**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

**(Mark One)**

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

**For the fiscal year ended January 31, 2007**

**OR**

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

**For the transition period from                       to                       **

**Commission File Number: 1-15529**

**OPTIOSOFTWARE, INC.**

(Exactname 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’stelephone number, including area code:**(770) 576-3500

**Securitiesregistered pursuant to Section 12(b) of the Act:**None

**Securities registered pursuant toSection 12(g) of the Act:**Common Stock, no par value

(Titleof Class)

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act. Yes o No x

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act. Yes o No x

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof the registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act).

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act). Yes o No x

Theaggregate market value of the voting stock held by nonaffiliates of theRegistrant, based upon the closing sale price for the Common Stock on July 31,2006 as reported by the Over-the-Counter Bulletin Board, was approximately$12,710,099. The shares of Common Stock held by each officer and director andby each person known to the Registrant who owns 5% or more of the outstandingCommon Stock have been excluded in that such persons may be deemed to beaffiliates. This determination of affiliate status is not necessarily aconclusive determination for other purposes.

Therewere 22,506,714 shares of the Registrant’s Common Stock outstanding as of April 18,2007.

**DOCUMENTSINCORPORATED BY REFERENCE**

Parts of the Registrant’s Definitive Proxy Statementon Schedule 14A for its 2007 Annual Meeting of Stockholders are incorporated byreference in Part III of this Annual Report on Form 10-K. TheProxy Statement will be filed within 120 days of the end of the fiscal yearcovered by this Annual Report on Form 10-K.

 

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**OPTIOSOFTWARE, INC.ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED JANUARY 31, 2007TABLE OF CONTENTS**

|            | ** ** | ** **                                                                                                          | ** ** | **Page** |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|----------|
| ** ** |       | **PART I**                                                                                                     |       |     |
| Item 1.    |       | Business                                                                                                            |       | 2        |
| Item 1A.   |       | Risk Factors                                                                                                        |       | 22       |
| Item  1B.  |       | Unresolved  Staff Comments                                                                                          |       | 29       |
| Item 2.    |       | Properties                                                                                                          |       | 29       |
| Item 3.    |       | Legal  Proceedings                                                                                                  |       | 30       |
| Item  4.   |       | Submission  of Matters to a Vote of Security Holders                                                                |       | 31       |
|       |       | **PART II**                                                                                                    |       |     |
| Item 5.    |       | Market  for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases  of Equity Securities |       | 32       |
| Item  6.   |       | Selected  Financial Data                                                                                            |       | 35       |
| Item  7.   |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       | 37       |
| Item  7A.  |       | Quantitative  and Qualitative Disclosures about Market Risk                                                         |       | 49       |
| Item  8.   |       | Financial  Statements and Supplementary Data                                                                        |       | 49       |
| Item  9.   |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                               |       | 49       |
| Item  9A.  |       | Controls  and Procedures                                                                                            |       | 49       |
| Item 9B.   |       | Other  Information                                                                                                  |       | 50       |
|       |       | **PART III**                                                                                                   |       |     |
| Item 10.   |       | Directors and Executive Officers of the Registrant  and Corporate Governance                                        |       | **       |
| 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 and  Director Independence                                           |       | **       |
| Item 14.   |       | Principal Accountant Fees and Services                                                                              |       | **       |
|       |       | **PART IV**                                                                                                    |       |     |
| Item 15.   |       | Exhibits,  Financial Statement Schedules                                                                            |       | 50       |

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********            **Theinformation required by Items 10, 11, 12, 13 and 14 of Part III is herebyincorporated by reference from the Registrant’s Definitive Proxy Statement onSchedule 14A to be filed not more than 120 days after January 31, 2007.

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**FORWARD-LOOKINGSTATEMENTS**

In addition to historicalinformation, this Annual Report on Form 10-K for the fiscal yearended January 31, 2007 ( “Annual Report”) contains forward-lookingstatements that involve risks and uncertainties. Such forward-looking statementsare made pursuant to the “safe-harbor” provisions of the Private SecuritiesLitigation Reform Act of 1995 and are made based on management’s currentexpectations or beliefs, as well as assumptions made by, and informationcurrently available to, management. These forward-looking statements include,among other things, statements regarding Optio Software, Inc.’s (“we”, “us”,“our”, the “Company” or “Optio”) anticipated costs and expenses, Optio’scapital needs and financing plans, product and service development, Optio’sgrowth strategies, integration of acquired entities, market demand for Optio’sproducts and services, relationships with Optio’s strategic marketingalliances, and competition. These forward-looking statements include, amongothers, words such as “expects,” “anticipates,” “intends,” “believes”, “may”, “plan”,“could”, “should”, “will”, and similar language. You are cautioned not to placeundue reliance on the forward-looking statements in this Annual Report, whichspeak only as of the date hereof. Optio undertakes no obligation to publiclyrelease any revisions to such forward-looking statements or reflect events orcircumstances after the date of this Annual Report. Optio’s actual results maydiffer significantly from those projected in any such forward-lookingstatements. Factors that might cause or contribute to such differences include,but are not limited to, risks associated with Optio’s reliance on strategicmarketing and reseller relationships, collectibility of accounts receivable,fluctuations in operating results, failure to integrate new products and newlyacquired companies, diversion of management resources relating to acquisitions,reduction in cash reserves relating to acquisitions or the share repurchaseprogram, challenges relating to acquisitions and the possibility that suchacquisitions may cause Optio to no longer be profitable, the negative effect onOptio’s earnings relating to the amortization or potential write-down ofacquired assets or goodwill, failure to retain the business relationships withexisting customers , changes in competition, changes in economic conditions inthe U.S. and in other countries in which Optio currently does business (bothgeneral and relative to the technology industry), delays or inability indeveloping new or unique software products, market acceptance of new products,the failure of new products to operate as anticipated, expectation of achievingand sustaining operating profits and earnings, including timing of cash flowsand company performance, disputes regarding Optio’s intellectual property,possible adverse results of pending or future litigation, or risks associatedwith Optio’s international operations. These and additional factors are setforth in Section 1.A. of this Annual Report. You should carefully reviewthese risks and additional risks described in other documents Optio files fromtime to time with the Securities and Exchange Commission (“SEC”), including theQuarterly Reports on Form 10-Q that Optio has filed.

**PART I**

**Item 1.**                        BUSINESS

Optio Software, Inc. (“we”, “us”, “our”, the “Company”or “Optio”), incorporated in 1981 as a Georgia corporation, provides documentautomation, print management, imaging and electronic health record solutionsthat enable organizations to achieve unprecedented speed, accuracy,functionality and quality in their inbound and outbound documents. Ourinfrastructure software and services enhance the form, content, distributionand availability of business critical information. Our software allowsinformation stored within or created by an organization’s wide range ofenterprise systems, applications or databases to be intelligently captured,transformed and customized in formats according to the business needs of anorganization’s customers, suppliers and partners. The information is thendelivered to the appropriate destinations, which include print, fax, e-mail,wireless devices, the Internet or archive. Optio’s software also allowsinformation to be transformed into a wide variety of formats, languages andstandards and enables customers to create customized documents based on theirspecific business requirements. For example, customers can use our software tocreate and deliver customized business documents (invoices, 

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purchase orders, packing slips,etc.) and business-to-business transactions around the globe by Internet, e-mail,fax or print. In addition, Optio’s solutions can accept inbound documents fromthird parties such as suppliers and customers, capture and store their imagefor later retrieval, extract transactional data and inject them intooperational workflows or integrate their data into a company’s enterprisesystems. Optio’s solutions are non-intrusive and can be deployed withoutmodifying the software or the business processes that created the originalinformation. We reduce the cost and complexity of document-centric businessprocesses while extending the value of existing technology investments.

We engage primarily in the development, sale andsupport of software for companies located principally in the United States andEurope. In Optio’s first 18 years, the Company’s primary business consisted ofproviding software and services that addressed organizations’ needs forcustomized information delivered via print, fax and e-mail to users ofenterprise and healthcare applications. The type of solution that provides thisfunctionality was traditionally known as a distributed output managementsolution.

In August 1998, Optio acquired Optio SoftwareEurope, S.A., a software product distributor in Europe, providing Optio’s firstentry into the European markets.

In addition to it’s distributed output managementsolutions, in 1999 Optio began pursuing the e-business market created bythe evolution of the Internet. In September 1999, Optio introduced thefirst of its e.ComSeries of products, Optio e.ComPresentTM, a browser-basedsoftware solution allowing document presentation to the Internet. 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 ofproducts, Optio e.ComIntegrate®. Also in March 2000, Optio purchasedMuscato Corporation (“Muscato”) and TransLink Solutions Corporation (“Translink”),further expanding its breadth into the e-commerce market. Muscato offereda product, e.ComEngine, which enabled the real-time exchange of informationbetween systems utilizing dissimilar formats and protocols. Unfortunately,Optio was unsuccessful in the integration of these two companies andsubsequently disposed of the two companies and the e.ComEngine product in December 2001.After the disposal of Muscato and Translink, Optio focused on expanding itscore products and increasing the capability of its integrated solutions.

Most recently, Optio has focused on expanding frommanaging output only to managing the lifecycle of transactional documents.Optio has focused its development on features and functionality that enhance acustomer’s ability to manage documents, thus positioning the Company as aprovider of document-centric business process solutions. In 2003, Optiointroduced Optio Print ManagerTM, enabling reliable print delivery and acentralized management console for accessing printers and monitoring theirstatus. In 2004, Optio introduced Optio Imaging SolutionsTM, the Company’sintelligent data capture, imaging and Internet-accessible archive solution thatallows documents to be scanned, indexed and archived according to a customer’sdefined needs, and extracts transactional data and integrates it withenterprise systems. During fiscal year 2006, we partnered with variousconsulting groups to help develop application specific adapters to the OptioImaging Solutions, thus enabling Optio to provide specific strategic documentautomation solutions for Oracle, QAD and SAP end-users, including, for example,procure-to-pay and order-to-cash solutions. These products represent thefoundation of the Optio Business Process SolutionTM. Optio Business Process Solutions allowcustomers to automate manual processes, transform documents into automatedtransactions and provides on-line access to critical business information.Optio Business Process Solutions are specifically designed to streamlineerror-prone manual processes associated with invoices and other paper documentsand help customers achieve faster, more accurate procure-to-pay, order-to-cashand other document-intensive business processes.

During fiscal year 2007, Optio focused on thecompletion of its latest version of document automation tools, Optio DocumentServerTM and Optio Design CenterTM. These products were released in 

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January 2007. Inaddition, Optio focused on the development of its new Business ProcessManagement (“BPM”) solution, specifically known as ProCentraTM Solution Suite.

The ProCentraSolution Suite is composed of the following modules:

·       ProCentra BPM, the “heartbeat” of thisnew product line creates, initiates, deploys, monitors and measures processesas transactional documents flow through an organization. It also providescustomers with the ability to define process maps and execute these maps on itsserver.

·       ProCentra’sContent Repository is more than a standard database and document library. Inaddition to storing and retrieving documents as they flow through a company’sbusiness processes, it can safely store all related documents and supportinginformation and metrics.

·       ProCentra’sAnalytics module analyzes and reports on the process metrics via a series ofconfigurable reports and dashboards that also enable users to drilldown intothe information stored in the Content Repository.

·       ProCentra’sProcess Accelerator includes pre-defined process/workflow maps, integrationpoints, interactive forms, work queues, reports and activity-monitoringdashboards, which work together to enhance process visibility and reduceoverall process costs and inefficiencies. Examples of Process Acceleratorsinclude maintenance/service contract renewal and invoice dispute resolution.

With the development of these products, Optio hastransitioned itself from a document output management solution vendor to acompany offering customers a suite of solutions that not only create documents,but also help them transform these documents into automated transactions andthen manage the processes surrounding these documents and transactions.

To address the needs ofour healthcare market, in August 2004, Optio acquired VertiSoftCorporation (“VertiSoft”), bringing with it the Optio QuickRecord SuiteTM of products. These products automatethe collection and distribution of healthcare documents, whether they beprinted documents collected through scanning and indexing, on-line forms ordata streams; create a central repository with Internet-enabled access bymedical personnel or financial services; and provide physicians with the abilityto electronically sign patient care documents with the product’s e-signaturecapability. During fiscal year 2007, Optioincreased the breadth and scope of our electronic health record solution suitewith two new QuickRecord® modules, Deficiency ManagementTMand QuickTabletTM .

**Internet Website**

Optio’s Internet website can be found atwww.optiosoftware.com or www.optio.com. We also maintain a healthcare specificwebsite at www.optiohealthcare.com. We make available free of charge or throughour Internet website our annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K, ourproxy statements and Forms 3, 4 and 5 filed by directors and executive officersand amendments to those reports as soon as reasonably practicable after suchmaterial is filed or furnished to the SEC. These filings may be accessed byclicking on the Investor Relations page under “Company” on our home page,and then by clicking on “SEC Filings” for a direct link to Optio’s SEC filingson the SEC website, at www.sec.gov. Additionally, Optio’s Code of Ethics forFinancial Officers may be found on the Optio website. From time to time,corporate governance materials on our website may be updated to comply with rules issuedby the SEC or as desirable to promote the effective governance of Optio. Inaddition, amendments to the Code of Ethics and any grant of a waiver from aprovision of the Code of Ethics requiring disclosure under applicable SEC rules willbe disclosed on our website. Any stockholder wishing to receive, withoutcharge, a copy of any of the Optio SEC filings or the Code of Ethics shouldwrite to the Secretary, Optio Software, Inc., 3015 Windward Plaza,Windward Fairways II, Atlanta, Georgia 30005.

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The reference to ourwebsite address does not constitute incorporation by reference of theinformation contained on the website and should not be construed as part ofthis Annual Report.

**Wholly-OwnedSubsidiaries**

Optio currently has twodirect wholly-owned foreign subsidiaries, Optio Software Europe, S.A. (“OptioEurope”) and VertiSoft Limited (“VertiSoft UK”). Optio Europe is directlyinvolved in the sales, marketing and support activities for Optio’s productsthroughout mainland Europe and the United Kingdom through its wholly-ownedsubsidiaries Optio Software Deutschland GmbH (“Optio Germany”), and OptioSoftware UK, Pvt. Limited (“Optio UK”). VertiSoft UK was directly involved inthe sales and marketing activities for certain customers acquired withVertiSoft, but has since assigned those contracts to Optio UK and ceasedoperations. The Company markets in the Asia Pacific region through varioussoftware resellers.

**Segment Information**

Optio is organized around geographic areas. Optio’sU.S. operations and European operations, which include Optio Europe, OptioGermany and Optio UK, represent Optio’s current two reportable segments. Theforeign locations principally function as distributors of products developed byOptio in the United States. Optio attributes revenue to its operating segmentsbased upon the location of the subsidiary originating the sale, which istypically the geographic location where the software is installed. Theaccounting policies, as described in the summary of significant accountingpolicies in Optio’s consolidated financial statements, are applied consistentlyacross the segments. Intersegment sales are based on intercompany transferprices to achieve a reasonable margin upon distribution.

Segmentinformation for the fiscal years ended January 31, 2005, 2006 and 2007 issummarized below.

| **Year ended January 31, 2005** | ** ** | ** ** | ** ** | **United States** | ** ** | **Europe** | ** ** | **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                 |       | 773,000    |       | 45,000                 |       | 818,000    |       | —       |       | 818,000          |       |
|                                                     |            |            |            |                        |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

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| **Year ended January 31, 2006** | ** ** | ** ** | ** ** | **United States** | ** ** | **Europe** | ** ** | **Combined** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------------------|------------|------------|------------|--------------|------------|------------------|------------|------------------|------------|
| Revenue from external  customers:                   |       |       |       |                   |       |       |       |         |       |             |       |
| License fees                                        |       | $          | 7,993,000  |                   | $          | 1,965,000  |       | $            | 9,958,000  |             | $          | —           |       | $ | 9,958,000 |   |
| Subscription fees                                   |       | 2,125,000  |       | 40,000                 |       | 2,165,000  |       | —       |       | 2,165,000        |       |
| Services, maintenance and other                     |       | 14,795,000 |       | 2,703,000              |       | 17,498,000 |       | —       |       | 17,498,000       |       |
| Intersegment  revenue                               |       | 351,000    |       | 120,000                |       | 471,000    |       | (471,000     | )          | —           |       |
| Total revenue                                       |       | 25,264,000 |       | 4,828,000              |       | 30,092,000 |       | (471,000     | )          | 29,621,000       |       |
| Interest income                                     |       | 269,000    |       | —                 |       | 269,000    |       | —       |       | 269,000          |       |
| Interest expense                                    |       | 14,000     |       | —                 |       | 14,000     |       | —       |       | 14,000           |       |
| Depreciation and  amortization                      |       | 824,000    |       | 37,000                 |       | 861,000    |       | —       |       | 861,000          |       |
| Income tax  expense                                 |       | 52,000     |       | 5,000                  |       | 57,000     |       | —       |       | 57,000           |       |
| Segment income  (loss) before income taxes          |       | 1,214,000  |       | (259,000               | )          | 955,000    |       | —       |       | 955,000          |       |
| Segment net  income (loss)                          |       | 1,162,000  |       | (264,000               | )          | 898,000    |       | —       |       | 898,000          |       |
| Total segment  assets                               |       | 19,333,000 |       | 3,788,000              |       | 23,121,000 |       | (3,423,000   | )          | 19,698,000       |       |
| Expenditures for  long-lived assets                 |       | 407,000    |       | 63,000                 |       | 470,000    |       | —       |       | 470,000          |       |
|                                                     |            |            |            |                        |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

| **Year ended January 31, 2007** | ** ** | ** ** | ** ** | **United States** | ** ** | **Europe** | ** ** | **Combined** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------------------|------------|------------|------------|--------------|------------|------------------|------------|------------------|------------|
| Revenue from external  customers:                   |       |       |       |                   |       |       |       |         |       |             |       |
| License fees                                        |       | $          | 6,153,000  |                   | $          | 1,565,000  |       | $            | 7,718,000  |             | $          | —           |       | $ | 7,718,000 |   |
| Subscription fees                                   |       | 2,312,000  |       | 41,000                 |       | 2,353,000  |       | —       |       | 2,353,000        |       |
| Services, maintenance and other                     |       | 15,289,000 |       | 3,317,000              |       | 18,606,000 |       | —       |       | 18,606,000       |       |
| Intersegment  revenue                               |       | 395,000    |       | 90,000                 |       | 485,000    |       | (485,000     | )          | —           |       |
| Total revenue                                       |       | 24,149,000 |       | 5,013,000              |       | 29,162,000 |       | (485,000     | )          | 28,677,000       |       |
| Interest income                                     |       | 431,000    |       | —                 |       | 431,000    |       | —       |       | 431,000          |       |
| Interest expense                                    |       | 13,000     |       | —                 |       | 13,000     |       | —       |       | 13,000           |       |
| Depreciation and  amortization                      |       | 875,000    |       | 41,000                 |       | 916,000    |       | —       |       | 916,000          |       |
| Income tax  expense                                 |       | 85,000     |       | 1,000                  |       | 86,000     |       | —       |       | 86,000           |       |
| Segment income  (loss) before income taxes          |       | 724,000    |       | (356,000               | )          | 368,000    |       | —       |       | 368,000          |       |
| Segment net  income (loss)                          |       | 639,000    |       | (357,000               | )          | 282,000    |       | —       |       | 282,000          |       |
| Total segment  assets                               |       | 22,438,000 |       | 4,187,000              |       | 26,625,000 |       | (3,688,000   | )          | 22,937,000       |       |
| Expenditures for  long-lived assets                 |       | 1,526,000  |       | 180,000                |       | 1,706,000  |       | —       |       | 1,706,000        |       |
|                                                     |            |            |            |                        |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

Optio’s Europeanoperations generated revenue from licenses, subscription fees and services tocustomers, excluding intersegment revenue, of $4.9 million in the year ended January 31,2007, representing 17% of total revenue, compared to $4.7 million in the yearended January 31, 2006, representing 16% of total revenue and compared to$5.0 million in the year ended January 31, 2005, representing 17% of totalrevenue.

**Industry**

Organizations areincreasingly being driven to enhance the cost-effectiveness of their existingsystems and overall productivity of the organization by sharing vital businessinformation, in the proper format, with the appropriate users. Their objectiveis to improve the efficiency of mission-critical business 

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processessuch as procurement, manufacturing, warehousing, shipping, invoicing andcollections, patient registration and billing, and patient care. This objectivecan be met by enhancing the form, content, process, distribution andavailability of documents and content that enable these processes, thusreducing their cost and complexity and improving overall efficiency. To achievethese objectives, organizations must deliver focused, business-readyinformation derived from a multitude of sources across the enterprise, toemployees, customers, suppliers and strategic partners. In addition, manyorganizations are embracing e-business to enhance their productivity andcost-savings. Organizations are attempting to maximize the value of theirbusiness processes by using the Internet to conduct business electronically andreach a large number of geographically dispersed users across the extendedenterprise. Some examples of e-business applications include the electronicdistribution of information related to the procurement of goods and services,presentation of bills and collection of payments over the Internet and theviewing of reports and other company information utilizing Internet browsers.Specifically, this environment has created the need for a comprehensivesoftware solution that gathers information on a real-time basis frommultiple sources, including enterprise, healthcare, legacy and customapplications, external databases and files; enhances the information to improveits suitability for business purposes; customizes and formats the informationto meet business objectives; provides timely and reliable delivery of theinformation formats to the appropriate destinations, including the Internet,e-mail, printers, faxes and wireless devices; provides a universal,Internet-enabled access point for all documents and information; automates dataextraction from various documents; integrates the data extracted from thesedocuments back to enterprise and archive applications; and creates pre-definedprocess/workflow maps for the documents, interactive forms to gatherinformation, work queues to inform individuals of processes to perform with thedocuments, and finally reports and dashboards regarding the processes of thedocuments and their business impact and results. Most business relationshipspair buyers and sellers, providers and consumers, and care givers and patientsin 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 thishas created the need for solutions that will accept documents created by otherorganizations, scan and capture their image, extract relevant data andintegrate it into a company’s enterprise systems.

These needs have created amarket for software that performs cost-effective management of thetransformation and delivery of information from various enterprise computingsystems. The Gartner Group (“Gartner”) defines the markets that providesoftware solutions described above as the Distributed Output Management (“DOM”)Market and the Integrated Document Archive and Retrieval Systems (“IDARS”)Market. In a report dated March 13, 2006, Gartner estimated that the 2005worldwide market size for DOM was $441 million in software and maintenance, andforecasted a five percent compound annual growth rate from 2006 to 2010.

Gartner also defines amarket, representing the convergence of the DOM and IDARS markets, as theEnterprise Content Management (“ECM”) Market. On June 27, 2006, Gartnernoted that they believed that IDARS will cease to be a stand-alone market andwill become an integral component of an ECM suite by 2007. In the same report,Gartner projected that by 2010, enterprises will be complementing their ECMplatforms with integrated content archiving solutions to more effectivelymanage fixed content. The Meta Group stated in a report dated May 24, 2006that total software revenue for worldwide ECM will grow at a 12.8 percentcompound annual growth rate from 2005 through 2010, while noting thatmaintenance spending is growing faster than new license revenue.

The ability to capture andintegrate inbound documents and its respective market segment is knowncollectively as Document Capture or Data Capture. A 2006 study focusing on thisglobal market published by Harvey Spencer Associates indicates that it isexpected to grow from $1.052 billion in 2005 to $1.99 billion by the endof 2009. This represents a compound annual growth rate of 17%.

Further research conductedby the Company through its Customer Advisory Board (“CAB”) indicates thatextending the current solution set to manage more elements and interactionsthat comprise an 

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organization’sdocument-intensive business processes (e.g. inbound and outbound documents andinteractions relating to procurement processes) would be of value. Thisapproach, which is known collectively as business process management, is afurther extension of the Content Management market. Gartner defines BPMS, orBusiness Process Management Suites, as a natural advancement to meet thegrowing requirements for greater degrees of process management maturity andagility. And, on June 28, 2006, Gartner Dataquest projected that in theBPMS market license revenue would grow to more than $1 billion by 2009,with a compound annual growth rate of 14 percent, making it the secondfastest-growing software infrastructure market overall (with security as numberone).

**Technology**

Optio’s suite of productsis used to enhance business critical documents and information, theirsubsequent distribution and the integration of corresponding documents receivedfrom other organizations into an organization’s business processes. It providesan organization’s systems and applications with the ability to shareinformation, transfer documents and conduct business transactions withcustomers, suppliers and employees, in the proper format, with the appropriatecontent and at the time and location required. Optio’s software containscomponents for: communicating with Optio’s visual design software; collecting,transforming, and routing information from other enterprise applicationprograms or databases; performing calculations and other types of datatransformations; formatting the information into human-readabledocuments, e-business documents or database transactions; distributinginformation to a wide variety of digital destinations including Internetservers, fax servers, e-mail servers, alphanumeric pagers, printers,document archives and e-commerce application servers; maintaining and executingrecipient specified rules for information notification and documentdelivery; securely controlling the distribution and processing of informationbetween multiple computers within the same network and over the Internet;scanning documents and extracting data from the captured images to beintegrated into various enterprise or archive applications; and collectinginformation via interactive forms and routing documents via workflow andbusiness process designs and reporting of the results of such businessprocesses.

Optio’s software supportsmany industry standards for file, message and document formats, documentdelivery methods and data access from enterprise databases and other datasources. Our software also supports many of the proprietary formats for data,documents and information produced by the software of third parties with whomwe have strategic relationships and other common enterprise applicationsoftware vendors. For example, e-business documents may be extracted fromexisting enterprise application output and transformed into XML, Adobe PDF andmany other standard electronic document formats.

Certain components ofOptio’s technology have been developed by other manufacturers. In some cases,these other manufacturers, also known as Original Equipment Manufacturers (“OEM”),have granted Optio a license to embed their technology within Optio’s productsfor re-licensing to end-users. In other cases, Optio has a value-added reselleragreement in place, which allows Optio to resell the manufacturer’s product asa part of Optio’s own solution set. These agreements provide for a minimum twoor three-year contractual commitment; however, the contract may be terminatedby either party thereafter with 90 days written notice. Termination of theseagreements could have a material impact on Optio’s product offerings, strategicinitiatives and results of operations.

**Technical Advantages**

Webelieve Optio’s technology provides customers with the following advantages:

·       *Transparency.*   Optio’s technology works with theexisting hardware/software infrastructure and business processes of anenterprise and is transparent and non-intrusive to the user.

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·       *Preservation of Application Business Logic.*   Enterpriseapplications use many business rules to validate and control businessinformation. Optio’s software works directly with the information produced bythe execution of these business rules, which preserves the value and integrityof the original application business logic and security, and maintains theconsistency of the information.

·       *Ability to Work With Time Sensitive Data.*   Optio’ssoftware works with business data as it is generated, not only after it hasbeen stored in a database. Applications can therefore process time sensitiveinformation much more effectively, getting the right information to theappropriate person at the right time.

·       *Powerful Language.*   Optio’s proprietary documentcustomization language, the programming language that allows for documents orother output to be customized to the user’s needs, enables Optio’s software toaddress many complicated business information processing problems requiringlarge volumes of data. This same language allows Optio’s software to addressmany problems in the areas of e-business and information delivery thatother programming languages and application servers cannot.

·       *Ease of Use.*   The visual design approach used by OptioDesign CenterTM harnesses the power of Optio’s DocumentCustomization Language and puts it into the hands of less technically savvyusers without limiting access to the power of our technology.

·       *Scope of Solution.*   Optio’s software can handle a widevariety of information sources, document formats and digital destinations,without requiring third-party software.

·       *SecureInternet Architecture.*   Optio’s software utilizes customdeveloped technology built on industry standards that allows the Company’ssoftware to securely distribute and control the processing of information onthe Internet.

**Strategic Initiatives**

Optio’sobjective is to be a global innovator and a leading provider of solutions thattransform and exchange vital business information. Optio is dedicated tohelping its customers achieve long-term success by reducing the cost andcomplexity of their document-centric business processes while extending thevalue of existing technology investments.To achieve these objectives, Optio intends to:

·       *Strengthen our Business Process Solution Credentials with the RightCombination of Products, Messaging, Sales and Successful Implementations.*   Infiscal year 2004, Optio set forth its strategy to expand from managing outputonly, to managing the lifecycle of transactional documents. This meant thatOptio might expand its product offering from products that enhance the flow ofinformation *from* systems *to*people, to products that enhance the flow of information *between*systems *and* people. In other words, improveddocument formats and distribution may no longer be the sole intended result.Instead, overall improvement of document-intensive processes will require morecollaboration and interaction. Comprehensive management of document-intensiveprocesses is the goal, rather than solely document creation and delivery. Withthis strategy in mind, Optio set forth to create its Optio Business ProcessSolution suite. Optio introduced its Optio Imaging Solutions, which combineintelligent data capture, document imaging and an Internet-accessible archive. Wealso partnered with various consulting groups to help develop applicationspecific adapters to the Optio Imaging Solution, thus enabling Optio to providespecific strategic document automation solutions for Oracle, QAD and SAP endusers. The combination of these application specific adapters with the OptioImaging Solutions formed the basis for Optio’s Business Process Solutions. Withthe timely marketing of the speed, accuracy, quality and financial savingsresulting from the successful implementations of the Optio Imaging Solutionalready completed, Optio 

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believes it canuniquely position itself within the business process solution market to offerits customers a set of attractive software solutions.

·       *Extend our Solutions to include Business ProcessManagement Capabilities*.   In fiscal 2008, Optio’s developmentteam will continue to focus on a new business process management solution,ProCentraTM withmulti-step interactive process functionality, metrics gathering and reporting,and an enhanced document repository. With this combination of products, Optiocan build more powerful business process solutions that will provide greaterdegrees of process automation, collaboration and business metrics fordocument-intensive processes.

·       *Increase our Capabilities, Knowledge and Experienceto Better Serve the Needs of our Customers.  *In moving from aDOM focused company to a provider of business process improvement solutions,the knowledge and skill sets required to help our customers analyze, understandand enhance the document intensive processes becomes increasingly complex. Tomeet this need we will invest in our workforce by adding employees who haveproven experience in business process management, workflow, ERP applicationintegration and imaging solutions. In addition, we will provide training andmentoring to our current staff.

·       *Strengthen the Performance of our Healthcare Division in the Urban andRural Hospital Market.  *With the purchase of VertiSoft in August 2004,Optio acquired a subscription-based revenue model requiring customers to paymonthly contractual fees for the duration of long-term contracts, providing amore stable revenue recognition pattern. Optio continues to offer thissubscription-based contract model for all of its healthcare products in anattempt to drive the subscription-based revenues in this market. Thesubscription-based revenue model lends itself to wider acceptance in the urbanand rural healthcare markets, allowing the participants in such markets toovercome capital budget constraints and more rapidly adopt the technologysolutions they need today. While Optio’s healthcare group will not exclusivelyfocus on the urban and rural hospital markets, we intend to strengthen ourmarketing focus in these areas to increase our revenue.

**Products**

*Software*

Optio solutions manage andenhance mission-critical output from virtually any platform or operatingsystem. Our products support output from initial design through the fulldocument lifecycle and smoothly scale to meet new processing demands. Oursoftware is divided into several solution sets: Output Solutions, BusinessProcess Solutions, Optio Business Process Management Solutions and HealthcareSolutions.

Optio’s Output, BusinessProcess and Business Process Management Solutions are designed to meet theneeds of the general business marketplace and Optio’s Healthcare Solutions aretailored to the special needs of the healthcare marketplace.

Optio’s Output Solutions include Optio Design Centerand Optio Document Server, their predecessors, Optio DesignStudio and Optioe.ComIntegrate, Optio FaxTM, Optio Advanced Labeling and Optio Print Manager.Optio’s Business Process Solutions include Optio e.ComPresent, Optio ImagingSolutions and Optio’s Business Process Adapters. Optio’s Business ProcessManagement Solutions consists of the ProCentra Solution Suite, which we intendto generally release in 2007.

Optio’s Healthcare Solutions include Optio MedForms,Optio DesignStudio, Optio Fax, Optio MedEx, Optio Advanced Labeling, OptioPatient Signature Capture and the Optio QuickRecord Suite.

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In each case, Optio’scustomers may purchase the entire solution or may purchase one or more of thesoftware products that make up the particular solution. Typically, customersbuy either Optio Document Server, Optio e.ComIntegrate or Optio MedEx as well asone or more other components of the applicable solution. The Optio DocumentServer and Optio e.ComIntegrate solution sets are designed for companies ofdifferent sizes and with varying functional needs across industries. Optiooffers tiered solution sets that include Optio’s server technologies, eitherOptio Document Server or Optio e.ComIntegrate, and a design tool, either OptioDesign Center or Optio DesignStudio, along with services and training toimplement the solution. As advanced functions are required, customers can addsupport for XML, double-byte characters and presenting documents and reports onthe Internet. Other components of the suite of products may include OptioFax,our fax server product; Optio e.ComPresent, our Internet accessible documentrepository; Optio Print Manager, our application providing assured delivery andprinter definition management; Optio Imaging Solutions, our intelligent datacapture, image and archive solution; and Optio’s ProCentra Solution Suite,Optio’s business process management solution offering workflow and businessprocess designer, interactive forms, and reporting regarding the businessprocesses. Most of the current year revenue derived from the enterprise suiteis attributable to Optio e.ComIntegrate, and most of the revenue derived fromthe healthcare suite is attributable to Optio Medex. Optio Document Server isexpected to replace Optio e.ComIntegrate as the largest revenue producingproduct from the enterprise suite in fiscal 2008.

**OptioOutput Solutions**

| *Optio Document ServerTM*  |   | Optio’s Document Server is the foundation of the  Optio Enterprise Suite. It is the latest in our document design and  automation solutions and builds upon all of Optio’s core technologies. The  software enables the capture, transformation and distribution of information  from multiple enterprise applications to multiple output destinations.  Features enable customers to work together or independently on specific  portions of document-management projects, according to the most appropriate  available resources. New source and version control capabilities ensure that  the proper file is always in use and that team members are aware of the  latest file updates. Customers can add additional modules such as inbound and  outbound processing of XML, CBL, cXML, ebXML, Double-Byte and Binary Large  Object (“BLOB”) languages. |
|--------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *Optio e.ComIntegrate**®* |   | Optio’s e.ComIntegrate  is the precursor to Optio’s Document Server. It provides the necessary  software infrastructure to enable business-to-business transformation, and  distribution of critical information. 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 BLOB.  Organizations seeking to XML-enable their existing applications can map  standard purchase orders, invoices, and shipping advice documents without  requiring enterprise application modifications.                                                                                                                                                                                    |

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| *OptioDCSTM*            |   | 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, Internet servers, document archives and e-commerce servers.  This product serves our reseller base of customers only, and targets  customers needing reduced functionality.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|-----------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *Optio Design CenterTM* |   | Optio Design Center  allows its user to quickly customize documents for multiple purposes and  destinations, produce optimal document design and distribution results throughout  the enterprise, create customized invoices and forms that satisfy all client  requirements, and develop unique process workflows that can be reused for new  initiatives. Optio Design Center has the following enhanced features:  (i) Enhanced Graphical User Interface (“GUI”)—Productivity enhancements abound in process flow and business  rule creation, input mapping, form layout and the overall presentation  of user information; (ii) Proactive “Wizard” Technology—Wizard guides users through  document design and automation tasks with ease; (iii) Cheat Sheets—intuitive help feature walks the  user through specific document design processes in a step-by-step format,  according to preconfigured check lists; (iv) Information at-a-Glance—All relevant information can be  viewed during the design phase according to the user’s personal preferences;  and (v) Enhanced XML Capabilities—Users can view, manipulate and  transform XML data within Design Center, enabling increased efficiencies and  acceleration of XML-based document processes. |
| *Optio DesignStudioTM*  |   | Optio DesignStudio is  the precursor to Optio Design Center. It is a 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 Enterprise or Healthcare  Suite then processes, in real time, the design files it creates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| *OptioFaxTM*            |   | Software that transmits  and receives information using electronic fax standards and protocols to  support business requirements for distributing enterprise information.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *OptioReprintTM*        |   | Software that allows the  user to browse, view and reprint recently submitted print jobs. OptioReprint  allows users 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |

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| *Optio Print ManagerTM*           |   | 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 Advanced LabelingTM*       |   | Allows organizations to  generate thermal, bar-code and radio frequency identification (“RFID”) labels  and print them on-demand from desktop computers and mobile devices.                                                                                                                                                                         |
| *Optio Enterprise ProcessPACKSTM* |   | 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.                                            |

 

**OptioBusiness Process Solutions**

| *Optio Imaging SolutionsTM*         |   | Automatically reads,  indexes and extracts information—including table and line item data—from  unfamiliar, unstructured or semi-structured documents and business  correspondence; and then automatically indexes and stores images in a  centralized, Internet-accessible archive.                                                                                                                                                                                                                                                                                                                                                         |
|-----------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *Optio e.ComPresentTM*              |   | 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 Business Process AdaptersTM* |   | Provide integration of  inbound data to and direct access to transactional business documents from  enterprise applications such as Oracle E-business Suite, J.D. Edwards  EnterpriseOne, QAD MFG/PRO and SAP mySAP Business Suite.                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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**OptioBusiness Process Management Solutions**

| *Optio ProCentraTM* |   | ProCentra provides  essential Business Process Management capabilities and serves as a powerful  framework for process control and integration, while leveraging Optio’s  document management solutions through a series of configurable Internet  services. ProCentra creates, initiates, deploys, monitors and measures  processes as transactional documents flow through an organization. It also  provides companies with the ability to define process maps and execute these  maps on the server. ProCentra’s Content Repository is more than a standard  database and document library. In addition to storing and retrieving  documents as they flow through your company’s business processes, you can  safely store all related documents and supporting information side-by-side,  while feeding the ProCentra Analytics module with reliable, actionable  metrics. Each Process Accelerator provides a complete solution dedicated to  improving the lifecycle of a specific business process and resolving related  issues. Each customized Accelerator includes pre-defined process /workflow  maps, integration points, interactive forms, work queues, reports and  dashboards, which work together to enhance process visibility and reduce  overall process costs and inefficiencies. We intend to generally release  ProCentra in fiscal year 2008. |
|-------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Optio Healthcare Solutions**

| *Optio MedFormsTM* |   | 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, Internet servers and document archives.                                                                                                                                                                              |
|------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *Optio MedExTM*    |   | Built on the foundation  of Optio MedForms, but includes the HIPAA-SmartTM Technology 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. |

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| *Optio QuickRecord Intelligent  HubTM*                                                                    |   | 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,  thus providing the basis for a complete composite patient view.                                                                                                                                                       |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *Optio QuickChart**®*                                                                                         |   | Intranet and  remote access via the Internet, providing physicians and caregivers with a  secure 24/7 self-service to all patient documents.                                                                                                                                                                                                                                                                                   |
| *Optio QuickDeliveryTM*                                                                                        |   | Automated  document delivery of critical documents to point of need.                                                                                                                                                                                                                                                                                                                                                           |
| *Optio QuickScanTM*                                                                                            |   | Desktop imaging  for scanning paper documents.                                                                                                                                                                                                                                                                                                                                                                                 |
| *Optio QuickSignTM*                                                                                            |   | Electronic  signature authentication for physicians.                                                                                                                                                                                                                                                                                                                                                                           |
| *Optio Patient Signature CaptureTM*                                                                            |   | Enables patients  to sign documents using an electronic signature clipboard. The signature is  embedded into an electronic document and then delivered to the input queue of  a document repository such as the Optio QuickRecord Suite.                                                                                                                                                                                       |
| *Optio Deficiency ManagementTM*                                                                                |   | Enables analysts  to analyze charts by queue or search by patient name, review the documents in  the patient’s chart to determine whether or not the chart has met the  established criteria for completion, and manually assign deficiencies to  electronic or scanned documents. Physicians can then quickly and securely  complete patient charts, and electronically sign or edit documents from an  Internet portal. |
| *Optio QuickTabletTM*                                                                                          |   | “Ink-on-glass”  technology enables healthcare administrators, nurses and physicians to easily  fill out and directly submit pre-loaded forms into a patient’s electronic  health record. Users write on a Tablet PC to electronically capture  information and directly submit such information into the patient’s chart.                                                                                  |
| *Optio e.ComPresent, Optio**e.ComIntegrate, OptioFax, OptioReprint, Optio Print Manager, Optio Imaging  Solutions* |   | Equivalent in  functionality to the products included in 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.                                                                                                                                                                                                                  |

 

*Services*

*Consulting.**  *Optio’s consulting services provide customers withexpertise and assistance in evaluating, planning and implementing Optio’ssoftware products. To ensure a successful implementation of Optio’s softwareproducts, the Company’s consultants assist customers with the evaluation,planning and design process, the initial installation of a system, theintegration of Optio’s software products with the customer’s existingenterprise computing applications and ongoing training and upgrades. Managementbelieves that consulting services enable rapid implementation of Optio’ssoftware products, ensure success with the Optio solutions, strengthen thecustomer relationship and add to Optio’s industry-specific knowledgebase.

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While consulting services are optional and notessential to the functionality of the software, substantially all of Optio’scustomers utilize these services to facilitate the rapid implementation of thesoftware. These services are billed on an hourly or daily basis that variesbased on the type of service provided.

Optio employs its ownstaff of consultants, systems analysts and technical personnel devoted toassisting customers in all phases of systems implementation, includingevaluation, planning and design, customer-specific configuring of modulesand on-site implementation or conversion from existing systems. In addition,Optio utilizes third party consultants, such as those from major systemsintegrators, to assist in certain implementations. During the year ended January 31,2005, Optio reduced its internal consulting staff to 12 employees from 15employees in fiscal year 2004. In addition, select employees within theconsulting services organization were given opportunities elsewhere within theCompany, requiring us to rehire their positions and train the new employees.This required us to increase our use of outsourcers during fiscal year 2005.During the year ended January 31, 2006, Optio used a large majority of itsinternal consultants to test products and to perform installations of thelatest release of MedEx, version 1.2, to its existing customers. As a result,we were required to further increase our use of outsourcers to meet theimplementation demands of new customers. Approximately 70% of Optio’s consultingrevenue during fiscal year 2006 was performed by outsourcers. During the yearended January 31, 2007, approximately 87% of Optio’s consulting revenuewas performed by outsourcers. Optio’s internal consulting staff decreased evenfurther to five employees and as a result, our use of outsourcers increased infiscal 2007. Separately, six additional employees are dedicated as trainingstaff for internal, customer and partner training, as well as to developingcurriculum materials for training programs.

*Maintenance*

Optio offers acomprehensive maintenance program that provides customer telephone support, aswell as timely software updates and designated upgrades offering increasedfunctionality and technology advances. Optio offers these services for a feeequal to a percentage of the current software license fee per annum. As of January 31,2007, a majority of Optio’s customers subscribed to the comprehensivemaintenance support program. Customers who pay on a subscription basis have themaintenance fee included in their subscription payments.

**Research andDevelopment**

*Overview*

To maintain Optio’s competitive position, Optio mustcontinually enhance its current products and introduce new features orfunctionality, specifically those which build upon the Company’s businessprocess management strategy. Product development activities for the year ended January 31,2007 were focused on (i) the introduction of Optio Deficiency Managementand QuickTablet for the healthcare market, (ii) the development of ProCentra,Optio’s new business process management product with multi-step interactiveprocess functionality and enhanced document repository, (iii) OptioDocument Server and Design Center, a new design tool and document serverplatform, (iv) a new version of Optio’s e.ComPresent product, and (v) andadditional adapters to the Optio Imaging Solutions, which enable the product toperform application specific business processes.

During the year ended January 31, 2007, Optiospent $5.5 million, or 19% of revenue, on research and development activities,an increase from $5.1 million, or 17% of revenue, spent in the prior year.Optio has estimated that during the year ended January 31, 2007, personneltime spent on the above projects, and thus the associated percentage of thetotal $5.5 million spent on research and development, was divided as follows:18% allocated to the introduction of Optio Deficiency Management andQuickTablet; 36% to the development of ProCentra, Optio’s new business processmanagement product; 40% to Optio Document 

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Server and Design Center,Optio’s new design tool and document server platform; 5% to the introduction ofa new version of Optio’s e.ComPresent product; and 1% to the introduction ofadditional adapters to the Optio Imaging Solutions.

Current development projects as of January 31,2007 include (i) a Community Connect product which allows hospitals in acommunity to share patient information via Optio’s QuickRecord Suite, (ii) anew version of Optio’s Medex Suite, scheduled for release in the second half offiscal 2008, (iii) ProCentra, Optio’s new business process managementsolution, to be released in the second quarter of fiscal 2008, (iv) a newversion of e.comPresent, Optio’s document archive/repository, scheduled forrelease in the second quarter of fiscal 2008, and (v) sustainingengineering projects focused on improving the products released during previousyears.

All of Optio’s researchand development employees are located in the U.S. The products sold by Optio inEurope are developed in the U.S.

*Future ProductDevelopment Activities*

In addition to completing the current developmentprojects discussed above, product development activities for fiscal year 2008and beyond are focused on supporting Optio’s strategic initiatives. In general,Optio intends to offer new features focused on improving business processes andallowing hospitals to share patient information in a connected healthcarecommunity.

Amajor initiative for the year ending January 31, 2008 is the ongoingdevelopment of ProCentra, Optio’s new business process managementsolution. On this platform, Optio will be able to design products which addressmultiple business process models. In addition, Optio intends to focus onproduct development that can be readily adapted for software as a service. Inother words, multiple customers would be provided with remote access andmanagement of Optio’s products located on a central server. To address Optio’shealthcare market, Optio intends to develop additional features for its QuickRecordSuite and community health initiatives. Finally, Optio will continue to produce maintenance releases to repairsoftware defects, to modify products to accommodate changes to partner softwaredesign and upgrade vendor supported application programming interfaces.

*Retirement*

In the future, Optiointends to no longer offer or support certain older versions of our existingproducts and the operating systems on which they operate. Optio is in theprocess of developing migration paths for our customers on these products andintends to retire certain products once the migration path is defined andcommunicated to our customer base.

**Sales and Marketing**

During the yearended January 31, 2007, approximately 77% of Optio’s software revenue wasgenerated through Optio’s direct sales force, compared to 73% in the year endedJanuary 31, 2006. Optio had 36, 38, and 38 U.S. sales representatives andsales support staff as of January 31, 2005, 2006, and 2007, respectively.Optio’s U.S. sales representatives are divided into teams that:

·       directlymarket to potential customers based on geographic regions in the manufacturing,retail and distribution industries, and other market segments;

·       directlymarket to potential customers in the healthcare industry; and

·       sellto resellers and distributors.

Optio’s international sales organization, focused onEurope, was composed of 11, 10, and 11 sales representatives as ofJanuary 31, 2005, 2006 and 2007, respectively.

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The percentage of Optio’s license revenues generatedthrough its worldwide reseller network declined between the year ended January 31,2006 and 2007, decreasing by 4% from 27% in the prior year to 23% in thecurrent year.

Optio’s marketingactivities during the year ended January 31, 2007 were principally focusedon trade shows and webinars where the Company was able to demonstrate itsproducts and their capabilities. Other marketing promotions included directmail and electronic media campaigns, editorial placements in various trademagazines, as well as distribution of product brochures and other literature toinform new and existing customers about our new product offerings.

**StrategicRelationships**

Optio has strategic relationships with third partiesthat help to market, sell, implement, support and enhance Optio’s solutions.These strategic relationships are discussed in the following paragraphs.

*DistributorRelationships.**  *Optiohas relationships with distributors who market and resell Optio’s software.These distributors may also provide education, implementation and customizationservices for their customers. Optio’s major distributors include HarvestTechnology and Brisbane Information Technology Group.

*IndependentSoftware Vendor/Value-Added Reseller Relationships.**  *Optio has relationships withresellers that market and resell Optio’s software as a component of their ownsolutions and who often provide software-related education, implementation andcustomization services to their customers. These resellers have their ownsoftware solutions that typically address a specific market sector and utilizeOptio’s software to enhance the functionality of their own solutions. Optio’ssoftware is sold along with their own solutions under the Optio brand name.Optio’s major value-added resellers include Infor Global Solutions, Epicor,SunGuard Pentamation Inc. and Strategic Information Group.

*OEMRelationships.**  *Certaincompanies may choose to embed Optio’s software within their software andre-label the software with their own name. Because resellers who embed orinclude Optio’s products within their solutions provide substantially all ofthe sales and marketing efforts and the initial support services with respectto this embedded software, they receive price discounts on Optio’s software.

*ReferralRelationships.**  *Optiohas established relationships with over 30 partners including QAD, Inc. (“QAD”),Rapidigm and QHR (formerly Quorum Health Resources, LLC), to refer prospects toOptio that may have an interest in licensing Optio’s solution. As part of adefined process, Optio validates that it is not currently working with thatprospect and if Optio secures a licensing agreement with that prospect within afixed period of time, Optio will pay a referral fee to the referring partner.

*ImplementationRelationships.**  *Optiohas active relationships with 10 consulting organizations to provide valueadded services that assist customers in implementing Optio’s software. Optiotrains and tests these organizations’ consultants to install and use Optio’ssoftware and certifies them once they have demonstrated their proficiency indelivering complete solutions that meet the needs of the customers.

*Vendor Relationships.**  *Optio has relationships with major ERP and healthcaresoftware vendors where Optio has demonstrated that its solutions are compatiblewith their applications and provide complementary functionality. These vendorsinclude Oracle Corporation, QAD and SAP. In most cases, Optio’s products arecertified as to their compatibility with these vendors. As a result, these vendorswill include descriptions of Optio products’ key features and benefits in theirdirectories that are published periodically in print and on their Internetsites. Optio can also feature the vendors’ logos in its advertising andpromotional materials and participate in vendor sponsored trade shows,marketing programs and other events. In the past, these vendor relationshipshave resulted in significant revenues and Optio expects that they will continueto do so in the future.

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**Customers**

Optio’s customers consistof enterprises across a broad spectrum of industries; however, healthcare,manufacturing, retail and distribution customers represent approximately 60% ofOptio’s customers. Other customer industry segments include technology, banks,financial institutions and the public sector. As of January 31, 2007,Optio licensed its products for use by more than 5,000 customers.

No single customeraccounted for 10% or more of Optio’s total revenue during the fiscal yearsended January 31, 2005, 2006 or 2007.

**Competition**

The market for Optio’ssoftware and services is intensely competitive, quickly evolving and subject torapid technological change. Management expects competition to intensify in thefuture. Optio’s potential competitors vary in size and in the scope and breadthof the products and services offered. Our potential competitors fit into threeseparate categories. The first category includes custom software developers.The second is comprised of distributed output management, imaging or print managementsolutions from organizations such as Adobe Systems Incorporated, AFP Technology(Formscape), Kofax, Captiva Software Corporation, Documentum, Inc. (nowpart of EMC Corporation), Bottomline Technologies, The Hewlett Packard Company,StreamServe, McKesson Corporation, Standard Register, Cypress Corporation (nowowned by ASG Software Solutions), FormFast, and Evergreen. The third categoryconsists of the potential competition from the Company’s ERP or healthcaresoftware vendor partners. If these partners enhance their own software productsto include functionality currently supplied by Optio, such partners wouldbecome direct competitors to the Company.

Some ERP vendors havebegun to recognize their end-users’ requirement for better output from theirERP applications. Thus, select ERP vendors have begun to include minimalfunctionality to address their customer needs and now compete with Optio’s coretechnology. This has put pressure on Optio to expand its product offerings toaddress the full range of business process solutions and document management,rather than simply output management, which we believe is a differentiatingfactor.

Management believes thatOptio is differentiated from its competitors by its software’s ability tocombine various capabilities, including information customization, distributedoutput management, information integration and exchange, print management,imaging, business process management and e-business enablement, into oneintegrated solution. To the best of management’s knowledge, none of Optio’scompetitors provides such functionality in a single integrated solution.Management believes that Optio also competes on the basis of its software’sability to operate across multiple operating systems. With respect to the OptioHealthcare Suite, management believes that Optio compares favorably with itscompetitors because Optio offers a vertically oriented solution to address theneeds of the healthcare marketplace, including HIPAA regulatory concerns. Inaddition, a subscription-based licensing model, pursuant to which customers paya monthly fee for use of our software and support, makes our products verycompetitive in the small to mid-size hospital facility market.

Management believes thatthe principal competitive factors present in Optio’s market include: productperformance, quality, functionality and features; cost of solution; customerservice; core technology; ease of implementation and use; and value derivedfrom the solution. Although management believes that Optio’s products andservices currently compete favorably with respect to each of these factors,Optio’s market is evolving rapidly and it may not be able to maintain itscompetitive position against current and potential competitors.

**Intellectual Property**

Optiodistributes its products under software license agreements, which generallygrant clients perpetual or subscription-based licenses to use, rather than own,Optio’s products. These licenses contain 

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various provisions protecting our ownership and theconfidentiality of the underlying technology. The majority of Optio’s softwareproducts are protected from unauthorized use through electronic activation keystied to the system on which the software is licensed to operate. The sourcecode, or the intellectual property underlying Optio’s software, is protected asa trade secret and as unpublished copyrighted work.

Optio protects itsproprietary rights by relying on copyright, trade secret, and trademark laws,confidentiality agreements and contractual obligations. Some of Optio’ssoftware, documentation and other written materials are protected under theFederal copyright law. Optio has registered “Optio” and its accompanying logo,as well as its products’ names such as “Optio e.ComIntegrate” as trademarks inthe United States and in certain countries in which Optio sells its products.Optio has used the “Optio” trademark in the European Community since 1997 andregistration is pending as two oppositions to the mark have been cleared. Inaddition, Optio has received a notice from a third party claiming registrationand ownership of the trademark “QuickScan” in the United States. The partieshave reached an agreement in principle whereby the use of the word QuickScanmust always be combined with the word Optio (for example, Optio QuickScan).Finally, Optio is currently seeking trademark registration for the names of itsmost recently released or soon to be released products, namely “ProCentra”, “OptioDeficiency Management” and “Optio QuickTablet”.

Optio also relies on tradesecret laws of the State of Georgia and the states in which it does business toprotect its software designs and other proprietary information. In addition,non-disclosure agreements contained in employment contracts protect Optio’sproprietary information from disclosure by current and former employees.

While Optio has notapplied for any U.S. patents, the Company acquired a patent in the acquisitionof VertiSoft, U.S. patent number 5,437,024, for an improvement in SelectiveComputer-Generated Information Distribution System by Computer PeripheralEmulation and Use, which is a method for distributing reports. It is possiblethat Optio may not develop proprietary products or technologies that arepatentable, that any patent issued to Optio may not provide Optio with anycompetitive advantages, or that the patents of others will seriously harm theCompany’s business.

Despite Optio’s efforts toprotect its proprietary rights, unauthorized parties may attempt to copyaspects of Optio’s products or to obtain and use Optio proprietary information.Policing the unauthorized use of Optio’s products is difficult, and while Optiois unable to determine the extent to which piracy of Optio’s software productsexists, software piracy can be expected to be a persistent problem. Inaddition, the laws of some foreign countries do not protect Optio’s proprietaryrights to as great an extent as do the laws of the United States. Optio’s meansof protecting its proprietary rights may not be adequate and Optio’scompetitors may independently develop similar technology, duplicate Optio’sproducts or design around patents issued to Optio or Optio’s other intellectualproperty.

There has been a substantial amount of litigation inthe software and Internet industries regarding intellectual property rights. Itis possible that in the future third parties may claim that Optio or itscurrent or potential future products infringe on their intellectual property.Management expects that software product developers and providers of e-commercesolutions will be increasingly subject to infringement claims as the number ofproducts and competitors in the industry grows and the functionality ofproducts in different industry segments overlap. Any claims, with or withoutmerit, could be time-consuming, result in costly litigation, cause productshipment delays or require Optio to enter into royalty or licensing agreements.Royalty or licensing agreements, if required, may not be available on termsacceptable to Optio or at all, which could seriously harm our business.

**Employees**

Optiohad 167, 170 and 182 employees as of January 31, 2005, 2006 and 2007,respectively. The Company’s employees are not covered by any collectivebargaining agreements. Optio considers its relationships with its employees tobe good.

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**Executive Officersof the Registrant**

As ofthe date of this Annual Report, the following individuals serve as executiveofficers of Optio:

| **Name**        | ** ** | ** ** | ** ** | **Age**                                                                    | ** ** | **Position** |
|-----------------|------------|------------|------------|----------------------------------------------------------------------------|------------|--------------|
| C. Wayne Cape   |       | 53         |       | President,  Chief Executive Officer and Chairman of the Board of Directors |
| Chris Beecroft  |       | 51         |       | Senior Vice  President and General Manager of Enterprise Sales             |
| Michael McGuire |       | 58         |       | Senior Vice  President and General Manager of Healthcare Sales             |
| Steven Kaye     |       | 54         |       | Senior Vice  President of Marketing and Product Management                 |
| Donald French   |       | 57         |       | Senior Vice  President of Research and Development                         |
| Daryl G. Hatton |       | 45         |       | Chief Technology  Officer                                                  |
| Caroline Bembry |       | 36         |       | Chief Financial Officer                                                    |

 

*C.Wayne Cape,*the founder of Optio, served as ChiefExecutive Officer and President of Optio from its inception in 1981 through June 2001and again since February 2003. Mr. Cape has acted as a member ofOptio’s Board of Directors since the Company’s inception and became Chairman ofthe Board in September 1999. Prior to launching Optio, Mr. Cape wasan employee at Digital Communication Associates from 1974 to 1981 where heserved in a variety of technical, sales and regional sales managementpositions.

*ChrisBeecroft*has served as Senior Vice President andGeneral Manager of Enterprise Sales and Services since May 2006. From November 2005to May 2006, Mr. Beecroft was Regional Vice President of Sales forVersata. Prior to that, beginning in July 2004, Mr. Beecroft held theposition of Vice President of Business Development for CapGemini. From April 2003until July 2004, Mr. Beecroft was employed as Regional Director ofSales for PeopleSoft. Prior to that, Mr. Beecroft held the position ofRegional Manager for Siebel. Mr. Beecroft is certified as a CertifiedPublic Accountant in the state of Florida.

*MichaelMcGuire*has served as Senior Vice President andGeneral Manager of Healthcare Sales and Services since June 2006. From August 2004to May 2006, Mr. McGuire held the position of Senior Vice Presidentof Sales and Marketing for CareCentric, Inc., a leading provider ofbilling, management and technology solutions for the home healthcare industry. Priorto that, beginning in May 2002, Mr. McGuire was employed as ChiefOperating Officer for Vertisoft. Prior to that, beginning in April of1999, Mr. McGuire served as Chief Operating Officer for Healthcare.com(now Quovadx).

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

*Donald French*hasserved as Senior Vice President of Research and Development since February 2005.Previously, Mr. French served as the Company’s Senior Vice President ofProduct Development—Healthcare Products from August 2004, when he joinedthe Company with the acquisition of VertiSoft. Mr. French was the founderand president of VertiSoft in 1988, a healthcare pioneer in clinical documentmanagement systems. Prior to that, Mr. French founded Epic Development, acompany based upon the concept of streamlining information access anddistribution for physicians and hospital administrators. Mr. Frenchoriginally became involved in healthcare solutions as the founder of FMG 

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Corp., establishedin 1978. Prior to establishing FMG Corp., he was instrumental indeveloping the Tandy TRS-80 microcomputer, as well as other software andhardware for Radio Shack.

*DarylG. Hatton*has served as Chief Technology Officer forOptio since February 1997. From October 1993 to February 1997,he served as director of research for the Company. From 1988 through 1993, Mr. Hattonwas a co-founder and president of Pacific Genesys Development, Inc., aCanadian corporation in the electronic forms software development industry,which was acquired by Optio in 1993. Prior to that, Mr. Hatton was VicePresident of Product Development for Modatech Systems, Inc., a publiclytraded software developer of sales force automation solutions.

*Caroline Bembry*hasserved as Optio’s Chief Financial Officer since August 2003. From December 2002to August 2003, Ms. Bembry served as the Vice President of Finance ofOptio and from November 1999 to December 2002, she served as theController of Optio. Prior to joining Optio, Ms. Bembry was AssistantCorporate Controller for WebMD Medical Manager from June 1997 to November 1999.Prior to serving at WebMD Medical Manager, Ms. Bembry held variouspositions with Coopers & Lybrand LLP. Ms. Bembry is certified as a Certified Public Accountant inFlorida.

**Item 1.A.**             RISKFACTORS

You should carefullyconsider the following factors in evaluating us and our business. The risks anduncertainties described below are not the only ones we face. Additional risksand uncertainties not presently known to us, which we currently deem immaterialor that are similar to those faced by other companies in our industry orbusiness in general, may affect our business operations. If any of thefollowing risks actually occur, our business, financial condition or results offuture operations could be materially and adversely affected.

**Risks Related ToOur Business**

**Wehave incurred losses and may need to raise additional capital.**

We achieved net income of$282,000, $898,000 and $1.7 million for the years ended January 31, 2007,2006 and 2005, respectively. At January 31, 2007, we had an accumulateddeficit of approximately $43.3 million. We may incur significant operatinglosses in the future. We may need to increase revenues or decrease expenses tomaintain profitability, which may impact our business, and we cannot assure youthat we will be able to do so. We cannot assure you that we can sustain orincrease profitability or generate positive cash flows from future operatingactivities. Based on our currently available cash reserves, if we cannotmaintain profitability and a positive cash flow position, we may need to raiseadditional capital or obtain additional financing to fund our operations andexpand our business. If we need to raise additional capital or obtain additionalfinancing, there can be no assurance that we will be successful in raising suchadditional capital on favorable terms, or at all. Failure to raise such capitalcould result in a material adverse effect on our ability to meet our businessobjectives.

**Our subscription revenue model may force us toterminate subscription agreements with collection risks, thereby decreasing ourfuture revenue.**

We earn subscription-based revenue, where customerspay monthly subscription fees for certain software and maintenance rights,typically pursuant to three to five-year contracts. We may also have additionalsubscription-based revenue in the future, particularly for software sales inthe healthcare industry.

If we increase our subscription-based sales, thequarterly revenue of the Company may initially decrease. Under a perpetuallicense model, all of the revenue from the sale is usually recognized in the 

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quarter in which the saleoccurs. However, in a standard subscription-based software sale, the revenue isrecognized monthly over the term of the underlying agreement.

Further, due to thisdelayed payment method, the collection risk may be greater; however, we wouldcancel the software license if the customer fails to pay the monthlysubscription fee. While our recent history shows very low early termination ofsubscription agreements, there are no assurances that such trend will continuein the future.

**We rely on our strategicmarketing relationships to generate customer referrals; if we do notsuccessfully develop and maintain these relationships, our revenue willdecline.**

We expect sales of oursoftware and services based on customer referrals generated through strategicmarketing relationships will continue to account for a significant portion ofour revenue. The loss of a significant number of these relationships wouldcause our revenue to decrease. Most of our revenue from these relationships isderived from strategic marketing relationships with three types of entities:large software vendors, healthcare management companies and consulting firms.Large software vendors, such as QAD, may recommend our products to theircustomers or provide us with customer referrals. Consulting firms, such asDeloitte Consulting Product Services LLC, may recommend our software to theircustomers. In some cases, healthcare management organizations such as QuorumHealth Resources, refer our software to its hospitals. Some of theseorganizations receive referral fees for these sales and others do not. Wereceive license fees from the customers in these sales. We expect that alimited number of our strategic marketing relationships, such as those with QADand Quorum, will account for a substantial portion of our customer referralsand, therefore, revenue over time. Our strategic relationships are generallyterminable by either party upon 30 to 90 days’ notice. Therefore, thecontinuation of these relationships is uncertain. Furthermore, softwaremanufacturers may decide to promote technologies and standards that are notcompatible with our software or that compete with our software, or they maylose market share for their products, which could cause our revenues todecline.

**We rely in part onthird-party reseller relationships to generate revenue; if we do not continueto develop and maintain these relationships, our revenue will decrease.**

During the year ended January 31,2007, 2006 and 2005, approximately 23%, 27% and 26%, respectively, of oursoftware license revenue was derived from partners, such as resellers,value-added distributors or OEM relationships. We intend to augment ourindirect sales channel through such additional third-party resellerarrangements, including relationships with specific strategic systemsintegrators which may resell or recommend our products. As a result, we maybecome more dependent on these types of relationships. We may not be able tosuccessfully augment these arrangements, and the expansion of indirect resalemethods, even if successful, may not increase revenue. As a result, we mayincur expenses that do not promote the growth of our business, which could havea material adverse effect on our financial condition, results of operations andcash flows.

**We rely on our ability to retain our existing keypersonnel and attract additional key personnel; if we are unable to do so, wemay not be able to effectively manage and expand our business.**

Our future performance depends on the continuedservices of our senior management, product development and sales personnel. Theloss of the services of one or more of our key personnel could seriously harmour ability to manage and expand our business. In particular, we rely on theexperience and knowledge of our President, Chief Executive Officer, Chairmanand founder, C. Wayne Cape.

Our future success alsodepends on our continuing ability to attract, hire, train and retain asubstantial number of highly skilled managerial, technical, sales, marketingand customer support personnel. We are particularly dependent on hiringadditional personnel to increase our direct sales, healthcare expansion 

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andresearch and development efforts. In addition, new hires frequently requireextensive training before they achieve desired levels of productivity.Competition for qualified personnel is intense and we may fail to retain ourkey employees or to attract or retain other highly qualified personnel. If wefail to attract and retain such personnel, we may not be able to effectivelymanage and expand our business.

**We may expand ourinternational operations; if we do not effectively manage this expansion, ouroperating results could be adversely affected.**

Substantially all of our current international revenueis derived from the operations of our wholly-owned subsidiaries operating inFrance, Germany and the UK. Our foreign operations generated revenue fromlicenses and services, including maintenance services, to customers of $4.9million in the twelve months ended January 31, 2007, representing 17% oftotal revenue. Our foreign operations generated revenue from licenses andservices, including maintenance services, to customers of $4.7 million in thetwelve months ended January 31, 2006, representing 16% of total revenue,compared to $5.0 million in the twelve months ended January 31, 2005,representing 17% of total revenue. Our international operations may negativelyaffect our operating results due to difficulties in staffing and managingforeign operations; potential losses or gains from currency fluctuations as aresult of transactions and expenses being denominated in foreign currencies; seasonalreductions in business activity in Europe; increased financial accounting andreporting burdens and complexities and potentially adverse tax consequences;delays in delivering language-specific versions of our software due to ourlimited experience in creating these versions; compliance with a wide varietyof complex foreign laws and treaties, including, but not limited to, labor lawsand trade restrictions; unstable political and economic internationalconditions; reduced protection for intellectual property rights in somecountries; and licenses, tariffs and other trade barriers.

The expansion of ourexisting international operations and entry into additional internationalmarkets would require significant management attention and financial resources,and would place additional burdens on our management, administrative,operational and financial infrastructure. We cannot be certain that ouroperations in other countries would produce desired levels of revenue orprofitability, thus providing a satisfactory return on investment.

**Our software may sufferfrom defects or errors, which may harm its reputation or subject us to productliability claims.**

The software we offer isinherently complex. Despite extensive testing and quality control, currentversions, new versions or enhancements of our software may contain errors aftercommencement of commercial shipments. Any errors may harm the reputation of oursoftware or subject us to product liability claims. Significant technicalchallenges also arise with our software because our customers purchase anddeploy our software across a variety of computer platforms and integrate themwith a number of third-party software applications and databases. Any defectsor errors that are discovered after commercial release of our software couldresult in the loss of revenue or delay in market acceptance of our software.Moreover, we could face significant product liability claims and higherdevelopment costs if our software contains undetected errors, if we fail to meetour customers’ expectations or if a customer’s system experiences failuresfollowing the implementation of our software, regardless of our responsibilityfor such failure. Although we maintain general liability insurance coverage,this coverage may not continue to be available on reasonable terms or at all,or may be insufficient to cover one or more large claims. In addition, aproduct liability claim, whether or not successful, could adversely affect ourbusiness by increasing our costs and diverting our management’s attention.

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**The third-party softwareon which we rely may suffer from defects or errors or may become obsolete,which would adversely affect our sales.**

Our software containscomponents developed and maintained by third-party software vendors, and weexpect that we will incorporate software from third-party vendors in our futuresoftware. We may not be able to replace the functionality provided by thisthird-party software if it becomes obsolete, if the contracts with our currentvendors are terminated by the vendor, or this third-party software isdiscovered to be defective or incompatible with future versions of our softwareor if it is not adequately maintained or updated. Any significant interruptionin the availability of this third-party software or defects in this softwarecould harm our sales and disrupt our ability to support current customersunless and until we can secure an alternative source. In addition, we haveentered into, and plan to continue to enter into, strategic relationships withother companies, whereby we license our software for integration withthird-party software. If the other companies’ software fails to meet customerexpectations or causes a failure in its customers’ systems, the reputation andsales of our software could be adversely affected, even if our softwareperforms in accordance with its functional specifications.

**We rely on third partiesto provide part of our consulting services; if these third parties do notprovide satisfactory services, our reputation could be harmed and our revenuefrom these services could decrease.**

We currently contractwith, and may increasingly contract with, third-party providers to assist us inproviding consulting services to our customers. Services provided by thesethird parties may include providing assistance to our customers in installingand implementing our software. If we are unable to continue contracting withthird parties for these consulting services, or if these third parties do notmeet the needs or expectations of our customers, our business and reputationmay be harmed and we will have to perform these functions ourselves. Providingthese services could place a significant strain on our internal consultingresources, and we may not be able to successfully perform these services on atimely and cost-effective basis, which could have a material adverse effect onour financial condition, results of operations and cash flows.

**Disputes regarding ourintellectual property could adversely affect our ability to sell our softwareand services.**

We believe that our ability to sell our software andservices depends, in significant part, on protecting our proprietaryintellectual property and favorably resolving intellectual property claims thatmay be brought against us. If we fail to adequately protect our intellectualproperty rights, our ability to sell our software and services may berestricted, and our operating results could be adversely affected.

We rely on a combination of copyright, trademark andtrade secret laws and contractual provisions to establish and protect ourproprietary rights. We have registered the trademarks for “Optio” and certainof Optio’s product names in the United States and have applied for the UnitedStates registration of the trademark for certain other yet un-registered Optioproduct names. We have obtained trademark registration for “Optio” in certainforeign countries in which we sell our products. We have also registered thedomain names “optiosoftware.com” and “HIPAASmart.com.” We have not filed anycopyrights or patents for our software, but we have acquired a patent for animprovement in Selective Computer-Generated Information Distribution System byComputer Peripheral Emulation and Use from VertiSoft Corporation, which weacquired in August 2004.

The steps we have taken to protect our proprietaryrights may not be adequate. We may not be able to secure trademark or servicemark registrations for our marks in the United States or in foreign countries,and third parties may infringe upon or misappropriate our copyrights,trademarks, service marks, domain names and similar proprietary rights. Inaddition, effective copyright and trademark protection may be unenforceable orlimited in foreign countries. Also, our competitors or others may adopt productor 

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service names similar toours, thereby impeding our ability to build brand identity and possibly leadingto customer confusion. In addition, litigation may be necessary to enforce andprotect our trade secrets, copyrights and other intellectual property rights.Any litigation would divert management resources, be expensive and may noteffectively protect our intellectual property. Our inability to adequatelyprotect our intellectual property rights could adversely affect our business.

We may be subject tolitigation for claims of infringement of the rights of others or to determinethe scope and validity of the intellectual property rights of others.Furthermore, adverse determinations in litigation could result in the loss ofproprietary rights, subject us to significant monetary liabilities, require usto seek licenses from third parties, or prevent us from selling our productsand services. If we are required to obtain new licenses from third parties, wemay not be able to obtain them on commercially reasonable terms or at all. Anyof these results could reduce the acceptance of the Optio brand, which couldadversely affect our business.

**Wemay not meet our covenants under our bank debt arrangements.**

At January 31, 2007,we were in compliance with all financial covenants required under our line ofcredit facility. However, at certain times in the past, we were not incompliance with our loan covenants and received appropriate waivers of defaultfrom our lender. We believe it is possible that certain requirements containedin our loan covenants may still not be met during fiscal 2008. If we fail tomeet any negative covenant under our loan facility while we have any borrowingsoutstanding thereunder, our lender has the right to declare the outstandingdebt immediately due and payable and commence foreclosure on all of our assetswhich secure the loan if we do not repay the outstanding loan balance.

**Ourinternational operations may adversely affect our operating results.**

Optio’s internationaloperations pose additional risks to its operations as a result of the followingfactors: potential losses or gains from currency fluctuations as a result oftransactions and expenses being denominated in foreign currencies; increasedfinancial accounting, administrative and reporting burdens and complexities;potentially adverse tax consequences; compliance with a wide variety of complexforeign laws and treaties, including employment laws; adverse changes ineconomic conditions of foreign countries, caused by various sources, includingeconomic instability and disputes; and reduced protection for intellectualproperty rights in some countries.

**We are subject torisks on the collection of our accounts receivable.**

We maintain allowances fordoubtful accounts or collection risks on accounts receivable. If a substantialamount of our accounts receivable became uncollectible, it would have amaterial adverse impact on our income and cash position.

**Risks Related To Our Industry**

**We may make acquisitions in order to remaincompetitive in our markets; if we are unable to do so, our competitive positioncould be weakened.**

We intend to continuously evaluate our position withinour industry, and we may acquire complementary technologies or businesses inthe future. However, we may not be able to identify suitable acquisitioncandidates that are available for sale at reasonable prices. Due toconsolidation trends within the technology industry, failure to adopt andsuccessfully implement a long-term acquisition strategy could weaken ourcompetitive position. We may elect to finance future acquisitions with debtfinancing, which would increase our debt service requirements, or through theissuance of additional common or preferred stock, which could result indilution of our existing shareholders. In addition, we may not be able toarrange adequate financing for any acquisitions on acceptable terms or at all.

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**Acquisitions may be difficult to integrate into ourbusiness, may limit our ability to manage our operations and may result inadverse accounting treatment.**

We may be unable to obtaina satisfactory return on our investments in acquisitions as a result of variousfactors, including, but not limited to, difficulties in assimilating theoperations, products, technology, information systems and personnel of theacquired company with our operations; the diversion of our management’sattention from other business concerns; the impairment of relationships withour employees, affiliates and organizations with which we have strategicmarketing relationships; difficulties maintaining uniform standards, controls,procedures and policies; our lack of direct prior experience in the markets ofthe acquired company; and the loss of key employees of the acquired company.Future acquisitions may also involve large one-time write-offs related togoodwill and other intangible assets. The failure to obtain a satisfactory returnon our investments in acquisitions could have a material adverse effect on ourfinancial condition, results of operations and cash flows.

**We face intense competition in our industry; if we areunable to compete successfully, we may not be able to sell our software andservices, which would harm our operating results.**

If we are unable tosatisfy our customers’ requirements, we may lose those customers to ourcompetitors, which would harm our operating results. The market for oursoftware and services is intensely competitive, fragmented and constantlychanging. Our customers’ requirements and the technology available to satisfythose requirements continually change. We expect competition to persist andfurther intensify in the future.

We believe that our competitorsfit into three segments. The first segment is custom software development. Thesecond segment is comprised of output management, imaging and print managementsolutions from organizations such as AFP Technology Ltd. (Formscape, now partof Bottomline Technologies); The Hewlett-Packard Company; StreamServe, Inc.;BottomLine Technologies; Documentum, Inc. (now part of EMC Corporation);Kofax; Captiva Software Corporation; Adobe Systems Incorporated; McKessonCorporation; Standard Register and Evergreen. The third segment is comprised ofthe ERP or healthcare software vendor partners with which we typically partnerand which may enhance their own software products to include functionalitycurrently handled by us, thus directly competing with us.

Some ERP vendors havealready begun to recognize their end-users’ requirement for better output fromtheir ERP applications. Thus, select ERP vendors have begun to include minimalfunctionality to address their customers’ needs and now compete with our coretechnology. This development has put pressure on us to expand our offerings toaddress the full range of business process and document management solutions,rather than simply output management. Any competition with our partners wouldnegatively impact our ongoing relationships with select ERP vendors.

We expect to faceincreased competition from our current competitors. In addition, newcompetitors, alliances among existing and future competitors, or acquisitionsby or consolidations of our competitors may emerge and rapidly gain significantmarket share.

Some of these companies,as well as some other competitors, have longer operating histories andsignificantly greater financial, marketing and other resources than we do. Manyof these companies can also leverage extensive customer bases and adoptaggressive pricing policies to increase their market shares. In addition, it ispossible that new competitors or alliances among competitors may emerge andrapidly acquire significant market shares.

Competitive pressures maymake it difficult to acquire and retain clients and may require us to reducethe price of our software. We cannot be certain that we will be able to competesuccessfully with existing or new competitors. If we fail to competesuccessfully, our financial condition, results of operations and cash flowscould be adversely affected.

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**We may experience delaysin enhancing existing software and in developing new software; these delays mayadversely affect our competitiveness and cause us to lose market share.**

Our competitiveness andability to maintain or increase our market share will depend, in part, on ourability to develop, test, market, sell and support enhancements to our currentand new software on a timely basis in response to changing customers’ needs,competition, technological developments and emerging industry standards. Ourfailure to successfully adapt our software and services to this rapidlychanging market could reduce our revenue and adversely affect our operatingresults. The software industry is characterized by rapidly changing technology,evolving industry standards, emerging competition and frequent introductions ofnew products and services. These developments could limit the marketability ofour software and services and could render our software and services obsolete.We may not successfully identify new product opportunities or develop and bringnew and enhanced products and services to the market in a cost-effective andtimely manner. If we fail to release new software and upgrades on time or ifour products and/or services fail to achieve market acceptance, we mayexperience customer dissatisfaction, cancellation of orders and licenseagreements and loss of revenue.

**Risks Related ToOur Common Stock**

**Our operating results mayfluctuate in future periods; as a result, we may fail to meet expectations ofinvestors and our stock price may decline.**

Our revenue and operating results may vary fromquarter to quarter. As a result, we may fail to meet the expectations of ourinvestors, which may cause our stock price to fluctuate. These fluctuations mayoccur as a result of any of the following factors, including, but not limitedto, variations in market acceptance of and demand for our software; the sizeand timing of our customer orders; increased expenses, whether related to salesand marketing, product development or administration; delays in introducing newsoftware or software enhancements; new software introductions or changes inpricing policies by our competitors; costs related to acquisitions oftechnologies or businesses; and the amount and timing of expenditures relatedto expansion of our operations.

The purchase of oursoftware involves a significant commitment of resources, recurring expenses andattendant delays frequently associated with approving capital expenditures andreviewing new technologies that affect key operations. The decision-makingprocesses of our customers’ senior management require us to provide asignificant level of training to prospective customers regarding the use andbenefits of our software. We may expend substantial funds and managementresources during the sales cycle and fail to consummate the sale. Accordingly,our results of operations for a particular period may be adversely affected ifthe sales forecasted for a particular period are delayed or do not otherwiseoccur.

**Future issuances ofshares of our common stock could cause our stock price to decline.**

Future issuances of sharesof our common stock may depress our stock price. Sales of a substantial numberof shares of our common stock in the public market could adversely affect themarket price of our common stock. In addition, there are a significant numberof options convertible into shares of common stock. Our investors will likelyexperience further dilution upon the exercise of such outstanding stockoptions.

**The low price ofour common stock could result in difficulty in trading our common stock.**

Our common stock iscurrently quoted on the Over-the-Counter Bulletin Board (the “Bulletin Board”)and is no longer listed on the NASDAQ Market. As a result, trading our sharesmay be more difficult for investors, leading to further declines in shareprice. Such declines could also make it more difficult for us to raiseadditional capital. We would also incur additional costs under state blue skylaws if we completed an offering of our common stock. Further, the BulletinBoard may be terminated, in which 

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case wewould either attempt to list our common stock on some other exchange or it maycause our common stock to further decline and lower our trading volume. Thereare no assurances that we would be able to qualify for another exchange.

**Our management andaffiliates control more than 55% of our issued and outstanding common stock andwill therefore be able to significantly influence the outcome of anyshareholder vote.**

In excess of 55% of ourissued and outstanding common stock is controlled by our management andaffiliates. This may discourage a potential acquirer from offering to purchaseor otherwise attempting to obtain control of our company, which in turn couldreduce our stock price or prevent our shareholders from realizing a premiumover our stock price.

**Outside investorsmay accumulate large portions of our common stock.**

Several groups of outsideinvestors have acquired a substantial amount of shares of our common stock.These investors have filed Schedules 13D with the SEC and have not indicatedthat they intend to take control of our company. However, if these investorsand their affiliates continue to accumulate shares of our common stock, theycould attempt to change our Board of Directors and/or management. Some of theseinvestors are included as affiliates in the 55% ownership discussed above. Basedupon the requests of these investors, Jay Wolf of Trinad Management, LLC, wasadded to the Board of Directors.

**Our articles ofincorporation and bylaws, and certain provisions of the Georgia law, mayprevent or delay a future takeover, thus preventing investors from realizing apremium on our stock price.**

Our articles ofincorporation, bylaws and certain provisions of the Georgia law, could make itmore difficult for a third party to acquire us, even if a change in controlwould be beneficial to our shareholders. For example, our articles of incorporationand bylaws provide, among other things, that our Board of Directors, withoutshareholder approval, has the authority to issue preferred stock with rightssuperior to the rights of the holders of common stock; that shareholders mustcomply with advance notice provisions contained in our bylaws to make proposalsat shareholder meetings and to nominate candidates for election to our Board ofDirectors; that our Board of Directors is classified and directors servestaggered terms; and that the shareholders may call a special meeting only uponrequest of 50% of the votes entitled to be cast on each issue to be consideredat the special meeting. Georgia law also contains “business combination” and “fairprice” provisions that may have the effect of delaying, deterring or preventinga change in control of our company.

**We do not intend topay dividends in the foreseeable future.**

We have never declared orpaid dividends on our common stock. We intend to retain our earnings, if any,for use in the operation and expansion of our business. In addition, our creditfacility contains a negative covenant that prohibits us from paying a dividendon our common stock. Therefore, we do not anticipate declaring or paying anydividends in the foreseeable future.

**Item 1.B.**            UNRESOLVEDSTAFF COMMENTS

Not applicable.

**Item2.**                        PROPERTIES

Optio’s principalcorporate offices are located in approximately 51,000 square feet at 3015Windward Plaza, Windward Fairways II, Atlanta, Georgia, 30005. The term of thislease is through December 31, 2012. Sales offices are also located inFrance, Germany and the United Kingdom, providing Optio with an additional3,000 square feet.

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Optio leases all of itsproperties with remaining terms between one and seven years. Managementbelieves that its facilities are adequate for its current needs and thatsuitable additional space will be available as required.

**Item3.**                        LEGALPROCEEDINGS

On November 13, 2001,a lawsuit styled Kevin Dewey vs. Optio Software, Inc., et. al. was filedin the United States District Court for the Southern District of New York. Thecomplaint was filed against the underwriters in the Company’s initial publicoffering as well as Optio and certain officers and directors of Optio, by asingle plaintiff purportedly on behalf of persons purchasing Optio’s commonstock between December 14, 1999 and December 6, 2000. The lawsuitalso seeks class action status. Optio is a co-defendant with approximately 300other issuers in this suit. The complaint includes allegations of violations of(i) Section 11 of the Securities Act of 1933, as amended (the “SecuritiesAct”), by all named defendants, (ii) Section 12(a)(2) of theSecurities Act by the underwriter defendants, (iii) Section 15 of theSecurities Act by the individual defendants, and (iv) Section 10(b) ofthe Securities Exchange Act of 1934, as amended, and Rule 10b-5promulgated thereunder by the underwriter defendants. The complaint allegesthat Optio’s prospectus was materially false and misleading because it failedto disclose, among other things, that: (i) the underwriters had solicitedand received excessive and undisclosed commissions from certain investors inexchange for which the underwriters allocated to those investors materialportions of a limited number of Optio shares issued in connection with theOptio initial public offering; and (ii) the underwriters had entered intoagreements with customers whereby the underwriters agreed to allocate Optioshares to those customers in the Optio initial public offering in exchange forwhich the customers agreed to purchase additional Optio shares in theaftermarket at pre-determined prices. The complaint seeks unspecified amountsas compensatory damages as a result of Optio’s alleged actions, as well aspunitive damages and reimbursement for the plaintiffs’ attorneys’ fees andassociated costs and expenses of the lawsuit. A proposal to settle the claimsagainst Optio and other companies and individual defendants in the litigationwas conditionally accepted by Optio. The completion of the settlement issubject to a number of conditions, including Court approval. The Courtpreliminarily approved the settlement on February 15, 2005, subject tocertain modifications which are currently pending approval by the defendants.Under the settlement, the plaintiffs will dismiss and release all claimsagainst participating defendants in exchange for a contingent payment guarantyby the insurance companies collectively responsible for insuring the issuers inthe action. Optio may still have yet undetermined exposure to the underwriterspursuant to indemnification provisions in the underwriting agreement enteredinto at the time of the initial public offering. Under the guaranty, all of theinsurers for all the issuers will be required to pay an amount equal to $1.0billion less any amounts ultimately collected by the plaintiffs from theunderwriter defendants in all of the pending cases. A settlement fairnesshearing was held on April 24, 2006, however no ruling has been issued yetby the Court. There can be no assurance that this proposed settlement will beapproved and implemented in its current form, or at all. On December 5,2006, the United States Court of Appeals for the Second Circuit overturned theDistrict Court’s certification of the class of plantiffs who are pursuing theclaims that would be settled in the settlement against the underwriterdefendants. Plantiffs filed a Petition for Rehearing and Rehearing En Banc withthe Second circuit on January 5, 2007 in response to the Second Circuit’sdecision. The Petition for Rehearing and Rehearing En Banc was denied on April 6,2007. Plantiffs have informed the District Court that they would like to beheard as to whether the settlement may still be approved even though thePetition for Rehearing was denied. The District Court indicated that it woulddefer consideration of final approval of the settlement pending plantiffs’request for further appellate review. The disposition of this matter is limitedto Optio’s $300,000 corporate insurance deductible. The Company has completedpayment of the insurance deductible through payment of legal fees. Optio willhave no additional exposure unless the insurance companies become insolvent orunless Optio’s liability exceeds its policy limits through this matter or othermatters. Optio’s insurance companies 

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currentlyhave an A or AA rating. The range of loss, if any, cannot be estimated and thusno potential loss is reflected in Optio’s consolidated financial statements.

Management believes thatit has meritorious defenses in the foregoing matter and intends to pursue itsposition vigorously. While litigation is inherently subject to manyuncertainties, management does not believe that the outcome of this case willhave a material adverse effect on the financial position of Optio. However,depending on the amount and timing of an unfavorable resolution of the lawsuit,it is possible that Optio’s financial condition, results of operation orliquidity could be materially affected.

In addition, Optio isparty to routine litigation or administrative proceedings incidental to itsbusiness, none of which is believed by the Company to be likely to have amaterial effect on the financial condition, results of operations or liquidityof the Company.

**Item4.**                        SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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**PART II**

**Item5.**                        MARKET FORREGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES

**Market Information**

On December 15, 1999,Optio’s common stock began trading on the Nasdaq National Market under thesymbol “OPTO” until June 19, 2002, when Optio’s common stock began tradingon the Nasdaq SmallCap Market. Effective January 8, 2003, Optio failed tomeet the qualifications for listing on the Nasdaq SmallCap Market and begantrading on the Over-the-Counter Bulletin Board under the symbol “OPTO.OB”. OnApril 18, 2007, the closing price of the common stock on theOver-the-Counter Bulletin Board was $1.46.

Thefollowing table reflects the range of high and low sale prices of Optio’scommon stock by quarter, for the two most recent fiscal years. Bid pricesreflect inter dealer prices without retail mark-up, mark-down or commissions.

| ** **                           | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------------|------------|----------|------------|---------|------------|
| Quarter Ended  January 31, 2007 |       | $        | 1.61       |    | $          | 1.17 |   |
| Quarter Ended  October 31, 2006 |       | $        | 1.40       |    | $          | 1.03 |   |
| Quarter Ended  July 31, 2006    |       | $        | 1.52       |    | $          | 1.20 |   |
| Quarter Ended  April 30, 2006   |       | $        | 1.47       |    | $          | 1.11 |   |
| Quarter Ended  January 31, 2006 |       | $        | 1.34       |    | $          | 1.05 |   |
| Quarter Ended  October 31, 2005 |       | $        | 1.23       |    | $          | 0.80 |   |
| Quarter Ended  July 31, 2005    |       | $        | 1.38       |    | $          | 0.92 |   |
| Quarter Ended April 30, 2005    |       | $        | 1.45       |    | $          | 0.95 |   |

 

**Holders**

As of April 18, 2007,there were approximately 111 holders of record of Optio’s common stock.

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**Stock PerformanceGraph**

The following line-graph provides a comparison of thecumulative total shareholder return on the Company’s Common Stock for theperiod from January 31, 2002 through January 31, 2007, against thecumulative shareholder return during such period achieved by the Nasdaq StockMarket (U.S. Companies) Index and the Standard and Poor’s Application SoftwareIndex. The graph assumes that $100 was invested on January 31, 2002 ineach of the comparison indices and in the Common Stock. All amounts have beencalculated as if all dividends were reinvested.

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$100invested on 1/31/02 in stock or index-including reinvestment of dividends.Fiscal year ending January 31.

| ** **                      | ** ** | **1/02** | ** ** | **1/03** | ** ** | **1/04** | ** ** | **1/05** | ** ** | **1/06** | ** ** | **1/07** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
| Optio Software,  Inc.           |       | 100.00   |       | 51.22    |       | 178.05   |       | 164.63   |       | 151.22   |       | 196.34   |       |
| NASDAQ Composite                |       | 100.00   |       | 67.71    |       | 106.18   |       | 110.50   |       | 128.60   |       | 128.35   |       |
| S & P Application  Software |       | 100.00   |       | 52.60    |       | 73.56    |       | 72.81    |       | 94.00    |       | 98.82    |       |

 

The preceding StockPerformance Graph shall be deemed incorporated by reference by any generalstatement incorporating by reference this Annual Report on Form 10-Kinto any filing under the Securities Act or the Exchange Act (collectively, the“Acts”), except to the extent that the Company specifically incorporates thisinformation by reference, and shall not otherwise be deemed filed under theActs.

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**Repurchases**

On January 5,2007, Optio announced a share repurchase plan under which we could repurchaseup to $2.0 million of our common stock over a next twelve-month period. Duringfiscal 2007, we purchased a total of 40,000 shares at an average purchase priceof $1.50 per share, or approximately $60,000 in the aggregate. The repurchasedshares were held and not cancelled. As of January 31, 2007, the dollarvalue of shares that remained available for repurchase under this program wasapproximately $1,940,000. The repurchases for the fiscal year ended January 31,2007 are reflected in the following table:

| **Period**                   | ** ** | ** ** | ** ** | **Total Number  Of Shares  Purchased** | ** ** | **Average Price  Paid Per  Share** | ** ** | **Total Shares  Purchased As  Part of Publicly  Announced Plan** | ** ** | **Approximate Dollar Value  of Shares That May Yet  Be Repurchased Under  The Program** | ** ** |
|------------------------------|------------|------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|
| 1/1/2007 – 1/31/2007(1) |       |       | 40,000     |                                             |       |                                         | $          | 1.50                                                                                      |       |                                                                                                                                 |       | 40,000 |   |   |   | $ | 1,940,000 |   |   |
|                              |            |            |            |                                                  |            |                                              |            |                                                                                           |            |                                                                                                                                      |            |  |  |  |  |  |  |  |  |  |  |

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(1)          Lastrepurchase date was January 31, 2007.

**Dividends**

Optio did not pay anydividends during the years ended January 31, 2005, 2006 or 2007. Optiointends to retain all of its earnings to finance the expansion of its businessand for general corporate purposes and does not anticipate paying any cashdividends on its common stock for the foreseeable future. In addition, Optio’sline of credit contains a covenant that prohibits the payment of dividends.

**Recent Sales ofUnregistered Securities**

None.

**SecuritiesAuthorized Under Equity Compensation Plans**

See Item 12, whichincorporates by reference to the Proxy Statement relating to our 2007 AnnualMeeting of Shareholders, the information concerning securities authorized forissuance under our equity compensation plans.

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**Item 6.**                        SELECTEDFINANCIAL DATA

Thefollowing table sets forth the selected historical financial data of Optio. Theselected financial data should be read together with the consolidated financialstatements and related notes and the section of this Annual Report entitled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.” Theselected financial data as of and for the years ended January 31, 2003,2004, 2005, 2006 and 2007 have been derived from the audited consolidatedfinancial statements of Optio.

| ** **                                                                             | ** ** | **Year Ended January 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                             | ** ** | **2003**                                  | ** ** | **2004** | ** ** | **2005(a)** | ** ** | **2006(a)** | ** ** | **2007(a)(b)** | ** ** |
| ** **                                                                             | ** ** | **(in thousands, except per share data)** | ** ** |
| **Statement of Operations Data:**                                                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Revenue:                                                                               |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| License fees                                                                           |       | $                                         | 10,445     |   | $ | 10,205 |   | $ | 10,175 |   | $ | 9,958 |   |   | $ | 7,718 |   |   |
| Subscription fees                                                                      |       | —                                    |       | — |   | 930 |   | 2,165 |   |   | 2,353 |   |   |
| Services, maintenance  and other                                                       |       | 17,379                                    |       | 17,110 |   | 17,262 |   | 17,498 |   |   | 18,606 |   |   |
| Total revenue                                                                          |       | 27,824                                    |       | 27,315 |   | 28,367 |   | 29,621 |   |   | 28,677 |   |   |
| Costs of revenue (exclusive of depreciation and  amortization shown separately below): |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| License fees                                                                           |       | 549                                       |       | 436 |   | 650 |   | 769 |   |   | 678 |   |   |
| Services, maintenance  and other                                                       |       | 7,808                                     |       | 6,358 |   | 5,891 |   | 6,410 |   |   | 6,813 |   |   |
| Total cost of revenue                                                                  |       | 8,357                                     |       | 6,794 |   | 6,541 |   | 7,179 |   |   | 7,491 |   |   |
| Operating expenses:                                                                    |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                                                                    |       | 12,821                                    |       | 9,448 |   | 10,957 |   | 11,399 |   |   | 10,295 |   |   |
| Research and development                                                               |       | 4,278                                     |       | 4,078 |   | 4,616 |   | 5,099 |   |   | 5,518 |   |   |
| General and  administrative                                                            |       | 6,962                                     |       | 4,572 |   | 4,120 |   | 4,368 |   |   | 5,403 |   |   |
| Impairment of M2 note  receivable                                                      |       | —                                    |       | 900 |   | — |   | — |   |   | (900 | ) |   |
| Depreciation and  amortization                                                         |       | 920                                       |       | 553 |   | 613 |   | 861 |   |   | 916 |   |   |
| Total operating expenses                                                               |       | 24,981                                    |       | 19,551 |   | 20,306 |   | 21,727 |   |   | 21,232 |   |   |
| Income (loss) from  operations                                                         |       | (5,514                                    | )          | 970 |   | 1,520 |   | 715 |   |   | (46 | ) |   |
| Other income (expense):                                                                |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Interest income                                                                        |       | 233                                       |       | 171 |   | 187 |   | 269 |   |   | 431 |   |   |
| Interest expense                                                                       |       | (51                                       | )          | (17 | ) | (12 | ) | (14 | ) |   | (13 | ) |   |
| Other                                                                                  |       | 44                                        |       | 45 |   | 53 |   | (15 | ) |   | (4 | ) |   |
| Income (loss) before  income taxes and loss from discontinued operations               |       | (5,288                                    | )          | 1,169 |   | 1,748 |   | 955 |   |   | 368 |   |   |
| Income tax expense  (benefit)                                                          |       | (578                                      | )          | (202 | ) | 95 |   | 57 |   |   | 86 |   |   |
| Income (loss) from continuing  operations                                              |       | (4,710                                    | )          | 1,371 |   | 1,653 |   | 898 |   |   | 282 |   |   |
| Loss from discontinued  operations                                                     |       | (132                                      | )          | — |   | — |   | — |   |   | — |   |   |
| Net income (loss)                                                                      |       | $                                         | (4,842     | ) | $ | 1,371 |   | $ | 1,653 |   | $ | 898 |   |   | $ | 282 |   |   |
| Income (loss) per share  from continuing operations—basic                         |       | $                                         | (0.25      | ) | $ | 0.07 |   | $ | 0.08 |   | $ | 0.04 |   |   | $ | 0.01 |   |   |
| Income (loss) per share  from continuing operations—diluted                       |       | $                                         | (0.25      | ) | $ | 0.06 |   | $ | 0.07 |   | $ | 0.04 |   |   | $ | 0.01 |   |   |
| Loss per share from  discontinued operations—basic and diluted                    |       | $                                         | (0.01      | ) | $ | 0.00 |   | $ | 0.00 |   | $ | 0.00 |   |   | $ | 0.00 |   |   |
| Net income (loss) per  share—basic                                                |       | $                                         | (0.26      | ) | $ | 0.07 |   | $ | 0.08 |   | $ | 0.04 |   |   | $ | 0.01 |   |   |
| Net income (loss) per  share—diluted                                              |       | $                                         | (0.26      | ) | $ | 0.06 |   | $ | 0.07 |   | $ | 0.04 |   |   | $ | 0.01 |   |   |
| Weighted average shares  outstanding—basic                                        |       | 18,963                                    |       | 19,191 |   | 20,097 |   | 20,993 |   |   | 22,232 |   |   |
| Weighted average shares outstanding—diluted                                       |       | 18,963                                    |       | 21,313 |   | 23,544 |   | 24,116 |   |   | 24,803 |   |   |

 

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| ** **                    | ** ** | **At January 31,** | ** ** |
|-------------------------------|------------|------------------------------|------------|
| ** **                    | ** ** | **2003**                     | ** ** | **2004** | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** |
| ** **                    | ** ** | **(in thousands)**           | ** ** |
| **Balance Sheet Data:**       |       |                         |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents    |       | $                            | 3,902      |   | $ | 5,328 |   | $ | 5,433 |   | $ | 7,954 |   | $ | 11,948 |   |
| Working capital  (deficiency) |       | (1,560                       | )          | 1,448 |   | 1,474 |   | 3,299 |   | 6,097 |   |
| Total assets                  |       | 14,443                       |       | 14,246 |   | 17,495 |   | 19,698 |   | 22,937 |   |
| Long-term  obligations        |       | 297                          |       | 188 |   | 92 |   | 63 |   | 1,735 |   |
| Shareholders’ equity     |       | 2,774                        |       | 4,287 |   | 7,927 |   | 9,121 |   | 10,720 |   |
|                               |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)           Includes the results ofoperations of VertiSoft since acquisition, for the period August 10, 2004to January 31, 2005 and for the full years ended January 31, 2006,and January 31, 2007, respectively.

(b)          Includesthe effect of the adoption of Statement of Financial Standards No. 123R,Share-Based Payments, for the year ended January 31, 2007.

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**Item 7.**                        MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionshould be read in conjunction with the consolidated financial statements andrelated notes thereto and “Item 6. Selected Financial Data” appearing elsewherein this Annual Report.

**Overview**

Optio is engaged primarily in the development, saleand support of infrastructure software that enhances the form, content,delivery and availability of business critical information. Optio’s primarybusiness consists of providing software and services that addressorganizations’ needs for document output management, forms automation, printmanagement and imaging solutions in the enterprise and healthcare industries.

Optio markets and sellsits software and services throughout the United States and Europe, and in theAsia Pacific region, through its direct sales force and certified resellers.Optio also offers consulting services, which provide customers withimplementation assistance and training. As of January 31, 2007, Optio hadover 5,000 customers worldwide using Optio’s software and services. No singlecustomer accounted for 10% or more of Optio’s revenue for the years endedJanuary 31, 2005, 2006, or 2007.

**Management Summary**

Optio’s strategic initiatives for fiscal year 2007were as follows: (i) enhance our business process solution credentialswith the right combination of products, messaging, sales and successfulimplementations, (ii) prepare the organization to meet the challenges ofthe business process solution market, and (iii) strengthen the focus andperformance of our healthcare division in the urban and rural hospital market.

Several factors contributed to Optio’s focus onexpanding the product line to a document-centric business process solution fromits historical document output management solutions. In fiscal 2005, theconsolidation of the large ERP vendors such as J.D. Edwards and Oracle,negatively impacted Optio’s revenue. In addition, the large ERP vendors arebeginning to introduce limited functionality document output managementsolutions of their own, which could impact the Company’s revenue. The averagesales price for document output management solutions has continued to decline,thus inhibiting Optio’s revenue growth. Recognizing these factors, Optio’smanagement began a strategic initiative to evolve the Company’s product line toinclude business process solutions that address such functions asprocure-to-pay and order-to-cash, as well as other document-intensive businessprocesses. In December 2004, Optio introduced Optio Imaging SolutionsTM,its intelligent data capture, imaging and Internet-accessible archive and thefirst of our Optio Business Process SolutionTM suite of products. We alsopartnered with various consulting groups to help develop application specificadapters to the Optio Imaging Solution, thus enabling us to provide specificstrategic document automation solutions for Oracle, QAD and SAP endusers. Optiogained immediate traction for this product, both to existing customers and newcustomers, during the year ended January 31, 2006, with sales of thesesolutions contributing six percent of Optio’s license revenue and contributingto a 20% increase in the average sale price during fiscal year 2006. Tocontinue Optio’s transition to a company that helps customers manage the entirelife-cycle of documents, in fiscal 2007, Optio focused significant developmentefforts on its ProCentra product, our new business process management solution.While significant time was spent developing the product during 2007, it willnot be released until fiscal 2008. As a result, Optio continued to focus on thesale of its document output management, print management and imaging solutions.Optio continued to feel downward pressure in the document output managementmarket, primarily resulting from certain ERP vendors introducing basic similarfunctionality and from Optio’s competitors continuing to offer decliningprices, making it difficult to compete at a higher average sales price. In theprint management and imaging solutions space, Optio 

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faced longer sales cycles,primarily because these products have a higher average sale price. While salesof these products increased slightly between 2006 and 2007, Optio’s overalllicense revenue sales declined from 2006 to 2007.

In the healthcare market, we set forth to grow oursubscription-based revenue model. Initially, sales of our electronic healthrecord product were focused on a community health model, in which we targetedlarger hospital systems desiring to share patient data among physicians andcaregivers and multiple, unrelated facilities. While we continue to market tothese types of facilities, we found that the subscription-based revenue modellends itself to wider acceptance in the urban and rural healthcare market,allowing such customers to overcome capital budget constraints and more rapidlyadopt the technology solutions they need today. As a result, Optio began afocus on the urban and rural hospital market, creating partnerships with advocacyorganizations for rural hospitals, such as HomeTown Health LLC. Thesepartnerships actively market Optio’s electronic health record solution, on asubscription basis, to the hospitals within its group. By focusing on the ruralhospitals, during fiscal year 2007, Optio closed contracts which will bringover $2.0 million in subscription revenue over the next several years. Optioalso discovered that the length of time until the products are installed, whichis when the Company can begin recognizing the monthly subscription fee, isoften longer than we anticipated. As a result, there was not a dramatic impacton revenue from these contracts during fiscal year 2007.

Even with a focus to move a greater percentage of ourhealthcare revenues to the subscription-based model, which increased in 2007 innominal terms, healthcare perpetual license fees remained consistent between2006 and 2007 due mainly to the obtaining of a new significant customer.

To continue to strengthen our healthcare revenuesources for the future, Optio has focused on the enhancement of our existingproducts and the introduction of new products to establish a fully integratedelectronic health record-enabling solution. In February 2005, Optiointroduced version 1.2 of Optio MedEx, which provides improved performance,navigation and search capabilities, new HL7 message support and integration toOptio Print Manager. Also in fiscal year 2006, Optio introduced its new OptioPatient Signature CaptureTM solution that enables patients to electronicallysign documents using an e-signature tablet. In fiscal 2007, Optiointroduced Optio Deficiency ManagementTM , which allows individuals toelectronically view a patient’s chart for completion or mark deficiencies inthe chart, and Optio QuickTabletTM. which allows physicians to write patientinformation on a Tablet PC and electronically capture the information into apatient’s chart.

A primary strategy initiated in fiscal 2006 andcontinuing in 2007 was to strengthen our European revenue sources. This strategyhad previously been affected by turnover in our European organizationcompounded by legal employment constraints in changing the workforce. In 2007,selective replacements of new personnel, including a new Managing Director,contributed to an increase in revenues of $215,000 from our European group.

Total license revenuesdecreased 22% between the years ended January 31, 2006 and 2007, primarilythe result of declining enterprise revenues, in both the United States andEurope, resulting from the decline of the document output management space andlonger sales cycles for the print management and imaging solutions. Ourhealthcare perpetual licenses remained consistent between 2006 and 2007. In2006, subscription revenue for the entire year totaled $2.2 million. In fiscal2007, with a minimal amount of additional new subscription contracts,subscription fees increased to $2.4 million.

**Critical AccountingPolicies and Use of Estimates**

Optio has identified thefollowing significant accounting policies and estimates that are critical tothe understanding of its consolidated financial statements.

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*Revenue Recognition*

*Overview*

The Company’s revenueconsists of perpetual license fees of the Company’s software products,maintenance, consulting services, customer training and subscription feescovering the licensing of the Company’s software products and maintenance. TheCompany generally charges fees for licenses of its software products eitherbased on the number of Central Processing Units (“CPUs”) on which the productis installed or, to a lesser extent, based on the number of persons or hospitalbeds registered to use the product. The Company’s revenue recognition policiesare in accordance with Statement of Position (“SOP”) No. 97-2, *Software Revenue Recognition*, as amendedby SOP No. 98-9, *SoftwareRevenue Recognition, With Respect to Certain Transactions,* and theSEC’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 directsales force and indirectly through resellers. In general, software licenserevenues are recognized when a non-cancelable license agreement has been signedand the customer acknowledges an unconditional obligation to pay, the softwareproduct has been delivered, there are no significant uncertainties surroundingproduct acceptance, the fees are fixed or determinable, collection isconsidered probable, the remaining elements such as future services are notconsidered essential to the functionality of the software and the Company has alegally enforceable claim not subject to refund or forfeiture if futureservices are not rendered. Delivery is considered to have occurred when titleand risk of loss have been transferred to the customer, which generally occurswhen media containing the licensed programs is provided to a common carrier. Incase of electronic delivery, delivery occurs when the customer is given accessto the licensed programs. If collectibility is not considered probable, revenueis recognized when the fee is collected. The Company enters into resellerarrangements that typically provide for sublicense fees payable based upon apercentage of list price. The Company does not grant its resellers the right ofreturn.

The Company recognizes revenue using the residualmethod pursuant to the requirements of SOP No. 97-2, as amendedby SOP No. 98-9. Revenues recognized from multiple-elementsoftware arrangements are allocated to each element of the arrangement based onthe fair values of the elements, such as licenses for software products,maintenance, consulting services or customer training. The determination offair value is based on objective evidence, which is specific to the Company andcan differ from amounts contained in the customer arrangement. The Companylimits its assessment of objective evidence for each element to either theprice charged when the same element is sold separately or the price establishedby management having the relevant authority to do so, for an element not yetsold separately. If evidence of fair value of all undelivered elements existsbut evidence does not exist for one or more delivered elements, then revenue isrecognized using the residual method. Under the residual method, the fair valueof the undelivered elements is deferred and the remaining portion of thearrangement fee is recognized as revenue.

The Company recordsdeferred revenue for software license agreements when cash has been receivedfrom the customer and the agreement does not qualify for revenue recognitionunder the Company’s revenue recognition policy. The Company records accountsreceivable for software license agreements when the agreement qualifies forrevenue recognition but cash or other consideration has not been received fromthe customer.

*SubscriptionRevenue*

The Company**also licenses certain of its products in the form of asubscription service contract, with terms typically ranging from three to fiveyears. Subscription revenue, which includes a license of the 

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softwareproduct, technical support and future unspecified enhancements to the softwareproduct, is recognized on a daily basis over the term of the agreement. Unlikelicense fee revenue, subscription service contracts include licenses that arenot perpetual in duration.

*Services,Maintenance and Other Revenue*

Consulting servicesrevenue and customer training revenue are recognized as such services areperformed, as they are incidental to the functionality of the software.Maintenance revenues, which include revenues bundled with software licenseagreements that entitle the customers to technical support and futureunspecified enhancements to the Company’s products, are deferred and recognizedratably over the related term of the agreement, which is generally twelvemonths. In accordance with Emerging Issues Task Force release 01-14, *Income Statement Characterization of ReimbursementsReceived for Out of Pocket Expenses Incurred*, the Company recognizesreimbursable expenses as revenue and as an expense in cost of revenue in allperiods presented.

*Accounts Receivable*

Optio maintains allowances for doubtful accounts forestimated losses resulting from customers’ inability to make payments requiredunder their contracts. The amount of Optio’s reserve is based on historical experience and Optio’s specific review and analysis of thereceivables outstanding. Management reviews its accounts receivable on aregular basis to determine if any such amounts may be potentiallyuncollectible. The Company includes any balances that are determined to beuncollectible, along with a general reserve at varying percentages of 2% fordomestic and 3% for international balances less than 30 days old, to 50% forinternational accounts more than 90 days old, in its overall allowance fordoubtful accounts. Based on historical experience, management believes theCompany’s allowance for doubtful accounts is adequate as presented; however,the amount of the reserve could be different under different conditions orusing varying assumptions. If the percentage of the general reserve were toincrease by 1%, an additional $35,000 reserve would be required. If thefinancial condition of Optio’scustomers were to deteriorate, resulting in their inability to make payments,additional reserves would be required, increasing Optio’s bad debt expense included in general andadministrative expenses.

*Impairment Assessments*

Optio adopted Statement ofFinancial Accounting Standards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets,* on February 1,2002. This standard requires that goodwill no longer be amortized and insteadbe tested for impairment on a periodic basis.

Pursuant to SFAS 142, Optio isrequired to test goodwill for impairment upon adoption and annually or moreoften if events or changes in circumstances indicate that the asset might beimpaired. SFAS 142 provides for a two-stage approach to determining whether andby how much goodwill has been impaired. The first stage requires a comparisonof the fair value of the reporting unit, in our case, the former VertiSoftbusiness, 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 bookvalue, then the second stage must be completed to determine the amount, if any,of actual impairment. Optio has selected August 1 as its annual impairmenttesting date for its goodwill. The Company performed an analysis as ofAugust 1, 2005 and 2006, respectively, comparing the fair value of thereporting units with the carrying value of such reporting units, includinggoodwill, and determined that no impairment of its goodwill existed. While no impairment charge was determined to benecessary in the current year, the Company’s future assessments could leadmanagement to determine that the goodwill is completely impaired, which wouldrequire the Company to record an impairment charge of $2.3 million.

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Theprocess of evaluating the potential impairment of goodwill is highly subjectiveand requires significant judgment decisions. In estimating our fair value, wewill make estimates and judgments about future revenues and cash flows. Ourforecasts will be based upon assumptions that are consistent with the plans andestimates we are using to manage our business. Changes in these estimates couldchange our conclusion regarding impairment of goodwill and potentially resultin a non-cash goodwill impairment charge for all or a portion of the goodwillbalance. For long-lived assets, accounting standards dictate that assets becomeimpaired when the undiscounted future cash flows expected to be generated bythem are less than their carrying amounts. In such cases, the affected assetsare written down to their estimated fair value.

*Foreign Currencies*

**Thefinancial position and results of operations of the Company’s foreignsubsidiaries are generally measured using local currencies as the functionalcurrencies, including the British pound and the Euro. Assets and liabilities ofthese subsidiaries are translated into U.S. dollars at the exchange rate ineffect at each year-end. Income and expense items are translated at averageexchange rates for the year. The resulting translation adjustments are recordedin the foreign currency translation adjustment account. Optio and its subsidiariesconduct their business locally, thus the effects of changes in foreign currencyexchange rates have had a minimal effect on the Company’s results of operationsto date.**

**Results ofOperations**

Thefollowing table sets forth certain items from Optio’s statements of operationsas a percentage of total revenue for the periods indicated. 

| ** **                               | ** ** | **Year Ended January 31,** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenue:                                 |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| License fees                             |       |                                      | 36         | % |   |   | 34 | % |   |   | 27 | % |   |
| Subscription fees                        |       |                                      | 3          |   |   |   | 7 |   |   |   | 8 |   |   |
| Services, maintenance and other          |       |                                      | 61         |   |   |   | 59 |   |   |   | 65 |   |   |
| Total revenue                            |       |                                      | 100        |   |   |   | 100 |   |   |   | 100 |   |   |
| Costs of revenue:                        |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| License fees                             |       |                                      | 2          |   |   |   | 2 |   |   |   | 2 |   |   |
| Services, maintenance and other          |       |                                      | 21         |   |   |   | 22 |   |   |   | 24 |   |   |
| Total costs of revenue                   |       |                                      | 23         |   |   |   | 24 |   |   |   | 26 |   |   |
| Gross profit                             |       |                                      | 77         |   |   |   | 76 |   |   |   | 74 |   |   |
| Operating expenses:                      |       |                                      |       |   |   |   |   |   |   |   |   |   |   |
| Sales and marketing                      |       |                                      | 39         |   |   |   | 39 |   |   |   | 36 |   |   |
| Research and development                 |       |                                      | 16         |   |   |   | 17 |   |   |   | 19 |   |   |
| General and administrative               |       |                                      | 15         |   |   |   | 15 |   |   |   | 19 |   |   |
| Reversal of valuation reserve on M2 note |       |                                      | —     |   |   |   | — |   |   |   | (3 | ) |   |
| Depreciation and amortization            |       |                                      | 2          |   |   |   | 3 |   |   |   | 3 |   |   |
| Total operating expenses                 |       |                                      | 72         |   |   |   | 74 |   |   |   | 74 |   |   |
| Income from operations                   |       |                                      | 5          |   |   |   | 2 |   |   |   | — |   |   |
| Interest and  other income (expense)     |       |                                      | 1          |   |   |   | 1 |   |   |   | 1 |   |   |
| Income before income taxes               |       |                                      | 6          |   |   |   | 3 |   |   |   | 1 |   |   |
| Income tax  expense                      |       |                                      | —     |   |   |   | — |   |   |   | — |   |   |
| Net income                               |       |                                      | 6          | % |   |   | 3 | % |   |   | 1 | % |   |

 

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*Revenue*

Total revenue decreased 3% to $28.7 million in fiscal2007 from $29.6 million in fiscal 2006 and increased 4% to $29.6 million in2006 from $28.4 million in fiscal 2005. The decrease in revenues in 2007 wasprimarily the result of a decrease in license fees of $2.2 million partiallyoffset by increases in maintenance and other fees of $1.1 million andsubscription fees of $0.2 million. The increase in revenues in 2006 wasprimarily the result of an increase in subscription fees of $1.2 million. Optioadded a new revenue source, in the form of subscription fees, as a result ofits acquisition of VertiSoft in August 2004. For the year ended January 31,2005, subscription fees were reflected from the period of August 10, 2004,the date of acquisition, through January 31, 2005. However, subscriptionfees were reflected for the full year ended January 31, 2006. This fact,coupled with an additional subscription customers, accounted for the $1.2million increase in subscription fees between fiscal years 2005 and 2006.

License fees revenue decreased 22% to $7.7 million in2007 from $10.0 million in 2006 and decreased 2% to $10.0 million from $10.2million in 2005.

Optio’s license revenues from its European operationsdecreased 20% to $1.6 million in 2007 from $2.0 million in 2006. Licenserevenue declined in each of our European subsidiaries, primarily due toturnover in our sales staff, especially in Germany, and a significant declinein our business through resellers. Optio’s license revenues from its Europeanoperations declined 7% to $2.0 million in 2006 from $2.1 million in 2005.Revenue from Optio’s German subsidiary nearly doubled from $480,000 in 2005 to$790,000 in 2006, the result of strong reseller relationships and a single significantnew SAP customer. Revenues from both the UK and French subsidiaries declined$400,000 from fiscal 2005 to fiscal 2006, the result of turnover in sales staffand difficulty in replacing employees due to labor law issues.

Domestically, license fee revenues declined to $6.2million in 2007 from $8.0 in 2006. Direct sales declined to $4.7 million in2007 from $5.9 million in 2006. License revenues in Optio’s healthcare divisionremained consistent between 2006 and 2007; however, in Optio’s enterprise division,including our European operations, Optio continues to face pressure in thedocument output management market in its enterprise industry as ERP vendorsbegin to offer basic similar functionality and competitors continue to offerlower-cost solutions. In addition, our business process management solutionshave not generated revenue as quickly as we anticipated. Sales of Optio’s newerproducts, including Optio Imaging Solutions, require a longer sales cycle thanour traditional output solutions products. Sales through resellers declined to$1.4 million 2007 from $2.1 million in 2006. During fiscal year 2006, Optioentered into several significant reseller transactions while no suchtransactions existed during fiscal year 2007.

License fees declined slightly to $10.0 million in2006 from $10.2 million in 2005. License fees from new direct customersincreased by $500,000 in 2006. In the prior year, sales of Optio’s products tonew customers were somewhat impacted by the ERP industry consolidation, causingdelays in decisions and causing sales to new customers to decline byapproximately $800,000 from 2004. The impact of the ERP consolidation wassomewhat minimized in 2006. In addition, sales of Optio’s Imaging Solutionproducts, introduced in December 2004, continued to increase sales between2005 and 2006, also increasing the average sale price per deal between theseyears by 20%.

License fee revenue from existing customers remainedconsistent between 2006 and 2005. Sales of newly introduced and additionalproducts to existing customers helped to provide an overall increase in Optio’sERP license revenues. In addition, Optio’s domestic non-healthcare, indirectpartner sales remained consistent between 2006 and 2005. Finally, Optio’shealthcare license revenue declined by $500,000 from 2005 to 2006 as Optiocontinued the transition to a subscription-based licensing model.

Revenue from services, maintenance and other increased6% to $18.6 million in 2007 from $17.5 million in 2006 and increased 1% to$17.5 million in 2006 from $17.3 million in 2005. Maintenance revenue increased10% to $13.0 million in 2007 from $11.8 million in 2006 and increased 4% to$11.8 million in 

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2006 from $11.4 million in2005. Services revenue decreased 2% to $5.6 million in 2007 from $5.7 millionin 2006 and decreased 3% to $5.7 million in 2006 from $5.9 million in 2005.Optio’s maintenance revenue increased in both 2006 and 2007 due to growth inand preservation of the customer base, coupled with slightly increasedmaintenance rates. The decline in license revenue contributed to the associateddecline in services revenue from 2006 to 2007. In 2006, Optio experienced adecline in training revenue, especially in Optio’s healthcare group, a resultof the delay in the roll-out of the new version of MedEx, accounting for$150,000 of the decline in services revenue between 2005 and 2006.

Optio added a new revenue source in the form ofsubscription 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. In 2006 and 2007, Optio reflected subscription revenue for the entireyear. This, coupled with a minimal amount of additional new subscriptioncontracts recognized, accounted for the $1.2 million increase in subscriptionfees to $2.2 million in 2006 and the further $0.2 million increase in 2007.

License fee revenueconstituted 27%, 34% and 36% of total revenue in 2007, 2006 and 2005,respectively. Subscription fees were new in fiscal year 2005 and representedonly 3% of revenue in that year; subscription fees constituted 8% and 7% oftotal revenue in 2007 and 2006, respectively. Services and other revenueconstituted 20%, 19% and 21% of total revenue in 2007, 2006 and 2005,respectively. Maintenance revenue constituted 45% of total revenue in 2007 and40% in each of the years 2006 and 2005. In 2005, with the introduction ofsubscription fee revenues, and in 2006 and 2007 with the inclusion ofsubscription fee revenues for an entire year, license fee revenues and servicesrevenue as a percentage of the total declined. Maintenance revenue, however,increasing 10% and 4% in 2007 and 2006, respectively, increased from 40% oftotal revenues in 2006 to 45% of total revenues in 2007.

*Costs of Revenue*

*Licensefees.**  *Costsof revenue from license fees, which excludes depreciation and amortizationshown separately and discussed below, decreased 12% to $678,000 in 2007 from$769,000 in 2006 and increased 18% to $769,000 in 2006 from $650,000 in 2005.Commissions paid to referral agents decreased by $55,000 from 2006 to 2007.Royalties paid to Optio’s OEM partners increased $10,000 in 2007, a result ofslightly increased sales of Optio’s newly introduced products which include OEMtechnology. In 2006, commissions paid to referral agents decreased by $75,000.Royalties paid to Optio’s partners increased $198,000 in 2006 from 2005. Costsof revenue from license fees represented 9% of total license revenue in 2007,8% in 2006 and 6% in 2005.

*Services,Maintenance and Other.**  *Costsof revenue from services, maintenance and other increased 6% to $6.8 million in2007 from $6.4 million in 2006 and increased 9% to $6.4 million in 2006 from$5.9 million in 2005. The cost of outsourcers increased $300,000 between 2007and 2006 as Optio relied more heavily on the use of outsourcers to implementthe software. In addition, the cost of internal resources increased slightlydue to salary increases. The cost of outsourcers increased by $500,000 between2006 and 2005.

Costs of revenue from services,maintenance and other represented 37%, 37% and 34% of total services,maintenance and other revenue in 2007, 2006 and 2005, respectively.

*Operating Expenses*

*Salesand Marketing.**  *Salesand marketing expenses decreased 10% to $10.3 million in 2007 from $11.4million in 2006 and increased 4% to $11.4 million from $11.0 million in 2005.The decrease in sales and marketing expenses in 2007 resulted primarily from (i) lowercommissions and bonuses of approximately $700,000, due to decreased sales and amodification of the compensation plans providing for lower commission rates and(ii) reduced sales personnel during a portion of the year in both the U.S.and Europe. Advertising and marketing expenses between 2006 and 2007 remainedconsistent. The increase 

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from 2005 to 2006 was theresult of a $175,000 increase in domestic sales salaries due to the increase ofsales personnel from 36 employees as of January 31, 2005 to 38 employeesas of January 31, 2006, (iii) a $253,000 increase in domesticcommissions and bonuses, primarily due to the increase in U.S. revenue ofapproximately $1.5 million between 2005 and 2006, and offset by (iv) adecrease in sales and marketing expenses of $166,000 in Europe due to reducingheadcount by two individuals and slightly reduced marketing expenditures.

*Researchand Development.**  *Researchand development expenses consist primarily of salaries, employee-relatedbenefit costs and consulting fees incurred in association with the developmentof our products. Costs incurred for the research and development of newsoftware products are expensed as incurred until such time that technologicalfeasibility, in the form of a working model, is established at which time suchcosts are capitalized. The costs incurred subsequent to the establishment of aworking model but prior to general release of the product have not beensignificant and have been expensed.

Research and development costs increased $419,000, or8%, from $5.1 million in 2006 to $5.5 million in 2007. The increase in researchand development expenses was primarily the result of additional salaries andbenefits. In addition, consulting costs increased by $13,000 over the previousyear.

Research and development costs increased $483,000, or10%, from $4.6 million in 2005 to $5.1 million in 2006. The increase inresearch and development expenses was primarily the result of $430,000 ofadditional salaries and $45,000 of additional maintenance expense related tosoftware used in the quality assurance process. While headcount in research anddevelopment remained consistent between the years ended January 31, 2005and 2006, fiscal 2006 included the VertiSoft employees for a full year whilefiscal 2005 included the VertiSoft employees only for the period of August 10,2004 through January 31, 2005. This accounted for additional $430,000 inresearch and development salaries between the two fiscal years.

Our planned research and development activities forfiscal 2008 are discussed more fully in Part I, Item 1 “Business—Researchand Development” of this Annual Report.

*Generaland Administrative.**  *Generaland administrative expenses increased 24% to $5.4 million in 2007 from $4.4million in 2006. The increase in general and administrative expenses is due to (i) $470,000of compensation expense related to stock options with the adoption of SFAS No. 123R,(ii) an increase of $162,000 in recruiting fees related to sales andaccounting staff augmentation, (iii) increased bad debt expense of$107,000, and (iv) increased salaries of approximately $135,000 foradditional accounting and administrative staff.

General and administrativeexpenses increased 6% to $4.4 million in 2006 from $4.1 million in 2005. Theincrease in general and administrative expenses is due to (i) a $125,000increase in salaries due primarily to the addition of certain human resourcesand information systems functions, (ii) increased legal and accountingfees of $180,000 and (iii) the inclusion of approximately $90,000 inseverance costs related to the termination of administrative personnel inFrance.

*Reversal of valuation reserve of M2 note.*   Inaccordance with FAS 114, as amended by FAS 118, when there is a change in thevalue of the collateral that would indicate the value of the loan has increased(is no longer impaired), the net carrying value of the loan should be adjustedto such valuation. The collateral supporting the M2 Systems note was sold in anarms-length, third party transaction, thereby providing a basis for valuing thecollateral based upon market prices which was in excess of the $2.8 millionowed to Optio. As a result, the carrying value of the M2 Systems note waseffectively written up to its full face value and the impairment chargepreviously recorded by Optio relating to the M2 Systems note was eliminated.Optio recognized an adjustment to the valuation reserve of $900,000 that was areduction of the Company’s third quarter operating expenses. The note was paidin full during the year ended January 31, 2007.

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*Depreciation andAmortization.*   Depreciation and amortizationincreased 6% to $916,000 in 2007 from $861,000 in 2006. The increase wasprimarily due to Optio’s renegotiation of the lease for Optio’s headquarters inwhich the landlord contributed $1.0 million towards the improvements of thespace. These leasehold improvements, as well as an additional approximate$800,000 purchased directly by Optio, are being depreciated over the term ofthe new lease or the expected life of the assets, as appropriate. This increasewas partly offset by a decrease in amortization expense as intangibles areamortized over the estimated useful life of the asset using the cash flowmethod, which results in a greater expense in the earlier periods and reducedexpense in the later periods. This resulted in a greater expense in periodsprior to fiscal year 2007.

Depreciation andamortization increased 40% to $861,000 in 2006 from $613,000 in 2005. Theincrease in 2006 is primarily the result of a $200,000 increase in amortizationof intangibles associated with the inclusion of the VertiSoft acquisition forthe full year of 2006, which was included for only the period of August 10,2004 through January 31, 2005 of the prior year. In addition, depreciationexpense increased $50,000 due to the addition of the VertiSoft assets andadditional purchases throughout the year.

*Interest and OtherIncome (Expense)*

Interest and other incomeincreased 73% to $414,000 in 2007 from $240,000 in 2006 and increased 5% to$240,000 in 2006 from $228,000 in 2005. Optio earned interest income of$431,000 in 2007, $269,000 in 2006 and $187,000 in 2005, primarily frominterest on the M2 Systems note receivable. Optio incurred interest expense onits capital leases of $13,000 in 2007, $14,000 in 2006 and $12,000 in 2005. 

*Income Taxes*

The income tax expense of $86,000 in 2007 is primarilythe result of tax expense required to record the deferred tax liabilityassociated with a temporary difference between the book and tax treatment ofthe approximate $2.3 million of goodwill acquired in the Vertisoft acquisition.Such goodwill is deductible for tax purposes over its estimated 15-year usefullife, whereas for book purposes it is not amortized but rather evaluated forimpairment on an annual basis in accordance with SFAS No. 142, *Goodwill and Other Intangible Assets*. Dueto the indeterminate reversal period of the underlying cumulative differencefor book purposes, the associated deferred tax liability has not been nettedagainst the Company’s deferred tax assets for purposes of estimating itsdeferred tax valuation allowance at January 31, 2007. Rather theassociated deferred tax liability has been recorded at its gross value untilsuch time that the related temporary difference reverses for book purposes, ifever. Optio will continue to record such deferred tax liability associated withthis temporary difference in future periods and thus incur income tax expense

The income tax expense of$57,000 in 2006 was also primarily the result of tax expense required to recordthe deferred tax liability associated with a temporary differencebetween the book and tax treatment of the goodwill acquired in the Vertisoftacquisition.

The Company has provided avaluation allowance on substantially all of its net deferred tax assets. TheCompany will continue to monitor the realizability of these net deferred taxassets and will reverse some or all of the valuation allowance as appropriate.In making this determination, the Company considers a number of factorsincluding whether there is a historical pattern of consistent and significantprofitability in combination with the Company’s assessment of forecastedprofitability in the future periods. Such patterns and forecasts allow us todetermine whether our most significant deferred tax assets such as netoperating loss and research and development credit carryforwards will morelikely than not be realizable in future years, in whole or in part. Thesedeferred tax assets in particular will require us to generate significanttaxable income in the applicable jurisdictions in future years in order torecognize their economic benefits. At this point, the Company does not believethat it has enough positive evidence to conclude that some or all of thevaluation allowance on deferred tax assets should be reversed. Realization 

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of theCompany’s capital loss carryforward would further require the generation ofcapital gain income, which management believes to be unlikely prior toexpiration of the federal capital loss carryforward during the upcoming year. However,facts and circumstances could change in future years and at such point theCompany will reverse the allowance as appropriate.

**Liquidity andCapital Resources**

At January 31, 2007 and 2006, Optio had $11.9million and $8.0 million, respectively, of cash and cash equivalents. 

Thefollowing table sets forth certain selected statements of cash flow informationfor the periods presented:

| ** **                                           | ** ** | **Year Ended January 31,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net cash provided  by operations                     |       | $                                         | 1,389,000  |   | $ | 2,501,000 |   | $ | 1,878,000 |   |
| Net cash provided  by (used in) investing activities |       | (493,000                                  | )          | (152,000 | ) | 1,659,000 |   |
| Net cash provided  by (used in) financing activities |       | (882,000                                  | )          | 245,000 |   | 319,000 |   |
| Net increase in cash and  cash equivalents           |       | 105,000                                   |       | 2,521,000 |   | 3,994,000 |   |
|                                                      |            |                                           |            |  |  |  |  |  |  |  |

 

Cash provided by operatingactivities in 2007 was primarily the result of net income of $282,000, plus a$916,000 add-back of non-cash depreciation and amortization expense, a $470,000add-back of non-cash stock compensation, an increase in the provision fordoubtful accounts of $137,000, an increase in the provision for deferred taxesof $65,000, plus overall changes in working capital resulting in a $908,000inflow of cash, less the deduction of a $900,000 non-cash gain on the reversalof impairment on the M2 Systems note. The major component of such workingcapital changes was a reduction in accounts receivable of $874,000 due toenhanced collection activities and slightly lower sales. Payments owed tovendors increased by $144,000, notably in EMEA, also benefiting cash providedby operations. Partly offsetting this favorability was a decrease in incometaxes payable of $49,000, an increase in spending for prepaids of $38,000, anda decrease in deferred revenue of $29,000.

Cash provided by operating activities in 2006 resultedprimarily from net income of $898,000, adjusted for the add-back ofdepreciation and amortization expense of $861,000, plus changes in workingcapital which resulted in a $672,000 inflow of cash, for a total of $2.5 millioncash provided by operating activities. The major components of the workingcapital increase were an increase in accounts receivable of $228,000, anincrease in prepaid expenses of $323,000, an increase in accounts payable,accrued expenses and income taxes payable of $215,000 and an increase indeferred revenue of $1.0 million. The increase in accounts receivable wasprimarily the result of the increase in sales in the fourth quarter of 2006over the fourth quarter of 2005. The increase in prepaid expenses was primarilydue to the deposits paid for the Company’s new multi-year lease for its mainheadquarters, increased deposits required for various marketing tradeshowsbooth space and for increased prepaid maintenance contracts for the Company’svarious software packages used internally. The increase in accounts payable andaccrued expenses was primarily the result of increased accrued commissions andbonuses and accrued sales taxes. Finally, the increase in deferred revenue isthe result of a $775,000 increase in deferred maintenance revenue and a$200,000 increase in deferred subscription revenue. The increase in deferredmaintenance revenue results from an overall increase in the number of customersand an increase in maintenance fees. The increase in deferred subscriptionrevenue is the result of billing an additional month in advance in 2006 over2005.

Cash provided by operating activities in 2005 resultedprimarily from net income of $1.7 million, adjusted for the add-back ofdepreciation and amortization expense of $613,000, then offset by changes inworking capital which resulted in a $964,000 use of cash, for a total of $1.4million cash provided by operating activities. The major components of theworking capital decrease were a decrease in accounts 

46

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receivable of $738,000 anda decrease in accrued expenses of $1.4 million. The $738,000 decrease inaccounts receivable was primarily the result of improved collections proceduresachieved through dedicating an employee to the collections effort, resulting inan 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 declinedprimarily as a result of the pay-out of approximately $600,000 of the Company’s2004 year-end bonuses and approximately $700,000 of accrued expenses, includingseverance, assumed in the VertiSoft acquisition.

Cash provided by investing activities in 2007 totaledapproximately $1.7 million. Optio received $2.9 million in payments on thereceivable from M2 Systems representing payment in full of the note, purchased$1.2 million of property and equipment, of which $422,000 of such assets wereacquired under a capital lease, primarily related to the remodeling of Optio’sheadquarter’s office space and paid $75,000 in conditional payments related tothe purchase of VertiSoft corporation. 

Cash used in investing activities in 2006 included thepurchase of $373,000 in property and equipment for general business purposes,the payment of an additional $97,000, primarily representing a singlecontingency payment of $75,000 plus another $22,000 of additional transactionalexpenses relating to the acquisition of VertiSoft, offset by the receipt of$318,000 on the M2 note receivable.

Cash used in investing activities during 2005 includedthe purchase of $470,000 in property and equipment for general businesspurposes, the payment of $348,000 for the acquisition of VertiSoft, offset bythe receipt of $325,000 on the M2 Systems note.

Cash provided by financing activities in 2007 includedreceipts of $419,000 from the exercise of stock options partly offset bypurchases of treasury stock of $60,000 and payments under capital leasestotaling $40,000. 

Cash provided by financing activities in 2006 includedthe proceeds from the exercise of stock options of $337,000, offset by thepayment of $92,000 on capital leases.

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

Optio’s only material long-term contractual obligationsas of January 31, 2007 consisted primarily of obligations under capitaland operating leases as indicated below:

| **Contractual Obligations**        | ** ** | ** ** | ** ** | **Total** | ** ** | **Less  than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More  than  5 Years** | ** ** |
|-----------------------------------------|------------|------------|------------|-----------|------------|-----------------------------|------------|--------------------|------------|--------------------|------------|------------------------------|------------|
| Capital Lease Obligations               |       | $          | 426,000    |      | $          | 96,000                      |       | $                  | 192,000    |               | $          | 138,000                      |       | $ | — |   |
| Operating Lease  Obligations            |       | 7,924,000  |       | 878,000   |       | 2,173,000                   |       | 2,127,000          |       | 2,746,000          |       |
| Obligations Under  Employment Contracts |       | 414,000    |       | 414,000   |       | —                      |       | —             |       | —             |       |
| Total                                   |       | $          | 8,764,000  |      | $          | 1,388,000                   |       | $                  | 2,365,000  |               | $          | 2,265,000                    |       | $ | 2,746,000 |   |

 

On April 26, 2007, Optioextended its existing line of credit through April 19, 2008. The line ofcredit bears interest at prime rate, subject to increase based on Optio’sperformance relative to certain financial ratios. Optio may borrow up to $4.0million, or such lesser amount as may be determined based on the level ofeligible accounts receivable. Currently, Optio has estimated that approximately$1.9 million would be available for borrowings based upon Optio’s historicalaccounts receivable balance. Accounts receivable, equipment, generalintangibles and other assets, as defined in the agreement, collateralize theline of credit. The agreement contains various covenants, including liquidityand earnings before interest, taxes, depreciation and amortization (“EBITDA”)requirements and restrictions on the payment of 

47

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dividends.As of January 31, 2006 and 2007, Optio was in compliance with the requiredfinancial ratios. There were no borrowings under the line of credit as of January 31,2007.

Management believes thatthe existing cash and cash equivalents, together with the line of credit, willprovide adequate cash to fund its anticipated cash needs at least through thenext twelve months. Optio intends to expand its product line, which may requireacquisitions of companies or products that enhance the Company’s product line.As a result, Optio may attempt to raise additional funds through equity or debtfinancing. There can be no assurance that Optio will be able to raiseadditional funds on favorable terms, or at all. Although not anticipated, adramatic decrease in demand for Optio’s products or services, or a dramaticchange in technology related to Optio’s products or services offered, couldhave a negative impact on Optio’s liquidity. This risk may include thepotential for Optio not meeting its debt covenant requirements, making anyborrowings under the line of credit unavailable.

**Off-Balance SheetFinancing**

Optio does not have anyoff-balance sheet financing arrangements or any relationships with “structuredfinance” or “special purpose” entities. Other than our non-cancelable capitaland operating leases for office space and equipment, we do not have anycontractual obligations that would impact our liquidity.

**Related PartyTransactions**

The Company purchasedVertiSoft in August 2004. Barron Hughes, a member of the Company’s Boardof Directors, served as the former Chief Financial Officer of VertiSoft untilits acquisition by the Company. In accordance with the purchase agreementgoverning the acquisition, Mr. Hughes was paid severance of $165,000. Inaddition, VertiSoft had a note payable to Mr. Hughes in the amount of$138,000. Effective as of the closing, the Company immediately repaid Mr. Hughesthe full amount of the note payable. Further, in connection with theacquisition, Mr. Hughes was issued options to purchase 96,975 shares ofthe common stock of the Company.

**New Accounting Pronouncements**

In June 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes-an interpretation ofSFAS No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertaintyin income taxes recognized in financial statements in accordance with SFAS No. 109,and recommends a recognition threshold and measurement characteristic forfinancial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. The differences between a tax positiontaken in a tax return and amounts recognized in the financial statements mayresult in an increase in a liability for income taxes payable, a reduction ofan income tax refund receivable, a reduction in a deferred tax asset or anincrease in a deferred tax liability. FIN 48 also provides guidance onclassification, interest and penalties, accounting in interim periods,disclosure, and transition. FIN 48 is effective for fiscal years beginningafter December 16, 2006, with early adoption encouraged. The Company hasnot yet determined the effects of adopting FIN 48.

In September 2006, the FASB issued FASB No. 157,“Fair Value Measurements” (“FASB 157”). FASB 157 redefines fair value,establishes a framework for measuring fair value and expands the disclosurerequirements regarding fair value measurement. FASB 157 is effective for fiscalyears beginning after November 15, 2007, and interim periods within thosefiscal years. The Company does not expect that the adoption of FASB 157 willhave a material impact on its results of operations or financial position;however, additional disclosures will be required under FASB 157.

In February 2007, theFASB issued FASB No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” (“FASB 159”). The standard requires companies to provideadditional information 

48

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thatwill help investors and other users of financial statements to more easilyunderstand the effect of the company’s choice to use fair value on its earnings.It also requires entities to display the fair value of those assets andliabilities for which the company has chosen to use fair value on the face ofthe balance sheet. The Statement is effective as of the beginning of an entity’sfirst fiscal year beginning after November 15, 2007. The Company does notexpect FASB 159 to have a material impact on the Company’s future results ofoperations or financial position.

**Item 7A.**                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Optio provides itsservices to customers primarily in the United States and, to a lesser extent,in Europe and elsewhere throughout the world. As a result, Optio’s financialresults could be affected by factors, such as changes in foreign currencyexchange rates or weak economic conditions in foreign markets. All sales arecurrently made in both U.S. dollars and local currencies. A strengthening ofthe U.S. dollar or the weakening of these foreign local currencies could makeOptio’s products less competitive in foreign markets. Based upon the relativesize of Optio’s foreign operations, Optio believes its exposure to foreigncurrency fluctuations is not a material risk. Optio’s interest income andexpense are sensitive to changes in the general level of U.S. interest rates.Based on Optio’s cash equivalents balance, outstanding notes receivable and thenature of its outstanding debt, Optio believes its exposure to interest raterisk is not material.

**Item 8.**                        FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

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

**Item 9.**                        CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**Item 9A.**                CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief FinancialOfficer have evaluated the effectiveness of our disclosure controls andprocedures (as defined in Rule 13a-15(e) of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”)) as of January 31, 2007, andhave concluded that, as of such date, our disclosure controls and proceduresare effective in ensuring that information required to be disclosed by us inthe reports that we file or submit under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms.

Our management isresponsible for establishing and maintaining adequate internal audit controlsover financial reporting, as such term is defined in the Exchange Act, Rule 13a-15(f).Our Chief Executive Officer and Chief Financial Officer concluded that, as of January 31,2007, our disclosure controls and procedures are effective in ensuring thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,to allow timely decisions regarding required disclosure.

**Changes in InternalControls**

There were no changes inour internal controls over financial reporting that occurred during the quarterended January 31, 2007, that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

49

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**Item 9B.**               OTHERINFORMATION

None.

**PART III**

The information requiredby Items 10 (Directors and Executive Officers of the Registrant and CorporateGovernance), 11 (Executive Compensation), 12 (Security Ownership of CertainBeneficial Owners and Management and Related Shareholder matters), 13 (CertainRelationships and Related Transactions and Director Independence) and 14 (PrincipalAccountant Fees and Services) of Part III is hereby incorporated byreference from the Registrant’s Definitive Proxy Statement on Schedule 14A tobe filed not more than 120 days after the fiscal year ended January 31,2007.

**PART IV**

**Item 15.**                 EXHIBITS,FINANCIAL STATEMENT SCHEDULES

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

(a)          (2)   Schedule II - Valuation and QualifyingAccounts - See page S-1 herein.

Other financialstatements and schedules are not presented because they are either not requiredor the information required by such financial statements or schedules ispresented elsewhere.

(b)                                    Theexhibits filed as part of this Report as required by Item 601 of Regulation S-Kare included in the Index to Exhibits at page E-1 included elsewhere inthis Annual Report.

50

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized on the 1st day of May,2007.
|        |   | OPTIO SOFTWARE, INC. |
|--------|--------|----------------------|
|   |   | By:                  | /s/  C. WAYNE CAPE |
|   |   |                 | C. Wayne Cape |
|   |   |                 | *President  and Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, thisreport has been signed below by the following persons on behalf of theregistrant and in the capacities and on the dates indicated.
|                       | **Signature** | ** **                                                             | ** ** | ** **       | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-----------------------|---------------|------------------------------------------------------------------------|------------|------------------|-----------|------------|------------|------------|----------|------------|
| /s/ C. WAYNE  CAPE    |          | President and  Chief Executive Officer                                 |       | May 1, 2007 |
| C.  Wayne Cape        |          | and Chairman of the  Board of Directors  (Principal Executive Officer) |       |             |
| /s/ CAROLINE  BEMBRY  |          | Chief Financial  Officer and                                           |       | May 1, 2007 |
| Caroline  Bembry      |          | Secretary (Principal  Financial  and Accounting Officer)               |       |             |
| /s/ BARRON  HUGHES    |          | Director                                                               |       | May 1, 2007 |
| Barron  Hughes        |          |                                                                   |       |             |
| /s/ DAVID  LEACH      |          | Director                                                               |       | May 1, 2007 |
| David  Leach          |          |                                                                   |       |             |
| /s/ RONALD  DIENER    |          | Director                                                               |       | May 1, 2007 |
| Ronald  Diener        |          |                                                                   |       |             |
| /s/ JAY WOLF          |          | Director                                                               |       | May 1, 2007 |
| Jay  Wolf             |          |                                                                   |       |             |
| /s/ JEFFREY  ANDERSON |          | Director                                                               |       | May 1, 2007 |
| Jeffrey  Anderson     |          |                                                                   |       |             |
| /s/ JAY TOOLE         |          | Director                                                               |       | May 1, 2007 |
| Jay Toole             |          |                                                                   |       |             |

 

51

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**OptioSoftware, Inc.Index to Consolidated Financial Statements**
|                                                                                                                     | ** ** | **Page  Number** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------|
|                                                                                                                |       |             |
| Report of Independent  Registered Public Accounting Firm                                                            |       | F-2              |
| Consolidated Balance Sheets as of  January 31, 2006 and 2007                                                   |       | F-3              |
| Consolidated Statements of  Operations for the years ended January 31, 2005, 2006 and 2007                     |       | F-4              |
| Consolidated Statements of  Shareholders’ Equity for the years ended January 31, 2005, 2006 and 2007 |       | F-5              |
| Consolidated Statements of Cash Flows for the years ended  January 31, 2005, 2006 and 2007                     |       | F-6              |
| Notes  to Consolidated Financial Statements                                                                         |       | F-7              |

 

F-1

----

**Report ofIndependent Registered Public Accounting Firm**

To the Board of Directors and Shareholders ofOptio Software, Inc.:

We have audited the accompanying consolidated balancesheets of Optio Software, Inc. (the “Company”) as of January 31, 2006and 2007 and the related statements of operations, shareholders’ equity andcash flows for each of the three years in the period ended January 31,2007. We have also audited the financial statement schedule listed in theaccompanying Item 15(a). These financial statements and schedule are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform our audit to obtain reasonableassurance about whether the financial statements and schedule are free ofmaterial misstatement. The Company is not required to have, nor were we engagedto perform, an audit of its internal control over financial reporting. Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements andschedule, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement andschedule presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Optio Software, Inc. as of January 31, 2006 and 2007, andthe results of their operations and their cash flows for each of the threeyears in the period ended January 31, 2007 in conformity with accountingprinciples generally accepted in the United States of America.

Also, in our opinion, the schedule for each of thethree years in the period ended January 31, 2007 presents fairly, in allmaterial respects, the information set forth therein.

Asdiscussed in Note 8 to the consolidated financial statements, effective February 1,2006, the Company adopted Statement of Financial Standards No. 123(R),Share-Based Payments.
| /s/ BDO SEIDMAN, Llp |   |
|----------------------|--------|
| Atlanta, Georgia     |   |
| April 30,  2007 |   |

 

F-2

----

**OPTIO SOFTWARE, INC.CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                         | ** ** | **January 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                                                         | ** ** | **2006**             | ** ** | **2007** | ** ** |
| **ASSETS**                                                                                                                         |       |                 |       |   |   |
| Current assets:                                                                                                                    |       |                 |       |   |   |
| Cash and cash equivalents                                                                                                          |       | $                    | 7,954,000  |   | $ | 11,948,000 |   |
| Accounts receivable, less allowance for doubtful  accounts of $481,000 and $382,000, respectively                                  |       | 4,811,000            |       | 3,903,000 |   |
| Prepaid expenses and other current assets                                                                                          |       | 720,000              |       | 723,000 |   |
| Notes receivable from related party                                                                                                |       | 5,000                |       | 5,000 |   |
| Current portion of notes receivable from M2                                                                                        |       | 323,000              |       | — |   |
| Total current assets                                                                                                               |       | 13,813,000           |       | 16,579,000 |   |
| Property and  equipment, net                                                                                                       |       | 613,000              |       | 2,714,000 |   |
| Notes receivable  from M2, net of impairment reserve of $900,000, less current portion                                             |       | 1,720,000            |       | — |   |
| Goodwill                                                                                                                           |       | 1,846,000            |       | 2,302,000 |   |
| Other  intangibles, net                                                                                                            |       | 1,615,000            |       | 1,251,000 |   |
| Other                                                                                                                              |       | 91,000               |       | 91,000 |   |
| Total assets                                                                                                                       |       | $                    | 19,698,000 |   | $ | 22,937,000 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                      |       |                 |       |   |   |
| Current liabilities:                                                                                                               |       |                 |       |   |   |
| Accounts payable                                                                                                                   |       | $                    | 922,000    |   | $ | 1,088,000 |   |
| Accrued expenses                                                                                                                   |       | 2,218,000            |       | 1,755,000 |   |
| Current portion of capital lease obligations                                                                                       |       | 1,000                |       | 78,000 |   |
| Current portion of lease incentive liability                                                                                       |       | —               |       | 122,000 |   |
| Deferred revenue                                                                                                                   |       | 7,373,000            |       | 7,439,000 |   |
| Total current liabilities                                                                                                          |       | 10,514,000           |       | 10,482,000 |   |
| Capital lease  obligations, less current portion                                                                                   |       | —               |       | 300,000 |   |
| Lease incentive  liability, less current portion                                                                                   |       | —               |       | 806,000 |   |
| Long-term accrued  rent payable                                                                                                    |       | —               |       | 526,000 |   |
| Other long-term  liabilities                                                                                                       |       | 63,000               |       | 103,000 |   |
| Total liabilities                                                                                                                  |       | 10,577,000           |       | 12,217,000 |   |
| 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; 21,475,826 and 22,461,514 shares issued and outstanding,  respectively |       | 52,577,000           |       | 53,847,000 |   |
| Treasury shares, 40,000 shares acquired, at cost                                                                                   |       | —               |       | (60,000 | ) |
| Accumulated deficit                                                                                                                |       | (43,533,000          | )          | (43,251,000 | ) |
| Accumulated other comprehensive income                                                                                             |       | 77,000               |       | 184,000 |   |
| Total shareholders’ equity                                                                                                    |       | 9,121,000            |       | 10,720,000 |   |
| Total liabilities  and shareholders’ equity                                                                                   |       | $                    | 19,698,000 |   | $ | 22,937,000 |   |

 

See accompanying notes to consolidated financial statements.

F-3

----

**OPTIO SOFTWARE,INC.CONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                                             | ** ** | **Year Ended January 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| Revenue:                                                                               |       |                                      |       |   |   |   |   |
| License fees                                                                           |       | $                                         | 10,175,000 |   | $ | 9,958,000 |   | $ | 7,718,000 |   |
| Subscription fees                                                                      |       | 930,000                                   |       | 2,165,000 |   | 2,353,000 |   |
| Services, maintenance, and other                                                       |       | 17,262,000                                |       | 17,498,000 |   | 18,606,000 |   |
|                                                                                   |       | 28,367,000                                |       | 29,621,000 |   | 28,677,000 |   |
| Costs of revenue  (exclusive of depreciation and amortization shown separately below): |       |                                      |       |   |   |   |   |
| License fees                                                                           |       | 650,000                                   |       | 769,000 |   | 678,000 |   |
| Services, maintenance, and other                                                       |       | 5,891,000                                 |       | 6,410,000 |   | 6,813,000 |   |
|                                                                                   |       | 6,541,000                                 |       | 7,179,000 |   | 7,491,000 |   |
| Operating  expenses:                                                                   |       |                                      |       |   |   |   |   |
| Sales and marketing                                                                    |       | 10,957,000                                |       | 11,399,000 |   | 10,295,000 |   |
| Research and development                                                               |       | 4,616,000                                 |       | 5,099,000 |   | 5,518,000 |   |
| General and administrative                                                             |       | 4,120,000                                 |       | 4,368,000 |   | 5,403,000 |   |
| Reversal of valuation reserve on M2 Systems note                                       |       | —                                    |       | — |   | (900,000 | ) |
| Depreciation and amortization                                                          |       | 613,000                                   |       | 861,000 |   | 916,000 |   |
|                                                                                   |       | 20,306,000                                |       | 21,727,000 |   | 21,232,000 |   |
| Income (loss)  from operations                                                         |       | 1,520,000                                 |       | 715,000 |   | (46,000 | ) |
| Other income  (expense):                                                               |       |                                      |       |   |   |   |   |
| Interest income                                                                        |       | 187,000                                   |       | 269,000 |   | 431,000 |   |
| Interest expense                                                                       |       | (12,000                                   | )          | (14,000 | ) | (13,000 | ) |
| Other                                                                                  |       | 53,000                                    |       | (15,000 | ) | (4,000 | ) |
|                                                                                   |       | 228,000                                   |       | 240,000 |   | 414,000 |   |
| Income before  income taxes                                                            |       | 1,748,000                                 |       | 955,000 |   | 368,000 |   |
| Income tax  expense                                                                    |       | 95,000                                    |       | 57,000 |   | 86,000 |   |
| Net income                                                                             |       | $                                         | 1,653,000  |   | $ | 898,000 |   | $ | 282,000 |   |
| Net income per  share—basic                                                       |       | $                                         | 0.08       |   | $ | 0.04 |   | $ | 0.01 |   |
| Net income per  share—diluted                                                     |       | $                                         | 0.07       |   | $ | 0.04 |   | $ | 0.01 |   |
| Weighted average  shares outstanding—basic                                        |       | 20,096,877                                |       | 20,992,877 |   | 22,232,347 |   |
| Weighted average shares  outstanding—diluted                                      |       | 23,544,398                                |       | 24,115,688 |   | 24,802,992 |   |

 

See accompanying notes to consolidated financial statements.

F-4

----

**OPTIO SOFTWARE,INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

| ** **                                                             | ** ** | **Common Stock** | ** ** | ** **   | ** ** | ** ** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total**  | ** **  |
|------------------------------------------------------------------------|------------|-----------------------|------------|--------------|------------|------------|------------|---------------------------------------|------------|------------|-------------|
| ** **                                                             | ** ** | **Common**            | ** ** | **Treasury** | ** ** | ** ** | ** ** | **Accumulated**                       | ** ** | **Income** | ** **  | **Shareholders’** | ** ** |
| ** **                                                             | ** ** | **Shares**            | ** ** | **Shares**   | ** ** | **Amount** | ** ** | **Deficit**                           | ** ** | **(Loss)** | ** **  | **Equity** | ** ** |
| 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 |   |   |
| Comprehensive  income, net of tax:                                     |       |                  |       |         |       |       |       |                                  |       |       |        |   |   |   |   |   |   |   |   |   |   |
| Net income                                                             |       | —                |       |         |       |       |       | —                                |       |       | 898,000     |   |   |   | — |   |   |   | 898,000 |   |   |
| Foreign currency translation Adjustment                                |       | —                |       |         |       |       |       | —                                |       |       | —      |   |   |   | (41,000 | ) |   |   | (41,000 | ) |   |
| Comprehensive income                                                   |       |                  |       |         |       |       |       |                                  |       |       |        |   |   |   |   |   |   |   | 857,000 |   |   |
| Issuance of common stock from the exercise of stock  options           |       | 581,561               |       |         |       |       |       | 337,000                               |       |       | —      |   |   |   | — |   |   |   | 337,000 |   |   |
| Balance at January 31, 2006                                       |       | 21,435,826            |       |         |       |       |       | 52,577,000                            |       |       | (43,533,000 | ) |   |   | 77,000 |   |   |   | 9,121,000 |   |   |
| Comprehensive  income, net of tax:                                     |       |                  |       |         |       |       |       |                                  |       |       |        |   |   |   |   |   |   |   |   |   |   |
| Net income                                                             |       | —                |       |         |       |       |       | —                                |       |       | 282,000     |   |   |   | — |   |   |   | 282,000 |   |   |
| Foreign currency translation Adjustment                                |       | —                |       |         |       |       |       | —                                |       |       | —      |   |   |   | 107,000 |   |   |   | 107,000 |   |   |
| Comprehensive income                                                   |       |                  |       |         |       |       |       |                                  |       |       |        |   |   |   |   |   |   |   | 389,000 |   |   |
| Treasury shares acquired                                               |       | (40,000               | )          |         | 40,000     |       |       | (60,000                               | )          |       |        |   |   |   |   |   |   |   | (60,000 | ) |   |
| Vertisoft shares released from escrow                                  |       | 310,000               |       |         | —     |       |       | 381,000                               |       |       | —      |   |   |   | — |   |   |   | 381,000 |   |   |
| Issuance of common stock from the exercise of stock  options           |       | 755,688               |       |         |       |       |       | 419,000                               |       |       | —      |   |   |   | — |   |   |   | 419,000 |   |   |
| Compensation expense related to stock options                          |       |                  |       |         |       |       |       | 470,000                               |       |       |        |   |   |   |   |   |   |   | 470,000 |   |   |
| Balance at  January 31, 2007                                      |       | 22,461,514            |       |         | 40,000     |       |       | $                                     | 53,787,000 |       |        | $ | (43,251,000 | ) |   |   | $ | 184,000 |   |   |   | $ | 10,720,000 |   |   |

 

See accompanying notes to consolidated financial statements.

F-5

----

**OPTIO SOFTWARE, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                         | ** ** | **Year Ended January 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| **Operating activities**                                                           | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                         |       | $                                         | 1,653,000  |   | $ | 898,000 |   | $ | 282,000 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                                      |       |   |   |   |   |
| Depreciation                                                                       |       | 405,000                                   |       | 446,000 |   | 552,000 |   |
| Amortization of other intangible assets                                            |       | 208,000                                   |       | 415,000 |   | 364,000 |   |
| Noncash stock compensation                                                         |       | —                                    |       | — |   | 470,000 |   |
| Provision for doubtful accounts                                                    |       | 67,000                                    |       | 30,000 |   | 137,000 |   |
| Gain on reversal of valuation reserve on M2 Systems  note                          |       | —                                    |       | — |   | (900,000 | ) |
| Loss on sale of property and equipment                                             |       | —                                    |       | — |   | 2,000 |   |
| Deferred income taxes                                                              |       | 20,000                                    |       | 40,000 |   | 40,000 |   |
| Change in  operating assets and liabilities (exclusive of acquisitions):           |       |                                      |       |   |   |   |   |
| Accounts receivable                                                                |       | 738,000                                   |       | (228,000 | ) | 874,000 |   |
| Prepaid expenses and other assets                                                  |       | (89,000                                   | )          | (323,000 | ) | (8,000 | ) |
| Accounts payable                                                                   |       | (76,000                                   | )          | 9,000 |   | 144,000 |   |
| Accrued expenses                                                                   |       | (1,374,000                                | )          | 194,000 |   | (1,000 | ) |
| Income taxes payable                                                               |       | 3,000                                     |       | 12,000 |   | (49,000 | ) |
| Deferred revenue                                                                   |       | (166,000                                  | )          | 1,008,000 |   | (29,000 | ) |
| Net cash provided  by operating activities                                         |       | 1,389,000                                 |       | 2,501,000 |   | 1,878,000 |   |
| **Investing  activities**                                                          |       |                                      |       |   |   |   |   |
| Purchases of  property and equipment                                               |       | (470,000                                  | )          | (373,000 | ) | (1,209,000 | ) |
| Payments from M2  Systems note receivable                                          |       | 325,000                                   |       | 318,000 |   | 2,943,000 |   |
| Purchase of  VertiSoft, net of cash acquired                                       |       | (348,000                                  | )          | (97,000 | ) | (75,000 | ) |
| Net cash provided  by (used in) investing activities                               |       | (493,000                                  | )          | (152,000 | ) | 1,659,000 |   |
| **Financing  activities**                                                          |       |                                      |       |   |   |   |   |
| Payments of notes  payable and capital lease obligations                           |       | (1,161,000                                | )          | (92,000 | ) | (40,000 | ) |
| Proceeds from  exercise of stock options                                           |       | 279,000                                   |       | 337,000 |   | 419,000 |   |
| Purchases of  treasury stock                                                       |       | —                                    |       | — |   | (60,000 | ) |
| Net cash provided  by (used in) financing activities                               |       | (882,000                                  | )          | 245,000 |   | 319,000 |   |
| Impact of foreign  currency rate fluctuations on cash                              |       | 91,000                                    |       | (73,000 | ) | 138,000 |   |
| Net increase in  cash and cash equivalents                                         |       | 105,000                                   |       | 2,521,000 |   | 3,994,000 |   |
| Cash and cash  equivalents at beginning of year                                    |       | 5,328,000                                 |       | 5,433,000 |   | 7,954,000 |   |
| Cash and cash  equivalents at end of year                                          |       | $                                         | 5,433,000  |   | $ | 7,954,000 |   | $ | 11,948,000 |   |
| **Supplemental cash flow information:**                                            |       |                                      |       |   |   |   |   |
| Cash paid for  interest                                                            |       | $                                         | 14,000     |   | $ | 14,000 |   | $ | 13,000 |   |
| Net cash paid for  income taxes                                                    |       | $                                         | 63,000     |   | $ | 12,000 |   | $ | 15,000 |   |
| Acquisition of property  and equipment financed with capital leases                |       | $                                         | —     |   | $ | — |   | $ | 422,000 |   |

 

See accompanying notes to consolidated financial statements

F-6

----

**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1.**                 Descriptionof Business

Optio Software, Inc.and subsidiaries (the “Company” or “Optio” or “Optio Software, Inc.”),provides document automation and electronic health record solutions that enableorganizations to achieve  speed,accuracy, functionality and quality in their inbound and outbound documents.The Company’s infrastructure software and services enhance the form, content,distribution and availability of business critical information. The Companymarkets primarily to companies located principally in the United States andEurope. The industry in which the Company operates is subject to rapid changedue to development of new technologies and products.

**2.**                 Summaryof Significant Accounting Policies

**Principles ofConsolidation**

Theconsolidated financial statements include the accounts of the Company and itswholly-owned subsidiaries. All significant intercompany balances andtransactions have been eliminated in consolidation.

**Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the amounts reported in the consolidated financialstatements and accompanying notes. Significant items subject to such estimatesand assumptions include the carrying amount of property and equipment,intangibles, goodwill and notes receivable; valuation allowances forreceivables and deferred tax assets; and litigation contingencies. Actualresults could differ from those estimates.

**Revenue Recognition**

*Overview*

The Company’s revenueconsists of perpetual license fees for the Company’s software products,maintenance fees, consulting services fees and customer training andsubscription fees which cover licensing of the Company’s software products andmaintenance. The Company generally charges fees for licenses of its softwareproducts either based on the number of Central Processing Units (“CPUs”) onwhich the product is installed or, to a lesser extent, based on the number ofpersons or hospital beds registered to use the product. The Company’s revenuerecognition policies are in accordance with Statement of Position (“SOP”) No. 97-2,*Software Revenue Recognition*, asamended; SOP No. 98-9, *SoftwareRevenue Recognition, With Respect to Certain Transactions,* and theSecurities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101,*Revenue Recognition in Financial Statements,*as amended by SAB 104, *RevenueRecognition*.

*License Fees*

The Company licenses its products through its directsales force and indirectly through resellers. In general, software licenserevenues are recognized when a non-cancelable license agreement has been signedand the customer acknowledges an unconditional obligation to pay, the software producthas been delivered, there are no significant uncertainties surrounding productacceptance, the fees are fixed or determinable, collection is consideredprobable, the remaining elements such as future services are not consideredessential to the functionality of the software, and the Company has a legallyenforceable claim 

F-7

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

not subject to refund orforfeiture if future services are not rendered. Delivery is considered to haveoccurred when title and risk of loss have been transferred to the customer, whichgenerally occurs when media containing the licensed programs is provided to acommon carrier. In case of electronic delivery, delivery occurs when thecustomer is given access to the licensed programs. If collectibility is notconsidered probable, revenue is recognized when the fee is collected. TheCompany enters into reseller arrangements that typically provide for sublicensefees payable based upon a percentage of list price or a contractuallynegotiated fixed fee. The Company does not grant its resellers the right ofreturn.

The Company recognizes license revenue using theresidual method pursuant to the requirements of SOP No. 97-2,as amended by SOP No. 98-9. Revenues recognized frommultiple-element software arrangements are allocated to each element of thearrangement based on the fair values of the elements, such as licenses forsoftware products, maintenance, consulting services or customer training. Thedetermination of fair value is based on objective evidence, which is specificto the Company and can differ from amounts contained in the customerarrangement. The Company limits its assessment of objective evidence for eachelement to either the price charged when the same element is sold separately orthe price established by management having the relevant authority to do so, foran element not yet sold separately. If evidence of fair value of allundelivered elements exists but evidence does not exist for one or moredelivered elements, then revenue is recognized using the residual method. Underthe residual method, the fair value of the undelivered elements is deferred andthe remaining portion of the arrangement fee is recognized as revenue.

The Company recordsdeferred revenue for software license agreements when cash has been receivedfrom the customer and the agreement does not qualify for revenue recognitionunder the Company’s revenue recognition policy. The Company records accountsreceivable for software license agreements when the agreement qualifies forrevenue recognition but cash or other consideration has not been received fromthe customer.

*Subscription fees*

The Company**also licenses certain of its products in the form of  subscription service contracts, with termstypically ranging from 3 to 5 years. Subscription revenue, which includes alicense of the software product, technical support and future unspecifiedenhancements to the software product, is recognized on a daily basis over theagreement period once the product has been installed. Unlike license feerevenue, subscription service contracts include licenses that are not perpetualin duration.

*Services,Maintenance and Other Revenue*

Consulting servicesrevenues and customer training revenues are recognized as such services areperformed as they are incidental and not essential to the functionality of thesoftware. Maintenance revenues, which include revenues bundled with softwarelicense agreements that entitle the customers to technical support and futureunspecified enhancements to the Company’s products, are deferred and recognizedratably over the related agreement period, generally twelve months. Inaccordance with Emerging Issues Task Force release 01-14, *Income Statement Characterization of ReimbursementsReceived for Out of Pocket Expenses Incurred*, the Company recognizesreimbursable expenses as revenue and as an expense in cost of sales in allperiods presented.

F-8

----

**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Long-Lived Assets**

TheCompany continually monitors events and changes in circumstances that wouldindicate the carrying amounts of property, equipment, and intangible assets maynot be recoverable. When such events or changes in circumstances are present,the Company assesses the recoverability of the respective asset by determiningwhether the carrying value of such asset will be recovered through undiscountedfuture cash flows. Should the Company determine that the carrying values of therespective assets are not recoverable, the Company would record a charge toreduce the carrying values of such assets to their fair values.

**Research andDevelopment and Software Development Costs**

Under the criteria setforth in Statement of Financial Accounting Standards (“SFAS”) No. 86, *Accounting for the Cost of Computer Software to beSold, Leased or Otherwise Marketed*, development costs incurred inthe research and development of new software products are expensed as incurreduntil technological feasibility in the form of a working model has beenestablished at which time such costs are capitalized and recorded at the lowerof unamortized cost or net realizable value. The costs incurred subsequent tothe establishment of a working model but prior to general release of theproduct have not been significant. To date, the Company has not capitalized anycosts related to the development of software for external use.

**Advertising Costs**

Advertising costs areexpensed in the period incurred. Total advertising expense amounted toapproximately $822,000, $926,000 and $922,000 during the years ended January 31,2005, 2006 and 2007, respectively.

**Shipping Fees andHandling Costs**

In accordance with Emerging Issues Task Force 00-10,*Accounting for Shipping and HandlingCharges,*the Company records all shipping fees and handlingcosts associated with transporting the licensed software to customers as costsof revenue. The revenues associated with customer billings for these charges isreported in services, maintenance and other revenue.

**Cash and CashEquivalents**

The Company considers allhighly liquid investments with a maturity of three months or less whenpurchased to be cash equivalents. Cash equivalents at January 31, 2007consisted primarily of investments in money market funds. The carrying amountsof the Company’s investments in cash equivalents approximate their fair valuesdue to the short maturities of these instruments.

**Property and Equipment**

Property and equipment are stated at cost. Depreciationexpense is calculated over the estimated useful lives of the related assets(generally three to seven years) using the straight-line method for financialreporting purposes and accelerated methods for income tax purposes.Amortization of assets recorded under capital leases is included indepreciation expense. Leasehold improvements are amortized using thestraight-line method over the shorter of the terms of the related leases or therespective useful lives of the assets.

F-9

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Propertyand equipment at January 31, 2006 and 2007 consisted of the following:

| ** **                                      | ** ** | **January 31,** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|
| ** **                                      | ** ** | **2006**             | ** ** | **2007** | ** ** |
| Equipment                                       |       | $                    | 2,605,000  |   | $ | 973,000 |   |
| Furniture and  fixtures                         |       | 612,000              |       | 822,000 |   |
| Purchased  software                             |       | 1,283,000            |       | 972,000 |   |
| Leasehold  improvements                         |       | 322,000              |       | 1,675,000 |   |
| Capital lease of  equipment                     |       | —               |       | 529,000 |   |
|                                            |       | 4,822,000            |       | 4,971,000 |   |
| Less accumulated  depreciation and amortization |       | (4,209,000           | )          | (2,257,000 | ) |
| Net property and  equipment                     |       | $                    | 613,000    |   | $ | 2,714,000 |   |

 

**Accrued Expenses**

Accruedexpenses as of January 31, 2006 and 2007 included the following:

| ** **                                 | ** ** | **January 31,** | ** ** |
|--------------------------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **2006**             | ** ** | **2007** | ** ** |
| Accrued  commissions and bonuses           |       | $                    | 583,000    |   | $ | 418,000 |   |
| Accrued sales  taxes                       |       | 453,000              |       | 332,000 |   |
| Accrued payroll  and payroll related taxes |       | 221,000              |       | 178,000 |   |
| Other                                      |       | 961,000              |       | 827,000 |   |
| Total accrued expenses                     |       | $                    | 2,218,000  |   | $ | 1,755,000 |   |

 

**Costs of Revenue**

Costsof revenue from license fees consist of costs relating to the manufacturing,packaging and distribution of software and related documentation and thirdparty license and referral fees. Costs of revenue from services, maintenanceand other, consists of personnel, outsourced consultants and direct expensesrelating to the cost of providing consulting, implementation, training, technicalsupport and allocable overhead.

**Goodwill and Other Intangible Assets**

The Company acquiredgoodwill and other intangible assets in connection with the acquisition ofVertiSoft Corporation (“VertiSoft”) in August 2004. Under the purchasemethod of accounting pursuant to SFAS 141, *BusinessCombinations*, the total purchase price was allocated to the acquiredentity’s net tangible and intangible assets based on their estimated fairvalues as of the date of the completion of the acquisition. Any excess of thepurchase price over the fair value of the net tangible assets/liabilities andidentifiable intangible assets acquired was recorded as goodwill. In accordancewith SFAS 142, *Goodwill and Other IntangibleAssets*, goodwill and intangible assets with indefinite livesresulting from business combinations have not been amortized but instead willbe tested for impairment at least annually (more frequently if certainindicators are present) while identifiable intangible assets with finite livesare amortized over their estimated useful lives. In the event that the Company’smanagement determines that the value of goodwill or intangible assets hasbecome impaired, the Company will incur an accounting charge for the amount ofimpairment during the fiscal quarter in which the determination is made. TheCompany has selected August 1 as its annual impairment testing date forits goodwill. For goodwill, the 

F-10

----

**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

impairmentdetermination is made at the reporting unit level and consists of two steps.First, the Company determines the fair value of a reporting unit and comparesit to its carrying amount. Second, if the carrying amount of a reporting unitexceeds its fair value, an impairment loss is recognized for any excess of thecarrying amount of the reporting unit’s goodwill over the implied fair value ofthat goodwill. The implied fair value of goodwill is determined by allocatingthe fair value of the reporting unit in a manner similar to a purchase priceallocation, in accordance with FASB Statement No. 141, *Business Combinations*. The residual fairvalue after this allocation is the implied fair value of the reporting unitgoodwill.

The Company performed thisanalysis as of August 1, 2005 and 2006, respectively, and determined thatno impairment of its goodwill existed.

Goodwilland Intangible assets and the related accumulated amortization as of January 31,2006 and 2007 were as follows:

| ** **                                  | ** ** | **January 31,** | ** ** |
|---------------------------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **2006**             | ** ** | **2007** | ** ** |
| Goodwill                                    |       | $                    | 1,846,000  |   | $ | 2,302,000 |   |
| Intangible Assets:                          |       |                 |       |   |   |
| Customer base                               |       | $                    | 1,260,000  |   | $ | 1,260,000 |   |
| Accumulated amortization—customer base |       | (252,000             | )          | (412,000 | ) |
| Technology                                  |       | 893,000              |       | 893,000 |   |
| Accumulated amortization—technology    |       | (345,000             | )          | (532,000 | ) |
| Non-compete                                 |       | 85,000               |       | 85,000 |   |
| Accumulated amortization—non-compete   |       | (26,000              | )          | (43,000 | ) |
| Intangible assets, net                      |       | $                    | 1,615,000  |   | $ | 1,251,000 |   |

 

The increase in Goodwillin fiscal year 2007 from fiscal year 2006 is due to the payment of contingentconsideration of $456,000 associated with the Vertisoft acquisition describedabove and as specified in the purchase agreement.

Amortizationexpense was $208,000, $415,000, and $364,000, for the years ended January 31,2005, 2006 and 2007, respectively. Expected amortization expense for the nextfive years is as follows:

| ** **             | ** ** | **Amortization  expense:** | ** ** |
|------------------------|------------|----------------------------|------------|
| January 31,  2008 |       |                       | $          | 295,000 |   |   |
| January 31,  2009 |       |                       | 282,000    |   |   |
| January 31,  2010 |       |                       | 249,000    |   |   |
| January 31,  2011 |       |                       | 117,000    |   |   |
| January 31, 2012  |       |                       | 105,000    |   |   |

 

As of January 31,2007, the total unamortized balance of all amortizable intangible assets was$1,251,000.

**Income Taxes**

Income taxes are accountedfor under the asset and liability method. Deferred income taxes reflect the nettax effects of temporary differences between the carrying amounts of assets andliabilities for financial reporting purposes and the amounts used for taxpurposes. Such amounts are measured using 

F-11

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

enactedtax rates and laws that are expected to be in effect when the differencesreverse. Valuation allowances are established when necessary to reduce deferredtax assets to the amounts expected to be realized.

**Employee Stock Options**

Prior to February 1,2006, the Company accounted for its stock-based employee compensationarrangements under the intrinsic value method prescribed by AccountingPrinciples Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB No. 25”), as allowed bySFAS No. 123, *Accounting forStock-Based Compensation*, as amended by SFAS No. 148, *Accounting for Stock-Based Compensation-Transitionand Disclosure*. As a result, no expense was recognized for optionsthat were granted with an exercise price equal to quoted market price at thedate of grant. In December 2004, the Financial Accounting Standards Board(FASB) issued SFAS No. 123R, *Share-BasedPayment*, which amended SFAS No. 123 and supersedes APB No. 25.SFAS No. 123R requires measurement of the cost of share-based payments toemployees, including grants of employee stock options, to be recognized in thefinancial statements based on their fair values beginning with the firstinterim or annual period after June 15, 2005. Subsequent to the effectivedate, the pro forma disclosures previously permitted under SFAS No. 123are no longer an alternative to financial statement recognition. Effective February 1,2006, the Company has adopted SFAS No. 123R using the modified prospectivemethod. Under this method, compensation cost recognized during the year ended January 31,2007 includes: (a) compensation cost for all share-based payments grantedprior to, but not yet vested as of February 1, 2006, based on the grantdate fair value estimated in accordance with the original provisions of SFAS No. 123amortized over the employees’ requisite service period (typically the options’vesting period) and (b) compensation cost for all share-based paymentsgranted subsequent to February 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS No. 123R amortizedratably over the options’ vesting period.

For periods prior toadoption of SFAS No. 123R, companies were required to calculate theestimated fair value of options and could elect to either include the estimatedcost in earnings or disclose the pro forma effect in the footnotes to theirfinancial statements. The Company chose to disclose the pro forma effect.

The fair value of theoptions used for the application of SFAS No. 123R disclosures is estimatedat the date of grant using the Black-Scholes option pricing model. Indetermining the fair value of options using the Black-Scholes option pricingmodel, various assumptions such as expected life, volatility, risk-freeinterest rate, dividend yield and forfeiture rates are used. The expected lifeof awards granted represents the period of time that they are expected to beoutstanding. The Company determines the expected life using the “simplifiedmethod” in accordance with SAB No. 107. Using the Black-Scholes optionvaluation model, the Company estimates the volatility of our common stock atthe date of grant based on the historical volatility of our common stock. Optiobases the risk-free interest rate used in the Black-Scholes option valuationmodel on the implied yield currently available on U.S. Treasury zero-couponissues with an equivalent remaining term equal to the expected life of theaward. Optio has not paid any cash dividends on our common stock in the lastten years and we do not anticipate paying any cash dividends in the foreseeablefuture. Consequently, the Company used an expected dividend yield of zero inthe Black-Scholes option valuation model. Finally, the Company uses historicaldata to estimate pre-vesting option forfeitures. Stock-based compensation isrecorded for only those awards that are expected to vest. The followingweighted-average assumptions were used for the years ended January 31,2005, 2006 and 2007: risk-free interest rate of 3.96%, 4.3%, and 4.95%,respectively; no dividend yield; volatility of 145%, 136% 

F-12

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

and119%, respectively; a forfeiture rate of 0%, 0% and 19.9%, repsectively; and anexpected life of the options of 7.11, 5.55 and 5.33 years, respectively.

Forpurposes of pro forma disclosures, the estimated fair value of the options isamortized to expense over the service period, which is generally the options’vesting period. The following table illustrates the effect on net income andnet income per share had the Company applied the fair value recognitionprovisions of SFAS No. 123 to account for our employee stock option planfor the years ended January 31, 2005 and 2006,  because stock-based employee compensation wasnot accounted for using the fair value recognition method during that period :

| ** **                                                         | ** ** | **Year Ended January 31,** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                         | ** ** | **2005**                                  | ** ** | **2006** | ** ** |
| Net income as  reported                                            |       | $                                         | 1,653,000  |   | $ | 898,000 |   |
| Add: Compensation  cost reported using the intrinsic value method  |       | —                                    |       | — |   |
| Deduct:  Compensation cost using the fair value method, net of tax |       | (395,000                                  | )          | (511,000 | ) |
| Pro forma net  income                                              |       | $                                         | 1,258,000  |   | $ | 387,000 |   |
| Net income per  share as reported—basic                       |       | 0.08                                      |       | 0.04 |   |
| Net income per  share as reported—diluted                     |       | 0.07                                      |       | 0.04 |   |
| Pro forma net  income per share—basic                         |       | 0.06                                      |       | 0.02 |   |
| Pro forma net income per  share—diluted                       |       | 0.05                                      |       | 0.02 |   |

 

The historical pro forma impact of applying the fairvalue method prescribed by SFAS No. 123 is not representative of theimpact that may be expected in the future due to changes resulting fromadditional grants in future years and changes in assumptions such asvolatility, interest rates and expected life used to estimate fair value of thegrants in future years.

Note that the above pro forma disclosure was notpresented for the year ended January 31, 2007 because stock-based employeecompensation has been accounted for using the fair value recognition methodunder SFAS No. 123R for this period. Implementation of SFAS No. 123Rresulted in $470,000 of share-based compensation expense in the year ended January 31,2007, reflected entirely within the general and administrative line item of theConsolidated  Statement of Operations andComprehensive Income. No income tax benefit nor any deferred tax asset wasrecognized during the year ended January 31, 2007 due to the valuationallowance placed on the Company’s deferred tax assets. The adoption of SFAS No. 123Rhad no impact on cash flows from operations or financing activities.

**Non-cash Transactions**

Non-cash activities duringthe year ended January 31, 2005 consisted of certain assets andliabilities assumed with the acquisition of VertiSoft discussed more fully inNote 12.

Duringthe second quarter of the current fiscal year, Optio entered into a capitallease for telephone equipment in the amount of $422,000. In addition, Optiorenegotiated the lease for its headquarter’s facilities. As part of the newlease agreement, the landlord contributed $1.0 million towards the improvementsof the space. This $1.0 million in leasehold improvements is reflected as afixed asset, with an offsetting lease incentive liability of $1.0 million,which will reduce future rent expense on a pro rata basis over the continuallife of the lease. The lease incentive liability has been recorded on Optio’sconsolidated balance sheet. Also during the current fiscal year, 310,000 sharesof Optio common stock were released from escrow. These shares related to thepurchase of VertiSoft by the Company and had been held in escrow for 18 monthsto secure the indemnification obligations of the shareholders of VertiSoft.

F-13

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**Comprehensive Income**

Comprehensive incomerepresents net income plus the results of certain shareholders’ equity changesnot reflected in the consolidated statements of operations. The items inaccumulated other comprehensive income relate principally to foreign currencytranslation adjustments.

**Translation of Foreign Currencies**

The financial position andresults of operations of the Company’s foreign subsidiaries are measuredgenerally using local currencies as the functional currency. Assets andliabilities of these subsidiaries are translated into U.S. dollars at theexchange rate in effect at each year-end. Income and expense items aretranslated at average exchange rates for the year. The resulting translationadjustments are recorded in the foreign currency translation adjustmentaccount.

**New Accounting Pronouncements**

In June 2006, theFASB issued FASB Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes-an interpretation of SFAS No. 109” (“FIN 48”). FIN 48clarifies the accounting for uncertainty in income taxes recognized infinancial statements in accordance with SFAS No. 109, and recommends arecognition threshold and measurement characteristic for financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. The differences between a tax position taken in a tax return andamounts recognized in the financial statements may result in an increase in aliability for income taxes payable, a reduction of an income tax refundreceivable, a reduction in a deferred tax asset or an increase in a deferredtax liability. FIN 48 also provides guidance on classification, interest andpenalties, accounting in interim periods, disclosure, and transition. FIN 48 iseffective for fiscal years beginning after December 16, 2006, with earlyadoption encouraged. The Company has not yet determined the effects of adoptingFIN 48.

In September 2006,the FASB issued FASB No. 157, “Fair Value Measurements” (“FASB 157”). FASB157 redefines fair value, establishes a framework for measuring fair value andexpands the disclosure requirements regarding fair value measurement. FASB 157is effective for fiscal years beginning after November 15, 2007, andinterim periods within those fiscal years. The Company does not expect that theadoption of FASB 157 will have a material impact on its results of operationsor financial position; however, additional disclosures will be required underFASB 157.

In February 2007, theFASB issued FASB No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” (“FASB 159”). The standard requires companies to provideadditional information that will help investors and other users of financialstatements to more easily understand the effect of the company’s choice to usefair value on its earnings. It also requires entities to display the fair valueof those assets and liabilities for which the company has chosen to use fairvalue on the face of the balance sheet. The Statement is effective as of thebeginning of an entity’s first fiscal year beginning after November 15,2007. The Company does not expect FASB 159 to have a material impact on theCompany’s future results of operations or financial position.

**Fiscal Year**

The Company maintains afiscal year ending January 31st. References to 2007, 2006 and 2005represent the years ended January 31, 2007, 2006 and 2005, respectively.

**Reclassifications**

Certainprior year amounts have been changed to conform with the current yearpresentation.

F-14

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**3.**                 NotesReceivable

On March 27, 2000, the Company acquired all theoutstanding shares of Muscato and substantially all of the assets of TransLink,an affiliate of Muscato. Subsequently, on December 4, 2001, the Companysold 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 $3.25million promissory note, and the retirement of the long-term notes in theaggregate amount of $8.9 million in principal and interest related to theoriginal purchase of Muscato. The assets of the TransLink business unit weresold for a $750,000 promissory note. These two notes were subsequentlyconsolidated into a single $3,640,000 promissory note.

In 2003, the Company executed a Settlement and ReleaseAgreement with M2 Systems covering the remainder of the indemnification claimsmade by M2 Systems. In exchange for M2 System’s agreement to release theCompany from such claims, the Company amended the promissory notes related tothe TransLink and Muscato divestiture, calling for a modified payment scheduleof a combined note. The modified payment schedule of the combined note requiredfour quarterly installments of $100,000, including interest calculated at theprime rate, up to a maximum rate of 6.75% (5.25% and 6.75% as of January 31,2005 and 2006, respectively) through January 31, 2004, four quarterlypayments of $115,000, including interest, through January 31, 2005, andeleven quarterly payments of $120,000 through October 31, 2007. Thebalance of the note, plus any additional accrued interest, was to be paid inthe quarter ending January 31, 2008, however, the balance was paid in fullearlier than scheduled, as described below.

During the third quarter of 2004, as a result of M2Systems’ failure to make timely payments, management determined that this wasan indication that it was probable that Optio would be unable to collect allamounts due according to the contractual terms of the note. At that time, theloan was considered impaired and was written down to the assessed fair value ofthe collateral. As of October 31, 2003, the collateral, includingtechnology, accounts receivable, fixed assets and the discounted net cash flowsof maintenance contracts was estimated to have an approximate fair value of$2.8 million, substantially less than the $3.7 million note receivable balanceas of October 31, 2003. Thus, Optio recorded an impairment charge of$900,000 during the year ended January 31, 2004.

On November 6,2006, Optio received approximately $2,758,000 in cash, representing fullrepayment of the M2 Systems note receivable, plus accrued interest. Suchrepayment represents an early retirement of the note, originally due December 1,2007. As a result, the valuation reserve previously recorded by Optio relatingto the M2 Systems’ note was reversed. Optio recognized an adjustment to thevaluation reserve of $900,000 that was a reduction of the Company’s operatingexpenses during the year ended January 31, 2007. In connection with suchrepayment, Optio released its lien on the assets of M2 systems, itssubsidiaries and related entities and the parties executed mutual releases.

**4.**                 FinancialInstruments

**Concentration of Credit Risk**

Financial instruments that potentially subject theCompany to significant concentrations of credit risk consist principally ofcash and cash equivalents and trade accounts receivable.

The Company maintains cash and cash equivalents atvarious financial institutions. Company policy is designed to limit exposure atany one institution. The Company performs periodic evaluations of the 

F-15

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

relative credit standingof those financial institutions that are considered in the Company’s investmentstrategy. Cash equivalents at January 31, 2007 of $11.9 millionrepresented investments in money market funds.

Concentrationsof credit risk with respect to trade accounts receivable are generally limiteddue to the large number of entities comprising the Company’s customer base;however, the Company generates between 25% and 35% of its domestic revenuesfrom healthcare organizations, with the remainder, including its internationalrevenues, generated by a wide array of industries. In addition, the Companygenerates portions of its revenues from the end-users of large enterpriseresource planning (“ERP”) system vendors such as Oracle Corporation and QAD, Inc.Over 30% of the Company’s domestic license revenues may be generated from theend-users of a single ERP vendor at any given point in time. The Companyperforms periodic credit evaluations of its customers’ financial condition andgenerally does not require collateral. Receivables generally are due within 30days, and management records estimates of expected credit losses. Managementreviews its accounts receivable on a regular basis to determine if any suchamounts may be potentially uncollectible. The Company includes any balancesthat are determined to be uncollectible, along with a general reserve, in itsoverall allowance for doubtful accounts. After all attempts to collect areceivable have failed, the receivable is written off against the allowance.Based on management’s best estimate, it believes the Company’s allowance fordoubtful accounts is adequate as presented. Historically, the Company has notexperienced significant losses related to receivables from groups or customersin any particular industry or geographic area. Bad debt expense for the yearsended January 31, 2005, 2006 and 2007 amounted to $67,000, $30,000 and$137,000, respectively. Materially different amounts of bad debt expense andallowance for doubtful accounts could be reported under different conditions orusing different assumptions.

**Fair Values**

The carrying amountsreported in the consolidated balance sheets for cash and cash equivalents andaccounts receivable approximate their fair values. The fair value estimateswere based on market information available to management as of January 31,2006 and 2007. The Company does not have financial instruments with off-balancesheet risk. The Company’s financial instruments consist primarily of accountsreceivable, accounts payable, and accrued expenses. The carrying amounts ofthese instruments approximate their fair value because of the short-termmaturity of such instruments.

**5.**                 CapitalLeases and Lines of Credit

TheCompany leases telecommunications and computer equipment under capital leases.Assets under capital leases included in property and equipment are as follows:

| ** **                     | ** ** | **January 31,** | ** ** |
|--------------------------------|------------|----------------------|------------|
| ** **                     | ** ** | **2006**             | ** ** | **2007** | ** ** |
| Equipment                      |       | $                    | 404,000    |   | $ | 529,000 |   |
| Less accumulated  amortization |       | (402,000             | )          | (51,000 | ) |
|                           |       | $                    | 2,000      |   | $ | 478,000 |   |

 

F-16

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Futureminimum lease payments under capital leases consist of the following at January 31, 2007:

| 2008                                         |   | $       | 96,000  |   |
|----------------------------------------------|--------|---------|---------|--------|
| 2009                                         |   | 96,000  |    |
| 2010                                         |   | 96,000  |    |
| 2011                                         |   | 96,000  |    |
| 2012                                         |   | 42,000  |    |
| Total minimum  lease payments                |   | 426,000 |    |
| Less amounts  representing interest          |   | (48,000 | )       |
| Present value of  net minimum lease payments |   | 378,000 |    |
| Less current  portion                        |   | (78,000 | )       |
|                                         |   | $       | 300,000 |   |

 

For the years ended January 31,2005, 2006 and 2007, the Company had a bank line of credit of up to $4.0million. The line of credit expired on April 21, 2007 and bears interestat the prime rate (8.25% at January 31, 2007), subject to increase basedon the Company’s performance relative to certain financial ratios.Subsequently, on April 26, 2007, Optio extended the line of credit throughApril 19, 2008. Optio may borrow up to $4.0 million, or such lesser amountas may be determined based on the level of accounts receivable. The Company hasestimated that approximately $1.9 million would be available for borrowingsbased upon the Company’s historical accounts receivable balance. Accountsreceivable, equipment, general intangibles and other assets as defined in theagreement collateralize the line of credit. The agreement contains variouscovenants, including liquidity and EBITDA requirements and restrictions ondividends. As of January 31, 2006 and 2007, Optio was in compliance withthe required financial ratios; however, in March 2005, Optio was inviolation of the required financial covenants and was in default on the line ofcredit. 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, 2006and 2007.

**6.**                 OperatingLeases

The Company leases office space and equipment underoperating leases. Rent expense under the Company’s operating leases wasapproximately $1,443,000, $1,559,000 and $1,201,000 during the years ended January 31,2005, 2006, and 2007, respectively.

Futureminimum lease payments under noncancellable operating leases, with initialterms of at least one year at the time of inception, are as follows at January 31, 2007:

| 2008       |   | $         | 878,000   |   |
|------------|--------|-----------|-----------|--------|
| 2009       |   | 1,118,000 |      |
| 2010       |   | 1,055,000 |      |
| 2011       |   | 1,067,000 |      |
| 2012       |   | 1,060,000 |      |
| Thereafter |   | 2,746,000 |      |
|       |   | $         | 7,924,000 |   |

 

F-17

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**7.**                 IncomeTaxes

Theprovisions for income taxes are summarized below:

| ** ** | ** ** | **Year Ended January 31,** | ** ** |
|------------|------------|-------------------------------------------|------------|
| ** ** | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| Current:   |       |                                      |       |   |   |   |   |
| Federal    |       | $                                         | 41,000     |   | $ | — |   | $ | 30,000 |   |
| State      |       | 22,000                                    |       | 12,000 |   | 15,000 |   |
| Foreign    |       | 12,000                                    |       | 5,000 |   | 1,000 |   |
|       |       | 75,000                                    |       | 17,000 |   | 46,000 |   |
| Deferred:  |       |                                      |       |   |   |   |   |
| Federal    |       | 16,000                                    |       | 32,000 |   | 32,000 |   |
| State      |       | 4,000                                     |       | 8,000 |   | 8,000 |   |
|       |       | 20,000                                    |       | 40,000 |   | 40,000 |   |
| Total      |       | $                                         | 95,000     |   | $ | 57,000 |   | $ | 86,000 |   |

 

Pre-taxincome (loss) attributable to foreign and domestic operations is summarizedbelow:

| ** **        | ** ** | **Year Ended January 31,** | ** ** |
|-------------------|------------|-------------------------------------------|------------|
| ** **        | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| U.S. operations   |       | $                                         | 2,132,000  |   | $ | 1,214,000 |   | $ | 724,000 |   |
| French operations |       | (379,000                                  | )          | (263,000 | ) | 293,000 |   |
| German operations |       | (73,000                                   | )          | 24,000 |   | 290,000 |   |
| U.K. operations   |       | 68,000                                    |       | (20,000 | ) | (939,000 | ) |
|              |       | $                                         | 1,748,000  |   | $ | 955,000 |   | $ | 368,000 |   |

 

A reconciliation of theprovision for income taxes to the statutory federal income tax rate is asfollows:

| ** **                                       | ** ** | **Year Ended January 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| Statutory rate of 34%  applied to pre-tax income |       | $                                         | 595,000    |   | $ | 325,000 |   | $ | 125,000 |   |
| State income taxes, net  of Federal tax effect   |       | 17,000                                    |       | 12,000 |   | 10,000 |   |
| Research and  development tax credits            |       | (351,000                                  | )          | (45,000 | ) | — |   |
| Meals and  entertainment expense                 |       | 20,000                                    |       | 17,000 |   | 23,000 |   |
| Expiration of capital  loss carryforwards        |       | —                                    |       | — |   | 6,115,000 |   |
| Change in  valuation allowance                   |       | (186,000                                  | )          | (252,000 | ) | (6,187,000 | ) |
|                                             |       | $                                         | 95,000     |   | $ | 57,000 |   | $ | 86,000 |   |

 

F-18

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Deferredincome taxes reflect the net effect of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of the Company’sdeferred tax assets and liabilities are as follows:

| ** **                            | ** ** | **January 31,** | ** ** |
|---------------------------------------|------------|----------------------|------------|
| ** **                            | ** ** | **2006**             | ** ** | **2007** | ** ** |
| Deferred income tax  assets:          |       |                 |       |   |   |
| Goodwill amortization                 |       | $                    | 305,000    |   | $ | 452,000 |   |
| Depreciation                          |       | 31,000               |       | 99,000 |   |
| Net operating loss carryforwards      |       | 8,240,000            |       | 8,100,000 |   |
| Capital loss carryforwards            |       | 6,115,000            |       | — |   |
| Payroll related and other accruals    |       | 134,000              |       | 47,000 |   |
| Allowance for doubtful accounts       |       | 476,000              |       | 149,000 |   |
| Research and development credits      |       | 996,000              |       | 854,000 |   |
| Reserve for ec-Hub                    |       | 533,000              |       | 544,000 |   |
| Share based compensation              |       | —               |       | 193,000 |   |
| Other, net                            |       | 146,000              |       | 351,000 |   |
| Valuation allowance                   |       | (16,976,000          | )          | (10,789,000 | ) |
| Total deferred income tax assets      |       | —               |       | — |   |
| Deferred income tax  liabilities:     |       |                 |       |   |   |
| Goodwill amortization                 |       | (60,000              | )          | (100,000 | ) |
| Total deferred income tax liabilities |       | (60,000              | )          | (100,000 | ) |
| Net deferred tax  liability           |       | $                    | (60,000    | ) | $ | (100,000 | ) |

 

At January 31, 2007, the Company has recorded a$100,000 deferred tax liability associated with a temporary difference betweenthe book and tax treatment of the approximate $2.3 million of goodwill acquiredin the Vertisoft acquisition. Such goodwill is deductible for tax purposes overa 15-year period, whereas for book purposes it is not amortized butrather 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 cumulativedifference for book purposes, the associated deferred tax liability has notbeen netted against the Company’s deferred tax assets for purposes ofestimating its deferred tax valuation allowance at January 31, 2007.Rather, the associated deferred tax liability has been recorded at its grossvalue until such time that the related temporary difference reverses for bookpurposes, if ever. This amount is included in other long-term liabilities at January 31,2007.

For financial reporting purposes, at January 31,2006 and 2007, a valuation allowance has been recognized to reduce the netdeferred income tax assets to zero. The Company has not recognized any benefitfrom the future use of the deferred tax assets because management’s evaluationof all the available evidence in assessing the realizability of the taxbenefits of such loss carryforwards indicates that the underlying assumptionsof the future profitable operations contain risks that do not providesufficient assurance to recognize such tax benefits currently.

The Company has approximately $31.7 million of netoperating loss carryforwards and $854,000 of research and development creditcarryforwards for federal income tax purposes that expire in various yearsthrough 2025 and 2026, respectively. Prior capital loss carryforwards of $15.2million expired in 2006. In addition, at January 31, 2007 the Company hadnet operating loss carryforwards of approximately $3.5 million resulting fromits European operations. For financial reporting purposes, a valuationallowance has 

F-19

----

**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

been established to offsetthe deferred tax assets related to these carryforwards. The net operating losscarryforwards may be subject to certain limitations in the event of a change ofownership of the Company.

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

The Company has provided avaluation allowance on substantially all of its net deferred tax assets. TheCompany will continue to monitor the realizability of these net deferred taxassets and will reverse some or all of the valuation allowance as appropriate.In making this determination, the Company considers a number of factorsincluding whether there is a historical pattern of consistent and significantprofitability in combination with the Company’s assessment of forecastedprofitability in the future periods. Such patterns and forecasts allow us todetermine whether our most significant deferred tax assets such as netoperating loss and research and development credit carryforwards will morelikely than not be realizable in future years, in whole or in part. Thesedeferred tax assets in particular will require us to generate significanttaxable income in the applicable jurisdictions in future years in order torecognize their economic benefits. At this point, the Company does not believethat it has enough positive evidence to conclude that some or all of thevaluation allowance on deferred tax assets should be reversed. Realization ofthe Company’s capital loss carryforward would further require the generation ofcapital gain income, which management believes to be unlikely prior toexpiration of the federal capital loss carryforward during the upcoming year.However, facts and circumstances could change in future years and at such pointthe Company will reverse the allowance as appropriate.

**8.**                 StockOptions

Effective January 1, 1997, the Company adopted aStock Incentive Plan (the “Plan”) for employees and key persons that providesfor the issuance of stock incentives covering up to 12,500,000 shares of commonstock. The Plan provides for the grant of incentive stock options,non-qualified stock options, restricted stock awards and stock appreciationrights. The terms and conditions of stock incentives granted under the Plan,including the number of shares, the exercise price and the time at which suchoptions become exercisable are determined by the Board of Directors. The termof options granted under the Plan may not exceed 10 years and the optionsgenerally vest over periods ranging from three to five years. Prior to theadoption of the Plan, options which had no termination period were granted tocertain officers and selected employees.

On October 15, 1999, the Company adopted aDirectors’ Stock Option Plan (the “Directors’ Plan”) for directors of theCompany who are not officers or employees of the Company. The Directors’ Planprovides for issuance of options to purchase the Company’s common stock at anexercise price equal to fair market value on the date of grant and expire 10years after issuance. The options are fully vested as of the date of issuance.

F-20

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Asummary of stock option activity is as follows:

| ** **                                            | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Life (in  Years)** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|--------------------------------------------|------------|----------------------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding  options at January 31, 2004         |       | 6,705,533                  |       |                                       | $          | 0.89                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Options granted                                       |       | 956,832                    |       |                                       | $          | 1.19                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Options exercised                                     |       | (403,121                   | )          |                                       | $          | 1.31                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Options canceled/forfeited                            |       | (219,852                   | )          |                                       | $          | 1.95                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Outstanding  options at January 31, 2005         |       | 7,039,392                  |       |                                       | $          | 0.91                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Options granted                                       |       | 670,379                    |       |                                       | $          | 1.12                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Options exercised                                     |       | (581,561                   | )          |                                       | $          | 0.51                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Options canceled/forfeited                            |       | (254,158                   | )          |                                       | $          | 1.82                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Outstanding  options at January 31, 2006         |       | 6,874,052                  |       |                                       | $          | 0.93                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Options granted                                       |       | 899,740                    |       |                                       | $          | 1.39                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Options exercised                                     |       | (755,688                   | )          |                                       | $          | 0.55                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Options canceled/forfeited                            |       | (491,727                   | )          |                                       | $          | 1.38                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Outstanding  options at January 31, 2007         |       | 6,526,377                  |       |                                       | $          | 1.01                                                                 |       |                                |       | 7.18 |   |   |   | $ | 5,140,270 |   |   |
| Exercisable  options at January 31, 2005         |       | 5,399,559                  |       |                                       | $          | 0.91                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Exercisable  options at January 31, 2006         |       | 5,397,020                  |       |                                       | $          | 0.90                                                                 |       |                                |       |   |   |   |   |   |   |   |
| Vested and  expected to vest at January 31, 2007 |       | 6,006,354                  |       |                                       | $          | 0.98                                                                 |       |                                |       | 7.05 |   |   |   | $ | 4,969,900 |   |   |
| Exercisable options at  January 31, 2007         |       | 5,138,468                  |       |                                       | $          | 0.94                                                                 |       |                                |       | 6.79 |   |   |   | $ | 4,666,571 |   |   |

 

Thefollowing table summarizes information concerning options outstanding andexercisable as of January 31, 2007:

| **Options Outstanding**                | ** ** | **Options Exercisable** | ** ** |
|----------------------------------------|------------|-------------------------|------------|
| **Exercise Prices**               | ** ** | ** **              | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| $0.002 - $  0.10             |       | 1,214,900               |       |   | N/A |   |   |   | $ | 0.03 |   |   | 1,214,900 |   |   | $ | 0.03 |   |   |
| $  0.24  - $  0.50 |       | 108,633                 |       |   | 5.28 |   |   |   | $ | 0.29 |   |   | 107,863 |   |   | $ | 0.29 |   |   |
| $  0.51  - $  0.78 |       | 364,510                 |       |   | 6.10 |   |   |   | $ | 0.73 |   |   | 289,110 |   |   | $ | 0.73 |   |   |
| $  0.79  - $  0.80 |       | 2,539,955               |       |   | 1.02 |   |   |   | $ | 0.80 |   |   | 2,539,955 |   |   | $ | 0.80 |   |   |
| $  0.81  - $  1.25 |       | 905,152                 |       |   | 7.88 |   |   |   | $ | 1.11 |   |   | 477,439 |   |   | $ | 1.11 |   |   |
| $  1.26  - $  2.00 |       | 1,281,647               |       |   | 8.00 |   |   |   | $ | 1.43 |   |   | 397,621 |   |   | $ | 1.52 |   |   |
| $  2.01  - $10.00            |       | 64,175                  |       |   | 3.12 |   |   |   | $ | 9.40 |   |   | 64,175 |   |   | $ | 9.40 |   |   |
| $10.01 - $16.00                        |       | 47,405                  |       |   | 1.93 |   |   |   | $ | 15.90 |   |   | 47,405 |   |   | $ | 15.90 |   |   |
|                                   |       | 6,526,377               |       |   | 7.18 |   |   |   | $ | 1.01 |   |   | 5,138,468 |   |   | $ | 0.94 |   |   |

 

F-21

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Otherinformation pertaining to option activity during the years ended January 31,2007 and 2006 was as follows:

| ** **                                                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Weighted average  grant date fair value of stock options granted |       | $        | 1.19       |     | $          | 1.14     |       | $ | 1.15 |   |
| Total fair value  of stock options vested                        |       | $        | 323,599    |     | $          | 436,749  |       | $ | 459,789 |   |
| Total intrinsic value of  stock options exercised                |       | $        | 569,878    |     | $          | 278,066  |       | $ | 277,496 |   |

 

In November 2005, the FASB issued FASB StaffPosition (“FSP”) No. FAS 123(R)-3, Transition Election Related to Accountingfor the Tax Effects of Share-Based Payment Awards (“FSP 123R-3”). We haveelected to adopt the alternative transition method provided in the FSP 123R-3for calculating the tax effects of share-based compensation pursuant to SFAS123R. The alternative transition method includes simplified methods toestablish the beginning balance of the additional paid-in capital pool (“APICpool”) related to the tax effects of employee share-based compensation, and todetermine the subsequent impact on the APIC pool and consolidated statements ofcash flows of the tax effects of employee share-based compensation awards thatare outstanding upon adoption of SFAS 123R.

Prior to the adoption of SFAS 123(R), we presented alltax benefits of deductions resulting from the exercise of stock options asoperating cash flows in the Statement of Cash Flows. SFAS 123(R) requiresthe cash flows resulting from the tax benefits resulting from tax deductions inexcess of the compensation cost recognized for those options (excess taxbenefits) to be classified as financing cash flows.

As of January 31,2007, the Company has reserved 11,029,889 shares of common stock for issuanceupon exercise of stock options under the Plan, 1,088,900 shares of common stockfor issuance upon exercise of stock options outside of the Plan and 230,000shares of common stock for issuance upon exercise of stock options under theDirectors’ Plan.

**9.**                 EmployeeBenefit Plan

The Company has a combinedprofit sharing and 401(k) plan (the “401K Plan”) that covers substantiallyall employees meeting specified age and length-of-service requirements. TheCompany may make a discretionary matching contribution each year. The Companyrecognized expense related to the 401K Plan of approximately $45,000, $129,000and $120,000 during the years ended January 31, 2005, 2006 and 2007,respectively.

**10.   RelatedParty Transactions**

The Company had a note receivable from a shareholderfor general personal purposes of $5,000 at both January 31, 2006 and 2007.

As further described in Note 12, the Company purchasedVertiSoft in August 2004. Barron Hughes, a member of the Company’s Boardof Directors, served as the former Chief Financial Officer of VertiSoft untilits acquisition by the Company. In accordance with the VertiSoft purchaseagreement, 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 repaidMr. Hughes the full amount of the note payable. Further, in connectionwith the acquisition, Mr. Hughes was issued 96,975 options to purchase thecommon stock of the Company.

F-22

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**11.**          IncomePer Share

Income per share has been computed in accordance withSFAS 128, *Earnings per Share*, which requiresdisclosure of basic and diluted earnings per share. Basic earnings per shareexcludes any dilutive effects of stock options. Diluted earnings per shareincludes the impact of potentially dilutive securities.

Thefollowing table sets forth the computation of basic and diluted net income pershare:

| ** **                                                                                     | ** ** | **Year ended January 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** |
| Net income                                                                                     |       | $                                         | 1,653,000  |   | $ | 898,000 |   | $ | 282,000 |   |
| Weighted average  shares outstanding—basic                                                |       | 20,096,877                                |       | 20,992,877 |   | 22,232,347 |   |
| Effect of  dilutive stock options                                                              |       | 3,299,297                                 |       | 2,812,811 |   | 2,570,645 |   |
| Effect of  VertiSoft shares held in escrow                                                     |       | 148,224                                   |       | 310,000 |   | — |   |
| Weighted average  shares outstanding—diluted                                              |       | 23,544,398                                |       | 24,115,688 |   | 24,802,992 |   |
| Income per  share—basic                                                                   |       | $                                         | 0.08       |   | $ | 0.04 |   | $ | 0.01 |   |
| Income per  share—diluted                                                                 |       | $                                         | 0.07       |   | $ | 0.04 |   | $ | 0.01 |   |
| Potentially dilutive  stock options, excluded from diluted weighted average shares outstanding |       | 685,141                                   |       | 990,190 |   | 799,177 |   |

 

**12.**          Acquisitionof VertiSoft Corporation

On August 10,2004, the Company consummated the merger of VertiSoft, a privately held Georgiacorporation, and Optio Software II, Inc., a wholly owned subsidiary of theCompany, whereby VertiSoft became the surviving wholly owned subsidiary of theCompany. Subsequently, on September 15, 2004, VertiSoft was merged withand into the Company, with the Company remaining the surviving corporation. Theconsideration given for all the common stock of VertiSoft included $348,000 incash, the issuance of 1.5 million shares of Optio common stock, of which310,000 shares were held in escrow for a period of 18 months to secure theindemnification obligations of the shareholders of VertiSoft, the issuance ofoptions to purchase 340,000 shares of common stock of the Company to certainformer VertiSoft executives and employees, and conditional cash payments of upto $225,000 to be paid out in various installments over a two year period,contingent upon the achievement of certain customer retention and productdevelopment goals which are included in goodwill when the uncertaintiesassociated with its contingencies are recorded. Two payments of $75,000 eachwere paid in August  2005 and May 2006, for total contingent considerationof $150,000 and $75,000 of additional contingent consideration to be paid wasnot earned. The cash component of the consideration given was paid from fundsgenerated from the on-going operations of the Company. The purchase price is asfollows:

| Cash paid                               |   | $         | 348,000   |   |
|-----------------------------------------|--------|-----------|-----------|--------|
| Cash paid in  contingent payment        |   | 150,000   |      |
| Common stock  issued (1,500,000 shares) |   | 1,690,000 |      |
| Stock options  issued                   |   | 361,000   |      |
| Acquisition costs                       |   | 339,000   |      |
|                                    |   | $         | 2,888,000 |   |

 

F-23

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The value of the common stock issued above was based onthe market price of the Company’s common stock on the date of issuance. The310,000 shares held in escrow were released to the VertiSoft shareholders in February 2006,and the value of the shares based on the market value of the Company’s commonstock on that date was added to goodwill.

The acquired assets consisted primarily of accountsreceivable, 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, salescontracts, service agreements, and purchase orders. In connection with theacquisition, the Company also assumed the liabilities of VertiSoft, consistingprimarily of promissory notes payable with an estimated fair value ofapproximately $1,100,000, accounts payable, accrued payroll, and serviceagreements.

Thepurchase price was allocated to the assets and liabilities assumed based ontheir respective fair values on the date of acquisition as follows:

| Tangible assets  acquired |   | $          | 280,000   |   |
|---------------------------|--------|------------|-----------|--------|
| Liabilities  assumed      |   | (1,932,000 | )         |
| Technology                |   | 893,000    |      |
| Customer  relationships   |   | 1,260,000  |      |
| Non-compete  agreement    |   | 85,000     |      |
| Goodwill                  |   | 2,302,000  |      |
|                      |   | $          | 2,888,000 |   |

 

The technology is being amortized over periods rangingfrom 3 months to 5 years, the customer relationships are being amortized over11 years and the non-compete agreement is being amortized over 5 years.

Theresults of operations of VertiSoft have been included in the Company’sconsolidated condensed financial statements from the date of the acquisition, August 10,2004. The following unaudited pro forma financial information presents thecombined results of operations of VertiSoft and Optio as though the acquisitionhad occurred at the beginning of the period presented. The pro forma financialinformation does not necessarily represent the results of operations that wouldhave occurred had VertiSoft and Optio been a single company during the periodpresented, nor does the Company believe that the pro forma financialinformation presented is necessarily representative of future operatingresults.

| ** **                                        | ** ** | **Year Ended  January 31,  2005** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| Revenue                                           |       | $                                           | 29,530,000 |   |
| Net income                                        |       | $                                           | 1,711,000  |   |
| Net income per  share—basic                  |       | $                                           | 0.08       |   |
| Net income per  share—diluted                |       | $                                           | 0.07       |   |
| Weighted average  shares outstanding—basic   |       | 20,717,888                                  |       |
| Weighted average shares  outstanding—diluted |       | 24,327,185                                  |       |

 

VertiSoft provides document management solutionsdesigned to streamline information access and distribution for physicians andclinical, medical records and financial services staff through a singleinterface or Composite Patient ViewTM. Its patented electronic documentmanagement system, 

F-24

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

QuickRecord, providessecure, individualized access to patient information retrieved from any system,inside or outside a business enterprise. The primary reasons for theacquisition were that the QuickRecord product broadens the Company’s portfolioof healthcare solutions and establishes a subscription-based licensing modelfor a new line of solutions.

In connection with thetransaction described above, the Company entered into a three-year employment agreementwith Donald H. French, VertiSoft’s former President and CEO. Mr. Frenchserves as Senior Vice President of Research and Development for the Company. Mr. French’semployment agreement provides for a base salary of $200,000, and an option toacquire 350,000 shares of common stock at $1.10 per share (the “Options”). TheOptions vest over a period of four years. Upon Mr. French’s resignationfor good reason, or termination without cause, as such terms are defined in theemployment agreement, the Company will be obligated to pay him his then-currentbase salary for the remaining term of the employment agreement. If Mr. French’semployment is terminated by reason of disability occurring in the performanceof his duties, he will receive his base salary for 12 months less any paymentsmade to him under any long-term or short-term disability insurance policies. IfMr. French is terminated for cause, including resignation, or the mutualconsent of the parties, he will receive no severance. Mr. French’s employmentagreement includes post-employment restrictive covenants not to compete,solicit the Company’s customers or recruit the Company’s employees.

**13.**          Segmentand Geographic Information

The Company’s segments are organized around geographiclocations. The Company’s U.S. operations and European operations represent theCompany’s two reportable segments. The foreign locations principally functionas distributors of products developed by the Company in the United States. Theaccounting policies as described in the summary of significant accountingpolicies are applied consistently across the segments. Intersegment sales arebased on intercompany transfer prices to achieve a reasonable margin upondistribution. Revenues are attributable to each segment based on the locationof the subsidiary originating the sale, which is typically the geographiclocation where the software is installed.

F-25

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Segmentinformation as of and for the years ended January 31, 2005, 2006 and 2007is summarized below.****

| **Year ended January 31, 2005** | ** ** | ** ** | ** ** | **United States** | ** ** | **Europe** | ** ** | **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        |       |
| Goodwill                                            |       | 1,454,000  |       | 294,000                |       | 1,748,000  |       | —       |       | 1,748,000        |       |
| Total segment  assets                               |       | 16,892,000 |       | 3,690,000              |       | 20,582,000 |       | (3,087,000   | )          | 17,495,000       |       |
| Expenditures for  long-lived assets                 |       | 773,000    |       | 45,000                 |       | 818,000    |       | —       |       | 818,000          |       |
|                                                     |            |            |            |                        |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

| **Year ended January 31, 2006** | ** ** | ** ** | ** ** | **United States** | ** ** | **Europe** | ** ** | **Combined** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------------------|------------|------------|------------|--------------|------------|------------------|------------|------------------|------------|
| Revenue from  external customers:                   |       |       |       |                   |       |       |       |         |       |             |       |
| License fees                                        |       | $          | 7,993,000  |                   | $          | 1,965,000  |       | $            | 9,958,000  |             | $          | —           |       | $ | 9,958,000 |   |
| Subscription fees                                   |       | 2,125,000  |       | 40,000                 |       | 2,165,000  |       | —       |       | 2,165,000        |       |
| Services, maintenance and other                     |       | 14,795,000 |       | 2,703,000              |       | 17,498,000 |       | —       |       | 17,498,000       |       |
| Intersegment  revenue                               |       | 351,000    |       | 120,000                |       | 471,000    |       | (471,000     | )          | —           |       |
| Total revenue                                       |       | 25,264,000 |       | 4,828,000              |       | 30,092,000 |       | (471,000     | )          | 29,621,000       |       |
| Interest income                                     |       | 269,000    |       | —                 |       | 269,000    |       | —       |       | 269,000          |       |
| Interest expense                                    |       | 14,000     |       | —                 |       | 14,000     |       | —       |       | 14,000           |       |
| Depreciation and  amortization                      |       | 824,000    |       | 37,000                 |       | 861,000    |       | —       |       | 861,000          |       |
| Income tax  expense                                 |       | 52,000     |       | 5,000                  |       | 57,000     |       | —       |       | 57,000           |       |
| Segment income  (loss) before income taxes     |       | 1,214,000  |       | (259,000               | )          | 955,000    |       | —       |       | 955,000          |       |
| Segment net  income (loss)                          |       | 1,162,000  |       | (264,000               | )          | 898,000    |       | —       |       | 898,000          |       |
| Goodwill                                            |       | 1,552,000  |       | 294,000                |       | 1,846,000  |       | —       |       | 1,846,000        |       |
| Total segment  assets                               |       | 19,333,000 |       | 3,788,000              |       | 23,121,000 |       | (3,423,000   | )          | 19,698,000       |       |
| Expenditures for  long-lived assets                 |       | 407,000    |       | 63,000                 |       | 470,000    |       | —       |       | 470,000          |       |
|                                                     |            |            |            |                        |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

F-26

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

| **Year ended January 31, 2007** | ** ** | ** ** | ** ** | **United States** | ** ** | **Europe** | ** ** | **Combined** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------------------|------------|------------|------------|--------------|------------|------------------|------------|------------------|------------|
| Revenue from  external customers:                   |       |       |       |                   |       |       |       |         |       |             |       |
| License fees                                        |       | $          | 6,153,000  |                   | $          | 1,565,000  |       | $            | 7,718,000  |             | $          | —           |       | $ | 7,718,000 |   |
| Subscription fees                                   |       | 2,312,000  |       | 41,000                 |       | 2,353,000  |       | —       |       | 2,353,000        |       |
| Services, maintenance and other                     |       | 15,289,000 |       | 3,317,000              |       | 18,606,000 |       | —       |       | 18,606,000       |       |
| Intersegment  revenue                               |       | 395,000    |       | 90,000                 |       | 485,000    |       | (485,000     | )          | —           |       |
| Total revenue                                       |       | 24,149,000 |       | 5,013,000              |       | 29,162,000 |       | (485,000     | )          | 28,677,000       |       |
| Interest income                                     |       | 431,000    |       | —                 |       | 431,000    |       | —       |       | 431,000          |       |
| Interest expense                                    |       | 13,000     |       | —                 |       | 13,000     |       | —       |       | 13,000           |       |
| Depreciation and  amortization                      |       | 875,000    |       | 41,000                 |       | 916,000    |       | —       |       | 916,000          |       |
| Income tax  expense                                 |       | 85,000     |       | 1,000                  |       | 86,000     |       | —       |       | 86,000           |       |
| Segment income  (loss) before income taxes     |       | 724,000    |       | (356,000               | )          | 368,000    |       | —       |       | 368,000          |       |
| Segment net  income (loss)                          |       | 639,000    |       | (357,000               | )          | 282,000    |       | —       |       | 282,000          |       |
| Goodwill                                            |       | 2,008,000  |       | 294,000                |       | 2,302,000  |       | —       |       | 2,302,000        |       |
| Total segment  assets                               |       | 22,438,000 |       | 4,187,000              |       | 26,625,000 |       | (3,688,000   | )          | 22,937,000       |       |
| Expenditures for  long-lived assets                 |       | 1,526,000  |       | 180,000                |       | 1,706,000  |       | —       |       | 1,706,000        |       |
|                                                     |            |            |            |                        |            |            |            |              |            |                  |            |                  |            |  |  |  |  |  |

 

**14.**          QuarterlyFinancial Results (Unaudited)

Summarized unaudited quarterly results for the yearsended January 31, 2006 and 2007 were as follows (in thousands, except pershare data):

| **For the year ended January 31, 2006** | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter** | ** ** | **Fourth  Quarter** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|--------------------|------------|---------------------|------------|
| Revenue                                                               |       |       | $          | 6,916              |       |                |       | $                  | 7,379      |                |       |   | $ | 7,080 |   |   |   | $ | 8,246 |   |   |
| Cost of revenue,  exclusive of depreciation and amortization          |       |       | 1,797      |               |       |                | 1,736      |               |       |                | 1,796      |   |   |   | 1,850 |   |   |
| Income (loss)  before interest and taxes                              |       |       | (125       | )                  |       |                | 209        |               |       |                | (38        | ) |   |   | 669 |   |   |
| Net income (loss)                                                     |       |       | (90        | )                  |       |                | 244        |               |       |                | 6          |   |   |   | 738 |   |   |
| Net income per  share—basic                                      |       |       | $          | 0.00               |       |                |       | $                  | 0.01       |                |       |   | $ | 0.00 |   |   |   | $ | 0.03 |   |   |
| Net income per  share—diluted                                    |       |       | $          | 0.00               |       |                |       | $                  | 0.01       |                |       |   | $ | 0.00 |   |   |   | $ | 0.03 |   |   |

 

| **For the year ended January 31, 2007** | ** ** | ** ** | ** ** | **First  Quarter** | ** ** | **Second  Quarter** | ** ** | **Third  Quarter(1)** | ** ** | **Fourth  Quarter** | ** ** |
|-----------------------------------------------------------------------|------------|------------|------------|--------------------|------------|---------------------|------------|-----------------------|------------|---------------------|------------|
| Revenue                                                               |       |       | $          | 6,862              |       |                |       | $                     | 6,768      |                |       |   | $ | 7,574 |   |   |   | $ | 7,473 |   |   |
| Cost of revenue,  exclusive of depreciation and amortization          |       |       | 1,809      |               |       |                | 1,790      |                  |       |                | 1,942      |   |   |   | 1,950 |   |   |
| Income (loss)  before interest and taxes                              |       |       | (38        | )                  |       |                | (414       | )                     |       |                | 1,107      |   |   |   | (288 | ) |   |
| Net income (loss)                                                     |       |       | (54        | )                  |       |                | (450       | )                     |       |                | 1,088      |   |   |   | (303 | ) |   |
| Net income (loss)  per share—basic                               |       |       | $          | 0.00               |       |                |       | $                     | (0.02      | )                   |       |   | $ | 0.05 |   |   |   | $ | (0.01 | ) |   |
| Net income (loss) per  share—diluted                             |       |       | $          | 0.00               |       |                |       | $                     | (0.02      | )                   |       |   | $ | 0.04 |   |   |   | $ | (0.01 | ) |   |

----

(1)          Includesthe adjustment of $900,000 for reversal of the valuation reserve on M2 Systemsnote which reduced third quarter operating expenses.

**15.**          ShareRepurchase Plan

On January 5,2007, Optio announced a share repurchase plan under which we could repurchaseup to $2.0 million of our common stock over a twelve-month period. Duringfiscal 2007, we purchased a total of 

F-27

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

40,000 shares at an average purchase price of $1.50per share, or approximately $60,000 in the aggregate. The repurchased shareswere held and not cancelled. As of January 31, 2007, the dollar value ofshares that remained available for repurchase under this program wasapproximately $1,940,000. The repurchases for the fiscal year ended January 31,2007 are reflected in the following table:

| ** **                   | ** ** | ** **            | ** ** | ** **             | ** ** | **Total Shares**          | ** ** | **Approximate Dollar Value**         | ** ** |
|------------------------------|------------|-----------------------|------------|------------------------|------------|--------------------------------|------------|------------------------------------------------|------------|
| ** **                   | ** ** | **Total Number** | ** ** | **Average Price** | ** ** | **Purchased As**          | ** ** | **of Shares That May Yet** | ** ** |
| ** **                   | ** ** | **Of Shares**    | ** ** | **Paid Per**      | ** ** | **Part of Publicly** | ** ** | **Be Repurchased Under**             | ** ** |
| **Period**                   | ** ** | ** **            | ** ** | **Purchased**          | ** ** | **Share**                      | ** ** | **Announced Plan**                        | ** ** | **The Program** | ** ** |
| 1/1/2007 – 1/31/2007(1) |       |                  | 40,000     |                   |       |                           | $          | 1.50                                           |       |   |   | 40,000 |   |   |   | $ | 1,940,000 |   |   |   |
|                              |            |                       |            |                        |            |                                |            |                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Lastrepurchase date was January 31, 2007.

**16.**          Contingencies

On November 13, 2001, a lawsuit styled KevinDewey vs. Optio Software, Inc., et. al. was filed in the United StatesDistrict Court for the Southern District of New York. The complaint was filedagainst the underwriters in the Company’s initial public offering as well asOptio and certain officers and directors of Optio, by a single plaintiffpurportedly on behalf of persons purchasing Optio’s common stock between December 14,1999 and December 6, 2000. The lawsuit also seeks class action status.Optio is a co-defendant with approximately 300 other issuers in this suit. Thecomplaint includes allegations of violations of (i) Section 11 of theSecurities Act of 1933, as amended (the “Securities Act”), by all nameddefendants, (ii) Section 12(a)(2) of the Securities Act by theunderwriter defendants, (iii) Section 15 of the Securities Act by theindividual defendants, and (iv) Section 10(b) of the SecuritiesExchange Act of 1934, as amended, and Rule 10b-5 promulgatedthereunder by the underwriter defendants. The complaint alleges that Optio’sprospectus was materially false and misleading because it failed to disclose,among other things, that: (i) the underwriters had solicited and receivedexcessive and undisclosed commissions from certain investors in exchange forwhich the underwriters allocated to those investors material portions of alimited number of Optio shares issued in connection with the Optio initialpublic offering; and (ii) the underwriters had entered into agreementswith customers whereby the underwriters agreed to allocate Optio shares tothose customers in the Optio initial public offering in exchange for which thecustomers agreed to purchase additional Optio shares in the aftermarket atpre-determined prices. The complaint seeks unspecified amounts as compensatorydamages as a result of Optio’s alleged actions, as well as punitive damages andreimbursement for the plaintiffs’ attorneys’ fees and associated costs andexpenses of the lawsuit. A proposal to settle the claims against Optio andother companies and individual defendants in the litigation was conditionallyaccepted by Optio. The completion of the settlement is subject to a number ofconditions, including Court approval. The Court preliminarily approved thesettlement on February 15, 2005, subject to certain modifications whichare currently pending approval by the defendants. Under the settlement, theplaintiffs will dismiss and release all claims against participating defendantsin exchange for a contingent payment guaranty by the insurance companiescollectively responsible for insuring the issuers in the action. Optio maystill have yet undetermined exposure to the underwriters pursuant to indemnificationprovisions in the underwriting agreement entered into at the time of theinitial public offering. Under the guaranty, all of the insurers for all theissuers will be required to pay an amount equal to $1.0 billion less anyamounts ultimately collected by the plaintiffs from the underwriter defendantsin all of the pending cases. A settlement fairness hearing was held on April 24,2006, however no ruling has been issued yet by the Court. There can be noassurance that this proposed settlement will be approved and implemented in itscurrent form, or at all. On December 5, 2006, the United States Court ofAppeals for 

F-28

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**OPTIO SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

the Second Circuitoverturned the District Court’s certification of the class of plantiffs who arepursuing the claims that would be settled in the settlement against theunderwriter defendants. Plantiffs filed a Petition for Rehearing and RehearingEn Banc with the Second circuit on January 5, 2007 in response to theSecond Circuit’s decision. The Petition for Rehearing and Rehearing En Banc wasdenied on April 6, 2007. Plaintiffs have informed the District Court thatthey would like to be heard as to whether the settlement may still be approvedeven though the Petition for Rehearing was denied. The District Court indicatedthat it would defer consideration of final approval of the settlement pendingplantiffs’ request for further appellate review. The disposition of this matteris limited to Optio’s $300,000 corporate insurance deductible. The Company hascompleted payment of the insurance deductible through payment of legal fees.Optio will have no additional exposure unless the insurance companies becomeinsolvent or unless Optio’s liability exceeds its policy limits through thismatter or other matters. Optio’s insurance companies currently have an A or AArating. The range of loss, if any, cannot be estimated and thus no potentialloss is reflected in Optio’s consolidated financial statements.

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

In addition, Optio isparty to routine litigation or administrative proceedings incidental to itsbusiness, none of which is believed by the Company to be likely to have amaterial effect on the financial condition, results of operations or liquidityof the Company.

**Indemnification**

Most of the Company’s softwarelicense agreements indemnify our customers in the event that the software soldinfringes upon the intellectual property rights of a third party. Theseagreements typically provide that in such event, Optio will either modify orreplace the software so that it becomes non-infringing or procure for thecustomer the right to use the software. The Company has recorded no liabilityassociated with these indemnifications, as management is not aware of anypending or threatened infringement actions that are possible losses. Optiobelieves the estimated fair value of these intellectual propertyindemnification clauses is minimal.

F-29

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**OptioSoftware, Inc.**

**ScheduleII—Valuation and Qualifying Accounts**

| ** **                                                         | ** ** | **Balance at  Beginning of  Period** | ** ** | **Charged to  Costs and  Expenses(a)** | ** ** | **Deductions** | ** ** | **Balance at  End of  Period(a)** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------|------------|----------------|------------|---------------------------------------------|------------|
| Year ended  January 31, 2005  Allowance for doubtful accounts |       | $                                              | 1,479,000  |                                             |       | $              | 67,000     |                                        |       | $ | (137,000 | ) | $ | 1,409,000 |   |
| Year ended January 31, 2006  Allowance for doubtful accounts  |       | $                                              | 1,409,000  |                                             |       | $              | 30,000     |                                        |       | $ | (58,000 | ) | $ | 1,381,000 |   |
| Year ended  January 31, 2007  Allowance for doubtful accounts |       | $                                              | 1,381,000  |                                             |       | $              | (763,000   | )                                           |       | $ | (236,000 | ) | $ | 382,000 |   |

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(a)           Includes a combinationof the allowance for doubtful accounts and the impairment reserve reversal in2007 of $900,000 related to the note receivable from M2 Systems.

S-1

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**EXHIBITINDEX**
| 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).                                                                                                                                                 |
| 2.4  |   | Amendment No. 1 to Agreement and Plan of  Reorganization, dated as of August 1, 2005, by and among Optio Software, Inc.,  Optio Software II, Inc., by Optio as a successor-in-interest, VertiSoft  Corporation, by Optio as a successor-in-interest, and Donald H. French, on  behalf of himself on behalf of all the Other Shareholders (incorporated by  reference to Exhibit 2.1 to Form 10-Q filed December 15,  2005). |
| 2.5  |   | Amendment No. 2 to Agreement and Plan of  Reorganization, by and among Optio Software, Inc., Optio Software  II, Inc., VertiSoft Corporation and Shareholders of Vertisoft  Corporation, dated May 19, 2006 (incorporated by reference to  Exhibit 2.1 to Form 10-Q filed June, 14,2006).                                                                                                                                        |
| 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 |   | Amendment No. 2 to Optio Software, Inc.  Outside Directors’ Stock Option Plan, dated as of November 2, 2005  (incorporated by reference to Exhibit 10.1 to Form 8-K filed  November 8, 2005)                                                                                                                                                                                                                           |
| 10.6 |   | 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).                                                                                                                                                                                                                                            |
| 10.7 |   | Office Lease Agreement between Gateway  Windward, Inc., as landlord, and Optio Software, Inc. as tenant,  dated December 21, 2005 (incorporated by reference to Exhibit 10.1  to Form 8-K filed December 23, 2005).                                                                                                                                                                                                              |
| 10.8 |   | 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).                                                                                                                                                                                                                                 |

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| 10.9  |   | 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). |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10 |   | 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).                                                                                   |
| 10.11 |   | M2 Systems Corporation $750,000 Non-Negotiable  Promissory Note (incorporated by reference to Exhibit 10.4 to  Form 10-Q filed December 14, 2001).                                                                                     |
| 10.12 |   | 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).                                                                    |
| 10.13 |   | Amended and Restated Loan and Security Agreement,  dated April 26, 2007, by and between Silicon Valley Bank and Optio  Software, Inc.                                                                                                       |
| 10.14 |   | 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).                                     |
| 10.15 |   | 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)                                                |
| 10.16 |   | 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)                                          |
| 10.17 |   | 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)                                                     |
| 10.18 |   | 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)                                                    |
| 10.19 |   | 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)                                                      |
| 10.20 |   | 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).                            |
| 10.21 |   | Employment Agreement, dated as of August 10,  2004, by and between Optio Software, Inc. and Donald H. French  (incorporated by reference to Exhibit 2.2 to Form 8-K filed  August 13, 2004).                            |
| 10.22 |   | Letter Agreement dated June 23, 2006 between  Optio Software, Inc. and Chris Beecroft (incorporated by reference to  Exhibit 10.1 to Form 8-K filed June 27, 2006).                                                          |
| 10.23 |   | Letter Agreement dated June 23, 2006 between  Optio Software, Inc. and Michael McGuire (incorporated by reference to  Exhibit 10.1 to Form 8-K filed June 27, 2006).                                                         |
| 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.                                                                                                                                        |
| 32.1  |   | Certification by CEO pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                             |
| 32.2  |   | Certification by CFO pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                            |

 

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