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

Results of Operations - March 31, 2012 compared to March 31, 2011

We had a net loss of $220,889 for the three months ended March 31, 2012, compared to a net loss of $223,396 for the three months ended March 31, 2011. For the nine months ended March 31, 2012, we had a net loss of $586,569 compared to a net loss of $768,908 for the nine months ended March 31, 2011.

Revenue

License and other revenues are derived from our product identification systems sold principally to customers in the LCD monitor industry. For the three months ended March 31, 2012, license and other revenue was $184,358 compared to $212,851 for the three months ended March 31, 2011, a decrease of $28,493. The license and other revenue decreases are attributable to the decrease in demand for licenses during the quarter. Revenues from the LCD market remain unpredictable as they are generated when customers open new production facilities or update production equipment. For the nine months ended March 31, 2012 and 2011, license and other revenues was $452,416 and $678,919, respectively. The decrease was due to the decrease in demand for licenses.

Cost of Goods Sold

Cost of sales for the three months ended March 31, 2012 totaled $74,298 and for the three months ended March 31, 2011, cost of sales were $83,714, a net decrease of $9,416. The decrease in cost of sales for the three months ended March 31, 2012, was the result of a reduction in the use of hardware inventories during the quarter. For the nine months ended March 31, 2012, the cost of sales totaled $188,415 compared to the nine months ended March 31, 2011 of $260,468. The net decrease of $72,053 was mainly due to a reduction in cost of maintaining the Company's data processing center for its mobile banking operations and the reduction in the use of hardware inventories for the period. This decrease was offset by increases in network costs that increased by $5,632.

Operating Expenses

Sales and marketing expense for the three months ended March 31, 2012 were $34,075 compared to $38,717 for the three months ended March 31, 2011, a decrease of $4,642. For the three months ended March 31, 2012, the Company had one direct sales staff person. The Company, for the three months ended March 31, 2012, paid out commissions of $299 compared to $185 for the three month period ended March 31, 2011. Sales and marketing expense for the nine months ended March 31, 2012 was $109,848 compared to $114,474 for the nine months ended March 31, 2011, a difference of $4,626. For the nine months ended March 31, 2012 the Company had one direct sales staff.

General and administrative expenses for the three months ended March 31, 2012 were $169,356 compared to $235,879 for the three months ended March 31, 2011, a decrease of $66,523 over the three months ended March 31, 2011. The decrease was mainly the result of decreases in some of the expenditures for the three months ended March 31, 2012, compared to the three months ended March 31, 2011. Legal fees decreased by $59,860 due to the waning down of the Aurora case discussed under legal proceedings. The Company also saw decreases of $3,197 in depreciation expense, $6,588 in payroll and related costs and $6,405 in health insurance expense. These decreases were offset by increases in temporary/contract help of $13,413 and patent renewal expense of $6,556 over the three months ended March 31, 2011. For the nine months ended March 31, 2012, general and administrative expenses were $425,472 versus $768,559 for the nine months ended March 31, 2011, a decrease of $343,087. The reduction was mainly the result of decreases in most of the expenditure for the nine months ended March 31, 2012. Payroll expense decreased by $38,301 due to a reduction in staff levels. The Company also saw decreases in legal fees of $161,274, $9,000 in professional fees, $9,591 in depreciation expense, $34,576 in patent renewal expense, $60,000 in bad debts expense, $24,374 in payroll penalty and interest expense, $8,259 in health insurance expense, and $7,326 in travel expense. These decreases were offset by an increase in contract/temporary help expense of $22,375.

Research and development expense for the three months ended March 31, 2012 totaled $55,896 versus $38,896 for the three months ended March 31, 2011. The increase of $17,000 was principally the result of an increase in contract/temporary expense that increased by $31,884 but was offset by a decrease of $14,884 in payroll costs. For the nine months ended March 31, 2012, research and development costs was $162,686 compared to $183,720 for the nine months ended March 31, 2011, a difference of $21,034. For the nine month ended March 31, 2012, the engineering payroll costs decreased by $91,704 due to a reduction in staff levels but consulting expense increased by $70,669 as the Company used more consulting services.

Other Income (Expense)

Interest income for the three months ended March 31, 2012 and 2011 was $106 and $0, respectively. Interest expense for the three months ended March 31, 2012 was $71,622 compared to $39,041 in the same period ended March 31, 2011. The increase was the result of issuance of notes payable. For the nine months ended March 31, 2012 and 2011 interest income was $110 and $0, respectively. For the nine months ended March 31, 2012 and 2011, interest expense was $152,674 and $120,606, respectively. The increase was the result of issuance of notes payable.

Liquidity

Our increase in cash and cash equivalent to $57,224 at March 31, 2012 compared to $14,996 at June 30, 2011 was mainly the result of $437,104 used in operating activities and $489,500 provided by financing activities. Net cash used in operations during 2012 was $437,104 compared with $79,176 used in operations during the same period in 2011. Cash used in operations during 2012 was primarily due to the $500,000 we were required to provide a bank as a guarantee for a prepaid card program, the increase in deferred revenue offset by the net loss in the period, decreases in accounts receivable and decreases in accrued expenses. Net cash used in investing activities was $10,168 during 2012 compared with $60,000 net cash used in investing activities during 2011 which was primarily the result of payment on note receivable. Net cash provided by financing activities of $489,500 during 2012 was due to proceeds from notes payable of $489,500. During the same period in 2011, the net cash provided by financing activities of $129,200 was from net proceeds from notes payable.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the nine months ended March 31, 2012, the Company had a net loss of $586,569. At March 31, 2012, the Company had a working capital deficit of $4,028,045 and a stockholders' deficiency of $4,023,445. The Company is delinquent or in default of $2,390,778 of its notes payable and is delinquent in payment of certain amounts due of $474,781 for payroll taxes and accrued interest and penalties as of March 31, 2012. The Company's operations are currently being supported by borrowings from affiliated parties, and its cash and forecasted cash flow from operations will not be sufficient to continue operations without continued external investment. The Company believes it will require additional funds in the near future to continue its operations and to continue to develop its existing projects and plans to raise such funds by finding additional investors to purchase the Company's securities, generating sufficient sales revenue, implementing further dramatic cost reductions or any combination thereof. There is no assurance that the Company can be successful in raising such funds, generating the necessary sales or reducing major costs. Further, if the Company is successful in raising funds from sales of equity securities, the terms of these sales may cause significant dilution to existing holders of common stock. The condensed consolidated financial statements do not include any adjustments that may result from this uncertainty.

If the Company is not successful in raising additional funds, generating sufficient revenues or implementing sufficient cost reductions, the Company may be forced to suspend or discontinue its operations or seek relief from its debt obligations under the United States Bankruptcy Code. Any of these actions is likely to result in a common stockholder's loss of his or her complete investment in the Company's common stock.

Subsequent to the quarter ended March 31, 2012, the Company borrowed a total of $4,500 from its current Chief Executive Officer and director, Van Tran, pursuant to a convertible demand note that bears interest at rate of 8% per annum. The note is convertible into the Company's common stock at the rate of one share per every $0.08 of indebtedness.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs". ASU No. 2011-4 does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the ASU as required. The ASU will affect the Company's fair value disclosures, but will not affect the Company's results of operations, financial condition or liquidity.

In June 2011, the FASB issued ASU No. 2011-05, "Presentation of Comprehensive Income". The ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders' equity, and instead requires consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the ASU as required. It will have no affect on the Company's results of operations, financial condition or liquidity.

In September 2011, the FASB issued ASU 2011-08, "Testing Goodwill for Impairment", an update to existing guidance on the assessment of goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company is currently evaluating the affects adoption of ASU 2011-08 may have on its goodwill impairment testing.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Critical Accounting Policies

Stock-Based Compensation:

The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs. Stock-based compensation for employees is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. Options vest and expire according to terms established at the grant date. The value of the stock compensation to non-employees is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.

We estimate volatility and forfeitures based upon historical data. As permitted by the authoritative guidance issued by the FASB, we use the "simplified" method to determine the expected life of an option due to the Company's lack of sufficient historical exercise data to provide a reasonable basis, which is a result of the relative high turnover rates experienced in the past for positions granted options. All of these variables have an effect on the estimated fair value of our share-based awards.

Revenue Recognition:

The Company accounts for revenue recognition in accordance with SEC Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements" and related amendments. Revenues for the Company are classified into four separate products; license revenue (Veritec's Multi-Dimensional matrix symbology), hardware revenue, identification card revenue, and debit card revenue. Revenues from licenses, hardware, and identification cards are recognized when the product is shipped and collection is reasonably assured. The process typically begins for license and hardware revenue with a customer purchase order detailing its hardware specifications so the Company can import its software into the customer's hardware. Once importation is completed, if the customer only wishes to purchase a license, the Company typically transmits the software to the customer via the Internet. Revenue is recognized at that point. If the customer requests both license and hardware products, once the software is imported into the hardware and the process is complete, the product is shipped and revenue is recognized at time of shipment. Once the software and/or hardware are either shipped or transmitted, the customers do not have a right of refusal or return. Under some conditions, the customers remit payment prior to the Company having completed importation of the software. In these instances, the Company delays revenue recognition and reflects the prepayments as customer deposits.

The process for identification cards begins when a customer requests, via the Internet, an identification card. The card is reviewed for design and placement of the data, printed and packaged for shipment. At the time the identification cards are shipped and collection is reasonably assured, revenue is recognized.

The Company, as a processor and a distributor, recognizes revenue from transaction fees charged cardholders for the use of its issued mobile debit cards. The fees are recognized on a monthly basis after all cardholder transactions have been summarized and reconciled with third party processors.