UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended July 31, 2007

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

For the transition period from to

Commission File Number: 1-15529

OPTIO SOFTWARE, INC.

(Exact name of registrant as specified in its charter)

Georgia		58-1435435
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

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

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

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

There were 22,085,529 shares of the Registrant’s common stock outstanding as of September 10, 2007.

OPTIO SOFTWARE, INC.

FORM 10-Q

For the Quarterly Period Ended July 31, 2007

TABLE OF CONTENTS



PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings
Item 1A.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q for the quarter ended July 31, 2007 contains forward-looking statements that involve risks and uncertainties. Such forward-looking statements are made pursuant to the “safe-harbor” provisions of the Private Securities Litigation Reform Act of 1995 and are made based on management’s current expectations or beliefs as well as assumptions made by, and information currently available to, management. These forward-looking statements include, among other things, statements regarding Optio Software, Inc.’s (“we”, “us”, “our”, the “Company” or “Optio”) anticipated costs and expenses, Optio’s capital needs and financing plans, product and service development, Optio’s growth strategies, integration of acquired entities, market demand for Optio’s products and services, relationships with Optio’s strategic marketing alliances, and competition. These forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes,” “may,” “plan,” “could,” “should,” “will,” and similar language. You are cautioned not to place undue reliance on the forward-looking statements in this document, which speak only as of the date of this Quarterly Report on Form 10-Q. Optio undertakes no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this Form 10-Q. Optio’s actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, risks associated with Optio’s reliance on strategic marketing and reseller relationships, collectibility of accounts receivable, fluctuations in operating results, failure to integrate new products and newly acquired companies, diversion of management resources relating to acquisitions or divestitures, reduction in cash reserves relating to acquisitions or the share repurchase program, challenges relating to acquisitions or divestitures and the possibility that this may cause Optio to no longer be profitable, the negative effect on Optio’s earnings relating to the amortization or potential write-down of acquired assets or goodwill, failure to retain the business relationships with existing customers from acquisitions, changes in competition, changes in economic conditions in the U.S. and in other countries in which Optio currently does business (both general and relative to the technology industry), delays or inability to develop new or unique software products, market acceptance of new products, the failure of new products to operate as anticipated, expectation of achieving and sustaining operating profits and earnings, including timing of such cash flows and company performance, disputes regarding Optio’s intellectual property, risks relating to the delisting of Optio’s stock, possible adverse results of pending or future litigation, or risks associated with Optio’s international operations. These and additional factors are set forth in Item 1A of Optio’s Annual Report on Form 10-K for the fiscal year ended January 31, 2007 (the “2007 Annual Report”), filed with the Securities and Exchange Commission (“SEC”) on May 1, 2007. You should carefully review the risk factors in the 2007 Annual Report and any additional risks described in other documents that Optio files from time to time with the SEC.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Optio Software, Inc.

Consolidated Condensed Balance Sheets

	January 31, 2007			July 31, 2007
				(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	11,948,000		$	9,420,000
Accounts receivable, net	3,903,000			3,238,000
Prepaid expenses and other current assets	723,000			878,000
Notes receivable from related party	5,000			5,000
Total current assets	16,579,000			13,541,000
Property and equipment, net	2,714,000			2,652,000
Other assets:
Goodwill	2,302,000			2,302,000
Other intangible assets, net	1,250,000			1,100,000
Other	92,000			96,000
Total assets	$	22,937,000		$	19,691,000
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,088,000		$	868,000
Accrued expenses	1,755,000			1,261,000
Current portion of lease incentive liability	122,000			122,000
Current portion of capital lease obligations	78,000			53,000
Deferred revenue	7,439,000			7,215,000
Total current liabilities	10,482,000			9,519,000

Long-term portion of lease incentive liability	806,000			744,000
Long-term portion of capital lease obligations	300,000			331,000
Long-term accrued rent payable	526,000			748,000
Other long-term liabilities	103,000			138,000
Total liabilities	12,217,000			11,480,000
Commitments and contingencies
Shareholders’ equity:
Common stock	53,787,000			53,514,000
Accumulated deficit	(43,251,000		)	(45,566,000		)
Accumulated other comprehensive income	184,000			263,000
Total shareholders’ equity	10,720,000			8,211,000
Total liabilities and shareholders’ equity	$	22,937,000		$	19,691,000

See accompanying notes.

Optio Software, Inc.

Consolidated Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

	Three Months Ended July 31,
	2006			2007
Revenue:
License fees	$	1,643,000		$	1,536,000
Subscription fees	560,000			633,000
Services, maintenance, and other	4,565,000			4,445,000
	6,768,000			6,614,000
Costs of revenue (exclusive of depreciation and amortization shown separately below):
License fees	146,000			124,000
Services, maintenance, and other	1,644,000			1,711,000
	1,790,000			1,835,000
	4,978,000			4,779,000
Operating expenses:
Sales and marketing	2,543,000			2,808,000
Research and development	1,375,000			1,401,000
General and administrative	1,380,000			1,533,000
Depreciation and amortization	200,000			273,000
	5,498,000			6,015,000
Loss from operations	(520,000		)	(1,236,000		)
Other income (expense):
Interest income	113,000			111,000
Interest expense	(2,000		)	(8,000		)
Other	(5,000		)	1,000
	106,000			104,000

Loss before income taxes	(414,000		)	(1,132,000		)
Income tax expense	36,000			13,000
Net loss	$	(450,000	)	$	(1,145,000	)
Net loss per share – basic and diluted	$	(0.02	)	$	(0.05	)
Weighted average common shares outstanding – basic and diluted	22,223,643			22,325,214
Comprehensive income (loss):
Net loss	$	(450,000	)	$	(1,145,000	)
Foreign currency translation adjustment	18,000			(5,000		)
Comprehensive loss	$	(432,000	)	$	(1,150,000	)

See accompanying notes.

Optio Software, Inc.

Consolidated Condensed Statements of Operations and Comprehensive Loss

(Unaudited)

	Six Months Ended July 31,
	2006			2007
Revenue:
License fees	$	3,541,000		$	2,819,000
Subscription fees	1,115,000			1,243,000
Services, maintenance, and other	8,974,000			8,819,000
	13,630,000			12,881,000
Costs of revenue (exclusive of depreciation and amortization shown separately below):
License fees	278,000			226,000
Services, maintenance, and other	3,321,000			3,382,000
	3,599,000			3,608,000
	10,031,000			9,273,000
Operating expenses:
Sales and marketing	5,082,000			5,639,000
Research and development	2,697,000			2,830,000
General and administrative	2,522,000			2,756,000
Depreciation and amortization	384,000			536,000
	10,685,000			11,761,000
Loss from operations	(654,000		)	(2,488,000		)
Other income (expense):
Interest income	209,000			227,000
Interest expense	(3,000		)	(12,000		)
Other	(4,000		)	—
	202,000			215,000

Loss before income taxes	(452,000		)	(2,273,000		)
Income tax expense	52,000			42,000
Net loss	$	(504,000	)	$	(2,315,000	)
Net loss per share – basic and diluted	$	(0.02	)	$	(0.10	)
Weighted average common shares outstanding – basic and diluted	22,036,310			22,404,793
Comprehensive income (loss):
Net loss	$	(504,000	)	$	(2,315,000	)
Foreign currency translation adjustment	67,000			79,000
Comprehensive loss	$	(437,000	)	$	(2,236,000	)

See accompanying notes.

Optio Software, Inc.

Consolidated Condensed Statement of Shareholders’ Equity

(Unaudited)

	Common Stock									Accumulated Other		Total
	Common		Treasury				Accumulated			Comprehensive		Shareholder’s
	Shares		Shares	Amount			Deficit			Income		Equity

Balance at February 1, 2007	22,461,514		40,000	$	53,787,000		$	(43,251,000	)	$	184,000	$	10,720,000
Comprehensive loss, net of tax:
Net loss	—		—	—			(2,315,000		)	—		(2,315,000			)
Foreign currency translation adjustment	—		—	—			—			79,000		79,000
Comprehensive loss												(2,236,000			)
Treasury shares acquired	(373,200	)	373,200	(530,000		)						(530,000			)
Exercise of stock options	73,865			17,000			—			—		17,000
Compensation expense related to stock options	—		—	240,000			—			—		240,000
Balance at July 31, 2007	22,162,179		413,200	$	53,514,000		$	(45,566,000	)	$	263,000	$		8,211,000

See accompanying notes.

Optio Software, Inc.

Consolidated Condensed Statements of Cash Flows

(Unaudited)

	Six Months Ended July 31,
	2006			2007
Cash flows from operating activities:
Net loss	$	(504,000	)	$	(2,315,000	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation	192,000			386,000
Amortization of intangibles	192,000			150,000
Non-cash stock compensation	198,000			239,000
Loss on disposal of assets	2,000			10,000
Provision for doubtful accounts	20,000			—
Deferred income taxes	50,000			36,000
Changes in operating assets and liabilities:
Accounts receivable	1,607,000			738,000
Prepaid expenses and other assets	(141,000		)	(150,000		)
Accounts payable	(75,000		)	(244,000		)
Accrued expenses	(704,000		)	(347,000		)
Income taxes payable	(53,000		)	(20,000		)
Deferred revenue	(238,000		)	(298,000		)
Net cash provided by (used in) operating activities	546,000			(1,815,000		)

Cash flows from investing activities:
Purchases of property and equipment	(482,000		)	(270,000		)
Payment in connection with the purchase of VertiSoft	(75,000		)	—
Repayment of note receivable from M2 Systems	147,000			—
Net cash used in investing activities	(410,000		)	(270,000		)

Cash flows from financing activities:
Payments of notes payable and capital lease obligations	(3,000		)	(37,000		)
Proceeds from exercise of stock options	300,000			17,000
Purchases of treasury stock	—			(529,000		)
Net cash provided by (used in) financing activities	297,000			(549,000		)

Impact of foreign currency rate fluctuations on cash	86,000			106,000
Net increase (decrease) in cash and cash equivalents	519,000			(2,528,000		)

Cash and cash equivalents at beginning of period	7,954,000			11,948,000
Cash and cash equivalents at end of period	$	8,473,000		$	9,420,000

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid	$	3,000		$	11,000
Income taxes paid	$	6,000		$	8,000

See accompanying notes.

Optio Software, Inc.

Notes to the Consolidated Condensed Financial Statements

(Unaudited)

1. Description of Business

Optio Software, Inc. (“we,” “us,” “our,” the “Company” or “Optio”), provides document automation and electronic health record solutions that enable organizations 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 Company markets primarily to companies located principally in the United States and Europe. The industry in which the Company operates is subject to rapid change due to development of new technologies and products.

2. Basis of Presentation

Interim Financial Information

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

The accompanying financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended January 31, 2007, included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2007 (the “2007 Annual Report”), filed with the Securities and Exchange Commission on May 1, 2007. Results of operations for the three and six months ended July 31, 2007 are not necessarily indicative of the results for the year ending January 31, 2008.

Share-Based Compensation Plans

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, Share-Based Payment, which requires measurement of the cost of share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005. Effective February 1, 2006, the Company has adopted SFAS No. 123R using the modified prospective method. Under this method, compensation cost recognized for periods subsequent to February 1, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of February 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 amortized over the employees’ service period (typically the options’ vesting period) and (b) compensation cost for all share-based payments granted subsequent to February 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123R amortized ratably over the options’ vesting period.

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

time that they are expected to be outstanding. The Company determines the expected life using the “simplified method” in accordance with Staff Accounting Bulletin No. 107. Using the Black-Scholes option valuation model, the Company estimates the volatility of our common stock at the date of grant based on the historical volatility of our common stock. Optio bases the risk-free interest rate used in the Black-Scholes option valuation model on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term equal to the expected life of the award. Optio has not paid any cash dividends on our common stock in the last ten years and we do not anticipate paying any cash dividends in the foreseeable future. Consequently, the Company used an expected dividend yield of zero in the Black-Scholes option valuation model. Finally, the Company uses historical data to estimate pre-vesting option forfeitures. Stock-based compensation is recorded for only those awards that are expected to vest. The following weighted-average assumptions were used for the three and six months ended July 31, 2007: risk-free interest rate of 5.03% and 4.73%; no dividend yield; volatility of 113% and 118%; a forfeiture rate of 23.2% and 23.2%; and an expected life of the options of 5.3 and 5.2 years.

A summary of stock option activity for the six months ended July 31, 2007 is as follows:

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in Years)	Aggregate Intrinsic Value
Outstanding options at February 1, 2007	6,526,377		$	1.01
Options granted	95,000		$	1.54
Options exercised	(73,865	)	$	0.26
Options canceled/forfeited	(80,317	)	$	5.21
Outstanding options at July 31, 2007	6,467,195		$	0.97	6.57	$	5,906,883
Exercisable options at July 31, 2007	5,314,685		$	0.91	6.22	$	5,359,488

Other information pertaining to option activity during the six months ended July 31, 2007 and 2006 was as follows:

	2007		2006

Weighted average grant date fair value of stock options granted	$	1.28	$	1.20
Total fair value of stock options vested	$	128,500	$	171,887
Total intrinsic value of stock options exercised	$	101,736	$	456,462

The following table summarizes information concerning options outstanding and exercisable as of July 31, 2007:

Options Outstanding					Options Exercisable
Exercise Prices	Number of Shares	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number of Shares	Weighted Average Exercise Price

$0.002 - $0.05	1,064,900	N/A	$	0.03	1,064,900	$	0.03
$0.10 - $0.78	547,195	6.60	$	0.55	509,695	$	0.53
$0.80 - $0.80	2,535,555	0.53	$	0.80	2,535,555	$	0.80
$0.91 - $1.09	45,330	7.71	$	1.00	35,296	$	0.98
$1.10 - $1.10	715,500	7.11	$	1.10	380,252	$	1.10
$1.12 - $1.32	676,282	8.44	$	1.29	307,101	$	1.29
$1.35 - $1.50	659,160	7.42	$	1.47	283,613	$	1.48
$1.55 - $10.00	196,247	5.79	$	4.24	171,247	$	4.63
$12.50 - $12.50	1,300	2.67	$	12.50	1,300	$	12.50
$16.00 - $16.00	25,726	2.41	$	16.00	25,726	$	16.00
	6,467,195	6.57	$	0.97	5,314,685	$	0.91

Goodwill and Other Intangible Assets

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

As of July 31, 2007, the gross carrying amount and the accumulated amortization by major intangible asset class is as follows:

Intangible Asset	Estimated Useful Life	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
Customer relationships	11.5 years	$	1,260,000	$	488,000	$	772,000
Technology	3 months – 5 years	893,000		599,000		294,000
Non-compete agreement	5 years	85,000		51,000		34,000

Non-Cash Transactions

During the second quarter of the prior fiscal year, Optio entered into a capital lease for telephone equipment in the amount of $422,000. In addition, Optio renegotiated the lease for its headquarter facilities. As part of the new lease agreement, the landlord contributed $1.0 million towards the improvements of the space. This $1.0 million in leasehold improvements was capitalized as property and equipment with an offsetting lease incentive liability of $1.0 million, which will reduce future rent expense, and was recorded as a liability on Optio’s condensed consolidated balance sheet. The liability has been amortized to a current balance of $866,000 as of July 31, 2007. During the second quarter of the current fiscal year, Optio entered into a capital lease for additional telephone equipment in the amount of $43,000.

New Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” (“FIN 48”). FIN 48 clarifies accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that results in a tax benefit. FIN 48 is effective for fiscal years beginning after December 15, 2006 and must be applied to all open tax positions upon initial adoption. Additionally, FIN 48 provides guidance on de-recognition, income statement classification of interest and penalties, accounting in interim periods, disclosure, and transition. This interpretation is effective for fiscal years beginning after December 15, 2006. The cumulative effect of applying the provisions of FIN 48 is required to be reported as an adjustment to tax liabilities and to the opening balance of retained earnings in the year adopted. The Company adopted the provisions of FIN 48 on February 1, 2007. After application of the provisions of FIN 48, it was not necessary for the Company to recognize any liability for unrecognized tax benefits or adjustment to the balance of retained earnings as of February 1, 2007. The Company’s policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense. As of February 1, 2007, the Company had no accrued interest and penalties related to unrecognized tax benefits. As of February 1, 2007, after the implementation of FIN 48, the Company’s unrecognized tax benefits were $0. The amount, if recognized, that would affect the effective tax rate is $0.

In February 2007, the FASB issued FASB No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115”. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements”. The Company did not elect early adoption. The Company does not expect FASB 159 to have a material impact on the Company’s results of operations or financial position.

3. Net Loss per Share

Net loss per share has been computed in accordance with SFAS 128, Earnings per Share, which

requires disclosure of basic and diluted earnings per share. Basic earnings per share excludes any dilutive effects of stock options. Diluted earnings per share includes the impact of potentially dilutive securities.

The following table sets forth the computation of net loss per share:

	Three months ended July 31,
	2006			2007

Net loss	$	(450,000	)	$	(1,145,000	)
Weighted average shares outstanding – basic	22,223,643			22,325,214
Dilutive securities	—			—
Weighted average shares outstanding – diluted	22,223,643			22,325,214
Net loss per share – basic and diluted	$	(0.02	)	$	(0.05	)
Potentially dilutive stock options, excluded from diluted weighted average shares outstanding	4,394,084			4,422,974

	Six months ended July 31,
	2006			2007

Net loss	$	(504,000	)	$	(2,315,000	)
Weighted average shares outstanding – basic	22,036,310			22,404,793
Dilutive securities	—			—
Weighted average shares outstanding – diluted	22,036, 310			22,404,793
Net loss per share – basic and diluted	$	(0.02	)	$	(0.10	)
Potentially dilutive stock options, excluded from diluted weighted average shares outstanding	4,405,201			3,953,812

4. Segment and Geographic Information

The Company’s business is organized around geographic areas. Optio’s U.S. operations and European operations represent Optio’s two reportable segments. The foreign locations principally function as distributors of products developed by the Company in the United States. The accounting policies described in the summary of significant accounting policies are applied consistently across the segments. Intersegment sales are based on intercompany transfer prices to achieve a reasonable margin upon distribution. Revenues are attributable to each segment based on the location of the subsidiary originating the sale, which is typically the geographic location where the software is installed.

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

Three Months ended July 31, 2006	United States			Europe			Combined			Eliminations			Consolidated
Revenue from external customers:
License fees	$	1,305,000		$	338,000		$	1,643,000		$	—		$	1,643,000
Subscription revenue	550,000			10,000			560,000			—			560,000
Services, maintenance and other	3,753,000			812,000			4,565,000			—			4,565,000
Inter-segment revenue	28,000			17,000			45,000			(45,000		)	—
Total revenue	5,636,000			1,177,000			6,813,000			(45,000		)	6,768,000
Interest income	113,000			—			113,000			—			113,000
Interest expense	2,000			—			2,000			—			2,000
Depreciation and amortization	192,000			8,000			200,000			—			200,000
Income tax expense (benefit)	40,000			(4,000		)	36,000			—			36,000
Segment income (loss) before income taxes	(447,000		)	33,000			(414,000		)	—			(414,000		)
Segment net income (loss)	(487,000		)	37,000			(450,000		)	—			(450,000		)
Total segment assets	20,561,000			3,598,000			24,159,000			(3,548,000		)	20,611,000
Expenditures for long-lived assets	301,000			8,000			309,000			—			309,000

Three Months ended July 31, 2007	United States			Europe			Combined			Eliminations			Consolidated
Revenue from external customers:
License fees	$	1,276,000		$	260,000		$	1,536,000		$	—		$	1,536,000
Subscription revenue	621,000			12,000			633,000			—			633,000
Services, maintenance and other	3,464,000			981,000			4,445,000			—			4,445,000
Inter-segment revenue	65,000			25,000			90,000			(90,000		)	—
Total revenue	5,426,000			1,278,000			6,704,000			(90,000		)	6,614,000
Interest income	111,000			—			111,000			—			111,000
Interest expense	8,000			—			8,000			—			8,000
Depreciation and amortization	258,000			15,000			273,000			—			273,000
Income tax expense	13,000			—			13,000			—			13,000
Segment loss before income taxes	(1,003,000		)	(129,000		)	(1,132,000		)	—			(1,132,000		)
Segment net loss	(1,016,000		)	(129,000		)	(1,145,000		)	—			(1,145,000		)

Total segment assets	19,541,000			4,146,000			23,687,000			(3,996,000		)	19,691,000
Expenditures for long-lived assets	110,000			21,000			131,000			—			131,000

Six Months ended July 31, 2006	United States			Europe			Combined			Eliminations			Consolidated
Revenue from external customers:
License fees	$	2,782,000		$	759,000		$	3,541,000		$	—		$	3,541,000
Subscription revenue	1,095,000			20,000			1,115,000			—			1,115,000
Services, maintenance and other	7,491,000			1,483,000			8,974,000			—			8,974,000
Inter-segment revenue	125,000			49,000			174,000			(174,000		)	—
Total revenue	11,493,000			2,311,000			13,804,000			(174,000		)	13,630,000
Interest income	209,000			—			209,000			—			209,000
Interest expense	2,000			1,000			3,000			—			3,000
Depreciation and amortization	369,000			15,000			384,000			—			384,000
Income tax expense (benefit)	56,000			(4,000		)	52,000			—			52,000
Segment loss before income taxes	(370,000		)	(82,000		)	(452,000		)	—			(452,000		)
Segment net loss	(426,000		)	(78,000		)	(504,000		)	—			(504,000		)
Total segment assets	20,561,000			3,598,000			24,159,000			(3,548,000		)	20,611,000
Expenditures for long-lived assets	472,000			10,000			482,000			—			482,000

Six Months ended July 31, 2007	United States			Europe			Combined			Eliminations			Consolidated
Revenue from external customers:
License fees	$	2,109,000		$	710,000		$	2,819,000		$	—		$	2,819,000
Subscription revenue	1,220,000			23,000			1,243,000			—			1,243,000
Services, maintenance and other	7,031,000			1,788,000			8,819,000			—			8,819,000
Inter-segment revenue	178,000			114,000			292,000			(292,000		)	—
Total revenue	10,538,000			2,635,000			13,173,000			(292,000		)	12,881,000
Interest income	227,000			—			227,000			—			227,000
Interest expense	12,000			—			12,000			—			12,000
Depreciation and amortization	506,000			30,000			536,000			—			536,000
Income tax expense	42,000			—			42,000			—			42,000
Segment loss before income taxes	(2,087,000		)	(186,000		)	(2,273,000		)	—			(2,273,000		)
Segment net loss	(2,129,000		)	(186,000		)	(2,315,000		)	—			(2,315,000		)
Total segment assets	19,541,000			4,146,000			23,687,000			(3,996,000		)	19,691,000
Expenditures for long-lived assets	246,000			24,000			270,000			—			270,000

5. Note Receivable

As further explained in Note 3 of the Notes to Consolidated Financial Statements included in Optio’s 2007 Annual Report, Optio held a note receivable from M2 Systems Corporation (“M2 Systems”) as partial consideration for the sale by Optio of its Muscato Corporation (“Muscato”) and Translink Solutions

Corporation business units.

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

6. Share Repurchase Program

On January 5, 2007, Optio announced a share repurchase plan under which we could repurchase up to $2.0 million of our common stock over a twelve month period. During the quarter ended July 31, 2007, we purchased a total of 280,700 shares at an average purchase price of $1.36 per share, or approximately $390,000 in the aggregate including broker fees. The repurchased shares were held and not cancelled. As of July 31, 2007, the dollar value of shares that remained available for repurchase under this program was approximately $1,423,000. The repurchases for the quarter ended July 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
5/1/2007 – 7/31/2007 (1)	280,700	$	1.36	413,200	$	1,423,000

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

7. Income Taxes

The Company adopted the provisions of FIN 48 on February 1, 2007. After application of the provisions of FIN 48, it was not necessary for the Company to recognize any liability for unrecognized tax benefits or adjustment to the balance of retained earnings as of February 1, 2007. The Company’s policy is to classify interest and penalties related to unrecognized tax benefits in income tax expense. As of February 1, 2007, the Company had no accrued interest and penalties related to unrecognized tax benefits. As of February 1, 2007, after the implementation of FIN 48, the Company’s unrecognized tax benefits were $0. The amount, if recognized, that would affect the effective tax rate is $0.

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

OVERVIEW

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

Optio markets and sells its software and services throughout the United States, Europe and the Asia Pacific region, through its direct sales force and certified resellers. Optio has offices in the United States, France, the United Kingdom and Germany. Optio also offers consulting services, which provide customers with implementation assistance and training. No single customer accounted for 10% or more of Optio’s revenue for the three or six months ended July 31, 2007.

Critical Accounting Policies and Use of Estimates

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

Revenue Recognition

Overview

The Company’s revenue consists of perpetual fees derived from the Company’s software products, maintenance, consulting services, customer training and subscription fees received from the licensing of the Company’s software products and maintenance. The Company generally charges fees for licenses of its software products either based on the number of Central Processing Units (“CPUs”) on which the product is installed or, to a lesser extent, based on the number of persons or hospital beds registered to use the product. The Company’s revenue recognition policies are in accordance with Statement of Position (“SOP”) No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Software Revenue Recognition With Respect to Certain Transactions and the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements, as amended by SAB 104, Revenue Recognition.

License Fees

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

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

The Company records deferred revenue for software license agreements when the invoice is rendered

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

Subscription Revenue

The Company also licenses certain of its products in the form of a subscription service contract, with terms typically ranging from three to five years. Subscription revenue, which includes a license of the software product, technical support and future unspecified enhancements to the software product, is recognized on a prorata basis over the term of the agreement. Unlike license fee revenue, subscription service agreements include licenses that are not perpetual in duration.

Services, Maintenance and Other Revenue

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

Accounts Receivable

Optio maintains allowances for doubtful accounts for estimated losses resulting from customers’ inability to make payments required under their contracts. The amount of Optio’s reserve is based on historical experience and Optio’s specific review and analysis of the receivables outstanding. Management reviews its accounts receivable on a regular basis to determine if any such amounts may be potentially uncollectible. The Company includes any balances that are determined to be uncollectible, along with a general reserve at varying percentages based on historical trends of 2% for domestic and 3% for international balances less than 30 days old, respectively, to 50% for international accounts more than 90 days old, in its overall allowance for doubtful accounts. Based on management’s best estimate, it believes the Company’s allowance for doubtful accounts is adequate as presented; however, the amount of the reserve could be different under different conditions or using varying assumptions. If the percentage of the general reserve were to increase by 1%, an additional $32,000 reserve would be required. If the financial condition of Optio’s customers were to deteriorate, resulting in their inability to make payments, additional reserves would be required, increasing Optio’s bad debt expense included in general and administrative expenses.

Impairment Assessments

Optio follows Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. This standard requires that goodwill no longer be amortized and instead be tested for impairment on a periodic basis.

Pursuant to SFAS 142, Optio is required to test goodwill for impairment upon adoption and annually or more often if events or changes in circumstances indicate that the asset might be impaired. SFAS 142 provides for a two-stage approach to determining whether and by how much goodwill has been impaired. The

first stage requires a comparison of the fair value of the reporting unit, in our case, the former VertiSoft business, to its net book value. If the fair value is greater than book value, no impairment is deemed to have occurred. If the fair value is less than book value, then the second stage must be completed to determine the amount, if any, of actual impairment. Optio has selected August 1 as its annual impairment testing date for its goodwill. The Company performed an analysis as of August 1, 2006, comparing the fair value of the reporting units with the carrying value of such reporting units, including goodwill, and determined that no impairment of its goodwill existed. While no impairment charge was determined to be necessary in the current year, the Company’s future assessments could lead management to determine that the goodwill is completely or partially impaired, which would require the Company to record an impairment charge of up to $2.3 million.

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

Foreign Currencies

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

RESULTS OF OPERATIONS

Three Months Ended July 31, 2007 Compared to Three Months Ended July 31, 2006

Revenues

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

	Three Months Ended July 31,
	2006		2007
Revenue:
License fees	24	%	23	%
Subscription fees	8		10
Services, maintenance and other	68		67
Total revenue	100		100
Costs of revenue (excluding depreciation and amortization, included below):
License fees	2		2
Services, maintenance and other	24		26
Total cost of revenue	26		28
	74		72
Operating expenses:
Sales and marketing	38		43
Research and development	21		21
General and administrative	20		23
Depreciation and amortization	3		4
Total operating expenses	82		91
Loss from operations	(8	)	(19	)
Interest and other income	2		2
Income tax expense	(1	)	—
Net loss	(7	)%	(17	)%

Revenues

Total revenues decreased from $6.8 million in the three months ended July 31, 2006 to $6.6 million in the three months ended July 31, 2007.

License fees

Revenues from software licenses decreased 7% to $1.5 million in the three months ended July 31, 2007 from $1.6 million for the three months ended July 31, 2006. License revenue of $252,000 from Optio’s healthcare division remained relatively consistent for the three months ended July 31, 2007 as compared to the three months ended July 31, 2006. For Optio’s enterprise division, software license revenue of $1,022,000 in the U.S. also approximated the level achieved in the same quarter of the prior fiscal year. In Europe, we experienced a shortfall of $96,000 as the closure of two certain customer sales were not achieved or were delayed.

Approximately $346,000 of Optio’s software license revenue during the three months ended July 31, 2007 was derived from partners, such as resellers, value-added distributors or OEM relationships, representing 23% of license revenue for Optio. During the three months ended July 31, 2006, Optio generated $587,000 of its software license revenue through partners, representing 36% of Optio’s license revenue. In the prior quarter of last year, we had several significant deals through our channel partners, while this year, there were many

smaller transactions.

Subscription fees

Subscription revenue increased to $633,000 in the three months ended July 31, 2007 from $560,000 in the three months ended July 31, 2006. Optio has signed additional contracts and additional modules for existing contracts, increasing the monthly amount recognized on a subscription basis.

Services, maintenance and other

Revenues from services, maintenance and other declined to $4.4 million for the three months ended July 31, 2007 from $4.6 million for the three months ended July 31, 2006. Services revenue decreased to $1.1 million for the three months ended July 31, 2007 from $1.3 million for the three months ended July 31, 2006. The decline in license revenue, especially in the previous quarter, contributed to the associated decline in services revenue. Maintenance revenue remained constant at $3.3 million for the three months ended July 31, 2007 and July 31, 2006, respectively. Maintenance revenue increased as Optio added to its customer base, combined with moderately increased pricing for its annual maintenance fees, offset by maintenance agreement expirations that were not renewed.

Revenue Mix

Revenue from licenses represented 23% of total revenue in the three months ended July 31, 2007, a slight decrease from license revenue at 24% of total revenue in the three months ended July 31, 2006. Subscription revenue represented 10% of total revenue in the three months ended July 31, 2007, increasing from 8% of total revenue from the same quarter last year. Services, maintenance and other revenue constituted 67% of total revenue in the three months ended July 31, 2007, a slight decrease from a percentage contribution of 68% in the prior year comparative period. Accordingly, the overall change in revenue mix reflected a slight decline in license fees and services, maintenance, and other revenue offset by an increase in subscription revenue for the three months ended July 31, 2007 as compared to the same quarter last year.

Costs of Revenues

Total costs of revenues remained constant at $1.8 million in the three months ended July 31, 2007 and 2006, respectively.

Licenses

Costs of revenues from licenses consist of costs related to the packaging and distribution of the products, fees paid for integration of third-party software products and fees paid to referral partners. Costs of revenues from licenses decreased to $124,000 in the three months ended July 31, 2007 from $146,000 in the three months ended July 31, 2006. Fewer products that include third-party software were sold during the three months ended July 31, 2007, as compared to the three months ended July 31, 2006, reducing the costs of revenue from licenses. Partly offsetting this, fees paid to referral partners were slightly higher for the three months ended July 31, 2007 to the three months ended July 31, 2006 as we had more deals referred by independent parties.

Services, Maintenance and Other

Costs of revenues from services, maintenance and other consist of personnel, subcontracting and other

expenses relating to the cost of providing customer support, education and consulting and implementation services. Costs of revenues from services, maintenance and other increased slightly to $1.7 million in the three months ended July 31, 2007 as compared to $1.6 million for the three months ended July 31, 2006. Optio’s internal implementation staff reflected the same staffing level as compared to the same quarter in the prior year and Optio’s reliance on external outsourcers also approximated the prior year. The increase in cost was mainly due to salary increases for internal staff.

Operating Expenses

Sales and Marketing

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

Sales and marketing expenses increased 10% to $2.8 million from $2.5 million for the three months ended July 31, 2007 and 2006, respectively. Sales and marketing expenses were 43% and 38% of total revenue for the three months ended July 31, 2007 and 2006, respectively. Salaries increased approximately $200,000 between the two quarters, due mainly to salary increases and increased staffing. Discretionary spending, in the aggregate, was also higher as compared to the same quarter in the prior fiscal year due largely to increased travel expenses. Partly offsetting this increase in expenses were reduced direct marketing expenditures, which decreased approximately $80,000 between the three months ended July 31, 2007 and the three months ended July 31, 2006.

Research and Development

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

Research and development expenses remained constant at $1.4 million for the three months ended July 31, 2007 and July 31, 2006, respectively. Research and development salaries and associated benefits increased $10,000 between the periods, primarily due to salary increases, as opposed to additional staff.

General and Administrative

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

General and administrative expenses increased to $1.5 million from $1.4 million in the three months ended July 31, 2007 and 2006, respectively. General and administrative expenses increased due to $50,000 of increased salaries representing additional accounting and administrative staff as well as salary increases. Legal fees also increased due to ongoing legal matters and the resolution of certain employment related claims in Europe.

Depreciation and Amortization

Depreciation and amortization expense increased to $273,000 from $200,000 for the three months ended July 31, 2007 and 2006, respectively. The increase was primarily due to Optio’s renegotiation of the lease for Optio’s headquarters in which the landlord contributed $1.0 million towards the improvements of the space. These leasehold improvements, as well as an additional $700,000 purchased directly by Optio, are being depreciated over the term of the new lease or the expected useful life of the assets, as appropriate. This increase was partly offset by a decrease in amortization expense as intangibles are amortized over the estimated useful life of the asset using the cash flow method, which results in a greater expense in the earlier periods and reduced expense in the later periods. This resulted in a greater expense in periods prior to fiscal year 2008.

Interest Income

Interest income decreased slightly to $111,000 in the three months ended July 31, 2007 from $113,000 in the three months ended July 31, 2006. Current interest income primarily represents interest earned on funds invested in short-term financial instruments, as compared to the same period in the prior year where most interest income was attributable to the then outstanding M2 Systems note receivable.

Interest Expense

Interest expense increased to $8,000 in the three months ended July 31, 2007, an increase from $2,000 in the three months ended July 31, 2006. Interest expense primarily represents the interest paid on Optio’s capital leases.

Six Months Ended July 31, 2007 Compared to Six Months Ended July 31, 2006

Revenues

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

	Six Months Ended July 31,
	2006		2007
Revenue:
License fees	26	%	22	%
Subscription fees	8		10
Services, maintenance and other	66		68
Total revenue	100		100
Costs of revenue (excluding depreciation and amortization, included below):
License fees	2		2
Services, maintenance and other	24		26
Total cost of revenue	26		28
	74		72
Operating expenses:
Sales and marketing	37		44
Research and development	20		22
General and administrative	19		21
Depreciation and amortization	3		4
Total operating expenses	79		91
Loss from operations	(5	)	(19	)
Interest and other income	1		1
Net loss	(4	)%	(18	)%

Revenues

Total revenues decreased from $13.6 million in the six months ended July 31, 2006 to $12.9 million in the six months ended July 31, 2007.

License fees

Revenues from software licenses decreased 20% to $2.8 million in the six months ended July 31, 2007 from $3.5 million for the six months ended July 31, 2006. We continue to face pressure in the document management output market as ERP vendors now offer similar functionality and competitors continue to offer lower cost solutions. In addition, our imaging solutions have not generated revenue as quickly as we anticipated. We have just recently begun to release our business process management solutions in modules, which we anticipated would generate replacement revenue for our declining document output management market. Sales of Optio’s newer products, including Optio imaging solutions and process management solutions, require a longer sales cycle than our traditional output solutions products. Across the two periods, Optio’s average contract size remained relatively constant.

Approximately $591,000 of Optio’s software license revenue during the six months ended July 31, 2007 was derived from partners, such as resellers, value-added distributors or OEM relationships, representing 21% of license revenue for Optio. During the six months ended July 31, 2006, Optio generated $947,000 of its software license revenue through partners, representing 27% of Optio’s license revenue. In the prior quarter

of last year, we had several significant deals through our channel partners, while this year, there were many smaller transactions.

Subscription fees

Subscription revenue increased to $1.2 million in the six months ended July 31, 2007 from $1.1 million in the six months ended July 31, 2006. Optio has signed additional contracts and additional modules for existing contracts, increasing the monthly amount recognized on a subscription basis.

Services, maintenance and other

Revenues from services, maintenance and other decreased to $8.8 million from $9.0 million for the six months ended July 31, 2007 and 2006, respectively. Services revenue decreased to $2.2 million for the six months ended July 31, 2007 from $2.5 million for the six months ended July 31, 2006. The decline in license revenue contributed to the associated decline in consulting services revenue. Maintenance revenue increased $200,000 to $6.6 million for the six months ended July 31, 2007 from $6.4 million for the six months ended July 31, 2006. Maintenance revenue continues to increase with additions to Optio’s customer base, as well as from moderate increases in the price of annual maintenance fees.

Revenue Mix

Revenue from licenses represented 22% of total revenue in the six months ended July 31, 2007 and 26% of total revenue in the six months ended July 31, 2006. Subscription revenue represented 10% and 8% of total revenue in the six months ended July 31, 2007 and 2006, respectively. Services, maintenance and other revenue constituted 68% and 66% of total revenue in the six months ended July 31, 2007 and 2006, respectively. Revenue from licenses declined between the six months ended July 31, 2007 and 2006, thus causing the percentage of revenue to shift toward services, maintenance and other as well as subscriptions, which increased during those same periods.

Costs of Revenues

Total costs of revenues remained constant at $3.6 million in the six months ended July 31, 2007 and 2006, respectively.

Licenses

Costs of revenues from licenses decreased to $226,000 in the six months ended July 31, 2007 from $278,000 in the six months ended July 31, 2006. Fewer products that include third-party software were sold during the six months ended July 31, 2007, as compared to the six months ended July 31, 2006, reducing the costs of revenue from licenses.

Services, Maintenance and Other

Costs of revenues from services, maintenance and other increased slightly to $3.4 million in the six months ended July 31, 2007 from $3.3 million for the same period in 2006. Optio slightly increased its internal implementation staff as compared to the same period in the prior year and, as a result, Optio relied less on external outsourcers. This resulted in a $144,000 decrease in the cost of outsourcers in the six months ended July 31, 2007 as compared to the six months ended July 31, 2006. Alternatively, the cost of internal staff and their associated costs increased by approximately $200,000 between the six month periods ended July 31, 2007

and 2006 due to salary increases and minor staff augmentation.

Operating Expenses

Sales and Marketing

Sales and marketing expenses increased 10% to $5.6 million from $5.1 million for the six months ended July 31, 2007 and 2006, respectively. Sales and marketing expenses were 44% and 37% of total revenue for the six months ended July 31, 2007 and 2006, respectively. Salaries increased approximately $300,000 for the six months ended July 31, 2007 as compared to the same period in the prior year, due mainly to salary increases and increased staffing. Discretionary spending, in the aggregate, was also higher as compared to the same period in the prior fiscal year due largely to increased travel expenses of approximately $250,000. Partly offsetting this increase in expenses were reduced direct marketing expenditures, which decreased $94,000 between the six months ended July 31, 2007 and the six months ended July 31, 2006.

Research and Development

Research and development expenses increased 5% to $2.8 million for the six months ended July 31, 2007 from $2.7 million in the six months ended July 31, 2006. Research and development salaries and associated benefits increased $171,000 between the periods, primarily due to salary increases, as opposed to additional staff, partly offset by reduced consulting costs of $57,000.

General and Administrative

General and administrative expenses increased to $2.8 million from $2.5 million in the six months ended July 31, 2007 and 2006, respectively. General and administrative expenses increased due to the following: (i) $191,000 of increased consulting costs relating to several corporate strategic and compliance initiatives, (ii) $62,000 of increased salaries representing additional accounting and administrative staff as well as salary increases, (iii) an increase of $42,000 in compensation expense relating to corporate stock options under SFAS No. 123R, and (iv) increased legal fees of $41,000 and recruiting fees of $34,000.

Depreciation and Amortization

Depreciation and amortization expense increased to $536,000 from $384,000 for the six months ended July 31, 2007 and 2006, respectively. The increase was primarily due to Optio’s renegotiation of the lease for Optio’s headquarters in which the landlord contributed $1.0 million towards the improvements of the space. These leasehold improvements, as well as an additional $700,000 purchased directly by Optio, are being depreciated over the term of the new lease or the expected useful life of the assets, as appropriate. This increase was partly offset by a decrease in amortization expense as intangibles are amortized over the estimated useful life of the asset using the cash flow method, which results in a greater expense in the earlier periods and reduced expense in the later periods. This resulted in a greater expense in periods prior to fiscal year 2008.

Interest Income

Interest income increased to $227,000 in the six months ended July 31, 2007 from $209,000 in the six months ended July 31, 2006. Current interest income primarily represents interest earned on funds invested in short-term financial instruments, as compared to the same period in the prior year where most interest income was attributable to the then outstanding M2 Systems note receivable.

Interest Expense

Interest expense increased to $12,000 in the six months ended July 31, 2007, an increase from $3,000 in the six months ended July 31, 2006. Interest expense primarily represents the interest paid on Optio’s capital leases.

LIQUIDITY AND CAPITAL RESOURCES

Optio had $9.4 million and $11.9 million in cash and cash equivalents at July 31, 2007 and January 31, 2007, respectively.

The following table sets forth certain selected statements of cash flow information for the six months ended July 31, 2007:

Net cash used in operations	$	(1,815,000	)
Net cash used in investing activities	(270,000		)
Net cash used in financing activities	(549,000		)
Net decrease in cash and cash equivalents	(2,528,000		)

Cash used in operations was primarily the result of a net loss of $2,315,000, less the $535,000 add-back of non-cash depreciation and amortization expense, stock compensation expense of $239,000, loss on disposal of assets of $10,000, provision for deferred taxes of $36,000, and changes in working capital resulting in a $572,000 inflow of cash. The major component of such working capital changes was a decline in accounts receivable due partly to the collection of several large receivables outstanding as of January 31, 2007, resulting in additional cash inflow of $739,000, partly offset by a decrease in payments due to suppliers by $244,000. Partly offsetting this favorability was a decrease in accrued expenses and income taxes payable of $367,000, a decrease in deferred revenue of $298,000, and an increase in spending for prepaids and other assets as Optio prepaid several of its insurance policies and other marketing expenses resulting in a $150,000 outflow. In investing activities, Optio purchased $270,000 of property and equipment. Optio’s financing activities included purchases of treasury stock of $529,000, payments under capital leases totaling $37,000 and receipts of $17,000 from the exercise of stock options.

On April 26, 2007, Optio extended its existing line of credit through April 19, 2008. The line of credit bears interest at prime rate, subject to increase based on Optio’s performance relative to certain financial ratios. Optio may borrow up to $4.0 million, or such lesser amount as may be determined based on the level of eligible accounts receivable. Currently, Optio has estimated that approximately $1.3 million would be available for borrowings based upon Optio’s historical accounts receivable balance. Accounts receivable, equipment, general intangibles and other assets, as defined in the loan agreement, collateralize the line of credit. The loan agreement contains various covenants, including liquidity and earnings before interest, taxes, depreciation and amortization (“EBITDA”) requirements and restrictions on the payment of dividends. As of July 31, 2007, Optio was in compliance with the required financial ratios. There were no borrowings under the line of credit as of July 31, 2007.

Management believes that the existing cash and cash equivalents, together with the line of credit, will provide adequate cash to fund its anticipated cash needs at least through the next twelve months. Optio intends to expand its product line, which may require acquisitions of companies or products that enhance the Company’s product line. As a result, Optio may attempt to raise additional funds through equity or debt financing. There can be no assurance that Optio will be able to raise additional funds on favorable terms, or at all. Although not anticipated, a dramatic decrease in demand for Optio’s products or services, or a dramatic

change in technology related to Optio’s products or services offered, could have a negative impact on Optio’s liquidity. This risk may include the potential for Optio not meeting its debt covenant requirements, making any borrowings under the line of credit unavailable.

New Accounting Pronouncements

In February 2007, the FASB issued FASB No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements”. The Company did not elect early adoption. The Company does not expect FASB 159 to have a material impact on the Company’s results of operations or financial position.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

ITEM 4. CONTROLS AND PROCEDURES.

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

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

Changes in Internal Controls

There were no changes in our internal controls over financial reporting that occurred during the quarter ended July 31, 2007, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On November 13, 2001, a lawsuit styled Kevin Dewey vs. Optio Software, Inc., et. al. was filed in the United States District Court for the Southern District of New York. The complaint was filed against the underwriters in the Company’s initial public offering as well as Optio and certain officers and directors of Optio, by a single plaintiff purportedly on behalf of persons purchasing Optio’s common stock between December 14, 1999 and December 6, 2000. The lawsuit also sought class action status. Optio is a co-defendant with approximately 300 other issuers in this suit. The complaint includes allegations of violations of (i) Section 11 of the Securities Act of 1933, as amended (the “Securities Act”), by all named defendants, (ii) Section 12(a)(2) of the Securities Act by the underwriter defendants, (iii) Section 15 of the Securities Act by the individual defendants, and (iv) Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated thereunder by the underwriter defendants. The complaint alleges that Optio’s prospectus was materially false and misleading because it failed to disclose, among other things, that: (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of a limited number of Optio shares issued in connection with the Optio initial public offering; and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocate Optio shares to those customers in the Optio initial public offering in exchange for which the customers agreed to purchase additional Optio shares in the aftermarket at pre-determined prices. The complaint seeks unspecified amounts as compensatory damages as a result of Optio’s alleged actions, as well as punitive damages and reimbursement for the plaintiffs’ attorneys’ fees and associated costs and expenses of the lawsuit. A proposal to settle the claims against Optio and other companies and individual defendants in the litigation was conditionally accepted by Optio. On December 5, 2006, the United States Court of Appeals for the Second Circuit overturned the District Court’s certification of the class of plaintiffs who are pursuing the claims that would be settled in the settlement against the defendants. Plaintiffs filed a petition for rehearing and rehearing en banc with the Second Circuit Court of Appeals in response to the Second Circuit’s decision. The petition for rehearing and rehearing en banc was denied on April 6, 2007, but clarified that the plantiffs may seek to certify a more limited class in District Court. On June 25, 2007, the District Court signed an order terminating the settlement. Plaintiffs are seeking a certification of a new class of plaintiffs, which is to be heard on September 27, 2007.

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

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

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, the factors discussed under “Item 1A. Risk Factors” in Part I of the 2007 Annual Report could materially affect our business, financial condition or future results. The risks described in our 2007 Annual Report are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

Optio held its Annual Meeting of Shareholders on June 28, 2007. There were present at the Annual Meeting in person or by proxy, holders of 22,405,217 shares of common stock entitled to vote. The following directors were elected and qualified, with the votes for each director being reflected below:

Name	Term	Votes For	Votes Withheld
Jay Toole	Class I Director with term to expire on the date of the annual meeting of shareholders to be held in 2009	21,651,844	27,920
David T. Leach	Class II Director with term to expire on the date of the annual meeting of shareholders to be held in 2010	21,648,044	31,720
Ronald G. Diener	Class II Director with term to expire on the date of the annual meeting of shareholders to be held in 2010	21,583,774	95,990
Jeffrey J. Anderson	Class III Director with term to expire on the date of the annual meeting of shareholders to be held in 2008	21,653,094	26,670

The directors holding office on the date of the meeting whose term had not expired remained in office. Such directors were C. Wayne Cape, F. Barron Hughes and Jay A. Wolf.

The appointment of BDO Seidman, LLP as Optio Software, Inc.’s independent registered public accounting firm for the fiscal year ending January 31, 2008, was ratified with 21,634,384 affirmative votes cast, 12,787 negative votes cast and 32,592 abstentions.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

(a) Exhibits

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

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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 14^th day of September, 2007.

	OPTIO SOFTWARE, INC.

	By:	/s/ C. Wayne Cape
		C. Wayne Cape
		President and Chief Executive Officer

OPTIO SOFTWARE INC 10-Q