Edgar Filing: VERITEC INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-KSB

(Mark one)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (fee required)

FOR THE FISCAL YEAR ENDED JUNE 30, 2005

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File No. 0-15113

VERITEC, INC.
(Exact name of small business issuer in its charter)

Nevada 95-3954373
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)

2445 Winnetka Avenue No. Golden Valley, MN 55427
(Address of principal executive offices) (Zip Code)

Issuer's telephone number, including area code: 763-253-2670

Securities registered under
Section 12(b) of the Act: None

Securities registered under
Section 12(g) of the Act: Common stock, $.01 par value
(Title of Class)

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [ ] No [X].

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to the Form 10-KSB. [ ]

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

Revenues for the year ended June 30, 2005 were $1,617,498.

Page 1 of 49

The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Company, computed by reference to the average bid price of
the common stock on June 30, 2005, was approximately $2,996,130.

Number of shares outstanding as of June 30, 2005 was: 15,078,598.

Check whether the issuer has 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 [ ] No [X].

DOCUMENTS INCORPORATED BY REFERENCE

Form 10-KSB for the period ended June 30, 1999 is hereby incorporated by
reference.

THIS DOCUMENT CONSISTS OF 49 PAGES, INCLUDING THE EXHIBIT PAGES.
THE EXHIBIT INDEX IS ON PAGE 45.

Page 2 of 49

VERITEC, INC.

FORM 10-KSB
FOR THE FISCAL YEAR ENDED JUNE 30, 2005

TABLE OF CONTENTS

Page No.
--------

PART I .............................................................. 4

FORWARD - LOOKING STATEMENTS ............................. 4

ITEM 1 DESCRIPTION OF BUSINESS .................................. 4

ITEM 1A RISK FACTORS ............................................. 10

ITEM 2 DESCRIPTION OF PROPERTY .................................. 12

ITEM 3 LEGAL PROCEEDINGS ........................................ 12

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...... 15

PART II ............................................................. 15

ITEM 5 MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES ............................................... 15

ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION ................................................ 16

ITEM 7 FINANCIAL STATEMENTS ..................................... 19

ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES ..................... 40

ITEM 8A CONTROLS AND PROCEDURES .................................. 40

ITEM 8B OTHER INFORMATION ........................................ 41

PART III ............................................................ 41

ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION
16 (a) OF THE EXCHANGE ACT ............................... 41

ITEM 10 EXECUTIVE COMPENSATION ................................... 42

ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS ............... 42

ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE .................................... 43

ITEM 13 EXHIBITS ................................................. 45

ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES ................... 46

SIGNATURES ....................................................... 46

Page 3 of 49

PART I

FORWARD-LOOKING STATEMENTS

This Form 10-KSB contains various "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements represent expectations and beliefs concerning a company's outlook,
future economic events, future performance and attainment of future goals and
are based on information available on the date of the filing, and are subject to
various risks and uncertainties.

The Private Securities Litigation Reform Act of 1995 provides "safe harbor"
for forward-looking statements. Certain information included in this Form 10-KSB
and other materials filed or to be filed with the Securities and Exchange
Commission (as well as information included in oral statements or other written
statements made or to be made) contain statements that are forward-looking and
actual results may materially differ from any future results expressed or
implied by such forward-looking statements. In addition to statements that
explicitly describe such risks and uncertainties readers are urged to consider
statements using the terms "anticipates" "belief", "believes", "can", "intends",
"may", "plans", "shall", or "will", and similar expressions to be uncertain and
forward-looking. Such forward-looking statements involve important risks and
uncertainties that could significantly affect anticipated results in the future
and accordingly, such results may materially differ from those expressed as our
desired outcome, goal, or result.

We undertake no obligation to update any forward-looking statements to reflect
events or circumstances that may arise after the date hereof unless specifically
required by the filing requirements of the Securities and Exchange Act as
amended or, the Regulations promulgated thereunder.

ITEM 1 DESCRIPTION OF BUSINESS

(a) General Development of Business

The Company refers to Veritec, Inc. (Veritec) and its wholly owned subsidiaries,
Veritec Iconix Ventures, Inc. (VIVI-USA; inactive and dissolved in May 2004),
Veritec Iconix Ventures, Inc., (VIVI-Japan; a Japanese company, discontinued
April 2005) and VCode Holdings, Inc. (VCode).

Veritec was incorporated in the State of Nevada on September 8, 1982 for the
purpose of development, marketing and sales of a line of microprocessor based
encoding and decoding system products 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 and 5,612,524. As more
fully described below, these patents are the property of VCode.

In 1995, an involuntary proceeding under Chapter 7 of the United States
Bankruptcy Code was commenced against us. The proceeding was subsequently
converted to a Chapter 11 proceeding and a plan of reorganization was confirmed
on April 23, 1997. The plan was completed, the trustee was discharged, and the
case closed on October 13, 1999. Further information with respect to the
bankruptcy proceeding is set forth in Item 3 of the Annual Report on Form 10-KSB
filed by us for the year ended June 30, 1999, which report is incorporated
herein by reference.

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In 1999, we moved from our previous location in California to a suburb of
Minneapolis, Minnesota. After moving to Minnesota, engineering efforts were
focused on converting the DOS based operating system to both Windows and UNIX
operating platforms, further augmenting the number of computers with which our
technology works.

In January 2002, Veritec initiated arbitration in the International Court of
Arbitration of the International Chamber of Commerce in Los Angeles, California,
against Mitsubishi Corporation (Mitsubishi), alleging five causes of action
arising out of various contracts and business dealings. Mitsubishi
counterclaimed and arbitration commenced.

In February 2002, as part of our objective to increase sales in Asia, we
acquired 50% ownership of VIVI-USA. The other 50% of VIVI-USA was acquired by
The Matthews Group, a related party. In April 2002, VIVI-USA acquired
VIVI-Japan. In June 2003, we acquired The Matthews Group's 50% interest in
VIVI-USA bringing our ownership of VIVI-USA and VIVI-Japan to 100%.

In June 2003, we sold VIVI-Japan's textile customer to Com Techno Alpha Inc.
(Com Techno), a Japanese corporation, for:

- 8,100,000 yen to be paid at a rate of 225,000 yen per month for
thirty-six months ($67,782 and $1,883 respectively in U.S. dollars).

- 120,000 shares of Veritec's common stock (subsequently returned and
cancelled).

Yoshihiro Tasaka, the principal of Com Techno, is a former employee and officer
of VIVI-Japan. The agreement provided for acceleration of payments to be
received for each sale of a Tuft Controller by Com Techno to this customer.

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. 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 was 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 provides that all expenses related to the enforcement and
licensing of the patents will be the responsibility of VData, with the parties
sharing in the net proceeds, as specified under the terms of the agreement,
arising from enforcement or licensing of the patents.

In January 2004, the Mitsubishi arbitration continued with Veritec proceeding on
two claims against Mitsubishi (tortuous interference with prospective business
opportunities and termination of a licensing agreement); and, Mitsubishi
proceeded on various claims against Veritec for trade secret misappropriation
and copyright infringement based upon the Error Detection and Correction
Technology functionality utilized by Veritec, together with, assorted breach of
contract claims. After three days the hearing was suspended because of
procedural irregularities.

In May 2004, VIVI-USA was dissolved and VIVI-USA's investment in VIVI-Japan was
transferred to Veritec.

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In February 2005, an adverse ruling was made against Veritec and in favor of
Mitsubishi resulting in a monetary award of $8,174,518 to Mitsubishi and
enjoining Veritec and by extension Veritec's customers from the future use or
sale of what was ruled as Mitsubishi's Error Detection and Correction
Technology. This ruling compelled Veritec to file a voluntary petition for
relief under Chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court (Bankruptcy Court) for the District of Minnesota on
February 28, 2005.

In April 2005, the Company discontinued the VIVI-Japan operations due to
continuing losses and the Company's financial condition. Mr. Masayuki Kuriyama,
the former operations manager of VIVI-Japan, was assigned the right to utilize
the VIVI-Japan name without liability to Veritec.

In December 2005, the Bankruptcy Court converted the Chapter 11 proceeding to
Chapter 7 of the Bankruptcy Code. Under Chapter 7, Veritec would be liquidated
and the shareholders would not receive anything upon liquidation.

Veritec's Third Amended Plan of Reorganization, with proof of acceptability of
its provisions by Mitsubishi and the majority of the other classes of creditors,
was submitted to the Bankruptcy Court with a motion requesting reconversion of
Veritec's case in bankruptcy to Chapter 11. This motion and related order was
approved in March 2006. On March 13, 2006, the order was executed subject only
to approval of the majority of creditors and shareholders of record, which was
subsequently obtained.

Upon execution of the order, Veritec once again became a "debtor-in-possession"
under the jurisdiction of the Bankruptcy Court. In general, as a
debtor-in-possession, Veritec was authorized under Chapter 11 to continue to
operate as an ongoing business, but could not engage in transactions outside the
ordinary course of business without the prior approval of the Bankruptcy Court.

In April 2006, Veritec's Third Amended Plan of Reorganization was confirmed by
the Bankruptcy Court. On August 8, 2006, after resolution of disputed creditor
claims, Veritec received from the Bankruptcy Court an Order and Final Decree
closing the Chapter 11 case in its entirety. Although not reflected in the
Consolidated Financial Statements appearing in this Form 10-KSB, Veritec was
relieved of $9,356,948 in debt including $7,874,518 owed to Mitsubishi.

In October 2006, Veritec entered into an agreement to purchase selected assets
of Secure Environments, Inc. (SEI), a Minnesota corporation that produces
identification cards. The assets acquired consisted of office furniture,
computer equipment, specialty software, security card and badge printers, and a
customer base of 73 small to large commercial and municipal customers, including
security firms and police departments. Terms of the purchase were Veritec's
assumption of $3,900 in debt and a 10% royalty, not to exceed $150,000 in
aggregate, for any future sales by Veritec to the 73 SEI customers. No other
consideration was, or is, to be paid.

(b) 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 and
5,612,524. 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(R) 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 novel uses of its Multi-Dimensional Matrix
Symbology.

Page 6 of 49

The Company also seeks fees from the enforcement and licensing of it patents
under its Exclusive License Agreement with Acacia.

The Company's main products are as follows:

The VeriCode(R)

The VeriCode(R) symbol is a two-dimensional high data density machine-readable
symbol that can contain up to approximately 500 bytes of data in a small area.
The VeriCode(R) symbol is based on a matrix pattern. The matrix is made up of
data cells, which are light and dark contrasting squares. This part of the
symbol looks like a scrambled chessboard. The matrix is enclosed within at least
two solid lines and/or a solid border. Surrounding the solid border is a quiet
zone of empty cells. This simple structure is the basis for the symbol's space
efficiency.

The size of the VeriCode(R) symbol is variable and can be increased or decreased
depending on application requirements. The symbol can be configured to fit
virtually any space. The data capacity of the symbol is also variable. By using
a greater or smaller number of data cells, more or less information can be
stored in the symbol. The main limitation to the size and density of the
VeriCode(R) symbol is the resolution of the marking and reading devices utilized
by the user.

Special orientation for reading the symbol is not necessary and is the basis of
the novelty of the Company's 5,612,524 patent. The VeriCode(R) symbol can be
read at high degrees of angularity from vertical, in any direction relative to
the reader. Veritec's symbology and reading software presently employs "Error
Detection and Correction" (EDAC) technology of our own design, similar to that
on music CD's. That means that if a symbol is partially damaged or obscured, the
complete data set stored in the symbol might be recovered. EDAC lowers the
symbol's data capacity, but it can permit data recovery if up to 25% of the
symbol is damaged. With EDAC, the code will return either accurate information
or no information, but it will not return false or wrong information.

The VeriCode(R) symbol offers high degrees of security and the level of this
security can be specified depending on the user's requirements. For any specific
application or organization, a unique encryption algorithm can be created so
that only authorized persons can create or read a VeriCode(R) symbol within the
user's application.

The VeriCode(R) symbol can hold any form of binary information that can be
digitized including numbers, letters, images and the minutia for biometric
information to the extent of its data storage capacity.

The VSCode

The VSCode is a derivative of the two-dimensional VeriCode(R) symbol. It is
built around the core competencies of the VeriCode(R) symbol which includes the
solid border, omni-directional reading and Error Detection and Correction
capability. The distinguishing factor for the VSCode is its ability to encrypt a
greater amount of data by increasing data density. This matrix can hold up to
approximately 4,151 bytes of data making it ideal for holding identification and
biometric information. The VSCode offers a high degree of security, which can
also be defined by the application requirements of the user.

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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 designed 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.

The FCR-100 Fingerprint Card Reader

The FCR-100 is a compact fingerprint card reader used to read and decode the
VSCode symbology containing biometric information and other secured data. It
consists of a combination of several modular components, including a quality
camera, lighting mechanism, digital fingerprint reader, software lock, USB cable
and housing, all tied into a PC operating system running the proprietary Veritec
software. Due to its modular design, the FCR-100 can be modified to meet
specific application needs.

The FCR-100 can be designed to work on most PC based operating systems,
including the full suite of Windows(R) operating systems. This allows the
operating system to function with the many different types of VSCode
applications such as bankcards, access control, personnel identification, border
control, and hospital identification cards. The FCR-100 is connected and powered
by a USB cable connection to a PC or server. The FCR-100 can be utilized with
wireless applications and will allow multiple reading stations to be connected
to a single computer.

Patents

United States Patent No. 4,924,078 was issued on May 8, 1990 on our founders'
application filed November 25, 1987. United States Patent No. 5,612,524 is a
continuation of the 4,924,078 patent. U.S. Patent No. 5,331,176 was issued on
July 19, 1994 on our founders' application filed on April 10, 1992. Veritec has
filed for additional U.S. patents related to novel uses of the Matrix
Symbologies. The Company holds the following European Patents: Germany Patent
No. 69033621.7; French and Great Britain Patent No. 0438841.

Trademarks

We have filed applications to register the trademark "VeriSecure" in the United
States. We have also filed applications to trademark "VSCode" in the following
countries: Australia, Taiwan, South Korea, Singapore, Japan, China, and Vietnam.
In addition we have filed applications to register VeriCode(R) in the following
countries: China, Singapore, Vietnam, and Australia. We have registered
trademarks for VeriCode(R) in the United States, Taiwan and South Korea. The
Company uses the following trademarks VeriWrite(C), VeriRead(C), VSWrite(C) and
VSRead(C).

Seasonality

We have not historically experienced seasonality.

Major Customers

During the fiscal year ended June 30, 2005, two foreign customers and two United
States based customers accounted for 77% of our revenues. Our largest customers
have distribution facilities in Korea, Japan and Taiwan. During the fiscal year
ended June 30, 2004, three foreign and one United States based customer
accounted for 82% of our revenues.

Page 8 of 49

Engineering, Research and Development

As of June 30, 2005, Veritec employed two full-time engineers and five
consultants in its engineering, research and development department. Despite the
fact that we were trying to improve our products and to develop new ones, with
the Company in bankruptcy we had to curtail these efforts. Since emerging from
bankruptcy we now employ three full-time engineers and have resumed our research
and development efforts.

Competition

The "symbology" business is intensely competitive. The Company is presently
under capitalized and recently emerged from bankruptcy. Consequently, there can
be no assurance that the Company will be able to successfully compete in the
"symbology" business.

Our VeriCode(R) 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 and OCR-B.
Competitors offering alternative symbologies include numerous well capitalized
publicly traded companies who offer a spectrum of bar code related systems
including Symbol Technologies (NYSE: SBL); Zebra Technologies Corporation
(NASDAQ: ZBRA); and Siemens Energy and Automation, Inc., a subsidiary of Siemens
AG (NYSE: SI).

The "DataMatrix" two-dimensional bar code is an established competitor to the
VeriCode(R). The DataMatrix code was popularized by Robotic Vision Systems,
Inc., which declared the DataMatrix symbol to be "in the public domain." In
contrast, our VeriCode(R) Symbol and technology are protected by various U.S.
and European patents and our software source codes are proprietary and protected
by copyright.

Veritec believes that while many potential customers and users of symbology
prefer to use a system that is believed to be in the public domain with open
source code software applications, we believe that other companies, especially
those requiring high security encoding and decoding capability will prefer to
purchase "closed" or proprietary systems. Our technology may be the technology
of choice for these potential customers.

Moreover, because of the high data density of the Company's VSCode and its
ability to provide error free reading in low contrast applications, we believe
the other 2-Dimensional symbols are not capable of competing in these
applications. However, new codes may be developed in the future that could.

Environmental Compliance

We believe that we are in compliance with all current federal and state
environmental laws.

Employees

As of June 30, 2005, inclusive of the two full-time engineers employed by the
Company in its engineering, research and development department as described
above, the Company employs seven full-time employees and one part-time employee
compared to eight full-time employees and no part-time employees in 2004. In
addition, the Company retained five consultants to provide specific services
related to various projects and specific needs throughout the year. The Company
continually evaluates the need for the hiring of qualified personnel.

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Financial Information about Geographic Areas

Foreign revenues accounted for 63% of the Company's revenue in fiscal year 2005
compared to 85% in fiscal year 2004. To date our revenues are concentrated in
Japan, Korea and Taiwan.

Available Information

The public may read and copy any materials Veritec has filed with the United
States Bankruptcy Court for the District of Minnesota at Room 301 U.S.
Courthouse, 300 South Fourth Street, Minneapolis, Minnesota 55415, attention Ms.
Lori Vosejpke, Bankruptcy Clerk (612) 664-5200.

The public may read and copy any materials we have filed with the Securities
Exchange Commission (SEC) at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We
electronically file reports with the SEC. Filings may be found on the Internet
site maintained by the SEC at www.SEC.gov; or, by accessing www.freeedgar.com;
and other Internet based financial service providers. Other information about us
can be found at our website, www.veritecinc.com and by contacting the Company at
2445 Winnetka Avenue North, Golden Valley, Minnesota 55427 (763) 253-2670.

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:

General Factors

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. 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.

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Continuing Licensing Revenues from Acacia and Intellectual Property

The Company is dependent on Acacia 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 could
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 of the Mitsubishi Error Detection
and Correction Technology, gave Mitsubishi a license to our VeriCode(R)
Technology that may result in increased competition. Competition in the Machine
Readable Information and symbology sector, coupled with the strain on our
relationships with our licensees and distributors while we were in bankruptcy
may impact future sales.

Dependence on The Matthews Group

The Company has traditionally been dependent on The Matthews Group for its
financial support. Management does not believe additional monies above the stock
subscription obligation will be required in the immediate future. However
additional capital may be required at some future point. The Company cannot
guarantee going forward that The Matthews Group will continue to provide
additional funding.

Ability to Obtain Access to Capital

Due to the Company's prior bankruptcies and history of losses, the Company's
ability to raise funds, whether from lending, selling stock, or other sources,
may be difficult to achieve. The Company may need to raise additional capital
for the development or marketing of new products. If the Company can not 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 substantially impair the Company's ability to grow
and implement its plans.

Competition

Our VeriCode(R) 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

Page 11 of 49

competitors include but are not limited to: Intermec (NYSE: IN); Siemens Energy
and Automation, Inc., a subsidiary of Siemens AG (NYSE: SI); Symbol Technologies
(NYSE: SBL); 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 be a material adverse impact.

ITEM 2 DESCRIPTION OF PROPERTIES

We lease approximately 3,200 square feet of office and laboratory space at 2445
Winnetka Avenue North, Golden Valley, Minnesota 55427, which serves as our
primary place of business. This lease is with Van Thuy Tran, a director and
chief executive officer of the Company. Our lease requires monthly payments of
$3,150 and runs through June 30, 2007.

As of June 30, 2005, Veritec was leasing on a month-to-month basis, a
single-family residence located at 10310 -39th Avenue North, Plymouth, Minnesota
to house visitors and consultants versus the high cost of hotel lodging. Our
lease requires a monthly payment of $1,500. The residence is owned by Larry
Johanns, a principal of The Matthews Group.

ITEM 3 LEGAL PROCEEDINGS

During the 1995-1997 bankruptcy, the Company sought an investment group to
assist in funding the $2,000,000 under the Plan of Reorganization approved by
the Bankruptcy Court in 1997. In the intervening years, various investment
groups attempted to help the Company fund this required investment. Partial
funding received from these investment groups was settled through stock
issuances by the Company. One of these former investment groups made claims
totaling $166,697 against the Company, $90,980 in cash and $75,717 in stock
(94,646 shares at $.80 per share), but has not pursued legal action relating to
these claims. It is possible that other investment groups will assert claims
against the Company regarding their efforts to secure funding on behalf of the
Company. Management believes it has appropriately reflected the activity with
these investment groups in the accompanying consolidated financial statements.
Management further feels these claims were settled in the bankruptcy. Due to
uncertainties, however, it is at least reasonably possible that claims will be
asserted and/or pursued. The ultimate outcome of these claims, if asserted
and/or pursued, cannot presently be determined.

On June 30, 2000, we were served as a defendant in the matter of Starosolsky vs.
Veritec, Inc., et al., in the United States District Court for the Central
District of California. This suit was brought by a shareholder and former
director of the Company against Veritec and various individuals claiming that
certain corporate actions were taken without proper authority of the Company's
Board of Directors and/or contrary to the Plan of Reorganization the Company
filed and completed under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court in the 1990's. The complaint seeks equitable
relief to set aside the issuance of Series H preferred stock (now converted into
common stock) issued to The Matthews Group that was authorized by the previous
approved bankruptcy reorganization plan in 1999, to prevent The Matthews Group
from voting its stock at any meetings of stockholders and to remove certain of
the individual defendants as directors of the Company. In December 2000, this
case was transferred to the United States District Court for the District of
Minnesota. The case has lingered without prosecution. Consequently, management
is not able to express an opinion on the likely outcome.

Page 12 of 49

On January 10, 2002, Veritec initiated arbitration against Mitsubishi in Los
Angeles, California, alleging breach of contract, trade secret misappropriation
and interference with business opportunities; seeking several million dollars in
compensatory damages, punitive damages, legal fees and accrued interest.
Mitsubishi counterclaimed on similar grounds and sought to enjoin Veritec's use
of the Error Detection and Correction Technology which Mitsubishi claimed as its
sole and separate property. Evidentiary hearings were conducted from the later
part of August through September 4, 2004. On February 15, 2005, Veritec received
notice from the International Court of Arbitration that it awarded Mitsubishi a
total of $8,174,518 in monetary damages and enjoined Veritec's use or sale of
the Error Detection and Correction Technology it deemed to be the sole property
of Mitsubishi. As a result, on February 28, 2005, Veritec filed for protection
under Chapter 11 of the United States Bankruptcy Code in the United States
Bankruptcy Court for the District of Minnesota. On December 16, 2005, the
Bankruptcy Court converted Veritec's Chapter 11 case in bankruptcy to a Chapter
7 and the Bankruptcy Court ordered all assets of the Company to be turned over
to the control of the Trustee.

In February 2006, Veritec and Mitsubishi entered into a Settlement Agreement
whereby, in exchange for $300,000, a license to utilize Veritec's VeriCode(R)
Technology, and dismissal of the patent infringement litigation filed by VData
and VCode against Mitsubishi, Mitsubishi waived its right to the $8,174,518 and
granted Veritec a license to use the Mitsubishi Error Detection and Correction
Technology. In light of the Settlement Agreement entered into with Mitsubishi,
on March 8, 2006, the Bankruptcy Court ruled in favor of reconverting Veritec's
case in bankruptcy back to one under Chapter 11 of the Bankruptcy Code.
Veritec's Third Amended Plan of Reorganization was formally filed with the Court
on March 13, 2006. In April 2006, Veritec's Third Amended Plan of Reorganization
was confirmed by the Bankruptcy Court. On August 8, 2006, after resolution of
disputed creditor claims, Veritec received from the Bankruptcy Court an Order
and Final Decree Closing the Chapter 11 case in its entirety. Although not
reflected in the Consolidated Financial Statements appearing in this Form
10-KSB, Veritec was relieved of $9,356,948 in debt including $7,874,518 owed to
Mitsubishi.

VCode joined with VData as Plaintiffs in patent enforcement litigation filed on
October 25, 2004, against Adidas America, Inc., Adidas Solomon AG, Advanced
Micro Devices, Inc., Boston Scientific Corporation, Stamps.com, and Hitachi
Global Storage Technologies (Thailand) Ltd. in the United States District Court
for the District of Minnesota. Adidas America, Inc., Advanced Micro Devices,
Inc., Boston Scientific, and Stamps.com filed Counterclaims in those actions.
All Defendants have since settled and entered into licensing agreements for use
of the technology under the Company's patents.

VCode joined with VData as Plaintiffs in patent enforcement litigation filed on
September 8, 2005, against Mitsubishi Corporation in the United States District
Court for the District of Minnesota alleging violations of the Company's
patents. This matter was dismissed as a part of the Settlement Agreement with
Mitsubishi described above.

VCode joined with VData as Plaintiffs in patent enforcement litigation filed on
October 4, 2005, against Brother Industries, Ltd., Sato Corporation, Toshiba
Corporation, and US Bank National Association in the United States District
Court for the District of Minnesota alleging violations of the Company's
patents. US Bank National Association has entered into a licensing agreement
with the Company and the case as to that defendant was dismissed as well as the
case against Sato Corporation. No opinion can be rendered at this time with
respect to the outcome of this action as to the remaining defendants.

Page 13 of 49

On January 26, 2006, Hartz Mountain Corporation, in response to a notice of
infringement sent to it by VData, filed a preemptive action seeking a
Declaratory Judgment against VData and the Company in the United States District
Court for the District of New Jersey. Amongst other remedies the action sought a
ruling from the Court that the Company's 4,924,078, 5,331,176 and 5,612,524
patents were not enforceable against Hartz Mountain and its related companies.
The Company has been advised by legal counsel that the preemptive filing of a
Declaratory Judgment action is commonplace in the enforcement areas of patent
law and practice. The Company joined VData with the filing of a cross complaint
against Hartz Mountain seeking amongst other remedies, monetary damages for past
infringement and future use of the knowledge learned from the Company's patents.
Hartz Mountain entered into a licensing agreement with VData and the Company
whereupon Hartz Mountain dismissed its action for Declaratory Judgment and VData
and the Company dismissed their actions against Hartz Mountain.

On March 13, 2006, in response to notices of infringement sent to their
customers by VData, 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 the Company's 5,612,524 patent is not enforceable
against Cognex Corporation and its customers. Presently, the Company is
conferring with VData and the legal counsel retained by VData to defend against
this action. Due to the recent nature of the case, only jurisdictional and
procedural issues have been litigated and a responsive pleading on behalf of
VData and the Company has not yet been filed. The Company cannot render an
opinion at this time with respect to the outcome of these actions.

On March 22, 2006, the United States Patent and Trademark Office granted an
application made for an Ex Parte Reexamination of the Company's 5,612,524
patent. The Company is conferring with VData, and counsel retained by VData, to
file the Company's reply to the applicant's submission. Due to the recent nature
of this matter, a response on behalf of VCode has not been filed with the United
States Patent and Trademark Office. The Company has been advised by legal
counsel that a preemptive filing of such a request for Ex Parte Reexaminations
is commonplace in the enforcement areas of patent law and practice. The Company
is confident in its patent but cannot render an opinion at this time with
respect to the outcome of the reexamination. However, not all claims of the
patent have been challenged and the Company believes that a determination
adverse to the patent would not be detrimental to the Company's ability to
market its products, but could be detrimental to 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 a licensing
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. No opinion can be rendered at this time with respect to
the outcome of this action as to the remaining defendants.

On September 5, 2006, an application was made for an Ex Parte Reexamination of
the Company's 4,924,078 patent. The Company is awaiting a determination from the
United States Patent and Trademark Office if it will grant reexamination on the
Application. The Company has conferred with VData, and the legal counsel
retained by VData, to file the Company's reply to the applicant's submission
should it be granted. Due to the recent nature of this matter, a response on
behalf of VCode is not yet required. The Company is confident in its patent but
cannot render an opinion at this time with respect to the outcome of the
reexamination. However, the Company believes that a determination adverse to the
patent would not be detrimental to the Company's ability to market its products,
but could be detrimental to collection of licensing fees based upon this patent.

Page 14 of 49

SEC Reporting Obligations

We are subject to the continuing reporting obligations of the Securities
Exchange Act of 1934 (the 1934 Act), which, among other things, requires the
filing of quarterly and annual reports and proxy materials with the Securities
and Exchange Commission (the SEC). Prior to September 1999 and periodically
thereafter, we did not comply with filing requirements. To our knowledge, there
is no current inquiry or investigation pending or threatened by the SEC in
connection with our prior reporting violations. However, there can be no
assurance that we will not be subject to such inquiry or investigation in the
future. As a result of any potential or pending inquiry by the SEC or other
regulatory agency, we may be subject to penalties, including among other things,
suspension of trading in our securities, court actions, administrative
proceedings, preclusion from using certain registration forms under the 1933
Act, injunctive relief to prevent future violations, and/or criminal
prosecution.

ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters where submitted to a vote of security holders through solicitation of
proxies or otherwise during the fourth quarter. An annual report will not be
issued to our shareholders for the period ended June 30, 2005.

PART II

ITEM 5 MARKET COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded in the over-the-counter market. Quotations are
available on the OTC Pink Sheets. The common shares are not traded or quoted on
any automated quotation system. The OTC Pink Sheet Symbol for our common stock
is "VRTC.PK". The following table sets forth the range of high and low bid
quotes of our common stock per quarter as provided by the National Quotation
Bureau (which reflect inter-dealer prices without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions).

Fiscal 2005 Fiscal 2004
Market Price Range ----------- -----------
of Common Stock High Low High Low
------------------ ---- --- ---- ---

Quarter Ended
September 30 .90 .25 .90 .25
December 31 1.90 .33 .50 .17
March 31 2.95 .14 .51 .25
June 30 .75 .32 .75 .25

Shareholders

As of September 30, 2006, there were approximately 803 shareholders of record,
inclusive of those brokerage firms and/or clearinghouses holding our common
shares for their clientele (with each such brokerage house and clearing house
being considered as one holder).

Page 15 of 49

Dividend Information

We have not paid or declared any dividends upon our common stock since our
inception and, by reason of our present financial status and our contemplated
financial requirements, we do not anticipate paying any dividends in the
foreseeable future.

Current Sales of Unregistered Securities

None

ITEM 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Results of Continuing Operations - June 30, 2005 compared to June 30, 2004

We had a net loss from continuing operations of $9,092,625 in the fiscal year
ended June 30, 2005 compared to a net loss from continuing operations of $16,115
in the fiscal year ended June 30, 2004. The 2005 loss takes into account
recognition of the arbitrators award in favor of Mitsubishi in the amount of
$8,174,518, substantial increases in expenses for legal fees, and declining
sales as attention was diverted from continuing operations to the Mitsubishi
Arbitration and, thereafter, to matters related to the Company filing its
petition in Bankruptcy on February 28, 2005.

Results of Discontinued Operations - June 30, 2005 compared to June 30,
2004

We had a net loss from discontinued operations of $306,688 in the fiscal year
ended June 30, 2005 compared to a net loss from discontinued operations of
$18,702 in the fiscal year ended June 30, 2004. The 2005 loss was due to a
decline in revenue of $210,300 for fiscal 2005 from $395,313 in fiscal 2004, a
decrease in gross profit percent to 26.2% in fiscal 2005 from 30.4% in fiscal
2004, and disposal costs.

Revenues

Revenues from continuing operations declined from $2,568,640 for fiscal year
ended June 30, 2004 to $1,617,498 for fiscal year ended June 30, 2005 or 37%.
The decline in revenues was mainly in the Asian market and was attributed, in
part, to the pending litigation with Mitsubishi.

Operating Expenses

Operating expense of $10,631,261 for fiscal year ended June 30, 2005 was
$8,307,737 or 358% higher than operating expense of $2,323,524 for fiscal year
ended June 30, 2004. The Mitsubishi award of $8,174,518 accounts for 98% of the
increase in operating expenses over the previous year.

Other Income (Expenses)

Interest expense for the fiscal year ended June 30, 2005 was $60,035 or 43%
lower than interest expense of $104,685 for the fiscal year ended June 30, 2004.
This lower interest expense was the result of the payment or conversion of all
notes payable and convertible notes to related party to either shares of common
stock or applying as prepayments towards the stock subscription obligation
throughout the fiscal year.

Page 16 of 49

Capital Expenditures and Commitments

During the fiscal year ended June 30, 2005, we made $23,693 in capital purchases
compared to $6,980 in 2004. Although we continue to minimize spending for
capital expenditures, we believe our need for additional capital equipment will
continue because of the need to develop and expand our business. The amount of
such additional capital is uncertain and may be beyond that generated from
operations.

Liquidity

The Company has relied on The Matthews Group for funding. Through November,
2006, The Matthews Group has funded $1,666,082, including prepayments, of the
original of $2,000,000 stock subscription receivable.

Related party indebtedness totaled $1,369,121 at June 30, 2004. In fiscal year
2005 this indebtedness, including additional accrued interest, was satisfied by
reducing the prepayment on subscription receivable account for $411,782, payment
of $50,000 of debt plus interest, and conversion of $965,134 into shares of
common stock. As of June 30, 2005, there is no related party indebtedness.

In February 2005, Veritec filed for bankruptcy protection under Chapter 11 and
in August 2006 emerged from bankruptcy. Although not reflected in the
Consolidated Financial Statements appearing in this Form 10-KSB, Veritec was
relieved of $9,356,948 in debt including $7,874,518 owed to Mitsubishi.

As of June 30, 2005, the Company has recognized licensing revenue of $57,280
through its relationship with Acacia. The Company has received additional
licensing revenue from Acacia of $1,414,050, of which, $769,267 and $644,783 was
earned in fiscal years 2006 and 2007, respectively.

As of November 13, 2006, the Company had consolidated cash balances of
$1,038,381, which, we believe is sufficient to meet our short-term needs.
However, the Company may need additional capital to continue to develop and
expand.

Commitments and Contractual Obligations

The Company has an annual lease commitment of $37,800 that expires June 30,
2007.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

Stock-Based Compensation:

The Company elected to continue following the accounting guidance of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees", for measurement and recognition of stock-based transactions with
employees. No compensation cost was recognized for options issued under the
plans when the exercise price of the options was at least equal to the fair
market value of the common stock at the date of grant. Had compensation cost for
the stock options issued been determined based on the fair value at the grant
date, consistent with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation", the effect
on the Company's 2005 and 2004 net loss and net loss per common share would have
been insignificant.

Page 17 of 49

Accounting for Discontinued Operations:

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
144, which changed the requirements for reporting discontinued operations as
well as changed the standards for reporting long-lived assets that have been
disposed. Reporting of discontinued operations was originally under the
provisions of APB No. 30. The FASB concluded that an expansion of those
provisions was warranted so that more disposal situations would trigger the
display of discontinued operations.

Under the provisions of SFAS No. 144, if a component of an entity is either
classified as held-for-sale or has been disposed of during the period, the
results of its operations are to be reported in discontinued operations,
provided that both of the following conditions are met:

a. The operations and cash flows of the component have been or will be
removed from the ongoing operations of the entity as a result of the
disposal transaction, and

b. The entity will have no significant continuing involvement in the
operations of the component after the disposal transaction.

The Company liquidated its VIVI-Japan operations in April 2005. Management
believes that the conditions for reporting VIVI-Japan as a discontinued
operation under the above requirements of SFAS No. 144 were appropriate.

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 from software sales, product sales and
engineering are recognized when products are shipped or services performed.
License fees are recognized upon completion of all required terms under the
agreement. The process typically begins with a customer purchase order detailing
its hardware specifications so the Company can customize its software to the
customer's hardware. Once customization is completed, the Company typically
transmits the software to the customer via the Internet. Revenue is recognized
at that point. Once the software is transmitted, the customers do not have a
right of refusal or return. Under some agreements the customers remit payment
prior to the Company having completed customization or completion of any other
required services. In these instances, the Company delays revenue recognition
and reflects the prepayments as customer deposits.

Page 18 of 49

ITEM 7 FINANCIAL STATEMENTS

VERITEC, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2005 AND 2004

TABLE OF CONTENTS

Page
----

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................. 20
CONSOLIDATED BALANCE SHEETS.............................................. 21
CONSOLIDATED STATEMENTS OF OPERATIONS.................................... 22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT......................... 23
CONSOLIDATED STATEMENTS OF CASH FLOWS.................................... 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 25

Page 19 of 49

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Veritec, Inc.
Golden Valley, Minnesota

We have audited the accompanying consolidated balance sheets of Veritec, Inc.
and Subsidiaries (Company) as of June 30, 2005 and 2004, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Veritec, Inc. and
Subsidiaries as of June 30, 2005 and 2004, and the results of their operations
and their cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.

The Company filed for bankruptcy protection on February 28, 2005, and emerged
from bankruptcy on August 8, 2006 (Note 1). The Company is involved in various
litigation matters, which could have a significant effect on the Company (Note
11).

/s/ Lurie Besikof Lapidus & Company, LLP
-----------------------------------------
Lurie Besikof Lapidus & Company, LLP
Minneapolis, Minnesota
November 13, 2006

Page 20 of 49

VERITEC, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JUNE 30, 2005 AND 2004

2005 2004
------------ ------------
(Restated)

ASSETS

Current Assets:
Cash $ 432,518 $ 275,034
Accounts receivables, net of allowance of $26,000 and $45,000 2,958 917,120
Inventories 6,693 20,730
Prepaid expenses - other 6,708 7,975
Prepaid legal retainer -- 100,000
Discontinued operations - assets -- 355,226
------------ ------------
Total Current Assets 448,877 1,676,085
Property and Equipment, net 22,603 7,332
Software Costs, net of accumulated amortization of $200,000 and $186,666 -- 13,334
------------ ------------
Total Assets $ 471,480 $ 1,696,751
============ ============
LIABILITIES AND STOCKHOLDERS DEFICIT

Current Liabilities:
Notes payable - related parties $ -- $ 390,000
Convertible notes - related parties -- 747,374
Accounts payable 1,581,943 1,442,296
Accrued expenses 159,932 349,482
Accrued expense - Mitsubishi litigation 8,174,518 --
Discontinued operations - liabilities -- 350,577
------------ ------------
Total Current Liabilities 9,916,393 3,279,729

Prepayment on Stock and Subscription Receivable 314,230 19,811
------------ ------------
Total Liabilities 10,230,623 3,299,540
------------ ------------
Commitments and Contingencies

Stockholders' Deficit:
Convertible preferred stock, par value $1.00; authorized 10,000,000
shares, 276,000 shares of Series H authorized, 1,000 and 76,000
shares issued 1,000 76,000
Common stock, par value $.01; authorized 20,000,000 shares, 15,078,598
and 7,071,849 shares issued 150,786 70,718
Subscription receivable (560,176) (717,717)
Additional paid-in capital 13,372,008 12,280,961
Accumulated deficit (22,722,761) (13,323,448)
Cumulative translation adjustment -- 10,697
------------ ------------
Total Stockholders' Deficit (9,759,143) (1,602,789)
------------ ------------
Total Liabilities and Stockholders' Deficit $ 471,480 $ 1,696,751
============ ============

See notes to consolidated financial statements

Page 21 of 49

VERITEC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 2005 AND 2004

2005 2004
----------- ----------
(Restated)

CONTINUING OPERATIONS
Revenues $ 1,617,498 $2,568,640
Cost of Sales 37,339 157,927
----------- ----------
Gross Profit 1,580,159 2,410,713
----------- ----------
Operating Expenses:
General and administrative 2,283,781 2,248,040
Sales and marketing 64,287 18,617
Research and development 108,675 56,867
Mitsubishi litigation 8,174,518 --
----------- ----------
Total Operating Expenses 10,631,261 2,323,524
----------- ----------
Operating Income (Loss) from Continuing Operations (9,051,102) 87,189
----------- ----------
Other Income (Expense):
Interest expense (60,035) (104,685)
Interest income 8,808 1,681
Other 9,704 (300)
----------- ----------
Total Other Income (Expense) (41,523) (103,304)
----------- ----------
Loss from Continuing Operations (9,092,625) (16,115)
----------- ----------
DISCONTINUED OPERATIONS
Loss from Operations of VIVI-Japan (262,596) (18,702)
Loss on Disposal of VIVI-Japan (44,092) --
----------- ----------
Loss from Discontinued Operations (306,688) (18,702)
----------- ----------
NET LOSS $(9,399,313) $ (34,817)
=========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING -
BASIC AND DILUTED 11,042,212 7,074,767
=========== ==========
LOSS PER COMMON SHARE
Basic and Diluted -
Continuing operations $ (0.82) $ --
Discontinued operations (0.03) --
----------- ----------
$ (0.85) $ --
=========== ==========

See notes to consolidated financial statements

Page 22 of 49

VERITEC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED JUNE 30, 2005 AND 2004

Preferred Stock Common Stock
----------------- -------------------- Subscription
Shares Amount Shares Amount Receivable
------- -------- ---------- -------- ------------

BALANCE, June 30, 2003 76,000 $ 76,000 7,126,849 $ 71,268 $(860,326)

Acquisition and
retirement of shares
at $.23 per share -- -- (120,000) (1,200) --
Exercise of option to
purchase shares at
$.23 per share -- -- 15,000 150 --
Issuance of common stock
to settle liability at
$.20 per share -- -- 25,000 250 --
Issuance of common stock
for Board of Director
fees at $.30 per share -- -- 25,000 250 --
Imputed interest on
subscription receivable -- -- -- -- (79,614)
Subscription receivable
reduction -- -- -- -- 222,223
Foreign currency
translation adjustments -- -- -- -- --
Net loss -- -- -- -- --
------- -------- ---------- -------- ---------
BALANCE, June 30, 2004 76,000 76,000 7,071,849 70,718 (717,717)

Conversion of preferred
stock to common stock (75,000) (75,000) 750,000 7,500 --
Conversion of notes
payable at $0.10 per
share to common stock -- -- 5,595,358 55,954 --
Conversion of notes payable
at $0.25 per shares to
common stock -- -- 1,622,391 16,224 --
Employee stock bonus -- -- 39,000 390 --
Imputed interest on
subscription receivable -- -- -- -- (64,681)
Subscription receivable
reduction -- -- -- -- 222,222
Foreign currency
translation adjustments -- -- -- -- --
Net loss -- -- -- -- --
------- -------- ---------- -------- ---------
BALANCE, June 30, 2005 1,000 $ 1,000 15,078,598 $150,786 $(560,176)
======= ======== ========== ======== =========

Additional Cumulative
Paid-in Accumulated Translation Stockholders'
Capital Deficit Adjustment Deficit
----------- ------------ ----------- -------------

BALANCE, June 30, 2003 $12,212,447 $(13,288,631) $ (581) $(1,789,823)

Acquisition and
retirement of shares
at $.23 per share (26,400) -- -- (27,600)
Exercise of option to
purchase shares at
$.23 per share 3,300 -- -- 3,450
Issuance of common stock
to settle liability at
$.20 per share 4,750 -- -- 5,000
Issuance of common stock
for Board of Director
fees at $.30 per share 7,250 -- -- 7,500
Imputed interest on
subscription receivable 79,614 -- -- --
Subscription receivable
reduction -- -- -- 222,223
Foreign currency
translation adjustments -- -- 11,278 11,278
Net loss -- (34,817) -- (34,817)
----------- ------------ -------- -----------
BALANCE, June 30, 2004 12,280,961 (13,323,448) 10,697 (1,602,789)

Conversion of preferred
stock to common stock 67,500 -- -- --
Conversion of notes
payable at $0.10 per
share to common stock 503,582 -- -- 559,536
Conversion of notes payable
at $0.25 per shares to
common stock 389,374 -- -- 405,598
Employee stock bonus 65,910 -- -- 66,300
Imputed interest on
subscription receivable 64,681 -- -- --
Subscription receivable
reduction -- -- -- 222,222
Foreign currency
translation adjustments -- -- (10,697) (10,697)
Net loss -- (9,399,313) -- (9,399,313)
----------- ------------ -------- -----------
BALANCE, June 30, 2005 $13,372,008 $(22,722,761) $ -- $(9,759,143)
=========== ============ ======== ===========

See notes to consolidated financial statements

Page 23 of 49

VERITEC, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, 2005 AND 2004

2005 2004
----------- ----------
(Restated)

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(9,399,313) $ (34,817)
Discontinued operations 306,688 18,702
----------- ---------
Loss from continuing operations (9,092,625) (16,115)
Adjustments to reconcile loss from continuing operations
to net cash provided (used) by operating activities:
Depreciation 8,422 7,358
Amortization of intangibles 13,334 40,000
Stock issued for compensation 66,300 7,500
Payroll applied to prepayment on subscription receivable 20,527 --
Common stock retired from sale of textile customer -- (27,600)
Changes in operating assets and liabilities from
continuing operations:
Accounts receivable 914,162 (752,863)
Inventories 14,037 (11,498)
Prepaid expenses 101,267 (104,513)
Accounts payables and accrued expenses 323,972 825,869
Accrued expense - Mitsubishi litigation 8,174,518 --
----------- ---------
Net cash provided (used) by operating activities from
continuing operations 543,914 (31,862)
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES FROM CONTINUING
OPERATIONS
Purchases of equipment (23,693) (6,980)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES FROM CONTINUING
OPERATIONS
Payments on notes payable - related parties (50,000) --
Proceeds from notes payable - related parties -- 305,000
Payments on long-term debt -- (5,000)
Proceeds from exercise of stock option -- 3,450
----------- ---------
Net cash provided (used) by financing activities from
continuing operations (50,000) 303,450
----------- ---------
DISCONTINUED OPERATIONS
Net cash provided (used) by operating activities (209,414) 265,319
Net cash provided (used) by investing activities 30,114 (121,023)
Net cash used by financing activities (122,740) (112,023)
----------- ---------
Net cash provided (used) by discontinued operations (302,040) 32,273
----------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (10,697) (21,878)
----------- ---------
NET INCREASE IN CASH 157,484 275,003
CASH AT BEGINNING OF YEAR 275,034 31
----------- ---------
CASH AT END OF YEAR $ 432,518 $ 275,034
=========== =========

See notes to consolidated financial statements

Page 24 of 49

VERITEC, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

The Company refers to Veritec, Inc. (Veritec) and its wholly owned
subsidiaries, Veritec Iconix Ventures, Inc. (VIVI-USA; inactive and
dissolved in May 2004), Veritec Iconix Ventures, Inc. (VIVI-Japan; a
Japanese company, discontinued April 2005) and VCode Holdings, Inc.
(VCode).

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 and 5,612,524. As more fully described below, these
patents are the property of VCode. 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 enables 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. The Company has also developed a Secured Identification System
based upon its proprietary VSCode and VeriCode(R) 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, Veritec 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 novel uses of its
Multi-Dimensional Matrix Symbology.

The Company's core business is the sale of its Multi-Dimensional Matrix
Symbology together with its proprietary software products for the writing
and reading thereof. Veritec owned two wholly owned subsidiaries: (1)
VIVI-Japan, a corporation established under the laws of Japan with its
principal place of business located in Osaka, Japan; and, (2) VCode, a
Minnesota corporation with offices at 2445 Winnetka Avenue North, Golden
Valley, Minnesota 55427.

VIVI-Japan: VIVI-Japan was actively engaged in the development and
marketing of unique applications of Veritec products within Japan and
Asia. VIVI-Japan was discontinued in April 2005.

VCode: 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. 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 was 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).

Page 25 of 49

The Exclusive License Agreement provides that all expenses related to
the enforcement and licensing of the patents will be the
responsibility of VData, with the parties sharing in the net proceeds,
as specified under the terms of the agreement, arising from
enforcement or licensing of the patents.

Bankruptcy Considerations

In February 2005, an adverse ruling was made against Veritec and in favor
of Mitsubishi Corporation (Mitsubishi), resulting in a monetary award of
$8,174,518 to Mitsubishi and enjoining Veritec and by extension Veritec's
customers from the future use or sale of what was ruled as Mitsubishi's
Error Detection and Correction Technology. This ruling compelled Veritec to
file a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court (Bankruptcy Court)
for the District of Minnesota, on February 28, 2005.

In December 2005, the Bankruptcy Court converted the Chapter 11 proceeding
to Chapter 7 of the Bankruptcy Code. Under Chapter 7, Veritec would be
liquidated and the shareholders would not receive anything upon
liquidation.

Veritec's Third Amended Plan of Reorganization, with proof of acceptability
of its provisions by Mitsubishi and the majority of the other classes of
creditors, was formally submitted to the Bankruptcy Court with a motion
requesting reconversion of Veritec's case in bankruptcy to Chapter 11. This
motion and related order was approved in March 2006. In March 2006, the
order was executed subject only to approval of the majority of creditors
and shareholders of record, which was subsequently obtained.

Upon execution of the order, Veritec once again became a
"debtor-in-possession" under the jurisdiction of the Bankruptcy Court. In
general, as a debtor-in-possession, Veritec was authorized under Chapter 11
to continue to operate as an ongoing business, but could not engage in
transactions outside the ordinary course of business without the prior
approval of the Bankruptcy Court.

In April 2006, Veritec's Third Amended Plan of Reorganization was confirmed
by the Bankruptcy Court. On August 8, 2006, after resolution of all
disputed creditor claims, Veritec received from the Bankruptcy Court an
Order and Final Decree closing the Chapter 11 case in its entirety.
Although not reflected in these Consolidated Financial Statements, Veritec
was relieved of $9,356,948 in debt including $7,874,518 owed to Mitsubishi.

Veritec had not filed any reports required under the Securities Act
Exchange Act of 1934 while in Bankruptcy. Veritec is in the process of
filing past due reports.

Principles of Consolidation

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

Accounting for Discontinued Operations

In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 144, which changed
the requirements for reporting discontinued operations as well as changed
the standards for reporting long-lived assets that have been disposed.
Reporting of discontinued operations was originally under the provisions of
Accounting Principals Board (APB) Opinion No. 30. FASB concluded that an
expansion of those provisions was warranted, so that more disposal
situations would trigger the display of discontinued operations.

Page 26 of 49

a. The operations and cash flows of the component have been or will be
removed from the ongoing operations of the entity as a result of the
disposal transaction, and

b. The entity will have no significant continuing involvement in the
operations of the component after the disposal transaction.

The Company liquidated its VIVI-Japan operation in April 2005. Management
believes that the conditions for reporting VIVI-Japan as a discontinued
operation under the above requirements of SFAS No. 144 were appropriate.
The comparative 2004 consolidated financial statements have been restated
to conform to the 2005 presentation.

Use of Estimates

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that may affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements
and reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Cash Concentrations

The Company maintains cash in a financial institution located in Minnesota.
At times, this balance may exceed federally insured limits of $100,000. The
Company has not experienced any losses in such accounts and believes it is
not exposed to any significant credit risk on its cash balances.

Accounts Receivable

The Company sells to domestic and foreign companies and grants
uncollateralized credit to customers, but requires deposits on unique
orders. Management periodically reviews its accounts receivable and
provides an allowance for doubtful accounts after analyzing the age of the
receivable, payment history and prior experience with the customer. The
estimated loss that management believes is probable is included in the
allowance for doubtful accounts.

While the ultimate loss may differ, management believes that any additional
loss will not have a material impact on the Company's financial position.
Due to uncertainties in the settlement process, however, it is at least
reasonably possible that management's estimate will change during the near
term.

Inventories

Inventories, consisting of purchased components for resale, are stated at
the lower of cost or market, applying the first-in, first-out (FIFO)
method.

Page 27 of 49

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of 3 to 7 years. When assets are retired or otherwise disposed
of, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is recognized in income. The cost
of maintenance and repairs is expensed as incurred; significant renewals
and betterments are capitalized.

Financial Instruments

The fair value of cash, accounts receivable, accounts payable, accrued
expenses, and short-term debt approximate their carrying values due to the
short-term nature of these financial instruments.

The subscription receivable approximates fair value as a result of the 10%
interest rate used for imputing interest. No quoted market value is
available for this instrument.

Revenue Recognition

The Company accounts for revenue recognition in accordance with Securities
and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101
"Revenue Recognition in Financial Statements" and related amendments.
Revenues from software sales, product sales and engineering are recognized
when products are shipped or services performed. License fees are
recognized upon completion of all required terms under the agreement. The
process typically begins with a customer purchase order detailing its
hardware specifications so the Company can customize its software to the
customer's hardware. Once customization is completed, the Company typically
transmits the software to the customer via the Internet. Revenue is
recognized at that point. Once the software is transmitted, the customers
do not have a right of refusal or return. Under some agreements the
customers remit payment prior to the Company having completed customization
or completion of any other required services. In these instances, the
Company delays revenue recognition and reflects the prepayments as customer
deposits.

Shipping and Handling Fees and Cost

Shipping and handling fees billed to customers are included in revenues and
shipping and handling costs are included in cost of sales.

Advertising

Advertising costs are expensed as incurred and totaled $5,313 in fiscal
2005 and $4,951 in fiscal 2004.

Research and Development

Research and development costs are expensed as incurred.

Loss per Common Share

Basic net loss per common share is computed by dividing the loss available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted net loss per common share, in addition
to the weighted average determined for basic net 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. Potentially

Page 28 of 49

dilutive instruments include stock options and warrants, preferred stock,
and convertible notes payable. For the years ended June 30, 2005 and 2004,
the stock options and warrants, preferred stock, and convertible notes
payable were antidilutive and, therefore, were not included in the
computations of diluted net loss per common share.

Stock-Based Compensation

The Company follows the accounting guidance of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," for
measurement and recognition of stock-based transactions with employees. No
compensation cost was recognized for options issued under the plans when
the exercise price of the options was at least equal to the fair market
value of the common stock at the date of grant. Had compensation cost for
the stock options issued been determined based on the fair value at the
grant date, consistent with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation," the effect on the Company's 2005 and 2004 net
loss and net loss per common share would have been insignificant.

Accounting Pronouncements

The Financial Accounting Standards Board issued SFAS No. 123(R),
"Share-Based Payment", in December 2004, which will require the cost of
employee compensation paid with equity instruments to be measured based on
grant-date fair values and recognized over the vesting period. In April
2005, the Securities and Exchange Commission announced the adoption of a
new rule that amends the compliance dates for SFAS No. 123(R). The new rule
allows companies to implement SFAS No. 123(R) at the beginning of their
fiscal year that begins after June 15, 2005. Under the new rule, SFAS No.
123(R) will become effective for the Company on July 1, 2005. Adoption of
SFAS No. 123(R) will have no impact on the Company's financial statements
as all options are fully-vested at the adoption date.

Reclassifications

Certain reclassifications have been made to the fiscal 2004 consolidated
financial statements to conform to the fiscal 2005 presentation. These
reclassifications had no effect on the net loss or net cash flows.

NOTE 2 - GOING CONCERN

The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has
relied on The Matthews Group for funding. Through November 2006, The
Matthews Group has funded $1,666,082, including prepayments, of the
original of $2,000,000 stock subscription receivable.

Related party indebtedness totaled $1,369,121 at June 30, 2004. In fiscal
year 2005 this indebtedness, including additional accrued interest, was
satisfied by reducing the prepayment on subscription receivable account for
$411,782, payment of $50,000 of debt plus interest, and conversion of
$965,134 into shares of common stock. As of June 30, 2005, there is no
related party indebtedness.

In February 2005, Veritec filed for bankruptcy protection under Chapter 11
and emerged from bankruptcy in August 2006. Although not reflected in these
Consolidated Financial Statements, Veritec was relieved of $9,356,948 in
debt including $7,874,518 owed to Mitsubishi.

Page 29 of 49

As of June 30, 2005, the Company has recognized licensing revenue of
$57,280 through its relationship with Acacia. The Company has received
additional licensing revenue from Acacia of $1,414,050, of which, $769,267
and $644,783 was earned in fiscal years 2006 and 2007, respectively.

As of November 13, 2006, the Company had consolidated cash balances of
$1,038,381, which we believe are sufficient to meet our short-term needs.
However, the Company may need additional capital to continue to develop and
expand.

NOTE 3 - DISCONTINUED OPERATIONS

Discontinued operations assets and liabilities included the following at June
30, 2004:

DISCONTINUED OPERATIONS - ASSETS
Cash $119,033
Certificates of deposit 120,257
Accounts receivable, net 32,682
Prepaid expense 2,316
Property and equipment, net 5,519
Technology rights, net 41,527
Note receivable 19,622
Security deposit and other assets 14,270
--------
Total discontinued operations assets $355,226
========
DISCONTINUED OPERATIONS - LIABILITIES
Current maturities of long-term debt $114,681
Accounts payable 43,555
Accrued expenses 23,043
Long-term debt, net of current maturities 169,298
--------
Total discontinued operation liabilities $350,577
========

Revenues of discontinued operations were $210,300 and $395,313 for the years
ended June 30, 2005 and 2004, respectively.

NOTE 4 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

June 30,
-----------------
2005 2004
------- -------

Furniture and equipment $56,157 $55,765
Vehicles 35,301 12,000
------- -------
91,458 67,765
Less accumulated depreciation 68,855 60,433
------- -------
$22,603 $ 7,332
======= =======

Page 30 of 49

NOTE 5 - NOTES PAYABLE - RELATED PARTIES

In October 2002, the Company's President, Van Tran, loaned $90,000 to the
Company for working capital. This note was unsecured, bore 10% interest and
was due on demand. Interest expense on this note was $5,144 and $9,000 in
2005 and 2004, respectively. Accrued interest on this note totaled $20,777
at February 28, 2005 and $15,633 at June 30, 2004. The note payable and
accrued interest were converted as a payment towards the prepayment on the
subscription receivable account as of February 28, 2005.

In fiscal years 2003 and 2002, The Matthews Group loaned the Company an
aggregate of $200,000 for working capital. These notes were unsecured, bore
10% interest and were due May 25, 2003 to June 23, 2003. Interest expense
on these notes totaled $13,334 in 2005 and $20,000 in 2004. Accrued
interest on these notes totaled $42,604 at February 28, 2005 and $29,270 at
June 30, 2004. The notes payable and accrued interest were converted as a
payment towards the prepayment on the subscription receivable account as of
February 28, 2005.

In June 2003, Veritec entered into an agreement to purchase The Matthews
Group's 50% ownership of VIVI-USA. As part of this agreement, the Company
issued The Matthews Group a promissory note of $50,000. The promissory note
to The Matthews Group bore interest at 10% and was due June 25, 2004.
Interest expense on this note was $3,333 and $5,000 in 2005 and 2004,
respectively. Accrued interest on this note totaled $8,401 at February 28,
2005 and $5,068 at June 30, 2004. The note payable and accrued interest
were converted as a payment towards the prepayment on the subscription
receivable account as of February 28, 2005.

In November 2003, a consultant and shareholder of the Company loaned
$50,000 to the Company for working capital. This note was unsecured, bore
10% interest and was due November 12, 2004. Interest expense on this note
totaled $833 in 2005 (including 2,500 shares of common stock to be issued)
and $4,428 in 2004. This note payable and accrued interest totaling $50,833
were repaid in August 2004. The issuance of the stock remains unsatisfied.

NOTE 6 - CONVERTIBLE NOTES - RELATED PARTIES

In April 2002, The Matthews Group loaned $100,000 to the Company for
working capital and to fund its investment in VIVI-USA. This note was
convertible at the option of the holder into common shares of the Company
at a convertible rate of $0.25 per share. This note was unsecured, bore 10%
interest and was due March 28, 2003. Interest expense on this note was
$6,070 and $10,000 in 2005 and 2004, respectively. Accrued interest on this
note totaled $27,576 and $21,506 at December 31, 2004 and June 30, 2004,
respectively. On December 22, 2004, The Matthews Group exercised its right
to convert the principal amount and all accrued, unpaid interest into
common stock of the Company as of December 31, 2004. The note and accrued
unpaid interest of $27,576 at December 31, 2004, were converted into
510,302 shares of common stock.

The Matthews Group paid an obligation on behalf of the Company to holders
of secured notes payable, collectively called "The Gant Group." Payments by
The Matthews Group to The Gant Group totaled $366,522 (principal -
$286,453; interest - $75,069; and legal fees - $5,000). The amount paid to
The Gant Group plus accrued interest of $30,853 owed to The Matthews Group
on these advances was incorporated into a $397,375 note on December 1,
2000. The note was convertible at the option of the holder into common
shares of the Company at a convertible rate of $0.10 per share. This note
was unsecured, bore 10% interest and was due on demand. Interest expense on
this note was $19,868 and $39,737 in 2005 and 2004, respectively. Accrued
interest on this note totaled $162,161 and $142,293 at December 31, 2004
and June 30, 2004, respectively. As of December 31, 2004, the principal
amount of $397,375 and accrued unpaid interest of $162,161 were converted
into 5,595,358 shares of common stock.

Page 31 of 49

In November 2003, Van Tran (Veritec CEO) and Larry Johanns (a principal of
The Matthews Group) loaned $250,000 to the Company for working capital. The
notes were convertible at the option of the holders into common shares of
the Company at a conversion rate of $0.25 per share. These notes were
unsecured, bore 10% interest and were due November 14, 2004. Interest
expense on this note was $12,200 and $15,822 in 2005 and 2004,
respectively. Accrued interest on this note totaled $28,022 and $15,822 at
December 31, 2004 and June 30, 2004, respectively. As of December 31, 2004,
the principal amount of $250,000 and accrued unpaid interest of $28,022
were converted into 1,112,089 shares of common stock.

NOTE 7 - PREPAYMENTS ON SUBSCRIPTION RECEIVABLE

The Matthews Group made prepayments against the Company's subscription
receivable (Note 8). These prepayments are unsecured and noninterest
bearing. It is assumed the prepayment on the subscription receivable at
June 30, 2005, will also ultimately be applied against the subscription
receivable.

NOTE 8 - STOCKHOLDERS' DEFICIT

Preferred Stock

The Articles of Incorporation of Veritec authorize 10,000,000 shares of
preferred stock with a par value of $1.00 per share. The Board of Directors
is authorized to determine any number of series into which shares of
preferred stock may be divided and to determine the rights, preferences,
privileges and restrictions granted to any series of the preferred stock.

As part of the bankruptcy Plan of Reorganization approved in 1999, a new
Series H convertible preferred stock was authorized. The Plan called for
Veritec to issue 275,000 shares of restricted Series H convertible
preferred stock in exchange for assets of $2,000,000 being invested into
Veritec. Each share of Series H convertible preferred stock is convertible
into 10 shares of the Veritec's common stock at the option of the holder.

In September 1999, The Matthews Group received 275,000 shares of Series H
convertible preferred stock in exchange for a promissory note in the amount
of $2,000,000. The Matthews Group exercised the conversion privilege and
converted 200,000 preferred shares to 2,000,000 shares of common stock.

In December 2004, The Matthews Group exercised the conversion privilege of
their remaining balance of Series H convertible preferred stock and
converted 75,000 preferred shares into 750,000 shares of common stock. The
remaining 1,000 shares of Series H convertible preferred stock issued and
outstanding is owned by an unrelated party.

Stock Bonus

In January 2005, the Company issued 39,000 shares to employees as stock
bonuses.

Page 32 of 49

Stock Options

Veritec issued options to various directors, employees and consultants on a
discretionary basis. These options are for the purchase of a fixed number
of shares of Veritec common stock at a stated price for a specified period.
Compensation cost is measured by the difference between the quoted market
price of the stock at the date of grant and the price, if any, to be paid
for the stock at exercise date. The Company did not issue any options in
2005 or 2004. The 15,000 remaining options issued prior to June 30, 2002
expire in June 2006.

A summary of stock options is as follows:

Option Price
Number of Range Per
Shares Share
--------- ------------

Balance at June 30, 2003 155,000 $.09 to $.80
Expired (125,000) $.09 to $.50
Exercised in fiscal 2004 (15,000) $.23
--------
Balance at June 30, 2004 and 2005 15,000* $.80
========

* Options are fully vested and exercisable.

Subscription Receivable

In September 1999, the Company accepted a commitment from The Matthews
Group to fund the $2,000,000 required under the bankruptcy Plan of
Reorganization. This funding is a promissory note that requires monthly
payments to the Company of $18,519 through fiscal 2009. These payments are
noninterest bearing and are collateralized by a pledge of properties
controlled by principals of The Matthews Group. A California Deed of Trust
and Minnesota mortgages were filed against various pledged properties to
collateralize the subscription.

The Company imputes a 10% interest rate on this subscription receivable.
Imputed interest on the subscription is excluded from operating results and
is instead credited directly to additional paid-in capital.

The Matthews Group has made prepayments toward this subscription receivable
(Note 7).

Page 33 of 49

NOTE 9 - CONCENTRATIONS

Major Customers:

Customers with revenues in excess of 10% of total revenues for 2005 and
2004 were as follows:

Year Ended
June 30,
-----------
2005 2004
---- ----

Customer A 34% 22%
Customer B 21% 16%
Customer C 12% 22%
Customer D 10% --%
Customer E 8% 22%
--- ---
85% 82%
=== ===

At June 30, 2004, Customer A accounted for 47% of the accounts receivable
and Customer C accounted for 36% of the accounts receivable.

Major Suppliers:

In 2005 and 2004, the Company used one supplier for its hand-held scanner
purchases. However, due to the fact that many manufacturers' hand-held
scanners are capable of porting the Company's software products, the
Company does not believe it is at risk to the marketplace.

Foreign Revenues:

Foreign revenues accounted for 63% of the Company's revenues in fiscal 2005
and 85% in fiscal 2004. These revenues are concentrated in Japan, Korea and
Taiwan.

NOTE 10 - INCOME TAXES

Deferred income taxes are provided on the liability method whereby deferred
tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and
their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.

Veritec, VIVI-USA, and VIVI-Japan, file separate income tax returns.
Veritec and VIVI-USA file separate income tax returns in the United States
and VIVI-Japan files a separate income tax return in Japan. VCode is a
corporation and is included in the income tax returns of Veritec. VIVI-USA
was dissolved in 2004 and filed a final tax return for the year ended June
30, 2004. The Company is currently not in compliance with information
return filing requirements in the United States of America with respect to
VIVI-Japan.

Page 34 of 49

A reconciliation between the expected federal income tax rate and the
actual tax rate is as follows:

Year Ended June 30,
------------------------------------------
2005 2004
--------------------- ------------------
Amount Percent Amount Percent
----------- ------- -------- -------

Expected federal tax (benefit) $(3,196,000) (34.0)% $(11,100) (34.0)%
State income tax, net of federal
tax benefit (607,900) (6.5) (2,100) (6.4)
Net operating losses expired 218,700 2.3 -- --
Valuation and utilization of
deferred tax assets 3,579,300 38.1 7,000 21.4
Foreign taxes -- -- 1,900 5.8
Other 5,900 0.1 6,200 19.0
----------- ----- -------- -----
Income tax expense (benefit) $ -- --% $ 1,900 5.8%
=========== ===== ======== =====

Deferred income tax assets have been reduced by a valuation allowance as it
is more likely than not they will not be realized. The following is a
summary of the deferred tax assets:

June 30,
-------------------------
2005 2004
----------- -----------

Allowance for doubtful accounts $ 10,600 $ 18,400
Inventory valuation allowance 12,400 10,800
Accrued expenses 4,900 3,500
Related party accruals -- 93,300
Intangible assets 39,600 39,600
Mitsubishi litigation 3,308,100 --
Net operating loss carryforwards 3,485,400 3,116,100
----------- -----------
Deferred tax asset 6,861,000 3,281,700
Valuation allowance (6,861,000) (3,281,700)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========

The 2004 deferred income tax assets and the related valuation allowance
were restated to correctly report net operating loss carryforwards. The
restatement had no impact on the net deferred tax asset or financial
statements.

Page 35 of 49

Veritec has net operating loss carryforwards available to offset future
taxable income that expire as follows (year ending June 30):

Year Federal Minnesota
---- ---------- ----------

2006 $ 452,000 $ --
2007 657,000 --
2008 979,000 --
2009 1,410,000 --
2010 1,227,000 --
2011 457,000 --
2012 301,000 --
2018 480,000 --
2019 451,000 --
2020 330,000 83,000
2021 654,000 196,000
2022 105,000 105,000
2023 794,000 792,000
2024 1,454,000 1,454,000
---------- ----------
$9,751,000 $2,630,000
========== ==========

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its U.S. office facilities from its President, Van Tran,
under a lease expiring June 30, 2007 and requires monthly payments of
$3,150 plus common area costs. The Company leases a house in Plymouth, MN
on a month-to-month basis from a principal of The Matthews Group for
purposes of housing customers, guests and consultants. The Company leased
its Japanese office facilities under a lease that expired February 28, 2006
and required monthly payments of 243,000 Yen plus common area costs. As of
June 30, 2005, due to the discontinuance of VIVI-Japan, Veritec had no
further responsibility for lease payments in Japan. Rent expense for
continuing operation, to a related party, was $54,300 in 2005 and $35,542
in 2004. Future annual minimum operating lease payments are $37,800 in
fiscal years 2007 and 2006.

Contingencies

During the 1995 - 1997 bankruptcy, the Company sought an investment group
to assist funding the $2,000,000 under the Plan of Reorganization approved
by the Bankruptcy Court in 1997. In the intervening years, various
investment groups attempted to help the Company fund this required
investment. Partial funding received from these investment groups were
settled through stock issuances by the Company. One of these former
investment groups has made claims totaling $166,697 against the Company,
$90,980 in cash and $75,717 in stock (94,646 shares at $.80 per share), but
has not pursued legal action relating to these claims. It is possible that
other investment groups will assert claims against the Company regarding
their efforts to secure funding on behalf of the Company. Management
believes it has appropriately reflected the activity with these investment
groups in the accompanying consolidated financial statements. Management
further feels these claims were settled in the bankruptcy. Due to
uncertainties, however, it is at least reasonably possible that claims will
be asserted and/or pursued. The ultimate outcome of these claims, if
asserted and/or pursued, cannot presently be determined.

Page 36 of 49

On June 30, 2000, we were served as a defendant in the matter of
Starosolsky vs. Veritec, Inc., et al., in the United States District Court
for the Central District of California. This suit was brought by a
shareholder and former director of the Company against Veritec and various
individuals claiming that certain corporate actions were taken without
proper authority of the Company's Board of Directors and/or contrary to the
plan of reorganization the Company filed and completed under Chapter 11 of
the United States Bankruptcy Code in the United States Bankruptcy Court in
the 1990's. The complaint seeks equitable relief to set aside the issuance
of Series H preferred stock (now converted into common stock) issued to The
Matthews Group that was authorized by the previous approved bankruptcy
reorganization plan in 1999, to prevent The Matthews Group from voting its
stock at any meetings of stockholders and to remove certain of the
individual defendants as directors of the Company. In December 2000, this
case was transferred to the United States District Court for the District
of Minnesota. The case has lingered without prosecution. Consequently,
management is not able to express an opinion on the likely outcome.

On January 10, 2002, Veritec initiated arbitration against Mitsubishi in
Los Angeles, California, alleging breach of contract, trade secret
misappropriation and interference with business opportunities; seeking
several million dollars in compensatory damages, punitive damages, legal
fees and accrued interest. Mitsubishi counterclaimed on similar grounds and
sought to enjoin Veritec's use of the Error Detection and Correction
Technology which Mitsubishi claimed as its sole and separate property.
Evidentiary hearings were conducted from the later part of August through
September 4, 2004. On February 15, 2005, Veritec received notice from the
International Court of Arbitration that it awarded Mitsubishi a total of
$8,174,518 in monetary damages and enjoined Veritec's use or sale of the
Error Detection and Correction Technology it deemed to be the sole property
of Mitsubishi. As a result, on February 28, 2005, Veritec filed for
protection under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Minnesota. On December
16, 2005, the Bankruptcy Court converted Veritec's Chapter 11 case in
bankruptcy to a Chapter 7 and the Bankruptcy Court ordered all assets of
the Company to be turned over to the control of the Trustee.

In February 2006, Veritec and Mitsubishi entered into a Settlement
Agreement, whereby in exchange for $300,000, a license to utilize Veritec's
VeriCode(R) Technology, and dismissal of the patent infringement litigation
filed by VData and VCode against Mitsubishi, Mitsubishi waived its right to
the $8,174,518 and granted Veritec a license to use the Mitsubishi Error
Detection and Correction Technology. In light of the Settlement Agreement
entered into with Mitsubishi, on March 8, 2006, the Bankruptcy Court ruled
in favor of reconverting Veritec's case in bankruptcy back to one under
Chapter 11 of the Bankruptcy Code. Veritec's Third Amended Plan of
Reorganization was formally filed with the Court on March 13, 2006. In
April 2006, Veritec's Third Amended Plan of Reorganization was confirmed by
the Bankruptcy Court. On August 8, 2006, after resolution of disputed
creditor claims, Veritec received from the Bankruptcy Court an Order and
Final Decree Closing the Chapter 11 case in its entirety. Although not
reflected in these Consolidated Financial Statements, Veritec was relieved
of $9,356,948 in debt including $7,874,518 owed to Mitsubishi.

VCode joined with VData as Plaintiffs in patent enforcement litigation
filed on October 25, 2004, against Adidas America, Inc., Adidas Solomon AG,
Advanced Micro Devices, Inc., Boston Scientific Corporation, Stamps.com and
Hitachi Global Storage Technologies (Thailand) Ltd., in the United States
District Court for the District of Minnesota. Adidas America, Inc.,
Advanced Micro Devices, Inc., Boston Scientific and Stamps.com filed
Counterclaims in those actions. All Defendants have since settled and
entered into licensing agreements for use of the technology under the
Company's patents.

VCode joined with VData as Plaintiffs in patent enforcement litigation
filed on September 8, 2005, against Mitsubishi Corporation in the United
States District Court for the District of Minnesota, alleging violations of
the Company's patents. This matter was dismissed as a part of the
Settlement Agreement with Mitsubishi described above.

Page 37 of 49

VCode joined with VData as Plaintiffs in patent enforcement litigation
filed on October 4, 2005, against Brother Industries, Ltd., Sato
Corporation, Toshiba Corporation and US Bank National Association in the
United States District Court for the District of Minnesota alleging
violations of the Company's patents. US Bank National Association has
entered into a licensing agreement with the Company and the case as to that
defendant was dismissed as well as the case against Sato Corporation. No
opinion can be rendered at this time with respect to the outcome of this
action as to the remaining defendants.

On January 26, 2006, Hartz Mountain Corporation, in response to a notice of
infringement sent to it by VData, filed a preemptive action seeking a
Declaratory Judgment against VData and the Company in the United States
District Court for the District of New Jersey. Amongst other remedies the
action sought a ruling from the Court that the Company's 4,924,078,
5,331,176 and 5,612,524 patents were not enforceable against Hartz Mountain
and its related companies. The Company has been advised by legal counsel
that the preemptive filing of a Declaratory Judgment action is commonplace
in the enforcement areas of patent law and practice. The Company joined
VData with the filing of a cross complaint against Hartz Mountain seeking
amongst other remedies, monetary damages for past infringement and future
use of the knowledge learned from the Company's patents. Hartz Mountain
entered into a licensing agreement with VData and the Company whereupon
Hartz Mountain dismissed its action for Declaratory Judgment and VData and
the Company dismissed their actions against Hartz Mountain.

On March 13, 2006, in response to notices of infringement sent to their
customers by VData, 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 the Company's 5,612,524 patent is
not enforceable against Cognex Corporation and its customers. Presently,
the Company is conferring with VData and the legal counsel retained by
VData to defend against this action. Due to the recent nature of the case,
only jurisdictional and procedural issues have been litigated and a
responsive pleading on behalf of VData and the Company has not yet been
filed. The Company cannot render an opinion at this time with respect to
the outcome of these actions.

On March 22, 2006, the United States Patent and Trademark Office granted an
application made for an Ex Parte Reexamination of the Company's 5,612,524
patent. The Company is conferring with VData, and counsel retained by
VData, to file the Company's reply to the applicant's submission. Due to
the recent nature of this matter, a response on behalf of VCode has not yet
been filed with the United States Patent and Trademark Office. The Company
has been advised by legal counsel that a preemptive filing of such a
request for Ex Parte Reexaminations is commonplace in the enforcement areas
of patent law and practice. The Company is confident in its patent but
cannot render an opinion at this time with respect to the outcome of the
reexamination. However, not all claims of the patent have been challenged
and the Company believes that a determination adverse to the patent would
not be detrimental to the Company's ability to market its products, but
could be detrimental to 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 a licensing 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. No opinion can be
rendered at this time with respect to the outcome of this action as to the
remaining defendants.

Page 38 of 49

On September 5, 2006, an application was made for an Ex Parte Reexamination
of the Company's 4,924,078 patent. The Company is awaiting a determination
from the United States Patent and Trademark Office if it will grant
reexamination on the Application. The Company has conferred with VData, and
the legal counsel retained by VData, to file the Company's reply to the
applicant's submission should it be granted. Due to the recent nature of
this matter, a response on behalf of VCode is not yet required. The Company
is confident in its patent but cannot render an opinion at this time with
respect to the outcome of the reexamination. However, the Company believes
that a determination adverse to the patent would not be detrimental to the
Company's ability to market its products, but could be detrimental to
collection of licensing fees based upon this patent.

We are subject to the continuing reporting obligations of the Securities
Exchange Act of 1934 (the 1934 Act), which, among other things, requires
the filing of quarterly and annual reports and proxy materials with the
SEC. Prior to September 1999 and periodically thereafter, we did not comply
with several filing requirements. To our knowledge, there is no current
inquiry or investigation pending or threatened by the SEC in connection
with our prior reporting violations. However, there can be no assurance
that we will not be subject to such inquiry or investigation in the future.
As a result of any potential or pending inquiry by the SEC or other
regulatory agency, we may be subject to penalties, including among other
things, suspension of trading in our securities, court actions,
administrative proceedings, preclusion from using certain registration
forms under the 1933 Act, injunctive relief to prevent future violations
and/or criminal prosecution.

NOTE 12 - SUPPLEMENTAL CASH FLOW INFORMATION

Year Ended
June 30,
-------------
2005 2004
---- ------

Cash paid for:
Interest $833 $9,042
Income taxes -- 1,900

Summary of Noncash Activity:

In fiscal year 2005, the convertible notes payable - related party and the
related accrued interest of $965,134 were converted into 7,217,749 shares
of common stock.

In fiscal year 2005, the Company converted notes payable - related party
and the related accrued interest of $411,782 into prepayment on stock and
subscription receivable.

In fiscal year 2005, the Company's President, Van Tran, contributed
deferred compensation of $84,333 owed her to the prepayment on stock and
subscription receivable.

In fiscal year 2005, The Matthews Group exercised their remaining balance
of preferred stock and converted 75,000 preferred shares into 750,000
shares of common stock.

In fiscal year 2005 and 2004, the Company reduced subscriptions receivable
by $222,222 and $222,223, respectively, through a reduction of the
prepayment on stock and subscription receivable.

In fiscal year 2004, the Company issued 25,000 shares of Veritec common
stock to settle a $5,000 obligation.

Page 39 of 49

In fiscal year 2004, the Company issued 25,000 shares of Veritec restricted
common stock to a new Board member for services. These shares were valued
at $.30 per share.

In fiscal year 2004, the Company received 120,000 shares of Veritec common
stock, which were retired, valued at $27,600 as part of the selling price
of VIVI-Japan's textile customer.

ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None

ITEM 8A CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, have 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. It was concluded that, as of the end of such period, our
disclosure controls and procedures are effective.

Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting
during the fiscal year to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

The quarterly review process in fiscal 2005 and the audit of our June 30, 2004,
consolidated financial statements revealed a need for stronger controls over our
financial reporting system. Improvements needed related to a general lack of
accounting staff. During the bankruptcy period, the Company utilized a
consultant for its accounting and financial reporting system. As a result,
certain controls were limited. When the Company emerged from bankruptcy, we
responded to these concerns by hiring a full time Chief Financial Officer.

Our management, including our Chief Executive Officer and Former Chief Financial
Officer Van Tran, do not expect that our disclosure controls and procedures will
prevent all errors and all fraud. A control system, no matter how well conceived
and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within our Company have
been detected. The design of any system of controls also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions; over time, control may become inadequate because of
changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.

Page 40 of 49

ITEM 8B OTHER INFORMATION

None

PART III

ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE
ACT.

The members of the present Board of Directors and Officers are:

Name Office Age Director Since
------------------ ----------------------------------- --- --------------

Mr. Larry Matthews Director 78 1999
Mr. Dean Westberg Director 73 2003
Ms. Van Thuy Tran Director, CEO, Treasurer, Secretary 61 1999

Each director will serve until the next annual meeting of shareholders, or until
their respective successors have been elected and duly qualified. Directors
serve one-year terms. The Board of Directors appoints officers. There are no
family relationships between any director and officer.

Mr. Larry Matthews was appointed as Acting President and Chief Executive Officer
and Director on January 28, 1999, in conjunction with a plan from "The Matthews
Group" to evaluate and possibly fund us out of bankruptcy. Mr. Matthews was
Chairman and Co-Owner of Vendtronics (sold to Food Engineering Corporation) from
1994 to 1998. From 1963 to 1983 he had various positions at Control Data
Corporation, including Vice President of Operations. Currently, Mr. Matthews is
on the Board of Directors of Artesyn Technologies (merger of ZYTEC, of which he
was a cofounder, and Computer Products), Crosswork, Inc., Third Wave Systems,
Solar Attic and ECO Fuels.

Mr. Dean W. Westberg was with 3M for 37 years, most of that time as a
photographic chemist. At 3M he did factory scale-up of introductory photographic
and printing products, quality control and technical service work; and he spent
much time in trouble shooting for 3M. After retiring from 3M he expanded his
education in international law and foreign trade. He became involved with
various start-up companies in establishing trading relations between the United
States and Asia. He has established a company to link small businesses in Mexico
and the United States with larger North American companies. Mr. Westberg has a
B.S. from Hamline University in chemistry and mathematics. He has studied at
University of St. Thomas with specialties in international finance,
international marketing, and law.

Ms. Van Thuy Tran is the current CEO of the Company. Ms. Tran was President of
Asia Consulting and Trading Company, a company dealing with trade in the Pacific
Rim countries. She is the co-founder of Circle of Love, providing mission works
in Vietnam. She was the founder of Equal Partners, Inc., a construction and
building company in Minnesota. Ms. Van Tran has a medical degree and worked in
the medical field for over 17 years. For the last twenty years, she has been an
entrepreneur involved in building businesses, providing opportunity for
minorities and creating solutions for people in distress.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to
us under Rule 16a-3(e) during fiscal 2005 and Form 5 and amendments thereto
furnished to us with respect to fiscal 2005, no person who was a director,
officer, or beneficial owner of more than ten percent of any class of our common
stock failed to file on a timely basis reports required by Section 16(a) of the
Securities Exchange Act during our most recent fiscal year or prior fiscal
years.

Page 41 of 49

Committee and Board Meetings

Three meetings of our Board of Directors were held in fiscal 2005, and all board
members attended all meetings. We have no standing audit, nominating or
compensation committees of our Board or committees performing similar functions
during fiscal 2005. The directors have regularly communicated to discuss our
affairs in addition to formal board meetings to transact and approve appropriate
business. Our Board has determined that we do not have an audit committee
financial expert. We do not have an audit committee financial expert given the
small size of our Company and business and/or inability to attract a board
member who would qualify as a financial expert given our current financial
position.

Code of Ethics

We have not adopted a code of ethics because our only executive officer at that
time was Van Thuy Tran.

Directors Compensation

Non-employee directors have the right to receive director's fees of $150 for
each meeting attended. These directors' fees totaled $750 in fiscal 2005 and
$900 in fiscal 2004.

ITEM 10 EXECUTIVE COMPENSATION

Van Thuy Tran, CEO, received compensation in the amount of $150,000 for the
fiscal year ended June 30, 2005, and $100,000 for the years ended June 30, 2004
and 2003. Ms. Tran received no other compensation from the Company.

Compensation pursuant to plans including pension, stock option, and stock
appreciation rights plan

As of June 30, 2005, we did not have stock option, stock appreciation rights
plans, phantom stock plans, or other incentive or compensation plan pursuant to
which benefits, remuneration, value or compensation was or is to be granted,
awarded, set aside, or accrued for the benefit of any of our executive officers.

ITEM 11 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth, as of June 30, 2005 certain information with
respect to all shareholders known by us to be beneficial owners of more than 5%
of our outstanding common stock, all directors, and all of our officers and
directors as a group.

Number of Shares Percent of
Name & Address Beneficially Owned Shares
-------------- ------------------ ----------
Common Common
(see notes 1 and 2
below)

Larry Matthews
7601 5th Avenue, Richfield, MN 55423 None N/A

Dean Westberg
4124 Jay Lane, White Bear Lake, MN 55110 55,000 0.4%

Van Thuy Tran (see note 1)
1430 Orkla Drive, Golden Valley, MN 55427 4,549,064 30.2%

The Matthews Group (see note 2)
1430 Orkla Drive, Golden Valley, MN 55427 8,789,628 58.3%

Page 42 of 49

Larry Johanns (see note 1)
518 North 12 Street, Osage, IA 50461 4,712,746 31.3%

All Officers and Directors as a group (3 persons)
Van Thuy Tran and Larry Matthews 9,316,810 61.8%

(1) The above shares include 50% of the shares owned or issuable to The
Matthews Group. Van Thuy Tran and Larry Johanns each own 50% of The
Matthews Group.

(2) Includes 750,000 shares issued in the conversion of 75,000 shares of the
Series H preferred stock and 7,217,749 shares as a result of the conversion
of the convertible notes payable and related accrued interest.

ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE

Subscription Receivable

In September 1999, we accepted a commitment from The Matthews Group to fund the
$2,000,000 required under our bankruptcy Plan of Reorganization. This funding is
in the form of a promissory note that calls for 108 monthly payments to us of
$18,519. These payments are non-interest bearing and are secured by a pledge of
properties controlled by a principal of The Matthews Group. The note is
collateralized by mortgages on income-producing real estate having an assessment
value in excess of $800,000, three properties owned by Van Thuy Tran and one
property by Larry Johanns. Non-exclusive of any balance in the Prepayment on
Subscription Receivable, the current remaining balance on the note is $648,148.

The Matthews Group has made prepayments against its Subscription Payable to us.
These prepayments are unsecured and non-interest bearing. It is assumed the
prepayment of $314,230 at June 30, 2005 will also ultimately be applied against
the subscription receivable.

Notes Payable - The Matthews Group

The Matthews Group paid an obligation on behalf of the Company to holders of
secured notes payable collectively called "The Gant Group." Payments by The
Matthews Group to The Gant Group totaled $366,522 (Principal - $286,453;
interest - $75,069; and legal fees - $5,000). These amounts paid to The Gant
Group plus accrued interest of $30,853 owed to The Matthews Group on these
advances were incorporated into a $397,375 note on December 1, 2000. This note
is unsecured, bears 10% interest and is due on demand. Interest expense on this
note totaled $19,869 in 2005 and $39,737 in 2004. Accrued interest related to
this note totaled $162,162 at December 21, 2004 and $142,293 at June 30, 2004.
At the option of The Matthews Group, all or a portion of this indebtedness can
be converted into Veritec, Inc. common stock at $.10 per share. As of December
31, 2004, the principal amount of $397,375 and accrued unpaid interest of
$162,161 were converted into 5,595,358 shares of common stock.

In fiscal years 2003 and 2002, The Matthews Group loaned the Company an
aggregate of $200,000 for working capital. These notes were unsecured, bore 10%
interest and were due May 25, 2003 to June 23, 2003. Interest expense on these
notes totaled $13,334 in 2005 and $20,000 in 2004. Accrued interest on these
notes totaled $42,604 at February 28, 2005 and $29,270 at June 30, 2004. The
notes payable and accrued interest were converted as a payment towards the
prepayment on the subscription receivable account as of February 28, 2005.

In June 2003, we entered into an agreement with The Matthews Group to purchase
50% ownership of VIVI-USA. As part of this agreement, we issued The Matthews
Group a promissory note of $50,000. The promissory note to The Mathews Group
bore 10% interest and was due on demand. Interest expense on this note totaled
$3,333 as of June 30, 2005 and $5,000 in 2004. Accrued interest on this note
totaled $8,401 at February 28, 2005 and $5,068 at June 30, 2004. This note
payable and accrued interest, were converted as a payment towards the prepayment
on the subscription receivable account as of February 28, 2005.

Page 43 of 49

Other Related Party Transactions

In October 2002, our President, Van Tran, loaned $90,000 to us for working
capital needs. This note is unsecured, bears interest at 10% and is due on
demand. Interest expense on this indebtedness totaled $6,394 in 2005 and $9,000
in 2004. Accrued interest on this indebtedness totaled $20,777 at February 28,
2005 and $15,633 at June 30, 2004. The note payable and accrued interest, were
converted as a payment towards the prepayment on the subscription receivable
account as of February 28, 2005.

In November 2003, Van Tran and Larry Johanns (a principal of The Matthews Group)
loaned $250,000 to the Company for working capital. The notes were convertible
at the option of the holders into common shares of the Company at the rate of
$0.25 per share. These notes were unsecured, bore 10% annual interest and were
due November 14, 2004. Interest expense to these related parties on this
indebtedness totaled $12,200 in 2005 and $15,822 in 2004. As of December 31,
2004, the principal amount of $250,000 and accrued unpaid interest of $28,022
were converted into 1,112,089 shares of common stock.

In November 2003, a consultant and shareholder of the Company, Bill Newfield,
loaned $50,000 to the Company for working capital. This note is unsecured, bears
10% interest payable monthly and is due November 12, 2004. Interest expense on
this indebtedness totaled $833 in 2005 and $4,428 in 2004 (including 2,500
shares of common stock to be issued). This note and all accrued interest were
repaid in August 2004. The issuance of the stock remains unsatisfied.

We lease our U.S. office facilities from our President, Van Tran, under a lease
running through June 30, 2007 and calling for monthly payments of $3,150 plus
common area costs. The Company also leases a house on a month-to-month basis
from a principal of The Matthews Group for purposes of housing customers, guests
and consultants. Related party rent expense was $54,300 in fiscal 2005 and
$35,542 in fiscal 2004.

Page 44 of 49

ITEM 13 EXHIBITS

*13. Form 10-KSB for the period ended June 30, 1999, filed on October 13,
1999, and is incorporated herein by this reference.

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. Section 1350).

*99.1. Press Release issued by the Registrant on February 16, 2005, announcing
the adverse ruling against Veritec, Inc., by the International Court of
Arbitration, awarding a monetary judgment in favor of Mitsubishi
Corporation of approximately $8.1 Million; and, enjoining Veritec from
further violations of Mitsubishi Corporation's copyrighted Error
Detection and Correction software (filed as Item 9.01 Exhibit 99.1 to
Veritec's Form 8-K filed on February 17, 2005 and incorporated herein by
reference)

*99.2. Notice of the Registrant having filed on February 28, 2005, a Petition
for Relief under Chapter 11 of the United States Bankruptcy Code with
the United States Bankruptcy Court, District of Minnesota (Case Number
05-31119) (filed as Item 1.03 Bankruptcy or Receivership to Veritec's
Form 8-K filed February 28, 2005 and incorporated herein by reference)

*99.3 Notice of the Registrant's case in Bankruptcy being converted to Chapter
7 of the United States Bankruptcy Code (Case Number 05-31119) (filed as
Item 1.03 Bankruptcy or Receivership to Veritec's Form 8-K filed
December 19, 2005 and incorporated herein by reference)

*99.4 Notice of the Registrant's case in Bankruptcy being reconverted to
Chapter 11 of the United States Bankruptcy Code (Case Number 05-31119)
(filed as Item 1.03 Bankruptcy or Receivership to Veritec's Form 8-K
filed March 10, 2006 and incorporated herein by reference)

*99.5 Notice of the Registrant's Third Amended Plan of Reorganization being
confirmed by the United States Bankruptcy Court (Case Number 05-31119)
(filed as Item 1.03 Bankruptcy or Receivership and Item 9.01 Financial
Statements with attached Exhibit 2.1 Order and Notice Confirming Plan
and Fixing Time Limits, dated April 26, 2006; Exhibit 2.2 Debtor's Third
Modified Plan of Reorganization with Settlement Agreement; and, Exhibit
99.1 Unaudited balance sheet of registrant at April 26, 2006, to
Veritec's Form 8-K filed May 1, 2006 and incorporated herein by
reference)

*99.6 Notice of the Registrant's receipt of "Order and Final Decree Closing
Chapter 11 Case" from the United States Bankruptcy Court (Case Number
05-31119) (filed as Item 1.03 Bankruptcy or Receivership and Item 8.01
Other Events identifying the Press Release issued announcing the same,
to Veritec's Form 8-K filed August 11, 2006 and incorporated herein by
reference)

* As Previously Filed

With respect to the documents incorporated by reference to this Form
10-KSB, Veritec's Commission File Number is 0-15113.

Page 45 of 49

ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

The aggregate fees billed by Lurie Besikof Lapidus & Company, LLP for
professional services rendered for the audit of our annual consolidated
financial statements for fiscal year ended June 30, 2005 were $40,000 to date.
The aggregate fees billed by Lurie Besikof Lapidus & Company, LLP for
professional services rendered for the audit of our annual consolidated
financial statements for fiscal year ended June 30, 2004 were $20,369 to date.

Audit-Related Fees

The aggregate audit-related fees billed by Lurie Besikof Lapidus & Company, LLP
for assurance and related rendered for the audit of our annual consolidated
financial statements for fiscal year ended June 30, 2004 were $30,970.

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

VERITEC, INC.

By /s/ Van Thuy Tran November 14, 2006
----------------------------------
Van Thuy Tran
Director, Chief Executive

By /s/ Gerald Fors November 14, 2006
----------------------------------
Gerald Fors
Chief Financial Officer

Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

Signature Title Date
--------- -------- -----------------

/s/ Dean Westberg Director November 14, 2006
-------------------------------------
Dean Westberg

/s/ Larry Matthews Director November 14, 2006
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Larry Matthews

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