The following Management's Discussion and Analysis is intended to assist the reader in understanding our results of operations and financial condition. Management's Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements beginning on page F-1 of this Annual Report. This Form 10-K includes certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act. All statements, other than statements of historical fact, included in this Form 10-K that address activities, events or developments that we expect, project, believe, or anticipate will or may occur in the future, including matters having to do with expected and future revenue, our ability to fund our operations and repay debt, business strategies, expansion and growth of operations and other such matters, are forward-looking statements. These statements are based on certain assumptions and analyses made by our management in light of its experience and its perception of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. These statements are subject to a number of assumptions, risks and uncertainties, including general economic and business conditions, the business opportunities (or lack thereof) that may be presented to and pursued by us, our performance on our current contracts and our success in obtaining new contracts, our ability to attract and retain qualified employees, and other factors, many of which are beyond our control. You are cautioned that these forward-looking statements are not guarantees of future performance and those actual results or developments may differ materially from those projected in such statements.

Overview

Park City Group, Inc. (the "Company") is a Software-as-a-Service ("SaaS") provider that brings unique visibility to the consumer goods supply chain, delivering actionable information that ensures product is on the shelf when the consumer expects it. Our service increases our customers' sales and profitability while enabling lower inventory levels for both retailers and their suppliers.

Our services are delivered principally though proprietary software products designed, developed, marketed and supported by the Company. These products are designed to facilitate improved business processes among all key constituents in the supply chain, starting with the retailer and moving back to suppliers and eventually raw material providers. In addition, the Company has built a consulting practice for business process improvement that centers around the Company's proprietary software products and through establishment of a neutral and "trusted" third party relationship between retailers and suppliers. The principal markets for the Company's products are multi-store retail and convenience store chains, branded food manufacturers, suppliers and distributors and manufacturing companies.

Historically, the Company offered applications and related maintenance contracts to new customers for a one-time, non-recurring up front license fee. Although not completely abandoning the license fee and maintenance model, since the acquisition of Prescient Applied Intelligience, Inc. ("Prescient") in January 2009, the Company has focused its strategic initiatives and resources to marketing and selling prospective customers a subscription for its product offerings. In support of this strategic shift toward a subscription-based model, the Company has scaled its contracting process, streamlined its customer on-boarding and implemented a financial package that integrates multiple systems in an automated fashion. As a result, subscription based revenue has grown from $203,000 for the 2008 fiscal year to $7.0 million this year. During that same period our revenue has transitioned from a 6% subscription revenue and 94% license and other revenue basis to 70% subscription revenue and 30% license and other revenue basis.

Recent Developments

ReposiTrakTM

On February 14, 2012 the Company announced a partnership with Levitt Partners, an internationally known health care and food safety-consulting firm. The Company's association with Levitt Partners resulted in the formation of Global Supply, which will provide a targeted solution for improving supply chain visibility for food and drug safety. The solution, ResposiTrakTM, is powered by the Company's technology and was developed in response to the passage of the Food Safety and Modernization Act in January of 2011. ResposiTrakTM enables grocery, supermarkets, packaged goods manufacturers, food processing facilities, drug stores and drug manufacturers, as well as logistics partners, to track and trace products and components to products throughout the food, drug and dietary supplement supply chains. In the event of a product recall, the solution quickly identifies the supply chain path taken by the recalled product or product component, and allows for the removal of affected products in a matter of minutes, rather than weeks. Additionally, ReposiTrakTM reduces risk of further contamination in the supply chain by identifying backward chaining sources and forward chaining recipients of affected products in near real time. On August 8, 2012, the Company announced that Global Supply had begun the first two implementations of ReposiTrakTM at a global grocery retailer and a major grocery wholesaler.

CVS Pharmacy, Inc.

On July 31, 2012, the Company announced a three-year service agreement to provide selected scan-based trading services to CVS through May 2015. The agreement reflects the Company's focus on increasing the number of retailers that use its software on a subscription basis, and marks the Company's progress towards contracting with major retailers outside of the grocery industry. The Company expects the subscription revenue potential generated from these relationships to be significantly larger than any of the Company's existing client hubs within the grocery industry.

Fiscal Year

Our fiscal year ends on June 30. References to fiscal 2012 refer to the fiscal year ended June 30, 2012.

Sources of Revenue

The Company derives revenue from four sources: (1) subscription fees, (2) hosting, premium support and maintenance service fees beyond the standard services offered, (3) license fees, and (4) professional services consisting of development services, consulting, training and education.

Subscription revenue is driven primarily by the number of connections between suppliers and retailers, the number of stores and SKU's. Subscription revenue contains arrangements with customers accessing our applications, which includes the use of the application, application and data hosting, subscription-based maintenance of the application and standard support included with the subscription.

Our hosting services provide remote management and maintenance of our software and customers' data, which is physically located in third party facilities. Customers access 'hosted' software and data through a secure internet connection. Premium support services include technical assistance for our software products and unspecified product upgrades and enhancements on a when and if available basis beyond what is offered with our basic subscription package.

License arrangements are a perpetual license. Software license maintenance agreements are typically annual contracts with customers that are paid in advance or according to terms specified in the contract. This provides the customer access to new software enhancements, maintenance releases, patches, updates and technical support personnel.

Professional services revenue is comprised of revenue from development, consulting, education and training. Development services include customizations and integrations for a client's specific business application. Consulting, education and training include implementation and best practices consulting. Our professional services fees are more frequently billed on a fixed price/fixed scope, but may also be billed on a time and materials basis. We have determined that the professional services element of our software and subscription arrangements is not essential to the functionality of the software.

Critical Accounting Policies

This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses the Company's financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles.

We commenced operations in the software development and professional services business during 1990. The preparation of our financial statements requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions. Management bases its estimates and judgments on historical experience of operations and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among others, will affect its more significant judgments and estimates used in the preparation of our consolidated financial statements.

Income Taxes

In determining the carrying value of the Company's net deferred income tax assets, the Company must assess the likelihood of sufficient future taxable income in certain tax jurisdictions, based on estimates and assumptions, to realize the benefit of these assets. If these estimates and assumptions change in the future, the Company may record a reduction in the valuation allowance, resulting in an income tax benefit in the Company's statements of operations. Management evaluates whether or not to realize the deferred income tax assets and assesses the valuation allowance quarterly.

Goodwill and Other Long-Lived Asset Valuations

Goodwill is assigned to specific reporting units and is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit's carrying amount is greater than its fair value. Management reviews the long-lived tangible and intangible assets for impairment when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Management evaluates, at each balance sheet date, whether events and circumstances have occurred which indicate possible impairment. The carrying value of a long-lived asset is considered impaired when the anticipated cumulative undiscounted cash flows of the related asset or group of assets is less than the carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the estimated fair market value of the long-lived asset. Economic useful lives of long-lived assets are assessed and adjusted as circumstances dictate.

Revenue Recognition

We recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement, (2) the service has been provided to the customer, (3) the collection of our fees is probable and (4) the amount of fees to be paid by the customer is fixed or determinable.

We recognize subscription revenue ratably over the length of the agreement beginning on the commencement dates of each agreement or when revenue recognition conditions are satisfied. For a fee, subscriptions provide the customer with access to the software and data over the Internet, or on demand, and provide technical support services and software upgrades when and if available. Under subscriptions, customers do not have the right to take possession of the software and such arrangements are considered service contracts. Accordingly, we recognize subscription revenue ratably over the length of the agreement and professional services are recognized as incurred based on their relative fair values. In situations where we have contractually committed to an individual customer specific technology, we defer all of the revenue for that customer until the technology is delivered and accepted. Once delivery occurs, we then recognize the revenue ratably over the remaining contract term. When subscription service is paid in advance, deferred revenue is recognized and revenue is recorded ratably over the term as services are consumed.

Set up fees paid by customers in connection with subscription services are deferred and recognized ratably over the life of the applicable agreement.

Hosting, premium support and maintenance service revenue is derived from services beyond the basic services provided in standard arrangements. We recognize hosting, premium service and maintenance revenue ratably over the contract terms beginning on the commencement dates of each contact or when revenue recognition conditions are satisfied. Instances where hosting, premium support or maintenance service is paid in advance, deferred revenue is recognized and revenue is recording ratably over the term as services are consumed.

Professional services revenue consists primarily of fees associated with application and data integration, data cleansing, business process re-engineering, change management and education and training services. Fees charged for professional services are recognized when delivered. We believe the fees for professional services qualify for separate accounting because: (1) the services have value to the customer on a stand-alone basis, (2) objective and reliable evidence of fair value exists for these services and (3) performance of the services is considered probable and does not involve unique customer acceptance criteria.

We also sell software licenses. For software license sales, we recognize revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement, (2) the service has been provided to the customer,
(3) the collection of our fees is probable and (4) the amount of fees to be paid by the customer is fixed or determinable. Licenses generally include multiple elements that are delivered up front or over time. Vendor specific objective evidence of fair value of the hosting and support elements is based on the price charged at renewal when sold separately, and the license element is recognized into revenue upon delivery. The hosting and support elements are recognized ratably over the contractual term.

Stock-Based Compensation

The Company recognizes the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The Company records compensation expense on a straight-line basis. The fair value of options granted are estimated at the date of grant using a Black-Scholes option pricing model with assumptions for the risk-free interest rate, expected life, volatility, dividend yield and forfeiture rate.

Capitalization of Software Development Costs

The Company accounts for research costs of computer software to be sold, leased or otherwise marketed as expense until technological feasibility has been established for the product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. Judgment is required in determining when technological feasibility of a product is established. We have determined that technological feasibility for our software products is reached shortly after a working prototype is complete and meets or exceeds design specifications including functions, features, and technical performance requirements. Costs incurred after technological feasibility is established have been and will continue to be capitalized until such time as when the product or enhancement is available for general release to customers.

Off-Balance Sheet Arrangements

The Company does not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenue and results of operation, liquidity or capital expenditures.

Results of Operations - Fiscal Years Ended June 30, 2012 and 2011

Revenue

                   Fiscal Year Ended June 30,                 Variance
                      2012              2011            Dollars        Percent
Subscription     $    6,994,484     $  6,548,578     $     445,906          6.8 %
Other revenues        3,104,063        4,203,554       (1,099,491)        -26.2 %
Total revenue    $   10,098,547     $ 10,752,132     $   (653,585)         -6.1 %

During the fiscal year ended June 30, 2012, the Company had total revenue of $10,098,547 when compared to $10,752,132 for the year ended June 30, 2011, a 6.1% decrease. This $653,585 decrease in total revenue was principally due to a decrease in other revenues of $1,099,491, as more particularly described below. The decrease was partially offset by an increase of $445,906 in subscription revenue.

While the Company experienced a decrease in total revenue in the most recently completed fiscal year when compared to the fiscal year ended June 30, 2011, management believes that the Company's strategy of pursuing contracts with suppliers ("spokes") to connect to retail customers ("hubs") that have been added in the most recently completed fiscal year, including the recently announced service agreement with CVS Pharmacy, Inc., should result in increased revenue during the fiscal year ending June 30, 2013, and in subsequent periods.

Subscription Revenue

Subscription revenue was $6,994,484 and $6,548,578 in 2012 and 2011 respectively, an increase of 6.8%. This $445,906 increase in the year ended June 30, 2012 when compared with the year ended June 30, 2011 was principally due to
(1) the increase of subscription customers added to the Company's customer base which contributed approximately $499,000 in new subscription revenue and (2) a $664,000 increase attributable to the growth of existing retailer and supplier subscriptions. The increase in subscription revenue was partially offset by a decrease of approximately $717,000 resulting from the non-renewal of existing clients, including the non-renewal of a significant retail client and related connections in January 2012.

The Company continues to focus its strategic initiatives on increasing the number of retailers, suppliers and manufacturers that use its software on a subscription basis. However, while management believes that marketing its suite of software solutions as a renewable and recurring subscription is an effective strategy, it cannot be assured that subscribers will renew the service at the same level in future years, propagate services to new categories or recognize the need for expanding the service offering of the Company's suite of actionable products and services.

Other Revenue

Other revenue was $3,104,063 and $4,203,554 in 2012 and 2011 respectively, a decrease of 26.2%. This $1,099,491 decrease in the year ended June 30, 2012 when compared with the year ended June 30, 2011 was principally due to (1) the non-renewal of maintenance contracts, partially offset by increases to existing contracts resulting in a net reduction of maintenance revenue of approximately $223,000, (2) a decrease in license revenue of $450,000 and (3) a decrease in professional service revenue of $361,000.

While these other sources of revenue will continue in future periods, management's focus on recurring subscription-based revenue will cause license, maintenance and consulting services to fluctuate and be difficult to predict.

Cost of Revenue and Product Support


                                            Fiscal Year Ended June 30,                Variance
                                               2012              2011          Dollars        Percent
Cost of revenue and product support         $    4,581,765     $ 4,028,222     $ 553,543           13.7 %
Percent of total revenue                             45.4%           37.5%

Cost of revenue and product support was $4,581,765 or 45.4% of total revenue, and $4,028,222 or 37.5% of total revenue for the years ended June 30, 2012 and 2011, respectively, a 13.7% increase. This increase of $553,543 for the year ended June 30, 2012 when compared with the same period ended June 30, 2011 is principally due to (i) a $481,000 increase in head count related expense, increased stock compensation, an increase in benefit costs, and the capitalization of software development costs in the prior year, (ii) a $82,000 increase in the use of outside consultants and contractors and (iii) a $19,000 increase from an expansion of our data center. These increases were partially offset by a $28,000 decrease related to network communication costs, hardware and software maintenance and support contracts, travel and related expenditures.

Sales and Marketing Expense

                            Fiscal Year Ended June 30,                 Variance
                               2012              2011           Dollars         Percent
Sales and marketing         $    2,640,292     $ 2,742,061     $ (101,769)          -3.7 %
Percent of total revenue             26.1%           25.5%

The Company's sales and marketing expense was $2,640,292, or 26.1% of total revenue, and $2,742,061 or 25.5% of total revenue, for the fiscal years ended June 30, 2012 and 2011, respectively, a 3.7% decrease. This $101,769 decrease over the previous year was primarily the result of (i) a decrease of approximately $226,000 in salary, employee benefits and training, stock-based compensation, and commission expense and (ii) a decrease of $46,000 in the use of outside sales contractors. These decreases were partially offset by increases of approximately (y) $165,000 in non-employee commissions primarily related to retailer marketing allowances and (z) an increase of approximately $6,000 in public relations, advertising, marketing and tradeshow expense, travel and related expenditures.

General and Administrative Expense

                              Fiscal Year Ended June 30,                 Variance
                                 2012              2011           Dollars         Percent
General and administrative    $    2,949,108     $ 3,053,818     $ (104,710)          -3.4 %
Percent of total revenue               29.2%           28.4%

The Company's general and administrative expense was $2,949,108, or 29.2% of total revenue, and $3,053,818 or 28.4% of total revenue for the years ended June 30, 2012 and 2011, respectively, a 3.4% decrease. This $104,710 decrease when comparing expenditures for the year ended June 30, 2012 with the same period ended June 30, 2011 is principally due to (i) the settlement of a lawsuit and related legal fees in the prior year through the combination of cash and equity and (ii) a decrease of approximately $41,000 in travel and related expenditures. These decreases were partially offset by (w) a $203,000 increase in bad debt expense, (x) a $124,000 increase in in salary, employee benefits, payroll taxes, bonuses, and compensation related expenditures such as stock-based compensation expense for certain employees and board members that are based on multi-year vesting schedules (y) an $89,000 increase in investor relations, shareholder cost, and other professional fees, and (z) a $33,000 increase in facility expenses.

Depreciation and Amortization Expense

                                 Fiscal Year Ended June 30,               Variance
                                    2012              2011         Dollars        Percent
Depreciation and amortization    $     900,094       $ 786,790     $ 113,304          14.4 %
Percent of total revenue                  8.9%            7.3%

The Company's depreciation and amortization expense was $900,094 and $786,790 for the year ended June 30, 2012 and 2011, respectively, an increase of 14.4%. This increase of $113,304 for the year ended June 30, 2012 when compared to the year ended June 30, 2011 is due to (1) an increase in depreciation related to new capital hardware investments and (2) an increase in amortization of capitalized software costs related to a project capitalized in fiscal year 2011.

Other Income and Expense

                                    Fiscal Year Ended
                                        June 30,                        Variance
                                  2012            2011           Dollars       Percent
Other gains                    $   319,272     $         -     $   319,272              %
Interest income (expense)        (205,227)       (346,704)       (141,477)        -40.8 %
Total other income (expense)   $   114,045     $ (346,704)     $   460,749        132.9 %

Net other income (expense) was net other income of $114,045 when compared with net other expense of $346,704 for the year ended June 30, 2012 and June 30, 2011, respectively. This $460,749 change is principally due to (1) a $141,477 decrease in interest expense resulting from the retirement of certain notes payable in July 2011 and January 2012 and (2) a gain on extinguishment of current liabilities of $319,272.

Preferred Dividends

                            Fiscal Year Ended June 30,              Variance
                               2012              2011        Dollars       Percent
Preferred dividends         $     834,687       $ 826,411     $ 8,276           1.0 %
Percent of total revenue             8.3%            7.7%

Dividends declared on preferred stock was $834,687 for the year ended June 30, 2012 when compared with $826,411 accrued in the same period in 2011. The $8,276 increase in accrued dividends is principally the result of dividends accrued on the additional Series A Preferred paid in kind in lieu of cash dividends. This increase has been partially offset by the conversion of shares of Series A Preferred to common stock. Holders of Series A Preferred are entitled to a 5.00% annual dividend ("Dividend Rate") payable quarterly in either cash or additional Series A Preferred at the option of the Company with fractional shares paid in cash. Holders of Series B Preferred are entitled to a 12.00% annual dividend payable quarterly in cash.

The Dividend Rate with respect the Series A Preferred increases to 10% per annum in the event the average closing price of the Company's common stock during the last thirty (30) trading days of any calendar quarter is less than $3.00 per share (a "Dividend Adjustment"). A holder of Series A Preferred has . . .