UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 (No fee required)

For the quarterly period ended March 31, 2008

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

For the transition period from                      to                     

VERITEC, INC.

(Exact name of registrant as specified in its charter)

NEVADA
(State or other jurisdiction of incorporation or organization)

95-3954373
(IRS Employer Identification Number)

2445 Winnetka Avenue North, Golden Valley, MN 55427
(Address of principal executive offices, zip code)

763-253-2670
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 15 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 þ No o

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes þ No o

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date. As of December 31, 2007, the Company had:

		Number of Shares of Common Stock
		15,113,088

Transition Small Business Disclosure Format (check one): Yes o No þ

 

 

FORM 10-QSB
VERITEC, INC.

INDEX

		Page(s)
PART I. FINANCIAL INFORMATION			1
Item 1. Financial Statements			1
Item 2. Management’s Discussion and Analysis or Plan of Operations			10
Item 3. Controls and Procedures			14
PART II. OTHER INFORMATION			14
Item 1. Legal Proceedings			14
Item 1A. Risk Factors			15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			17
Item 3. Defaults Upon Senior Securities			17
Item 4. Submission of Matters to a Vote of Security Holders			17
Item 5. Other Information			17
Item 6. Exhibits			17
Signatures			17
Exhibits Index			18
Exhibit 31
Exhibit 32

 ii 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

VERITEC, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

		March 31,				June 30,
		2008				2007
		(Unaudited)
ASSETS
Current Assets:
Cash		$	402,630			$	790,089
Accounts receivable, net			28,681				11,927
Note receivable from RBA, net			—				78,516
Inventories			19,853				26,213
Prepaid expenses			12,650				27,325
Total Current Assets			463,814				934,070
Property and Equipment, net			89,770				88,005
Software License, net			58,333				83,333
Patent Costs			43,756				18,756
Total Assets		$	655,673			$	1,124,164
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	28,624			$	56,072
Accrued expenses			239,385				405,074
Total Current Liabilities			268,009				461,146
Commitments and Contingencies
Stockholders’ Equity:
Convertible preferred stock, par value $1.00; authorized 10,000,000 shares, 276,000 shares of Series H authorized, 1,000 shares issued			1,000				1,000
Common stock, par value $.01; authorized 20,000,000 shares, 15,113,088 and 15,096,088 shares issued			151,131				150,961
Subscription receivable			(36,579	)			(193,876	)
Additional paid-in capital			13,668,636				13,575,926
Accumulated deficit			(13,396,524	)			(12,870,993	)
Total Stockholders’ Equity			387,664				663,018
Total Liabilities and Stockholders’ Equity		$	655,673			$	1,124,164

See notes to condensed consolidated financial statements.

VERITEC, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three months ended March 31,
		2008				2007
Revenues:
Other		$	317,244			$	171,015
Infringement			—				1,105,966
Total Revenues			317,244				1,276,981
Cost of Sales			38,635				24,191
Gross Profit			278,609				1,252,790
Operating Expenses:
Selling, general and administrative			300,443				709,070
Research and development			127,062				95,716
Total Operating Expenses			427,505				804,786
Income (Loss) from Operations			(148,896	)			448,004
Interest income			2,615				15,193
Net Income (Loss)		$	(146,281	)		$	463,197
Income (Loss) Per Common Share
Basic and Diluted		$	(0.01	)		$	0.03

See notes to condensed consolidated financial statements.

VERITEC, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Nine months ended March 31,
		2008				2007
Revenues:
Other		$	525,537			$	362,913
Infringement			445,349				1,767,894
Total Revenues			970,886				2,130,807
Cost of Sales			124,327				39,729
Gross Profit			846,559				2,091,078
Operating Expenses:
Selling, general and administrative			972,408				1,433,128
Research and development			417,338				290,611
Total Operating Expenses			1,389,746				1,723,739
Income (Loss) from Operations			(543,187	)			367,339
Other Income:
Interest income			16,671				31,701
Gain on sale of property and equipment			985				—
Total Other Income			17,656				31,701
Net Income (Loss)		$	(525,531	)		$	399,040
Income (Loss) Per Common Share
Basic and Diluted		$	(0.03	)		$	0.03

See notes to condensed consolidated financial statements.

VERITEC, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Nine months ended March 31,
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	(525,531	)		$	399,040
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation			24,152				7,728
Amortization of software license			25,000				5,000
Stock based compensation			56,060				123,539
Interest income added to note receivable from RBA			(5,284	)			(6,794	)
Services applied to reduce note receivable from RBA			57,750				26,488
Gain on sale of property and equipment			(985	)			—
Reverse allowance for note receivable from RBA			(48,000	)			—
Changes in operating assets and liabilities:
Accounts receivable			(16,754	)			(1,898	)
Inventories			6,360				(7,661	)
Prepaid expenses			14,675				(46,000	)
Accounts payables and accrued expenses			(165,687	)			119,698
Net cash provided (used) by operating activities			(578,244	)			619,140
CASH FLOWS FROM INVESTING ACTIVITIES
Advances on note receivable			(50,950	)			(400,000	)
Proceeds from sale of property and equipment			985				—
Collection on note receivable from RBA			125,000				304,083
Purchases of equipment			(25,917	)			(23,882	)
Purchase of patent			(25,000	)			—
Purchases of software license			—				(100,000	)
Net cash provided (used) by investing activities			24,118				(219,799	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on subscription receivable (including $9,370 interest credited to additional paid-in capital)			166,667				55,556
NET INCREASE (DECREASE) IN CASH			(387,459	)			454,897
CASH AT BEGINNING OF PERIOD			790,089				898,424
CASH AT END OF PERIOD		$	402,630			$	1,353,321
NONCASH ACTIVITIES
Issuance of common stock for accrued expenses		$	27,450			$	—
Applied accrued expenses and prepayment on subscription receivable to subscription receivable			—				111,111
Purchase of assets of Secure Environments, Inc. included in year end accrued expenses			—				6,296
Purchase of property and equipment included in accounts payable			—				48,000

See notes to condensed consolidated financial statements.

VERITEC, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. THE COMPANY

The Company refers to Veritec, Inc. (Veritec) and its wholly owned subsidiary VCode Holdings, Inc. (VCode).

B. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required for complete financial statements.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month and nine month periods ended March 31, 2008, are not necessarily indicative of the results that may be expected for the year ended June 30, 2008. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Form 10-KSB as of and for the year ended June 30, 2007. The Condensed Consolidated Balance Sheet at June 30, 2007, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.

The accompanying condensed consolidated financial statements include the accounts of Veritec and VCode. All inter-company transactions and balances were eliminated in consolidation.

C. NATURE OF BUSINESS

The Company is primarily engaged in the development, marketing, and sales of a line of microprocessor based encoding and decoding systems that utilize Matrix Symbology technology, a two-dimensional barcode technology originally invented by the founders of Veritec under United States patents 4,924,078, 5,331,176, 5,612,524 and 7,159,780. The Company’s encoding and decoding systems allow a manufacturer, distributor, reseller or user of products, to create and apply unique identifiers to the products in the form of a coded symbol. The coded symbol containing the binary encoded data applied to the product enable automated manufacturing control, together with identification, tracking, and collection of data through cameras, readers and scanners also marketed by the Company. The collected data is then available for contemporaneous verification or other user definable purposes. Veritec has also developed a Secured Identification System based upon its proprietary VSCode^™ and VeriCode^® Symbology. The Company’s Secured Identification System enables the storage of images, biometric information and data for contemporaneous verification of an individual’s unique identity. In addition to its United States patents, the Company holds patents in Europe (German Patent No. 69033621.7; French Patent No. 0438841; and Great Britain Patent No. 0438841); and has applications pending with the United States Patent and Trademark Office for uses of its Multi-Dimensional Matrix Symbology.

In November 2003, Veritec formed VCode to which it assigned United States patents 4,924,078, 5,331,176 and 5,612,524, together with all corresponding patent applications, foreign patents, foreign patent applications, and all continuations, continuations in part, divisions, extensions, renewals, reissues and re-examinations thereof. VCode in turn entered into an Exclusive License Agreement with VData LLC (VData), an Illinois limited liability company unrelated to Veritec. The purpose of the Exclusive Licensing Agreement is to allow VData to pursue enforcement and licensing of the patents against parties who wrongfully exploit the technology of such patents. VData is the wholly owned subsidiary of Acacia Research Corporation (NASDAQ: ACTG).

The Exclusive License Agreement provides that all expenses related to the enforcement and licensing of the patents will be the responsibility of VData. The Company and VData share the net proceeds arising from the enforcement or licensing of the patents.

Infringement revenue has been the primary source of revenue for the Company in recent periods. Patents 4,924,078 and 5,612,524, which are the subject of the infringement claims, are currently being reexamined by the U.S. Patent and Trademark Office and are the subject of a declaratory judgment action seeking to declare the patents invalid. All infringement actions of these patents have been suspended pending the outcome of these proceedings. Furthermore, the patents expired in November 2007. Therefore revenues from patent infringement claims will be significantly reduced or cease dependent upon the outcome of the patent re-exams. Should the patents be upheld, the Company will have an additional period of time in which to pursue infringers. If not, the infringement revenue from the patents 4,924,078 and 5,612,524 will cease.

During 2007, VCode and VData filed several infringement complaints against alleged infringers of the 5,331,176 patent. For the nine months ended March 31, 2008, the first infringement complaint of patent 5,331,176 was settled and the Company received proceeds totaling $195,349.

D. SIGNIFICANT ACCOUNTING POLICIES

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, and identification card revenue (collectively, other), and infringement 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 receives infringement revenue under its Exclusive License Agreement with VData. The Exclusive License Agreement with VData provides that all expenses related to the enforcement and licensing of the patents is the responsibility of VData. The Company and VData share the net proceeds arising from enforcement or licensing of the patents. As a result, all infringement revenue is recognized at the time it is received. None of the infringement revenue is refundable to any party once received.

Software License

The software license from RBA International, Inc. (RBA) is capitalized at cost and amortized using the straight-line method over an estimated useful life of three years.

Patent Costs

The patent application costs are capitalized and, when approved, will be amortized over its estimated useful life. If not approved, or if considered impaired, these costs will be written off when deemed impaired.

Income Taxes

The Company’s adoption on July 1, 2007, of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (as amended)”, did not have a significant impact on the Company’s consolidated financial position, results of operations, and cash flows.

E. INCOME (LOSS) PER COMMON SHARE

Basic income (loss) per common share is computed by dividing the income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted income (loss) per common share, in addition to the weighted-average number of common shares outstanding determined for basic income (loss) per common share, includes potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The weighted average shares outstanding were 15,113,088 and 15,078,598 for the three months ended March 31, 2008 and 2007, respectively. The weighted average shares outstanding were 15,107,648 and 15,078,598 for the nine months ended March 31, 2008 and 2007, respectively. Potentially dilutive instruments include stock options and preferred stock. For the three months and nine months ended March 31, 2008, stock options (282,749 common shares) and preferred stock (10,000 common shares) were antidilutive and, therefore, were not included in the computation of diluted loss per common share.

Diluted income per common share for the three months and nine months ended March 31, 2007, was computed as follows:

		Three Months				Nine Months
Net income		$	463,197			$	399,040
Weighted average shares outstanding			15,078,598				15,078,598
Incremental shares from assumed exercise or conversion of dilutive instruments:
Options			32,130				35,084
Preferred Stock			10,000				10,000
Shares outstanding — diluted			15,120,728				15,123,682
Income per common share — diluted		$	0.03			$	0.03

F. GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying condensed consolidated balance sheet, the Company has lost $13,396,524 from inception to March 31, 2008. At March 31, 2008, the Company has $195,805 of working capital and stockholders’ equity of $387,664. The Company has been dependent on The Matthews Group, a related party, to meet its operating needs. Through March 31, 2008, The Matthews Group has funded $1,962,963 of the original $2,000,000 subscription receivable. These matters raise substantial doubt that the Company will be able to continue as a going concern. The Company believes its cash and forecasted cash flow from operations may not be sufficient to continue operations through fiscal 2009. The condensed consolidated financial statements do not include any adjustments that may result from this uncertainty.

G. STOCK-BASED COMPENSATION

The Company has agreements with certain employees and consultants that provide up to five years of annual grants of options, on each employment anniversary date, to purchase shares of the Company’s common stock. The option price is 15% below the market price on the date of grant, the options vest one year from the date of grant, and the options expire five years after vesting. At March 31, 2008, the Company has commitments under these agreements to grant options for 30,000 shares of the Company’s common stock for the remaining three months in fiscal year 2008, 77,000 shares each fiscal year for 2009 through 2010, and 47,000 shares in fiscal 2011, totaling 231,000 options.

A summary of outstanding stock options is as follows:

		Number of				Weighted – Average
		Shares				Exercise Price
Outstanding at June 30, 2007			156,666			$	1.03
Granted			129,000			$	0.49
Forfeited			(2,917	)		$	0.51
Outstanding at March 31, 2008			282,749			$	0.79

The weighted-average remaining contractual life of stock options outstanding at March 31, 2008 is 4.8 years.

The weighted-average fair value of options granted for the three months ended March 31, 2008 and 2007 was $0.27 and $1.45, respectively. Stock-based compensation expense was $16,207 and $40,157 during the three months ended March 31, 2008 and 2007, respectively. Stock-based compensation expense was $56,060 and $123,539 during the nine months ended March 31, 2008 and 2007, respectively. As of March 31, 2008, there was $11,181 of unrecognized compensation costs related to stock options. These costs are expected to be recognized over the next four quarters.

The Company has an agreement with an employee to issue 2,000 shares of the Company’s common stock each year for fiscal 2008 through 2011.

The Board of Directors had authorized the Chief Executive Officer to issue up to 1,000,000 shares of the Company’s common stock in the form of options or stock bonuses to employees and consultants. At March 31, 2008, stock and stock options totaling 616,249 have been committed under this authorization.

H. NOTE RECEIVABLE

In June 2007, the Company provided a $125,000 line of credit bearing interest at 10% to RBA. RBA had borrowed the maximum of $125,000. For the nine month period ended March 31, 2008, the note had been reduced by services performed by RBA, net of interest, totaling $50,950, which was re-loaned in November 2007 to RBA once again maximizing the line of credit. On January 24, 2008, the Company received a certified check from RBA totaling $126,062. The check paid the outstanding balance of the note receivable issued to RBA in June 2007, which was comprised of principal and interest totaling $125,000 and $1,062, respectively. This note had been collateralized by assets of RBA. For the nine month period ended March 31, 2008, the Company recognized income of $48,000 from the reversal of the June 30, 2007 allowance for this note receivable.

I. SUBSCRIPTION RECEIVABLE

The Matthews Group, in the past, has made prepayments against the Company’s subscription receivable. These prepayments were nonrefundable and noninterest bearing. The prepayment on the subscription receivable was applied against the subscription receivable during the nine months ended March 31, 2007.

J. OTHER SIGNIFICANT EVENTS

In November 2006, the Company entered into an agreement with a manufacturing company to design and develop a line of readers to overcome the Company’s dependence on outside suppliers. In Phase One of the project, a proto-type cell phone reader designed by the manufacturing company was evaluated and accepted. Phase Two of the project requires the manufacturing company to design and manufacture four individual proto-type models of readers that work with Matrix Symbologies. The agreement required a deposit of $30,000 and payments of $30,000 for each of the four defined milestones with the total project cost not to exceed $150,000. To date the Company has made the required deposit of $30,000, a $20,000 advance and accrued another $95,000 for a total cost of $145,000 against the maximum expenditure of $150,000. In January 2008, the project was halted and a certified letter was sent demanding immediate repayment of the deposit and money advanced to the manufacturing company, which totaled $50,000, as a result of the manufacturing company’s inability to complete the project. The manufacturer has since contacted the Company and negotiations have begun. Payments under this agreement are recorded as research and development expense as the service is provided.

In August 2007, the Company entered into an agreement with a consultant to purchase certain intellectual property. The agreement requires the Company to make a $25,000 payment once it has been proven that the intellectual property is patentable. It also requires the Company to issue 60,000 shares of the Company’s common stock to the consultant once one or more patents have been issued. In January 2008, the Company’s patent attorney believed the intellectual property to be patentable and submitted the information to the patent office. The Company made the $25,000 payment on January 31, 2008.

In February 2008, the Company entered into an agreement with RBA International totaling $28,800 to investigate the feasibility of enhancing our PhoneCodes^© technology to include the transmission of bank transactions. The analysis and requirements document, completed in April 2008, includes, the benefits, the risks and the system architecture and infrastructure requirements of the BankCode^© project. Also included will be the plan and budget estimates of moving forward with the project.

K. RECENTLY ISSUED ACCOUNTING STANDARD

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements (as amended)”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and therefore, does not expand the use of fair value in any new circumstances. SFAS No. 157 will be effective for the Company beginning fiscal year 2009. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157. This FSP permits the delayed application of SFAS No. 157 for all non-recurring fair value measurement of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. Management is currently evaluating the impact SFAS No. 157 will have on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities (as amended), Including an Amendment of SFAS No. 115,” which permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. SFAS No. 159 will be effective for the Company beginning fiscal year 2009. Management is currently evaluating if it will elect the fair value option for any of the Company’s eligible financial instruments.

Item 2. Management’s Discussion and Analysis or Plan of Operation

Business Overview

Our business is based on two-dimensional barcode technology covered by four United States patents. Our revenues come from license fees or product sales related to products based on our technology, as well as significant payments from patent infringement lawsuits.

Principal products

We have developed and are marketing the four main products described below: Product Identification and tracking products, Bio-ID/stored-value cards, Time and Attendance systems and products based on PhoneCodes^© technology. Our plans are to continue focusing on product improvements, sales, and marketing of these product categories. Recently, the Company added additional independent sales representatives and distributors to assist us in the marketing of our new products: the PhoneCodes^©, ID Card Printing Systems and the Time and Attendance Software. We believe these new products, along with the addition of new distribution outlets, will open up new opportunities for Veritec.

Product Identification. Our principal product to date has been a Product Identification system for identification and tracking of manufactured products using our VeriCode^® barcode technology. This technology has been used in the LCD business for many years. Sales of this product have been focused in the Far East; however, the Company had discussions with U.S. companies and believes a U.S. market can be developed. The vast majority of our non-infringement revenue in recent periods has been derived from sales of these products. We recognize these revenues in the form of license fees, almost entirely from our customers in Asia.

Secure Bio-ID Cards and Stored-Value Cards. Secure Bio-ID cards present the cardholder’s picture, fingerprint minutia and other pertinent data that can be produced in either a soft or hard card material. The ID card, along with the individual’s picture and the VSCode^™, offer a unique and secure method of identifying individuals. We have developed a number of products based on our technology; however, sales have been limited to date. In the first nine months of fiscal 2008, the Company sold its first ID card printing system to an Indian tribe living in the U.S. that frequently crosses the U.S./Canadian border. The card printing system, which produces the ID card inclusive of the individual’s picture and Veritec’s VSCode^™, allows the Indian tribe to produce identification cards that enable them to enroll tribal members and their descendants and to act as a supplement to U.S. passports. The ID card includes the individual’s picture and a fingerprint, which is stored inside our 2-D barcode called the VSCode^™, a unique and secure data storage “container” that we believe has been designed not to be hacked. In the three month period ended March 31, 2008, the Company has received additional commitments for orders and is having ongoing discussions with other Indian tribes (and countries) for use of this ID card printing system.

The VSCode^™ is a derivative of the two-dimensional VeriCode^® symbol with the ability to encrypt a greater amount of data by increasing data density. The VSCode^™ offers a high degree of security, which can also be defined by the application requirements of the user. The VSCode^™ symbol can hold any form of binary information that can be digitized, including numbers, letters, images, photos, graphics, the minutia for biometric information, including fingerprints, to the extent of its data storage capacity, that are likewise limited by the resolution of the marking and reading devices employed by the user. VSCode^™ is ideal for bankcards and high security applications. Because the code is encrypted on the card it can be an independent portable database containing non-duplicative information that is unique to the individual owner of the bank account or credit card; or, the data can be verified through a central database while maintaining high security for the card issuer without the need of a PIN.

Time and Attendance Systems. We have recently introduced Time and Attendance system products, user-friendly systems that include our card maker and our proprietary card reader software to produce and to read our Bio-ID cards as well as keeping track of individual time and attendance. Our time and attendance Bio-ID card has a picture on the front of the card and a 2-D barcode, VSCode™, storing the individual unique fingerprint minutiae along with any additional information the employer may request. The Company has beta-tested, over the last few months, and sold the first system in December 2007, and believes it is now ready to market.

PhoneCodes^© Products. We have developed a number of products based on our PhoneCodes^© technology, but we have not derived revenues from these products to date. These software products will allow individuals or companies to receive or distribute gift certificates, tickets, coupons, receipts, or banking transactions using the VeriCode^® technology via wireless phone or PDA. TicketCode^© was introduced to the market in August 2007. The Company has had negotiations with several teams for the use of TicketCode^© for the upcoming baseball season and with several other companies for use of the other PhoneCodes^© products.

Patent Infringement Lawsuits and License Fees

In 2003, we assigned three of our four patents and associated rights to our subsidiary, Vcode. Vcode in turn entered into an Exclusive License Agreement with VData LLC (VData), a Illinois limited liability company unrelated to Veritec. The purpose of the Exclusive Licensing Agreement is to allow VData to pursue enforcement and licensing of the patents against parties who wrongfully exploit the technology of such patents. VData is the wholly owned subsidiary of Acacia Research Corporation (NASDAQ: ACTG) (collectively Acacia). The Exclusive License Agreement with VData provides that all expenses related to the enforcement and licensing of the patents is the responsibility of VData. The Company and VData share the net proceeds arising from the enforcement or licensing of the patents. The Company recognizes infringement revenues upon the completion of all required terms under the agreement with VData and when collection is assured. Proceeds from this arrangement are recorded as infringement revenue in the quarter the money was received. None of the infringement revenue is refundable to any party once received.

The two patents (nos. 4,924,078 and 5,612,524) that have been the subject of our major infringement claims in the past are currently being reexamined by the U.S. Patent and Trademark Office and are the subject of a declaratory judgment action seeking to declare the patents invalid. All infringement actions of these patents have been suspended pending the outcome of these proceedings. Furthermore, the patents expired in November 2007. Therefore revenues from patent infringement claims will be significantly reduced or cease dependent upon the outcome of the patent re-exams. Should the patents be upheld, the Company will have an additional period of time in which to pursue infringers. If not, the infringement revenue from these two patents will cease. During 2007, Vcode and VData filed several infringement complaints against alleged infringers of the third patent (no. 5,331,176) assigned to Vcode. In October 2007, the first infringement complaint relating to this patent was settled and we received proceeds totaling $195,349. As of May 2008, the infringement case of the third patent against Cognex has been dismissed without prejudice and proposed agreements with the other alleged infringers have been prepared and are awaiting signatures from all parties, which also dismisses the infringement claims without prejudice. By agreeing to dismiss without prejudice, the Company retains the possibility of pursuing infringement of the third patent at a later date.

Results of Operations — March 31, 2008 compared to March 31, 2007

Revenues

Revenues were $317,244 for the three months ended March 31, 2008, compared to $1,276,981 for the 2007 period, a decrease of $959,737. For the nine months ended March 31, 2008 revenues were $970,886, compared to $2,130,807 in the 2006 period, a decrease of $1,159,921.

For the three months ended March 31, 2008, the Company received no revenue from the infringement of our patents compared to $1,105,966 of infringement revenue for the 2007 period. There was no infringement revenue in the 2008 period because of the declaratory judgment action described above, causing a suspension of infringement actions relating to two of the patents assigned to Vcode. For the 2008 period, other revenue was $317,244 compared to $171,015 for the 2007 period. License revenues from product identification products increased by $150,890 in the 2008 period compared to 2007 as a result of expanded production in the LCD industry. Although the economy has been weak, the LCD industry has seen growth. Revenues from the LCD market remain unpredictable as they are generated when customers open new production facilities or update production equipment; however, for now the Company continues to experience relatively high demand for product identification product licenses in the LCD industry.

For the nine months ended March 31, 2008, other revenue increased $162,624 compared to other revenue for the 2007 period. The increase primarily related to increased license revenues from product identification products, which increased $143,436 in the 2008 period. The sale of two card printing systems and a $8,736 increase in revenue from Secure ID cards also contributed to the increase. During the 2008 period, the Company completed the first sales of our Card Printing Systems for ID cards and Time and Attendance Software, which both include our VSCode^™ with biometric identification.

For the nine months ended March 31, 2008, the Company recognized infringement revenues of $445,349 through its relationship with VData, compared to $1,767,894 for the 2007 period. For the 2008 period, infringement revenue from the two patents that expired in November 2007 was $250,000, compared to $661,928 for the 2007 period. The remaining infringement revenue for the 2008 period was the result of our settlement totaling $195,349 from the third patent.

Cost of Sales

Cost of sales was $38,635 for the three months ended March 31, 2008, compared to $24,191 for the 2007 period, an increase of $14,444. The increase reflected increased fees for a designated site and maintenance services of a computer database to store information in conjunction with our Independent Sales Organization (ISO) license. There is no cost associated with infringement revenue.

Cost of sales for the nine months ended March 31, 2008 and 2007, were $124,327 and $39,729, respectively, a difference of $84,598. Of this difference, $67,375 is a result of charges for the designated site and maintenance services of a computer database to store information in conjunction with our ISO license. The remaining amount totaling $17,223 is the cost of the ID Card Printing System and several readers that were sold.

Selling General and Administrative

Selling, general and administrative expenses were $300,443 for the three months ended March 31, 2008, versus $709,070 for the 2007 period, a decrease of $408,627. The difference was principally due to a $300,000 bonus to the Chief Executive Officer during the 2007 period. Other significant reductions of selling, general and administrative expenses for the 2008 period compared to the 2007 period include $23,950 stock option expense, $13,287 in lower health insurance premiums, a result of changing medical insurance providers, $41,440 less outside accounting fees, and $29,944 lower employee and consultant costs. The Company is continuing to review expenditures and reduce them when it is practical.

Selling, general and administrative expenses were $972,408 for the nine months ended March 31, 2008, versus $1,433,128 for the 2007 period, a decrease of $460,720. The difference was principally due to the $300,000 bonus to the Chief Executive Officer during the 2007 period. In addition, the Company reduced stock option expense by $67,479, reversed its reserve for a note receivable from RBA by $48,000, and reduced the cost of consultants and external accounting fees by $33,778 and $12,079, respectively for a total of $161,336.

Research and Development

Research and development expense of $127,062 for the three months ended March 31, 2008, increased by $31,346 over the 2007 period. The increase was principally a result of increasing engineering salary and benefit costs and increased cost of engineering consultants. In addition, in February 2008, the Company entered into an agreement with RBA International totaling $28,800 to investigate the feasibility of enhancing our PhoneCodes^© technology to include the transmission of bank transactions, which was recorded as R&D expense.

Research and development expense was $417,338 for the nine months ended March 31, 2008, versus $290,611 for the 2007 period, an increase of $126,727. The increase was principally a result of $95,000 towards the design and development of our own line of readers. The Company also added engineering salary and benefit costs of $25,600 for better-qualified talent, more specific to the needs of the Company, and had expense of $20,000 for the 2008 period, for the design and development of a banking kiosk by RBA. For the nine months ended March 31, 2008, the Company paid RBA $28,800 to investigate the feasibility of enhancing our PhoneCodes^© technology to include the transmission of bank transactions and $15,000 to the MESA company for the development of the time and attendance software. These increased costs were partially offset by reduced costs of engineering consultants by $45,400.

Liquidity and Capital Resources

The Company has relied on The Matthews Group for funding. Through March 31, 2008, The Matthews Group has funded $1,962,963, of the original $2,000,000 stock subscription receivable.

As of March 31, 2008 and 2007, the Company has recognized infringement revenue of $445,349 and $1,767,894, respectively, through its relationship with VData. This infringement revenue should not be viewed as unlimited and is likely to decline or cease in the near future considering the potential adverse determination in regard to the Patent Reexaminations or the Declaratory Judgment being sought by Cognex of patents 4,924,078 and 5,612,524.

The Company believes its cash and forecasted cash flow from operations may not be sufficient to continue operations through fiscal 2009, and the Company will need to significantly increase its revenue or receive a significant infusion of cash to continue operations, in addition to payment of the balance from The Matthews Group stock subscription receivable. At this time, the Company has not received any firm commitments from any investor to make a cash investment in the Company and there is substantial doubt whether the Company will be able to continue as a going concern. The Company is continuing to search for potential investors in conjunction with seeking other opportunities of obtaining financial support.

Critical Accounting Policies

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, and identification card revenue (collectively, other), and infringement 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 receives infringement revenue under its Exclusive License Agreement with VData LLC (VData). VData is a wholly owned subsidiary of Acacia Research Corporation (NASDAQ: ACTG). The Exclusive License Agreement with VData provides that all expenses related to the enforcement and licensing of the patents is the responsibility of VData. The Company and VData share the net proceeds arising from enforcement or licensing of the patents. As a result, all infringement revenue is recognized at the time it is received. None of the infringement revenue is refundable to any party once received.

Quantitative and Qualitative Disclosures About Market Risk

The Company has not issued or invested in financial instruments or derivatives for trading or speculative purposes. The Company is not actively involved in the trading of foreign currency and fluctuations in currency exchange rates have had no material impact. Although the Company is involved in the sales of its products to the Asian markets, all products are priced in United States Dollars and, as such, sales are not subject to material foreign currency exchange rate risk.

Item 3. Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended March 31, 2008 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 March 13, 2006, Cognex Corporation filed a preemptive action seeking a Declaratory Judgment against VData and the Company in the United States District Court for the District of Minnesota. Amongst other remedies the action seeks a ruling from the court that Vcode’s United States Patent No. 5,612,524 is not valid or enforceable against Cognex Corporation. On December 27, 2006, an answer and affirmative defense was filed to contest the plaintiff’s allegations and claims for damages, injunctive relief, attorney’s fees, and costs. A counterclaim was also filed for infringement of United States Patent No. 5,612,524. A summary hearing on this case was heard in December 2007. At this time a decision has not been rendered. This case was originally scheduled for trial in January 2008 but has been postponed until a later date.

On April 6, 2006, the U.S. Patent and Trademark Office granted a Third Party Request for an Ex Parte Reexamination of Vcode’s United States Patent No. 5,612,524. A response on behalf of the Company rebutting the allegations in the Request for Reexamination was filed with the U.S. Patent and Trademark Office. In December 2007, the Company received a determination by the U.S. Patent and Trademark Office stating that some of the claims in the patent were patentable and others were being rejected. The Company submitted a rebuttal against the decision in February 2008. Legal counsel has advised that a preemptive filing of such a request for Ex Parte Reexamination is commonplace in the enforcement areas of patent law and practice. The Company believes that when the final determination occurs, even if the determination is adverse to the patent, it would not be detrimental to the Company’s ability to market its products, but will be detrimental to the collection of licensing fees based upon this patent.

On May 23, 2006, Vcode joined with VData as a Plaintiff in a pending patent enforcement litigation filed against Aetna, Inc., PNY Technologies, Inc., Merchants’ Credit Guide Co., The Allstate Corporation, and American Heritage Life Insurance Company in the United States District Court for the District of Minnesota alleging violations of the Company’s patents. The Allstate Corporation and American Heritage Life Insurance Company have entered into an agreement with the Company and the case as to those defendants has been dismissed. Aetna, Inc., and Merchants’ Credit Guide Co., have filed responsive pleadings in the action. PNY Technologies, Inc. has counterclaimed with allegations of non-infringement, invalidity, and inequitable conduct and is seeking attorney’s fees and costs. Defendant Aetna, Inc. filed a Motion to Dismiss and a Motion for Rule 11 Sanctions. The Court denied both of Aetna’s motions. Defendant Merchant’s Credit Guide Co. filed a Motion to Stay Alternative Motion for Sanctions. The Court granted Merchants’ Motion to Stay and the case is currently stayed pending reexamination of the patents. This case has not been set for trial.

On October 26, 2006, a Third Party Request for an Ex Parte Reexamination of Vcode’s United States Patent No. 4,924,078 was made. On January 17, 2007, the reexamination for United States Patent No. 4,924,078 was ordered. Legal counsel has advised that a preemptive filing of such a request for Ex Parte Reexamination is commonplace in the enforcement areas of patent law and practice. The Company believes that a determination adverse to the patent would not be detrimental to the Company’s ability to market its products, but will be detrimental to the collection of licensing fees based upon this patent.

On April 16, 2007, Vcode and VData filed a patent infringement case in the Eastern District of Texas against Cognex relating to United States Patent No. 5,331,176. Cognex has counterclaimed for non-infringement and invalidity. In April 2008, an agreement between the parties was reached to dismiss without prejudice the claim. The agreement leaves open the possibility of a future patent infringement claim. The agreement has been signed by all parties and fully executed.

Vcode joined with VData as Plaintiffs in patent enforcement litigation filed on August 21, 2007, against Data Logic, Inc., Hand Held Products, Inc. and Siemens Energy and Automation, Inc. in the United States District Court for the District of Texas alleging violations of the Company’s Patent No. 5,331,176. Hand Held Products, Inc. has entered into an agreement with the Company and the case as to that defendant was dismissed. In April 2008, a proposed agreement between the remaining parties was reached to dismiss without prejudice the claim. The proposed agreement leaves open the possibility of a future patent infringement claim. The agreement is awaiting the signatures of all parties.

Item 1A. Risk Factors

Risk Factors

Investing in our Company entails substantial risk. In addition to the other risks and uncertainties discussed herein or available from outside sources, a number of risks and uncertainties that could cause actual results to differ materially from the plans, intentions and expectations reflected in or suggested by forward-looking statements of the Company set forth within the body and Exhibits hereof include amongst other things:

Cash Shortfall; Going Concern

The Company believes its cash and forecasted cash flow from operations may not be sufficient to continue operations through fiscal 2009, and the Company will need to significantly increase its revenue or receive a significant infusion of cash to continue operations, in addition to payment of the balance from The Matthews Group stock subscription receivable. At this time, the Company has not received any firm commitments from any investor to make a cash investment in the Company and there is substantial doubt whether the Company will be able to continue as a going concern.

We Have a History of Operating Losses

We have a history of operating losses that were a substantial factor in the Company having been twice placed in bankruptcy. Once from October 1995 through October 1999 and again from February 2005 through August 2006. In an effort to halt the continuation of these losses, we are developing new products, entering new markets and developing strategic alliances to grow revenue. There can be no assurance that we will be successful in these efforts, and even if we are, whether we can become profitable.

Loss of the Services of Key Employees Could Harm Our Operations

The Company’s performance depends on the talents and efforts of our key management and technical employees. The loss of certain key individuals could diminish our ability to maintain relationships with current and potential customers or to meet development and implementation schedules for existing technology and the technology that the Company intends to introduce in the future. Our future success also depends on our continuing ability to identify, hire, train and retain highly qualified technical and managerial personnel. If we fail to attract or retain these key individuals in the future, our business could be disrupted.

Continuing Licensing Revenues from VData and Intellectual Property

The Company has been dependent on VData for a significant portion of its revenue. In the event of an adverse determination either with regard to the Patent Reexaminations or the Declaratory Judgment being sought by Cognex, our future ability to obtain licensing fees for the 4,924,078 and 5,612,524 patents would cease. In addition to Cognex, future challenges of our intellectual property could be made by other claimants. Our business would be materially impacted in the event such claims are raised and ruled against us.

Competition in the Asian Market

The Company currently relies heavily on its sales to the Asian markets. The cross-licensing agreement we executed with Mitsubishi that allowed for our emergence from bankruptcy and rights to use the Mitsubishi EDAC Technology, gave Mitsubishi a license to our VeriCode^® Technology that may result in increased competition. We believe competition in the Machine Readable Information and symbology sector may continue to impact future sales.

Ability to Obtain Access to Capital

Due to the Company’s prior bankruptcies and history of losses, the Company’s ability to raise funds, may be difficult. The Company may need to raise additional capital for the development or marketing of new products. If the Company cannot raise such capital, or if the cost of such capital is too high, we may be unable to successfully develop and launch new products.

Effect of the Bankruptcy

The Company having been in bankruptcy has made it difficult for the Company to establish new trade credit relationships with both vendors and customers. Although the Company believes it will restore its credibility going forward, the lack of trade credit could impair the Company’s ability to grow and implement its plans.

Competition

Our VeriCode^® and VSCode^™ Matrix Symbologies compete with alternative machine-readable codes such as conventional bar code systems, including UPC, EAN Code 39 and Code 49; and, alphanumeric systems such as OCR-A, OCR-B, PDF-417, Data Matrix and many others. Competitors offering alternative symbologies include numerous well capitalized private and publicly traded companies who offer a wide variety of bar code systems and solutions, as well as, alternative product solutions such as Radio Frequency Identification (RFID) and Global Positioning Satellite (GPS) technology. Our competitors include but are not limited to: Intermec (NYSE: IN); Siemens Energy and Automation, Inc., a subsidiary of Siemens AG (NYSE: SI); Motorola Inc (NYSE: MOT); and, Zebra Technologies Corporation (NASDAQ: ZBRA). These companies have more resources than the Company, already have a strong customer base, and their products are widely used in the market place. Competition from such companies may further reduce the future level of demand for the Company’s products and/or the Company’s future margins of profit.

General Conditions Beyond the Companies Control

The general economic condition of the United States and other regions of the world, work disruptions, labor negotiations both at the Company and with our licensees and distributors, actions of the U.S. and foreign governments, foreign currency exchange rate fluctuations, inflation and other economic events all to varying degrees do, could and would have an effect upon the Company some of which could have a material adverse impact.

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

No matters were submitted to a vote of security holders during the period covered by this report.

Item 5. Other Information

None.

Item 6. Exhibits

A list of exhibits included as part of this Form 10-QSB is set forth in an Exhibit Index that immediately precedes the exhibits.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report on Form 10-QSB for the quarter ended March 31, 2008 to be signed on its behalf by the undersigned thereunto duly authorized on the May 14, 2008.

EXHIBIT INDEX

	31.		CEO/CFO Certification required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934.
	32.		Veritec, Inc. Certification of CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).