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

Results of Operations - September 30, 2012 compared to September 30, 2011

We had a net loss of $237,262 for the three months ended September 30, 2012, compared to a net loss of $128,732 for the three months ended September 30, 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 September 30, 2012, license and other revenue was $158,791 compared to $204,716 for the three months ended September 30, 2011, a decrease of $45,925. 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.

Cost of Goods Sold

Cost of sales for the three months ended September 30, 2012 totaled $63,757 and for the three months ended September 30, 2011, cost of sales were $55,257, an increase of $8,500. The increase in cost of sales for the three months ended September 30, 2012, was the result of an increase in the cost of maintaining the Company's data processing center for its mobile banking operations, which made up 80% of the total cost of sales in the current period compared to 78% in the quarter ended September 30, 2011.

Operating Expenses

Sales and marketing expense for the three months ended September 30, 2012 were $26,668 compared to $40,140 for the three months ended September 30, 2011, a decrease of $13,472. For the three months ended September 30, 2012, the Company had one direct sales staff person. The Company, for the three months ended September 30, 2012, paid out commissions of $173 compared to $314 for the three month period ended September 30, 2011.

General and administrative expenses for the three months ended September 30, 2012 were $182,535 compared to $160,548 for the three months ended September 30, 2011, an increase of $21,987 over the three months ended September 30, 2011. The increase was mainly the result of increases in some of the expenditures for the three months ended September 30, 2012, compared to the three months ended September 30, 2011. Legal fees increased by $9,870 due to patent renewal costs. The Company also saw increases of $23,341 in professional fees, $9,644 in contract and temporary help costs, and $11,837 in bank charges. These increases were offset by decreases in business insurance of $6,743 and directors fees of $3,000 over the three months ended September 30, 2011.

Research and development expense for the three months ended September 30, 2012 totaled $41,993 versus $37,109 for the three months ended September 30, 2011. The increase of $4,884 was principally the result of increase in contract and temporary help costs that increased by $4,288.

Other Income (Expense)

Interest expense for the three months ended September 30, 2012, was $81,102 compared to $40,394 in the same period ended September 30, 2011. The increase was due to amortization of discount on notes payable expense in the period ended September 30, 2012 compared to none in the period ended September 30, 2011.

Liquidity

Our decrease in cash and cash equivalent to $47,017 at September 30, 2012 compared to $62,115 at June 30, 2012 was the result of $70,690 used in operating activities offset by $60,592 provided by financing activities. Net cash used in operations during 2012 was $70,690 compared with $47,341 provided by operations during the same period in 2011. Cash used in operations during 2012 was primarily due to the increase in payroll liabilities offset by the net loss in the period, decreases in accounts receivable, and increases in accounts payable and accrued expenses. Net cash used in investing activities during 2012 was $5,000 compared with no net cash used in investing activities during 2011. Net cash provided by financing activities of $60,592 during 2012 was due to proceeds from notes payable of $67,000. During the same period in 2011, the net cash provided by financing activities of $19,500 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 three months ended September 30, 2012, the Company had a net loss of $237,262. At September 30, 2012, the Company had a working capital deficit of $4,521,082 and a stockholders' deficiency of $4,520,599. The Company is delinquent or in default of $2,075,474 of its notes payable and is delinquent in payment of certain amounts due of $561,278 for payroll taxes and accrued interest and penalties as of September 30, 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 September 30, 2012, the Company borrowed a total of $93,000 from The Matthews Group, a related party at 10% annual interest due on demand. The notes are convertible into the Company's common stock at $0.10 per share.

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 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

We do 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.