  | --------------- | - |  | ------------------------ | ---- | ----------------------------- | - |  | - | ----- |  | - | ----
|                                        |  | Number ofShares |   |  | Exercise Price Per Share |      | WeightedAverageExercise Price
|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
|Options granted                         |  | 739,697         |   |  | $                        | 0.37 |                               | - |  | $ | 1.21  |  | $ | 0.62
|Options exercised                       |  | (133,646        | ) |  | $                        | 0.35 |                               | - |  | $ | 1.34  |  | $ | 0.87
|Options canceled/forfeited              |  | (1,104,018      | ) |  | $                        | 0.24 |                               | - |  | $ | 16.00 |  | $ | 1.26
|                                        |  |                 |   |  |                          |      |                               |   |  |   |       |  |   |     
|Outstanding options at January 31, 2004 |  | 6,705,533       |   |  | $                        | 0.01 |                               | - |  | $ | 16.00 |  | $ | 0.89
|Options granted                         |  | 956,832         |   |  | $                        | 1.00 |                               | - |  | $ | 1.59  |  | $ | 1.19
|Options exercised                       |  | (403,121        | ) |  | $                        | 0.88 |                               | - |  | $ | 1.70  |  | $ | 1.31
|Options canceled/forfeited              |  | (219,852        | ) |  | $                        | 0.24 |                               | - |  | $ | 16.00 |  | $ | 1.95
|                                        |  |                 |   |  |                          |      |                               |   |  |   |       |  |   |     
|Outstanding options at January 31, 2005 |  | 7,039,392       |   |  | $                        | 0.01 |                               | - |  | $ | 16.00 |  | $ | 0.91
|                                        |  |                 |   |  |                          |      |                               |   |  |   |       |  |   |     
|Exercisable options at January 31, 2003 |  | 6,114,231       |   |  | $                        | 0.01 |                               | - |  | $ | 16.00 |  | $ | 0.87
|                                        |  |                 |   |  |                          |      |                               |   |  |   |       |  |   |     
|Exercisable options at January 31, 2004 |  | 5,402,140       |   |  | $                        | 0.01 |                               | - |  | $ | 16.00 |  | $ | 0.89
|                                        |  |                 |   |  |                          |      |                               |   |  |   |       |  |   |     
|Exercisable options at January 31, 2005 |  | 5,399,559       |   |  | $                        | 0.01 |                               | - |  | $ | 16.00 |  | $ | 0.91
|                                        |  |                 |   |  |                          |      |                               |   |  |   |       |  |   |     



The following table
summarizes information concerning options outstanding and exercisable as of January

31, 2005:



|                    |  |                     |  |                                          |  |                               |       |                 |           |                               |   |      
|------------------- |  | ------------------- |  | ---------------------------------------- |  | ----------------------------- | ----- | --------------- | --------- | ----------------------------- | - | -----
|Options Outstanding |  | Options Exercisable
|Exercise Prices     |  | Number ofShares     |  | WeightedAverageRemainingContractual Life |  | WeightedAverageExercise Price |       | Number ofShares |           | WeightedAverageExercise Price
|$0.002 - $ 0.10     |  | 1,414,900           |  | N/A                                      |  | $                             | 0.03  |                 | 1,414,900 |                               | $ | 0.03 
|$ 0.24 - $ 1.00     |  | 4,214,593           |  | 4.44                                     |  | $                             | 0.73  |                 | 3,468,571 |                               | $ | 0.75 
|$1.000 -$ 2.00      |  | 1,269,998           |  | 8.48                                     |  | $                             | 1.29  |                 | 376,187   |                               | $ | 1.52 
|$3.031 - $10.00     |  | 75,545              |  | 5.18                                     |  | $                             | 8.55  |                 | 75,545    |                               | $ | 8.55 
|$12.50 - $16.00     |  | 64,356              |  | 5.01                                     |  | $                             | 15.93 |                 | 64,356    |                               | $ | 15.93
|                    |  |                     |  |                                          |  |                               |       |                 |           |                               |   |      
|                    |  | 7,039,392           |  | 5.34                                     |  | $                             | 0.91  |                 | 5,399,559 |                               | $ | 0.91 
|                    |  |                     |  |                                          |  |                               |       |                 |           |                               |   |      



The Company has
reserved 11,857,141 shares of common stock for issuance upon exercise of stock options under the Stock Incentive Plan, 1,539,500 shares of common stock for issuance upon exercise of stock options outside of the Stock Incentive Plan and 290,000
shares of common stock for issuance upon exercise of stock options under the Directors Stock Option Plan.



10. 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 $308,000, $0 and $45,000 during the years ended January 31, 2003, 2004 and
2005, respectively.



11. Related Party Transactions



The Company had a note receivable from a shareholder for general personal
purposes of $5,000 at both January 31, 2004 and 2005.



F-17



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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.



As further described in Note 13, the Company purchased VertiSoft in August 2004. Barron Hughes, a member of the
Companys Board of Directors, served as the former Chief Financial Officer of VertiSoft until its acquisition by the Company. In accordance with the purchase agreement, Mr. Hughes was paid severance pay of $165,000. In addition, VertiSoft had a
note payable to Mr. Hughes in the amount of $138,000. Effective with the acquisition closing, the Company immediately repaid Mr. Hughes the full amount of the note payable. Further, in connection with the acquisition, Mr. Hughes was issued 96,975
options to purchase the Common Stock of the Company.



Robert
Beck, a member of the Companys Board of Directors, is the President and owner of Sales Builders, Inc. During the year ended January 31, 2004, the Company hired Sales Builders, Inc. to provide sales training to its employees. Fees paid to Sales
Builders, Inc. under this arrangement totaled $44,000.



12. Income (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,
|                                                                                              |  | 2003                   |            |   | 2004 |   | 2005      
|Income (loss)                                                                                 |  | $                      | (4,842,000 | ) |      | $ | 1,371,000  |  | $ | 1,653,000 
|                                                                                              |  |                        |            |   |      |   |            |  |   |           
|Weighted average shares outstanding - basic                                                   |  |                        | 18,962,662 |   |      |   | 19,190,661 |  |   | 20,096,877
|Effect of dilutive stock options                                                              |  |                        |           |   |      |   | 2,122,625  |  |   | 3,299,297 
|Effect of VertiSoft shares held in escrow                                                     |  |                        |           |   |      |   |           |  |   | 148,224   
|                                                                                              |  |                        |            |   |      |   |            |  |   |           
|Weighted average shares outstanding  diluted                                                 |  |                        | 18,962,662 |   |      |   | 21,313,286 |  |   | 23,544,398
|                                                                                              |  |                        |            |   |      |   |            |  |   |           
|Income (loss) per share  basic                                                               |  | $                      | (0.26      | ) |      | $ | 0.07       |  | $ | 0.08      
|                                                                                              |  |                        |            |   |      |   |            |  |   |           
|Income (loss) per share  diluted                                                             |  | $                      | (0.26      | ) |      | $ | 0.06       |  | $ | 0.07      
|                                                                                              |  |                        |            |   |      |   |            |  |   |           
|Potentially dilutive stock options, excluded from diluted weighted average shares outstanding |  |                        | 1,523,010  |   |      |   | 698,295    |  |   | 685,141   
|                                                                                              |  |                        |            |   |      |   |            |  |   |           



13. Acquisition of VertiSoft
Corporation



On August 10, 2004, the Company consummated
the merger of VertiSoft, a privately held Georgia corporation, and Optio Software II, Inc., a wholly owned subsidiary of the Company, whereby VertiSoft became the surviving wholly owned subsidiary of the Company. Subsequently, on September 15, 2004,
VertiSoft Corporation was merged with and into the Company, with Optio Software, Inc. remaining the surviving corporation. The consideration given for all the common stock of VertiSoft included $348,000 in cash, the issuance of 1.5 million shares of
Optio common stock, of which 310,000 shares are to be held in escrow for a period of 18 months to secure the indemnification obligations of the shareholders of VertiSoft, the issuance of options to purchase 340,000 shares of Common Stock to certain
former VertiSoft executives and employees, and future conditional cash payments of $225,000 to be paid out in various installments over the following two years, contingent upon the achievement of certain customer retention and product development
goals. The cash component of the consideration given was paid from funds generated from the on-going operations of the Company. The preliminary purchase price is as follows:



|                                                                                    |  |   |          
|----------------------------------------------------------------------------------- |  | - | ---------
|Cash paid                                                                           |  | $ | 348,000  
|Common stock issued (1,190,000 shares, excluding the 310,000 shares held in escrow) |  |   | 1,309,000
|Stock options issued                                                                |  |   | 361,000  
|Preliminary acquisition costs                                                       |  |   | 331,000  
|                                                                                    |  |   |          
|                                                                                    |  | $ | 2,349,000
|                                                                                    |  |   |          



F-18



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The value of the common stock issued above was based on the market price of the Companys common stock on the date of issuance. Should the 310,000
shares held in escrow be released to the VertiSoft shareholders at the end of the 18 month period, the value of the shares based on the market value of the Companys common stock on that date will be added to goodwill.



The acquired assets consisted primarily of accounts receivable, software (not
considered in-process research and development), machinery, equipment, furniture and fixtures, cash, and all of the interests, rights and benefits accruing to VertiSoft under any sales orders, sales contracts, service agreements, and purchase
orders. In connection with the acquisition, the Company also assumed the liabilities of VertiSoft, consisting primarily of promissory notes payable with an estimated fair value of approximately $1,100,000, accounts payable, accrued payroll, and
service agreements.



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



|                         |  |   |            |  
|------------------------ |  | - | ---------- | -
|Tangible assets acquired |  | $ | 280,000    |  
|Liabilities assumed      |  |   | (1,917,000 | )
|Technology               |  |   | 839,000    |  
|Customer relationships   |  |   | 1,314,000  |  
|Non-compete agreement    |  |   | 85,000     |  
|Goodwill                 |  |   | 1,748,000  |  
|                         |  |   |            |  
|                         |  | $ | 2,349,000  |  
|                         |  |   |            |  



The technology is
being amortized over periods ranging from 3 months to 5 years, the customer relationships are being amortized over 11 years and the non-compete agreement is being amortized over 5 years.



The results of operations of VertiSoft have been included in the Companys consolidated condensed financial statements
from the date of the acquisition, August 10, 2004. The following unaudited pro forma financial information presents the combined results of operations of VertiSoft and Optio as though the acquisition had occurred at the beginning of the periods
presented. The pro forma financial information does not necessarily represent the results of operations that would have occurred had VertiSoft and Optio been a single company during the periods presented, nor does the Company believe that the pro
forma financial information presented is necessarily representative of future operating results.



|                                              |  |                        |            |   |      |   |           
|--------------------------------------------- |  | ---------------------- | ---------- | - | ---- | - | ----------
|                                              |  | Year ended January 31,
|                                              |  | 2004                   |            |   | 2005
|Revenue                                       |  | $                      | 29,086,000 |   |      | $ | 29,530,000
|Net income (loss)                             |  | $                      | (297,000   | ) |      | $ | 1,711,000 
|Net income (loss) per share  basic           |  | $                      | (0.01      | ) |      | $ | 0.08      
|Net income (loss) per share  diluted         |  | $                      | (0.01      | ) |      | $ | 0.07      
|Weighted average shares outstanding  basic   |  |                        | 20,380,661 |   |      |   | 20,717,888
|Weighted average shares outstanding  diluted |  |                        | 20,380,661 |   |      |   | 24,327,185



VertiSoft provides
document management solutions designed to streamline information access and distribution for physicians and clinical, medical records and financial services staff through a single interface or Composite Patient View. Its patented electronic document management system, QuickRecord, provides secure, individualized
access to patient information retrieved from any system, inside or outside the enterprise. The primary reasons for the acquisition were that the QuickRecord product broadens the Companys portfolio of healthcare solutions and establishes a
subscription-based licensing model for a new line of solutions.



F-19



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



In connection with the transaction described above, the Company entered into a three-year employment agreement with Donald H. French, VertiSofts
former President and CEO. Mr. French serves as Senior Vice President of Research and Development for the Company. Mr. Frenchs employment agreement provides for a base salary of $200,000, and an option to acquire 350,000 shares of common stock
at $1.10 per share (the Options). The Options vest over a period of four years. Upon Mr. Frenchs resignation for good reason, as defined in the agreement, or termination without cause, the Company will be obligated to pay him his
then-current base salary for the remaining term of the employment agreement. If Mr. Frenchs employment is terminated by reason of disability occurring in the performance of his duties, he will receive his base salary for 12 months less any
payments made to him under any long-term or short-term disability insurance policies. If Mr. French is terminated for cause, including resignation, or the mutual consent of the parties, he will receive no severance. Mr. Frenchs employment
agreement includes post-employment restrictive covenants not to compete, solicit the Companys customers or recruit the Companys employees.



14. Segment and Geographic Information



The Companys segments are organized around geographic locations. The Companys U.S. operations and European operations represent the
Companys two reportable segments. The Company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. Revenues
are attributable to each segment based on the location of the subsidiary originating the sale, which is typically the geographic location where the software is installed.



Segment information for the years ended January 31, 2003, 2004 and 2005 is summarized below.



|                                                                       |  |               |            |   |        |   |            |       |  |   |          |   |  |              |            |   |              |   |            |   |  |   |            |  
|---------------------------------------------------------------------- |  | ------------- | ---------- | - | ------ | - | ---------- | ----- |  | - | -------- | - |  | ------------ | ---------- | - | ------------ | - | ---------- | - |  | - | ---------- | -
|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 |   |              | $ |           |   |  | $ | 10,445,000 |  
|                                                                       |  |               |            |   |        |  
|Services, maintenance and other                                        |  |               | 15,217,000 |   |        |   | 2,098,000  |       |  |   | 64,000   |   |  |              | 17,379,000 |   |              |   |           |   |  |   | 17,379,000 |  
|                                                                       |  |               |            |   |        |  
|Intersegment revenue                                                   |  |               | 470,000    |   |        |   | 180,000    |       |  |   |         |   |  |              | 650,000    |   |              |   | (650,000   | ) |  |   |           |  
|                                                                       |  |               |            |   |        |   |            |       |  |   |          |   |  |              |            |   |              |   |            |   |  |   |            |  
|Total revenue                                                          |  |               | 24,267,000 |   |        |   | 4,087,000  |       |  |   | 120,000  |   |  |              | 28,474,000 |   |              |   | (650,000   | ) |  |   | 27,824,000 |  
|                                                                       |  |               |            |   |        |  
|Interest income                                                        |  |               | 230,000    |   |        |   | 2,000      |       |  |   | 1,000    |   |  |              | 233,000    |   |              |   |           |   |  |   | 233,000    |  
|                                                                       |  |               |            |   |        |  
|Interest expense                                                       |  |               | 47,000     |   |        |   |           |       |  |   | 4,000    |   |  |              | 51,000     |   |              |   |           |   |  |   | 51,000     |  
|                                                                       |  |               |            |   |        |  
|Depreciation and amortization                                          |  |               | 835,000    |   |        |   | 81,000     |       |  |   | 4,000    |   |  |              | 920,000    |   |              |   |           |   |  |   | 920,000    |  
|                                                                       |  |               |            |   |        |  
|Income tax benefit                                                     |  |               | (472,000   | ) |        |   | (106,000   | )     |  |   |         |   |  |              | (578,000   | ) |              |   |           |   |  |   | (578,000   | )
|                                                                       |  |               |            |   |        |  
|Segment loss before income taxes and loss from discontinued operations |  |               | (3,775,000 | ) |        |   | (1,256,000 | )     |  |   | (257,000 | ) |  |              | (5,288,000 | ) |              |   |           |   |  |   | (5,288,000 | )
|Segment net loss including loss from discontinued operations           |  |               | (3,435,000 | ) |        |   | (1,150,000 | )     |  |   | (257,000 | ) |  |              | (4,842,000 | ) |              |   |           |   |  |   | (4,842,000 | )
|Total segment assets                                                   |  |               | 15,735,000 |   |        |   | 2,689,000  |       |  |   | 133,000  |   |  |              | 18,557,000 |   |              |   | (4,114,000 | ) |  |   | 14,443,000 |  
|                                                                       |  |               |            |   |        |  
|Expenditures for long-lived assets                                     |  |               | 219,000    |   |        |   | 48,000     |       |  |   | 1,000    |   |  |              | 268,000    |   |              |   |           |   |  |   | 268,000    |  



F-20



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                          |  |               |            |   |        |   |           |       |  |          |        |  |              |            |   |              |   |            |   |  |   |            |  
|----------------------------------------- |  | ------------- | ---------- | - | ------ | - | --------- | ----- |  | -------- | ------ |  | ------------ | ---------- | - | ------------ | - | ---------- | - |  | - | ---------- | -
|Year ended January 31, 2004               |  | United States |            |   | Europe |   |           | Other |  | Combined |        |  | Eliminations |            |   | Consolidated |  
|Revenue from external customers:          |  |               |            |   |        |   |           |       |  |          |        |  |              |            |   |              |   |            |   |  |   |            |  
|License fees                              |  | $             | 8,476,000  |   |        | $ | 1,729,000 |       |  | $        |       |  | $            | 10,205,000 |   |              | $ |           |   |  | $ | 10,205,000 |  
|Services, maintenance and other           |  |               | 14,633,000 |   |        |   | 2,469,000 |       |  |          | 8,000  |  |              | 17,110,000 |   |              |   |           |   |  |   | 17,110,000 |  
|Intersegment revenue                      |  |               | 481,000    |   |        |   | 133,000   |       |  |          |       |  |              | 614,000    |   |              |   | (614,000   | ) |  |   |           |  
|                                          |  |               |            |   |        |   |           |       |  |          |        |  |              |            |   |              |   |            |   |  |   |            |  
|Total revenue                             |  |               | 23,590,000 |   |        |   | 4,331,000 |       |  |          | 8,000  |  |              | 27,929,000 |   |              |   | (614,000   | ) |  |   | 27,315,000 |  
|Interest income                           |  |               | 171,000    |   |        |   |          |       |  |          |       |  |              | 171,000    |   |              |   |           |   |  |   | 171,000    |  
|Interest expense                          |  |               | 17,000     |   |        |   |          |       |  |          |       |  |              | 17,000     |   |              |   |           |   |  |   | 17,000     |  
|Depreciation and amortization             |  |               | 489,000    |   |        |   | 64,000    |       |  |          |       |  |              | 553,000    |   |              |   |           |   |  |   | 553,000    |  
|Income tax expense (benefit)              |  |               | (205,000   | ) |        |   | 3,000     |       |  |          |       |  |              | (202,000   | ) |              |   |           |   |  |   | (202,000   | )
|Segment income (loss) before income taxes |  |               | 1,623,000  |   |        |   | (460,000  | )     |  |          | 6,000  |  |              | 1,169,000  |   |              |   |           |   |  |   | 1,169,000  |  
|Segment net income (loss)                 |  |               | 1,828,000  |   |        |   | (463,000  | )     |  |          | 6,000  |  |              | 1,371,000  |   |              |   |           |   |  |   | 1,371,000  |  
|Total segment assets                      |  |               | 15,648,000 |   |        |   | 3,088,000 |       |  |          | 87,000 |  |              | 18,823,000 |   |              |   | (4,577,000 | ) |  |   | 14,246,000 |  
|Expenditures for long-lived assets        |  |               | 157,000    |   |        |   | 7,000     |       |  |          |       |  |              | 164,000    |   |              |   |           |   |  |   | 164,000    |  
|                                          |  |               |            |   |        |  
|Year ended January 31, 2005               |  | United States |            |   | Europe |   |           | Other |  | Combined |        |  | Eliminations |            |   | Consolidated |  
|Revenue from external customers:          |  |               |            |   |        |   |           |       |  |          |        |  |              |            |   |              |   |            |   |  |   |            |  
|License fees                              |  | $             | 8,050,000  |   |        | $ | 2,125,000 |       |  | $        |       |  | $            | 10,175,000 |   |              | $ |           |   |  | $ | 10,175,000 |  
|Subscription fees                         |  |               | 894,000    |   |        |   | 36,000    |       |  |          |       |  |              | 930,000    |   |              |   |           |   |  |   | 930,000    |  
|Services, maintenance and other           |  |               | 14,467,000 |   |        |   | 2,795,000 |       |  |          |       |  |              | 17,262,000 |   |              |   |           |   |  |   | 17,262,000 |  
|Intersegment revenue                      |  |               | 447,000    |   |        |   | 202,000   |       |  |          |       |  |              | 649,000    |   |              |   | (649,000   | ) |  |   |           |  
|                                          |  |               |            |   |        |   |           |       |  |          |        |  |              |            |   |              |   |            |   |  |   |            |  
|Total revenue                             |  |               | 23,858,000 |   |        |   | 5,158,000 |       |  |          |       |  |              | 29,016,000 |   |              |   | (649,000   | ) |  |   | 28,367,000 |  
|Interest income                           |  |               | 182,000    |   |        |   | 5,000     |       |  |          |       |  |              | 187,000    |   |              |   |           |   |  |   | 187,000    |  
|Interest expense                          |  |               | 12,000     |   |        |   |          |       |  |          |       |  |              | 12,000     |   |              |   |           |   |  |   | 12,000     |  
|Depreciation and amortization             |  |               | 596,000    |   |        |   | 17,000    |       |  |          |       |  |              | 613,000    |   |              |   |           |   |  |   | 613,000    |  
|Income tax expense                        |  |               | 83,000     |   |        |   | 12,000    |       |  |          |       |  |              | 95,000     |   |              |   |           |   |  |   | 95,000     |  
|Segment income (loss) before income taxes |  |               | 2,132,000  |   |        |   | (384,000  | )     |  |          |       |  |              | 1,748,000  |   |              |   |           |   |  |   | 1,748,000  |  
|Segment net income (loss)                 |  |               | 2,049,000  |   |        |   | (396,000  | )     |  |          |       |  |              | 1,653,000  |   |              |   |           |   |  |   | 1,653,000  |  
|Total segment assets                      |  |               | 16,892,000 |   |        |   | 3,690,000 |       |  |          |       |  |              | 20,582,000 |   |              |   | (3,087,000 | ) |  |   | 17,495,000 |  
|Expenditures for long-lived assets        |  |               | 425,000    |   |        |   | 45,000    |       |  |          |       |  |              | 470,000    |   |              |   |           |   |  |   | 470,000    |  



15. Quarterly Financial Results
(Unaudited)



Summarized unaudited quarterly results
for the years ended January 31, 2004 and 2005 are as follows:



|                                                            |  |              |       |               |   |                  |  |   |               |   |  |   |      
|----------------------------------------------------------- |  | ------------ | ----- | ------------- | - | ---------------- |  | - | ------------- | - |  | - | -----
|For the year ended January 31, 2004                         |  | FirstQuarter |       | SecondQuarter |   | ThirdQuarter (a) |  |   | FourthQuarter
|Revenue                                                     |  | $            | 6,515 |               | $ | 6,709            |  | $ | 6,378         |   |  | $ | 7,713
|Cost of revenue, exclusive of depreciation and amortization |  |              | 1,721 |               |   | 1,576            |  |   | 1,580         |   |  |   | 1,917
|Income (loss) before interest and taxes                     |  |              | 147   |               |   | 438              |  |   | (397          | ) |  |   | 782  
|Net income (loss)                                           |  |              | 193   |               |   | 646              |  |   | (357          | ) |  |   | 889  
|Net loss per share - basic                                  |  | $            | 0.01  |               | $ | 0.03             |  | $ | (0.02         | ) |  | $ | 0.05 
|Net loss per share - diluted                                |  | $            | 0.01  |               | $ | 0.03             |  | $ | (0.02         | ) |  | $ | 0.04 



F-21



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                                            |  |              |       |               |   |                  |  |                   |       |  |   |      
|----------------------------------------------------------- |  | ------------ | ----- | ------------- | - | ---------------- |  | ----------------- | ----- |  | - | -----
|For the year ended January 31, 2005                         |  | FirstQuarter |       | SecondQuarter |   | ThirdQuarter (b) |  | FourthQuarter (b)
|Revenue                                                     |  | $            | 7,206 |               | $ | 6,794            |  | $                 | 6,649 |  | $ | 7,718
|Cost of revenue, exclusive of depreciation and amortization |  |              | 1,735 |               |   | 1,543            |  |                   | 1,527 |  |   | 1,736
|Income (loss) before interest and taxes                     |  |              | 567   |               |   | 372              |  |                   | 312   |  |   | 269  
|Net income (loss)                                           |  |              | 569   |               |   | 427              |  |                   | 353   |  |   | 304  
|Net loss per share - basic                                  |  | $            | 0.03  |               | $ | 0.02             |  | $                 | 0.02  |  | $ | 0.01 
|Net loss per share - diluted                                |  | $            | 0.02  |               | $ | 0.02             |  | $                 | 0.02  |  | $ | 0.01 

---

|(a) | The income (loss) before interest and taxes for the quarter ended October 31, 2003 included the $900,000 impairment charge on the M2 Systems note receivable, as further discussed in
Note 4.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Includes the results of operations of VertiSoft of acquired on August 10, 2004, discussed more fully in Note 13.
|--- | ----------------------------------------------------------------------------------------------------------------



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), alleged breach of contract, promissory estoppel and promissory fraud arising out of the termination by Optio of negotiations of a possible merger with PTI. The plaintiffs were seeking compensatory damages of an unspecified amount,
but in excess of $1.0 million, as well as punitive damages in excess of $10.0 million, reimbursement for the plaintiffs attorneys fees and associated costs and expenses of the lawsuit. Optio counterclaimed against two of the plaintiffs
for failure to pay on a guarantee on a promissory note. On July 21, 2003, the parties executed a Settlement Agreement and Mutual General Release. The settlement included the release by PTIs trustee in bankruptcy of all claims against the
plaintiffs, the Company and a Company officer and a non-appealable order approving the release of the trustees claims by the bankruptcy court. Under the terms of the settlement, Optio paid a total of $875,000 and received immediate
reimbursement from its insurer of $750,000. Both parties were required to release all claims each may have in the PTI bankruptcy in exchange for a reciprocal release from the bankruptcy trustee. The Company had previously recorded a liability for
the settlement and a receivable for the amount to be contributed by the insurance carrier, after which settlement was made on July 21, 2003.



On November 13, 2001, a lawsuit styled Kevin Dewey vs. Optio Software, Inc., et. al. was filed in the United States District Court for the Southern
District of New York. The complaint was filed against the underwriters in the Company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. Optio is a co-defendant with approximately 300 other issuers in this suit. The complaint includes allegations of violations of (i) Section 11 of
the Securities Act of 1933 by all named defendants, (ii) Section 12(a)(2) of the Securities Act of 1933 by the underwriter defendants, (iii) Section 15 of the Securities Act of 1933 by the individual defendants, and (iv) Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder by the underwriter defendants. The complaint alleges that Optios prospectus was materially false and misleading because it failed to disclose, among other things, that: (i)
the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of a limited 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. 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. A proposal to settle the claims against Optio and other companies and individual defendants in the litigation was conditionally accepted by
Optio. The completion of the settlement is subject to a number of conditions, including Court approval. The Court preliminarily approved the settlement on February 15, 2005, subject to certain modifications which are currently pending approval by
the defendants. Under the settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in
the action. Optio may still have yet undetermined exposure to the underwriters pursuant to indemnification provisions in the underwriting agreement entered into at the time of the initial public offering. Under the guaranty, all the insurers for all
the issuers will be required to pay an amount equal to $1.0 billion less any amounts ultimately collected by the plaintiffs from the underwriter defendants in all the cases. The disposition of this matter is limited to Optios $300,000
corporate insurance deductible. The Company has completed payment of the insurance deductible through payment of



F-22



---

##### Table of Contents

OPTIO SOFTWARE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



legal fees. Optio will have no additional exposure unless the insurance companies become insolvent or unless Optios liability exceeds its policy limits through this matter or other matters. Optios
insurance companies currently have an A or AA rating. The range of loss, if any, cannot be estimated and thus no potential loss is reflected in Optios financial statements.



M2 Systems Corporation, purchaser of the Companys Muscato and TransLink business units, previously claimed 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 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 did not resolve any other claims M2 Systems had 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 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 (4.0% as of January 31, 2004), 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.



On April 8, 2003, a lawsuit styled Donald K. Dunaway v. Optio Software, Inc. was filed in the Circuit Court of the
Eighteenth Judicial Circuit for Seminole County, Florida. Optio removed the lawsuit to Federal District Court in the Middle District of Florida, Orlando Division. The compliant was filed by a former employee of Optio claiming that he was entitled to
certain unpaid commissions earned while employed at Optio. The plaintiff was seeking compensatory, actual, special and consequential damages as a result of Optios alleged actions, as well as reimbursement of plaintiffs attorneys
fees, prejudgment interest and the costs of the action. The lawsuit was settled on January 15, 2004 for $86,000. Optio recorded the settlement in its financial statements for the year ended January 31, 2004.



F-23



---

##### Table of Contents

Optio Software, Inc.

Schedule II - Valuation and Qualifying Accounts



|                                                           |  |                                |           |                                   |   |                              |  |            |  |   |                              |   |  |   |          
|---------------------------------------------------------- |  | ------------------------------ | --------- | --------------------------------- | - | ---------------------------- |  | ---------- |  | - | ---------------------------- | - |  | - | ---------
|                                                           |  | Balance at Beginning of Period |           | Charged to Costs and Expenses (a) |   | Acquired/ (Divested)Reserves |  | Deductions |  |   | Balance at End of Period (a)
|Year ended January 31, 2003Allowance for doubtful accounts |  | $                              | 927,000   |                                   | $ | 266,000                      |  |           |  | $ | (473,000                     | ) |  | $ | 720,000  
|                                                           |  |                                |           |                                   |  
|Year ended January 31, 2004Allowance for doubtful accounts |  | $                              | 720,000   |                                   | $ | 1,165,000                    |  |           |  | $ | (406,000                     | ) |  | $ | 1,479,000
|                                                           |  |                                |           |                                   |  
|Year ended January 31, 2005Allowance for doubtful accounts |  | $                              | 1,479,000 |                                   | $ | 67,000                       |  |           |  | $ | (137,000                     | ) |  | $ | 1,409,000

---

|(a) | Includes a combination of the allowance for doubtful accounts and the impairment reserve recorded on the note receivable from M2 Systems.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------





S-1



---

##### 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).



2.3 Agreement and Plan of Reorganization, dated as of August 10, 2004, by and among Optio Software, Inc., Optio Software II, Inc. VertiSoft Corporation and Shareholders
of VertiSoft Corporation (incorporated by reference to Exhibit 2.1 to Form 8-K filed August 13, 2004).



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 Directors 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 Amendment No. 1 to Optio Software,
Inc. Outside Directors Stock Option Plan dated as of December 19, 2003 (incorporated by reference to Exhibit 10.4 to Form 10-K filed April 21, 2004).



10.5 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).



10.6 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).



10.7 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).



10.8 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).



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



10.10 M2 Systems Corporation $3,640,000 Amended, Restated and Consolidated Promissory Note
(incorporated by reference to Exhibit 10.22 to Form 10-K filed May 1, 2003).



E-1



---

##### Table of Contents

10.11 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).



10.12 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).



10.13 Second Loan Modification Agreement, dated as of April 24, 2003, by and between Silicon
Valley Bank and Optio Software, Inc. (incorporated by reference to Exhibit 10.25 to Form 10-K filed May 1, 2003).



10.14 Third Loan Modification Agreement, dated as of June 4, 2003, by and between Silicon Valley Bank and Optio Software, Inc. (incorporated by reference to Exhibit 10.3
to Form 10-Q filed September 15, 2003).



10.15 Fourth Loan Modification
Agreement, dated as of December 4, 2003, by and between Silicon Valley Bank and Optio Software, Inc. (incorporated by reference to Exhibit 10.24 to Form 10-K filed April 21, 2004)



10.16 Fifth Loan Modification Agreement, dated as of April 8, 2004, by and between Silicon Valley Bank and Optio Software, Inc.
(incorporated by reference to Exhibit 10.25 to Form 10-K filed April 21, 2004)



10.17 Sixth Loan Modification Agreement, dated as of April 22, 2005, by and between Silicon Valley Bank and Optio Software, Inc.



10.18 Seventh Loan Modification Agreement, dated as of April 27, 2005, by and between Silicon Valley Bank and Optio Software, Inc.



10.19 Consulting Agreement, dated as of March 17, 2003, by and between Steven E. Kaye and
Optio Software, Inc. (incorporated by reference to Exhibit 10.27 to Form 10-K filed May 1, 2003).



10.20 Letter Agreement dated December 21, 2004 between Optio Software, Inc. and Caroline Bembry (incorporated by reference to Exhibit 10.1 to Form 8-K filed December 27, 2004)



10.21 Letter Agreement dated December 23, 2004 between Optio Software, Inc. and Paul
OCallaghan (incorporated by reference to Exhibit 10.2 to Form 8-K filed December 27, 2004)



10.22 Letter Agreement dated December 21, 2004 between Optio Software, Inc. and Terry Kraft (incorporated by reference to Exhibit 10.3 to Form 8-K filed December 27, 2004)



10.23 Letter Agreement dated December 27, 2004 between Optio Software, Inc. and Daryl Hatton
(incorporated by reference to Exhibit 10.4 to Form 8-K filed December 27, 2004)



10.24 Letter Agreement dated December 27, 2004 between Optio Software, Inc. and Steve Kaye (incorporated by reference to Exhibit 10.5 to Form 8-K filed December 27, 2004)



10.25 Employment Agreement by and between Optio Software, Inc. and C. Wayne Cape dated as of August 1, 2003 (incorporated by reference to
Exhibit 10.1 to Form 10-Q filed September 15, 2003).



10.26 Employment
Agreement, dated as of August 10, 2004, by and between Optio and Donald H. French (incorporated by reference to Exhibit 2.2 to Form 8-K filed August 13, 2004).



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.



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



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



E-2



---

##### Table of Contents

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



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



99.1 Safe
Harbor Compliance Statement for Forward-Looking Statements.



E-3