Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statement

This document contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Any statements in this document that do not describe historical facts are forward-looking statements. Forward-looking statements in this document (including forward-looking statements regarding the continued health of the Hospitality industry, future information technology outsourcing opportunities, changes in contract funding by the U.S. Government, the impact of current world events on our results of operations, the effects of inflation on our margins, and the effects of interest rate and foreign currency fluctuations on our results of operations) are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. When we use words such as "intend," "anticipate," "believe," "estimate," "plan," "will," or "expect", we are making forward-looking statements. We believe that the assumptions and expectations reflected in such forward-looking statements are reasonable, based on information available to us on the date hereof, but we cannot assure you that these assumptions and expectations will prove to have been correct or that we will take any action that we presently may be planning. We have disclosed certain important factors that could cause our actual future results to differ materially from our current expectations, including a decline in the volume of purchases made by one or a group of our major customers; risks in technology development and commercialization; risks of downturns in economic conditions generally, and in the quick-service sector of the hospitality market specifically; risks associated with government contracts; risks associated with competition and competitive pricing pressures; and risks related to foreign operations. Forward-looking statements made in connection with this report are necessarily qualified by these factors. We are not undertaking to update or revise publicly any forward-looking statements if we obtain new information or upon the occurrence of future events or otherwise.

Overview

PAR Technology is a leading provider of hospitality technology solutions that includes software, hardware and professional/lifecycle support services to several industries including: restaurants, hotels/resorts/spas, cruise lines, movie theaters and specialty retailers. In addition, the Company provides applied technology and technical outsourcing services primarily to the U.S. Department of Defense. PAR also provides best of breed technical tracking systems that focus upon "cold chain" shipping and logistics for road, rail, and transit markets by providing advanced integrated solutions for all types of refrigerated and dry assets.

The Company's hospitality technology products are used in a variety of applications by thousands of customers. PAR faces competition in all of its

markets (restaurants, hotels, spas, etc.) and competes primarily on the basis of product design, features, functions, product quality, reliability, price, customer service and deployment capability. The most recent trend in the hospitality industry has been to reduce the number of approved vendors in a specific concept to companies that have global capabilities and reach in sales, service and deployment, can achieve quality and delivery standards, have multiple product offerings, R&D capability, and can be competitive with their pricing. The Company's international scope as a technology provider to hospitality customers is a strategic competitive advantage as the Company provides innovative solutions, with significant global reach to its multinational customers like McDonald's, Yum! Brands, Subway, CKE Restaurants and the Mandarin Oriental Hotel Group. PAR's focus is to provide completely integrated technology products and services with industry leading customer service in the market segments in which it competes. The Company continually initiates new research and development efforts to create innovative technology to meet our customers' requirements and also has high probability for broader market appeal and success. PAR's business focuses upon operating efficiencies and controlling costs.

The economic conditions in late 2008 and year-to-date 2009 and the volatility in the financial markets in late 2008 and 2009, both in the U.S. and in many other countries where the Company operates, have contributed and may continue to contribute to higher unemployment levels, decreased consumer spending, reduced credit availability and/or declining business and consumer confidence. In regards to the current economic downturn, the QSR market continues to be strong for the large international companies, however, the Company has seen an impact on the regional QSR organizations whose business is slowing because of higher unemployment and lack of consumer confidence in specific domestic regions. These smaller businesses are also struggling to access affordable capital in the tight credit markets. Such conditions have had and could continue to have an impact on the markets in which the Company's customers operate, which could result in a reduction of sales, operating income and cash flows. These factors could also have a material adverse impact on the Company's significant estimates, specifically the fair value of the Company's reporting units used in support of its annual goodwill impairment test, which will be conducted in the fourth quarter, and may ultimately result in an impairment charge. However, even with the difficult environment, the Company remains optimistic about its prospects for recovery. The Company expects one of its large international customers to embark upon an aggressive upgrade to their in-store technology. In addition the Company is observing an improvement in the pipeline of business with its second tier customers.

The Company is currently focusing upon enhancing three distinct areas of its Hospitality segment. First, PAR has been investing in its development of next generation software. Second, the Company is building a highly capable and further reaching distribution channel. Third, as the Company's customers continue their expansion into international markets, PAR is creating a global infrastructure, initially focusing on the Asia/Pacific rim due to the new restaurant growth and concentration of PAR's customers in that region, but also one that will enhance our deployment and support globally.

Approximately 34% of the Company's revenues are generated in our Government segment. PAR provides IT and communications support services to the U.S. Department of Defense. The performance rating of PAR's Government segment translates into consistently winning add-on and renewal business and building long-term client-vendor relationships. PAR provides its clients the technical expertise necessary to operate and maintain complex technology systems utilized by government agencies.

PAR's logistics management business continues to grow its business. During 2009, the Company announced several new contracts including KLLM Transport Services, CR England and Hapag-Lloyd AG. PAR continues to expand its customer base in the cold chain and dry van markets. As the market recognizes the value proposition associated with the real time use of location and environmental information in both asset management and cargo quality assurance, PAR is well positioned in this emerging market.

The Company will continue to leverage its core technical capabilities and performance into related technical areas and an expanding customer base. PAR will seek to accelerate this growth through strategic acquisitions of businesses that broaden the Company's technology and/or business base.

Summary

PAR believes it can be successful in its two core business segments - Hospitality and Government - due to its global capabilities and industry expertise. The majority of the Company's business is in the quick-serve restaurant sector of the hospitality market. In regards to the current economic downturn, the QSR market continues to be strong for the large international companies, however, the Company has seen an impact on the regional QSR organizations whose business is slowing because of higher unemployment and lack of consumer confidence in specific domestic regions. These smaller businesses are also struggling to access affordable capital in the tight credit markets. However, even with the difficult environment, the Company remains optimistic about its prospects for recovery. The Company expects one of its large international customers to embark upon an aggressive upgrade to their in-store technology. In addition the Company is observing an improvement in the pipeline of business with its second tier customers.

It has been the Company's experience that its Government business is resistant to economic cycles including reductions in the Federal defense budgets. PAR's I/T outsourcing business focuses on cost-effective operations of technology and telecommunication facilities which must function independent of economic cycles and changing Federal defense budgets.

Results of Operations -- Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008

The Company reported revenues of $49.9 million for the quarter ended September 30, 2009, a decrease of 13.9% from the $58 million reported for the quarter ended September 30, 2008. The Company's net loss for the quarter ended September 30, 2009 was $778,000, or $.05 diluted loss per share, compared to net income of $828,000 and a $.06 diluted earnings per share for the same period in 2008.

Product revenues were $15.2 million for the quarter ended September 30, 2009, a decrease of 27.2% from the $20.9 million recorded in 2008. This decrease was due to a reduction in sales to certain restaurant concepts as new store rollouts that occurred in 2008 did not recur in 2009. In addition, sales in the Company's luxury hotel, resort and spa software business experienced a decline during the current quarter. These decreases were partially offset by an increase in sales of the Company's logistics management products to several commercial customers.

Customer service revenues include installation, software maintenance, training, twenty-four hour help desk support and various depot and on-site service options. Customer service revenues were $17.0 million for the quarter ended September 30, 2009, an 11.2% decrease from $19.2 million reported for the same period in 2008. This decrease is primarily due to a decline in installation revenue resulting from the overall decrease in product sales as well as a decrease associated with the completion of a major service initiative with a large restaurant customer, completed in the second quarter of 2009. Partially offsetting these decreases are increases in revenue associated with the Company's depot service center as well as service revenue associated with the Company's logistic management business.

Contract revenues were $17.7 million for the quarter ended September 30, 2009, a decrease of 1% when compared to the $17.9 million for the same period in 2008. This decrease was primarily due to timing; more specifically the completion of various contracts prior to the beginning of their replacement contracts.

Product margins for the quarter ended September 30, 2009 were 34.1%, a decline from 42.6% for the same period in 2008. This decrease in margins was mostly due to a shift in product mix as well as a decrease in software revenue in 2009 when compared to 2008.

Customer service margins were 30.1% for the quarter ended September 30, 2009, compared to 24.5% for the same period in 2008. Service margins increased primarily due to higher volume within the Company's depot service center as well as through the execution of cost reduction strategies in the customer service organization.

Contract margins were 6.1% for the quarter ended September 30, 2009, compared to 5.4% for the same period in 2008. This increase was due to higher margins on certain new fixed price contracts. The most significant components of contract costs in 2009 and 2008 were labor and fringe benefits. For 2009, labor and fringe benefits were $12.3 million or 74% of contract costs compared to $12.9 million or 76% of contract costs for the same period in 2008.

Selling, general and administrative expenses for the quarter ended September 30, 2009 were $8.6 million, a decrease of 5.9% from the $9.1 million for the same period in 2008. This decrease was primarily due to a reduction in

sales personnel in the Company's restaurant and hotel and spa businesses, partially offset by an increase in expense associated with the Company's logistic management business.

Research and development expenses were $3.8 million for the quarter ended September 30, 2009, an increase of 5.9% from the $3.6 million for the same period in 2008. The increase was primarily attributable to an increase in investment in the Company's luxury hotel, resort and spa software business as well as the continued investment in its logistics management business. These increases were partially offset by cost reductions achieved in outsourcing through the use of strategic restaurant product development relationships.

Amortization of identifiable intangible assets was $371,000 for the quarter ended September 30, 2009, compared to $388,000 for the same period in 2008. This decrease was due to certain intangible assets becoming fully amortized in 2008.

Other income, net, was $12,000 for the quarter ended September 30, 2009 compared to $216,000 for the same period in 2008. Other income primarily includes rental income and foreign currency gains and losses. The decrease is primarily due to a decline in foreign currency gains.

Interest expense represents interest charged on the Company's short-term borrowing requirements from banks and from long-term debt. Interest expense was $106,000 for the quarter ended September 30, 2009 as compared to $275,000 for the same period in 2008. The decrease is primarily due to lower borrowings and a lower average borrowing rate in 2009 compared to 2008.

For the quarters ended September 30, 2009 and 2008, the Company's expected effective income tax rate based on projected pre-tax income was 44.8% and 42.2%, respectively. The variance from the federal statutory rate in 2009 was primarily due to state income taxes and various nondeductible expenses partially offset by the research and experimental tax credit. For 2008, the increase in effective tax rate was primarily attributable to the expiration of the research and experimental tax credit at the end of 2007. Also contributing to the increase in effective tax rate was the taxable portion of the proceeds from the voluntary conversion of a Company-owned life insurance policy in 2008.

Results of Operations -- Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008

The Company reported revenues of $164.8 million for the nine months ended September 30, 2009, a decrease of 1.5% from the $167.3 million reported for the nine months ended September 30, 2008. The Company's net loss for the nine months ended September 30, 2009 was $293,000, or $.02 diluted loss per share, compared to net income of $757,000 or $.05 diluted earnings per share for the same period in 2008.

Product revenues were $52.6 million for the nine months ended September 30, 2009, a decrease of 10.1% from the $58.6 million recorded in 2008. This decrease was due to a reduction in sales to certain restaurant concepts as new store rollouts that occurred in 2008 did not recur in 2009. In addition, sales in the Company's luxury hotel, resort and spa software business experienced a decline during the current quarter. These decreases were partially offset by an increase in sales of the Company's logistics management products to several commercial customers.

Customer service revenues include installation, software maintenance, training, twenty-four hour help desk support and various depot and on-site service options. Customer service revenues were $56.1 million for the nine months ended September 30, 2009, a 5.2% increase from $53.3 million reported for the same period in 2008. This increase is primarily due to a major service initiative with a large restaurant customer. Also contributing to this growth was an increase in revenue associated with the Company's depot service center as well as service revenue associated with the Company's logistic management business.

Contract revenues were $56.1 million for the nine months ended September 30, 2009, an increase of 1.3% when compared to the $55.4 million recorded in the same period in 2008. This increase was primarily due to the start of new contracts in the information technology outsourcing area, including the timing of subcontract work and material purchases.

Product margins for the nine months ended September 30, 2009 were 34.3%, a decline from 41.9% for the same period in 2008. This decrease in margins was due to a shift in product mix as hardware sales increased while software revenue decreased in 2009 when compared to 2008. The lower software revenue was attributable to a drop in table service revenue as the Company fulfilled the requirements of a major customer in 2008.

Customer service margins were 29.1% for the nine months ended September 30, 2009, an increase compared to 25.3% for the same period in 2008. Service margins increased primarily due to higher installation revenue from a special initiative with a major restaurant customer as well as through the Company's execution of its cost reduction strategy throughout the service organization. Additionally, service margins were favorably impacted by margins earned by the depot service repair center due to higher volume.

Contract margins were 5.5% for the nine months ended September 30, 2009, an increase compared to 5.3% for the same period in 2008. This increase was due to higher margins on certain new fixed price contracts. The most significant components of contract costs in 2009 and 2008 were labor and fringe benefits. For 2009, labor and fringe benefits were $38.7 million or 73% of contract costs compared to $39.3 million or 75% of contract costs for the same period in 2008.

Selling, general and administrative expenses for the nine months ended September 30, 2009 were $26.8 million, relatively unchanged from the $26.9 million for the same period in 2008. This change was due to a reduction in sales personnel in the Company's restaurant and hotel and spa businesses, partially offset by an increase in expense associated with the Company's logistic management business.

Research and development expenses were $10.1 million for the nine months ended September 30, 2009, a decrease of 12.5 % from the $11.6 million for the same period in 2008. The decrease was primarily attributable to cost reductions achieved in outsourcing through strategic relationships, which was partially offset by the Company's investment in its logistics management business.

Amortization of identifiable intangible assets was $1.1 million for the nine months ended September 30, 2009, compared to $1.2 million for the same period in 2008. This decrease was due to certain intangible assets becoming fully amortized in 2008.

Other income, net, was $274,000 for the nine months ended September 30, 2009 compared to $759,000 for the same period in 2008. Other income primarily includes rental income and foreign currency gains and losses. The decrease is primarily due to a decline in foreign currency gains.

Interest expense represents interest charged on the Company's short-term borrowing requirements from banks and from long-term debt. Interest expense was $328,000 for the nine months ended September 30, 2009 as compared to $745,000 for the same period in 2008. The decrease is primarily due to lower interest expense recognized on the Company's interest rate swap agreement that it entered into in September 2007. The decline was also due to lower borrowings and a lower average borrowing rate in 2009 compared to 2008.

For the nine months ended September 30, 2009 and 2008, the Company's expected effective income tax rate based on projected pre-tax income was 55.1% and 41.9%, respectively. The variance from the federal statutory rate in 2009 was primarily due to state income taxes and various nondeductible expenses partially offset by the research and experimental tax credit. For 2008, the increase in effective tax rate was primarily attributable to the expiration of the research and experimental tax credit at the end of 2007. Also contributing to the increase in effective tax rate was the taxable portion of the proceeds from the voluntary conversion of a Company-owned life insurance policy in 2008.

Liquidity and Capital Resources

The Company's primary sources of liquidity have been cash flow from operations and lines of credit with various banks. Cash provided by operations was $6.2 million for the nine months ended September 30, 2009 compared to cash used by operations of $5.7 million for 2008. In 2009, cash was generated by

collection of accounts receivable partially offset by a decline in accounts payable, customer deposits, and deferred service revenue. In 2008, cash was impacted by the timing of payments to vendors and a growth in accounts receivable and inventory.

Cash used in investing activities was $1.7 million for the nine months ended September 30, 2009 versus cash used in investing activities of $165,000 for the same period in 2008. In 2009, capital expenditures were $1 million and were primarily for manufacturing, office and computer equipment. Capitalized software costs relating to software development of Hospitality segment products were $553,000 in 2009. In 2008, capital expenditures were $939,000 and were principally for computer equipment. Capitalized software costs relating to software development of Hospitality segment products were $641,000 in 2008. Additionally, in 2008 the Company received $1.6 million from the voluntary conversion of a Company-owned life insurance policy.

Cash used in financing activities was $6.2 million for the nine months ended September 30, 2009 versus cash provided of $5.1 million in 2008. In 2009, the Company decreased its short-term borrowings by $5.8 million, decreased its long-term debt by $666,000 and also benefited $300,000 from the exercise of employee stock options. In 2008, the Company increased its short-term bank borrowings by $5 million, decreased its long-term debt by $415,000 and benefited $480,000 from the exercise of employee stock options.

The Company has a credit agreement with a bank under which the Company has a borrowing availability up to $20 million in the form of a line of credit. This agreement allows the Company, at its option, to borrow funds at the LIBOR rate plus the applicable interest rate spread (1.5% at September 30, 2009) or at the bank's prime lending rate plus the applicable interest rate spread (3.25% at September 30, 2009). This agreement expires in June 2011. At September 30, 2009, there was $3 million outstanding under this agreement. The weighted average interest rate paid by the Company was 2.1% during the third quarter of 2009. This agreement contains certain loan covenants including leverage and fixed charge coverage ratios. The Company is in compliance with these covenants at September 30, 2009. This credit facility is secured by certain assets of the Company.

In 2006, the Company borrowed $6 million under an unsecured term loan agreement, executed as an amendment to one of its then bank line of credit agreements, in connection with the asset acquisition of SIVA Corporation. The loan provides for interest only payments in the first year and escalating principal payments through 2012. The loan bears interest at the LIBOR rate plus the applicable interest rate spread (1.5% at September 30, 2009) or at the bank's prime lending rate plus the applicable interest rate spread (3.25% at September 30, 2009). The terms and conditions of the line of credit agreement described in the preceding paragraph also apply to the term loan.

In September 2007, the Company entered into an interest rate swap agreement associated with the above $6 million loan, with principal and interest payments due through August 2012. At September 30, 2009, the notional principal amount totaled $4.5 million. This instrument was utilized by the Company to minimize significant unplanned fluctuations in earnings and cash flows caused by interest rate volatility. The Company did not adopt hedge accounting, but rather records the fair market value adjustments through the consolidated statements of operations each period. The associated fair value adjustment for the three and nine months ended September 30, 2009 are $18,000 and $105,000, respectively, and are included as decreases to interest expense.

In September 2009, the Company modified its $1.7 million mortgage, which is collateralized by certain real estate. The annual mortgage payment including interest totals $222,000. The mortgage bears interest at a fixed rate of 5.75% and matures in 2019. The terms of this agreement were modified to extend payment through 2019.

During fiscal year 2009, the Company anticipates that its capital requirements will be approximately $1 to $2 million. The Company does not enter into long term contracts with its major Hospitality segment customers. The Company commits to purchasing inventory from its suppliers based on a combination of internal forecasts and the actual orders from customers. This process, along with good relations with suppliers, minimizes the working capital investment required by the Company. Although the Company lists two major customers, McDonald's and Yum! Brands, it sells to hundreds of individual franchisees of these corporations, each of which is individually responsible for its own debts. These broadly made sales substantially reduce the impact on the Company's liquidity if one individual franchisee reduces the volume of its purchases from the Company in a given year. The Company, based on internal forecasts, believes its existing cash, line of credit facilities and its anticipated operating cash flow will be sufficient to meet its cash requirements through at least the next twelve months. However, the Company may be required, or could elect, to seek additional funding prior to that time. The Company's future capital requirements will depend on many factors including its rate of revenue growth, the timing and extent of spending to support product development efforts, expansion of sales and marketing, the timing of introductions of new products and enhancements to existing products, and market acceptance of its products. The Company cannot assure that additional equity or debt financing will be available on acceptable terms or at all. The Company's sources of liquidity beyond twelve months, in management's opinion, will be its cash balances on hand at that time, funds provided by operations, funds available through its lines of credit and the long-term credit facilities that it can arrange.

Recently Issued Accounting Pronouncements Not Yet Adopted

In October 2009, the FASB issued ASU No. 2009-14, "Certain Revenue Arrangements That Include Software Elements." ASU No. 2009-14 amends guidance included within ASC Topic 985-605 to exclude tangible products containing software components and non-software components that function together to . . .