##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2008



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

FOR THE TRANSITION PERIOD FROM              TO

COMMISSION FILE NUMBER: 0-20190





Authentidate Holding Corp.

(Exact name of registrant as specified in its
charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 14-1673067                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               |  |                                     



|                                                                                   |  |           
|---------------------------------------------------------------------------------- |  | ----------
|Connell Corporate Center 300 Connell Drive, 5thFloor, Berkeley Heights, New Jersey |  | 07922     
|(Address of principal executive offices)                                           |  | (Zip Code)

(908) 787-1700

(Registrants telephone number, including area code)



(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to the filing requirements for the past 90 days.    Yes  x    No   ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                           |  |                             
|-------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer   ̈        
|Non-accelerated filer   ̈   |  | Smaller reporting company  x

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

Indicate
the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



|                                         |  |                                
|---------------------------------------- |  | -------------------------------
|Class                                    |  | Outstanding at November 5, 2008
|Common Stock, $0.001 par value per share |  | 34,644,725 shares              









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##### Table of Contents

Authentidate Holding Corp.

Form 10-Q

Table of Contents



|           |  |                                                                                       |  |     
|---------- |  | ------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                       |  | Page
|Part I     |  | Financial Information                                                                 |  |     
|           |  |                                                                                      
|Item 1.    |  | Financial Statements                                                                  |  |     
|           |  |                                                                                      
|           |  | Condensed Consolidated Balance Sheets (Unaudited)                                     |  | 3   
|           |  |                                                                                      
|           |  | Condensed Consolidated Statements of Operations (Unaudited)                           |  | 4   
|           |  |                                                                                      
|           |  | Condensed Consolidated Statements of Cash Flows (Unaudited)                           |  | 5   
|           |  |                                                                                      
|           |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                      |  | 6   
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 16  
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 23  
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 24  
|           |  |                                                                                      
|Part II    |  | Other Information                                                                     |  |     
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 25  
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 26  
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 36  
|           |  |                                                                                      
|Item 3.    |  | Defaults upon Senior Securities                                                       |  | 37  
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 37  
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 37  
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 38  
|           | 
|Signatures |  | 39                                                                                   



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##### Table of Contents

Authentidate Holding Corp. and Subsidiaries

Condensed Consolidated Balance Sheets





|                                                                                                                                                        |  |                   |          |   |              |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                                                                        |  | September 30,2008 |          |   | June 30,2008 |  
|(in thousands, except per share data)                                                                                                                   |  | (unaudited)       |          |   |              |  
|Assets                                                                                                                                                  |  |                   |          |   |              |   |          |  
|Current assets                                                                                                                                          |  |                   |          |   |              |   |          |  
|Cash and cash equivalents                                                                                                                               |  | $                 | 2,836    |   |              | $ | 4,493    |  
|Restricted cash                                                                                                                                         |  |                   | 512      |   |              |   | 512      |  
|Marketable securities                                                                                                                                   |  |                   | 8,925    |   |              |   | 6,375    |  
|Accounts receivable, net                                                                                                                                |  |                   | 874      |   |              |   | 1,287    |  
|Prepaid expenses and other current assets                                                                                                               |  |                   | 1,328    |   |              |   | 671      |  
|                                                                                                                                                        |  |                   |          |   |              |   |          |  
|Total current assets                                                                                                                                    |  |                   | 14,475   |   |              |   | 13,338   |  
|Marketable securities                                                                                                                                   |  |                   | 1,000    |   |              |   | 3,950    |  
|Property and equipment, net                                                                                                                             |  |                   | 893      |   |              |   | 1,014    |  
|Note receivable, net of deferred gain of $2,000                                                                                                         |  |                   |         |   |              |   |         |  
|Other assets                                                                                                                                            |  |                   |          |   |              |   |          |  
|Software development costs, net                                                                                                                         |  |                   | 2,530    |   |              |   | 2,533    |  
|Goodwill                                                                                                                                                |  |                   | 7,341    |   |              |   | 7,341    |  
|Other assets                                                                                                                                            |  |                   | 1,339    |   |              |   | 1,375    |  
|Assets held for sale                                                                                                                                    |  |                   | 2,000    |   |              |   | 2,000    |  
|                                                                                                                                                        |  |                   |          |   |              |   |          |  
|Total assets                                                                                                                                            |  | $                 | 29,578   |   |              | $ | 31,551   |  
|                                                                                                                                                        |  |                   |          |   |              |   |          |  
|Liabilities and Shareholders Equity                                                                                                                    |  |                   |          |   |              |   |          |  
|Current liabilities                                                                                                                                     |  |                   |          |   |              |   |          |  
|Accounts payable and accrued expenses                                                                                                                   |  | $                 | 1,776    |   |              | $ | 1,850    |  
|Deferred revenue                                                                                                                                        |  |                   | 1,200    |   |              |   | 1,273    |  
|Other current liabilities                                                                                                                               |  |                   | 60       |   |              |   | 97       |  
|                                                                                                                                                        |  |                   |          |   |              |   |          |  
|Total current liabilities                                                                                                                               |  |                   | 3,036    |   |              |   | 3,220    |  
|Long-term deferred revenue                                                                                                                              |  |                   | 140      |   |              |   | 140      |  
|                                                                                                                                                        |  |                   |          |   |              |   |          |  
|Total liabilities                                                                                                                                       |  |                   | 3,176    |   |              |   | 3,360    |  
|                                                                                                                                                        |  |                   |          |   |              |   |          |  
|Commitments and contingencies                                                                                                                           |  |                   |          |   |              |   |          |  
|Shareholders equity                                                                                                                                    |  |                   |          |   |              |   |          |  
|Preferred stock $.10 par value; 5,000 shares authorized Series B, 28 shares issued and outstanding                                                      |  |                   | 3        |   |              |   | 3        |  
|Common stock, $.001 par value; 75,000 shares authorized, 34,615 and 34,537 issued and outstanding on September 30, 2008 and June 30,
2008, respectively |  |                   | 35       |   |              |   | 35       |  
|Additional paid-in capital                                                                                                                              |  |                   | 165,983  |   |              |   | 165,681  |  
|Accumulated deficit                                                                                                                                     |  |                   | (139,470 | ) |              |   | (137,006 | )
|Accumulated other comprehensive loss                                                                                                                    |  |                   | (149     | ) |              |   | (522     | )
|                                                                                                                                                        |  |                   |          |   |              |   |          |  
|Total shareholders equity                                                                                                                              |  |                   | 26,402   |   |              |   | 28,191   |  
|                                                                                                                                                        |  |                   |          |   |              |   |          |  
|Total liabilities and shareholders equity                                                                                                              |  | $                 | 29,578   |   |              | $ | 31,551   |  
|                                                                                                                                                        |  |                   |          |   |              |   |          |  

The accompanying notes are an integral part of the condensed consolidated financial statements.



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##### Table of Contents

Authentidate Holding Corp. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)





|                                      |  |                                 |        |   |      |   |        |  
|------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                      |  | Three Months EndedSeptember 30, |       
|(in thousands, except per share data) |  | 2008                            |        |   | 2007 |  
|Revenues                              |  |                                 |        |   |      |   |        |  
|Software licenses and support         |  | $                               | 983    |   |      | $ | 547    |  
|Hosted software services              |  |                                 | 707    |   |      |   | 501    |  
|                                      |  |                                 |        |   |      |   |        |  
|Total revenues                        |  |                                 | 1,690  |   |      |   | 1,048  |  
|                                      |  |                                 |        |   |      |   |        |  
|Operating expenses                    |  |                                 |        |   |      |   |        |  
|Cost of revenues                      |  |                                 | 735    |   |      |   | 454    |  
|Selling, general and administrative   |  |                                 | 2,827  |   |      |   | 4,557  |  
|Product development                   |  |                                 | 423    |   |      |   | 772    |  
|Depreciation and amortization         |  |                                 | 353    |   |      |   | 379    |  
|                                      |  |                                 |        |   |      |   |        |  
|Total operating expenses              |  |                                 | 4,338  |   |      |   | 6,162  |  
|                                      |  |                                 |        |   |      |   |        |  
|Operating loss                        |  |                                 | (2,648 | ) |      |   | (5,114 | )
|                                      |  |                                
|Other income, net                     |  |                                 | 202    |   |      |   | 531    |  
|                                      |  |                                 |        |   |      |   |        |  
|Net loss                              |  | $                               | (2,446 | ) |      | $ | (4,583 | )
|                                      |  |                                 |        |   |      |   |        |  
|Basic and diluted loss per share      |  | $                               | (0.07  | ) |      | $ | (0.13  | )
|                                      |  |                                 |        |   |      |   |        |  

The accompanying notes are an integral part of the condensed consolidated financial statements.



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Authentidate Holding Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)





|                                                                           |  |                                 |        |   |      |   |        |  
|-------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                           |  | Three Months EndedSeptember 30, |       
|(in thousands)                                                             |  | 2008                            |        |   | 2007 |  
|Cash flows from operating activities                                       |  |                                 |        |   |      |   |        |  
|Net loss                                                                   |  | $                               | (2,446 | ) |      | $ | (4,583 | )
|Adjustments to reconcile net loss to net cash used by operating activities |  |                                 |        |   |      |   |        |  
|Depreciation and amortization                                              |  |                                 | 353    |   |      |   | 379    |  
|Share-based compensation                                                   |  |                                 | 270    |   |      |   | 270    |  
|Restricted shares issued for services                                      |  |                                 | 32     |   |      |   | 30     |  
|Changes in assets and liabilities                                          |  |                                 |        |   |      |   |        |  
|Accounts receivable                                                        |  |                                 | 413    |   |      |   | 783    |  
|Prepaid expenses and other current assets                                  |  |                                 | (657   | ) |      |   | (410   | )
|Accounts payable, accrued expenses and other liabilities                   |  |                                 | (129   | ) |      |   | 359    |  
|Deferred revenue                                                           |  |                                 | (73    | ) |      |   | (79    | )
|                                                                           |  |                                 |        |   |      |   |        |  
|Net cash used in operating activities                                      |  |                                 | (2,237 | ) |      |   | (3,251 | )
|                                                                           |  |                                 |        |   |      |   |        |  
|Cash flows from investing activities                                       |  |                                 |        |   |      |   |        |  
|Purchases of property and equipment and other assets                       |  |                                 | (6     | ) |      |   | (47    | )
|Other intangible assets acquired                                           |  |                                 | (6     | ) |      |   | (18    | )
|Capitalized software development costs                                     |  |                                 | (181   | ) |      |   | (300   | )
|Net sales of marketable securities                                         |  |                                 | 800    |   |      |   | 3,446  |  
|                                                                           |  |                                 |        |   |      |   |        |  
|Net cash provided by investing activities                                  |  |                                 | 607    |   |      |   | 3,081  |  
|                                                                           |  |                                 |        |   |      |   |        |  
|Cash flows from financing activities                                       |  |                                 |        |   |      |   |        |  
|Net cash used in financing activities                                      |  |                                 |       |   |      |   |       |  
|                                                                           |  |                                 |        |   |      |   |        |  
|Effect of exchange rate changes on cash flows                              |  |                                 | (27    | ) |      |   | (3     | )
|                                                                           |  |                                 |        |   |      |   |        |  
|Net decrease in cash and cash equivalents                                  |  |                                 | (1,657 | ) |      |   | (173   | )
|Cash and cash equivalents, beginning of period                             |  |                                 | 4,493  |   |      |   | 8,735  |  
|                                                                           |  |                                 |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                   |  | $                               | 2,836  |   |      | $ | 8,562  |  
|                                                                           |  |                                 |        |   |      |   |        |  

The accompanying notes are an integral part of the condensed consolidated financial statements.



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##### Table of Contents

Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)



1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the company pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The condensed
consolidated financial statements include the accounts of Authentidate Holding Corp. (AHC) and its subsidiaries and joint venture (collectively, the company). All significant intercompany transactions and balances have been eliminated in
consolidation. The results of operations for the period ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year. Certain information and footnote disclosures normally included in the annual
financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the annual
consolidated financial statements and notes thereto included in the companys Form 10-K for the fiscal year ended June 30, 2008 and the attached Managements Discussion and Analysis of Financial Condition and Results of Operations.

The unaudited condensed consolidated financial statements have been prepared assuming that the company will continue as a going concern.
As discussed more fully in Note 15, on August 6, 2008, Authentidate entered into a definitive merger agreement to acquire the membership interests of Parascript LLC and certain of its subsidiaries. As originally structured, the closing of the
merger would have used substantially all of the companys cash and marketable securities. Therefore, following the merger the combined company would have been dependent on cash flows from operations, the net working capital of
Parascript on the closing date, and Parascripts existing line of credit to meet its future cash needs. Parascripts line of credit expires annually in April. Historically Parascript has been able to obtain a renewal of the line of credit
on commercially reasonable terms. However, in light of the uncertainty in the credit markets and changes in Parascripts business, the board of directors of the company is considering a proposal to change the structure of the proposed
merger. However, there can be no assurance that the parties will agree on an amendment to the merger agreement or that the combined company will have an available credit line or sufficient borrowing capacity under such a line to provide
sufficient working capital following the merger to fund operations. This raises substantial doubt regarding the combined companys ability to continue as a going concern following the proposed merger. The unaudited condensed consolidated
financial statements do not include any adjustments that might result from the outcome of this uncertainty.

2. Loss Per Share

The following table sets forth the calculation of basic and diluted loss per share for the periods presented (in thousands, except per share data):



|                                           |  |                                 |        |   |      |   |        |  
|------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                           |  | Three Months EndedSeptember 30, |       
|                                           |  | 2008                            |        |   | 2007 |  
|Net loss                                   |  | $                               | (2,446 | ) |      | $ | (4,583 | )
|Preferred stock dividends                  |  |                                 | (18    | ) |      |   | (18    | )
|                                           |  |                                 |        |   |      |   |        |  
|Net loss applicable to common shareholders |  | $                               | (2,464 | ) |      | $ | (4,601 | )
|                                           |  |                                 |        |   |      |   |        |  
|Weighted average shares                    |  |                                 | 34,606 |   |      |   | 34,449 |  
|                                           |  |                                 |        |   |      |   |        |  
|Basic and diluted loss per common share    |  | $                               | (0.07  | ) |      | $ | (0.13  | )
|                                           |  |                                 |        |   |      |   |        |  

All potential common shares were excluded from the calculation of net loss per share for the
periods presented because their impact is antidilutive. At September 30, 2008, employee and non-executive director options (3,915,000), warrants (400,000), performance based consultant options (375,000) and convertible preferred stock
(500,000) were outstanding. At September 30, 2007, employee and non-executive director options (4,738,000), warrants (473,000), performance based consultant options (375,000) and convertible preferred stock (500,000) were
outstanding.



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





3. Share-Based Compensation

The impact of share-based compensation expense on the results of operations is as follows (in thousands, except per share data):



|                                                 |  |                                 |        |   |      |   |        |  
|------------------------------------------------ |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                 |  | Three Months EndedSeptember 30, |       
|                                                 |  | 2008                            |        |   | 2007 |  
|Net loss before share-based compensation expense |  | $                               | (2,176 | ) |      | $ | (4,313 | )
|Share-based compensation expense                 |  |                                 | (270   | ) |      |   | (270   | )
|                                                 |  |                                 |        |   |      |   |        |  
|Net loss                                         |  | $                               | (2,446 | ) |      | $ | (4,583 | )
|                                                 |  |                                 |        |   |      |   |        |  
|Basic and diluted loss per share                 |  |                                 |        |   |      |   |        |  
|Net loss before share-based compensation expense |  | $                               | (0.06  | ) |      | $ | (0.12  | )
|Share-based compensation expense                 |  |                                 | (0.01  | ) |      |   | (0.01  | )
|                                                 |  |                                 |        |   |      |   |        |  
|Basic and diluted loss per share                 |  | $                               | (0.07  | ) |      | $ | (0.13  | )
|                                                 |  |                                 |        |   |      |   |        |  

Share-based compensation by category is as follows (in thousands):



|                                   |  |                                 |       |      |   |      
|---------------------------------- |  | ------------------------------- | ----- | ---- | - | -----
|                                   |  | Three Months EndedSeptember 30,
|                                   |  | 2008                            |       | 2007
|SG&A expenses, net                 |  | $                               | 2,592 |      | $ | 4,317
|Share-based compensation expense   |  |                                 | 235   |      |   | 240  
|                                   |  |                                 |       |      |   |      
|Total SG&A expenses                |  | $                               | 2,827 |      | $ | 4,557
|                                   |  |                                 |       |      |   |      
|Product development expenses, net  |  | $                               | 390   |      | $ | 742  
|Share-based compensation expense   |  |                                 | 33    |      |   | 30   
|                                   |  |                                 |       |      |   |      
|Total product development expenses |  | $                               | 423   |      | $ | 772  
|                                   |  |                                 |       |      |   |      
|Cost of revenues, net              |  | $                               | 733   |      | $ | 454  
|Share-based compensation expense   |  |                                 | 2     |      |   |     
|                                   |  |                                 |       |      |   |      
|Total cost of revenues             |  | $                               | 735   |      | $ | 454  
|                                   |  |                                 |       |      |   |      

The company computed the estimated fair values of all share-based compensation using the
Black-Scholes option pricing model and the assumptions set forth in the following table. The company based its estimate of the life of these options on historical averages over the past five years and estimates of expected future behavior. The
expected volatility was based on the companys historical stock volatility and historical stock volatility of comparable companies in the industry for the fiscal year ending 2008. The assumptions used in the companys Black-Scholes
calculations for fiscal 2009 and 2008 are as follows:



|                 |  |                        |   |  |               |   |  |                  |   |  |                                   
|---------------- |  | ---------------------- | - |  | ------------- | - |  | ---------------- | - |  | ----------------------------------
|                 |  | Risk FreeInterest Rate |   |  | DividendYield |   |  | VolatilityFactor |   |  | WeightedAverageOption Life(Months)
|Fiscal year 2009 |  | 3.2                    | % |  | 0             | % |  | 66               | % |  | 48                                
|Fiscal year 2008 |  | 4.5                    | % |  | 0             | % |  | 74               | % |  | 48                                



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





The Black-Scholes option-pricing model requires the input of highly subjective assumptions. Because
the companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements opinion,
the existing models may not provide a reliable single measure of the fair value of share-based compensation for employee stock options. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of
share-based compensation as circumstances change and additional data becomes available over time, which may result in changes to these assumptions and methodologies. Such changes could materially impact the companys fair value determination.

Stock option activity under the Employees and Non-Executive Directors Stock Option Plans (the Plans) for the period ended
September 30, 2008 is as follows (in thousands, except per share and average life data):



|                                       |  |                  |   |  |                              |      |                                                 |      |                         |   |  
|-------------------------------------- |  | ---------------- | - |  | ---------------------------- | ---- | ----------------------------------------------- | ---- | ----------------------- | - | -
|Employees Plan                         |  | Number ofOptions |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualLife (Years) |      | AggregateIntrinsicValue
|Outstanding, June 30, 2008             |  | 3,807            |   |  | $                            | 3.87 |                                                 |      |                         | $ | 
|Granted                                |  | 93               |   |  |                              | 0.63 |                                                 |      |                         |   |  
|Expired/forfeited                      |  | (455             | ) |  |                              | 3.13 |                                                 |      |                         |   |  
|                                       |  |                  |   |  |                              |      |                                                 |      |                         |   |  
|Outstanding, September 30, 2008        |  | 3,445            |   |  |                              | 3.88 |                                                 | 5.47 |                         | $ | 
|                                       |  |                  |   |  |                              |      |                                                 |      |                         |   |  
|Exercisable at September 30, 2008      |  | 2,698            |   |  | $                            | 4.28 |                                                 | 4.54 |                         |   |  
|                                       |  |                  |   |  |                              |      |                                                 |      |                         |   |  
|Expected to vest at September 30, 2008 |  | 605              |   |  | $                            | 1.56 |                                                 | 8.81 |                         | $ | 
|                                       |  |                  |   |  |                              |      |                                                 |      |                         |   |  



|                                |  |                  |  |                              |      |                                                 |      |                         |   |  
|------------------------------- |  | ---------------- |  | ---------------------------- | ---- | ----------------------------------------------- | ---- | ----------------------- | - | -
|Non-Executive Director Plan     |  | Number ofOptions |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualLife (Years) |      | AggregateIntrinsicValue
|Outstanding, June 30, 2008      |  | 410              |  | $                            | 3.93 |                                                 |      |                         |   |  
|Granted                         |  | 60               |  |                              | 0.58 |                                                 |      |                         |   |  
|                                |  |                  |  |                              |      |                                                 |      |                         |   |  
|Outstanding, September 30, 2008 |  | 470              |  | $                            | 3.50 |                                                 | 5.10 |                         | $ | 
|                                |  |                  |  |                              |      |                                                 |      |                         |   |  

Non-executive director options are granted at market price and vest on the grant date.



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





As of September 30, 2008, there was $375,000 of total unrecognized compensation expense related
to unvested share-based compensation arrangements granted under the Plans. This expense is expected to be recognized over a weighted-average period of 19 months.

There were no options exercised during the three months ended September 30, 2008 and 2007. The weighted average grant date fair value of options granted during the three month periods ended September 30,
2008 and 2007 was approximately $0.32 and $0.78, respectively. These values were calculated using the Black-Scholes option-pricing model.

The total fair value of options vested was $149,000 and $215,000 for the three month periods ended September 30, 2008 and 2007, respectively.

During fiscal 2006 the company issued 375,000 stock options to an independent consultant, exercisable at $3.25 per share. These options do not vest until the consultant realizes at least $1.0 million in sales of the
companys products; therefore no expense has been recorded as no sales have been realized through September 30, 2008. These options are not included in the disclosures above. These options expire at the later of seven years from the grant
date or five years from the vesting date.

Effective January 17, 2007, the Board of Directors amended the terms of existing stock
options previously granted to the companys current employees whereby such options expire ten years from the original grant date. The incremental share-based compensation expense related to this change is being amortized as the related options
vest.

On January 17, 2007, the shareholders approved several amendments to the 2001 Non-Executive Director Stock Option Plan whereby
non-executive director stock options expire ten years from the original date of grant, non-executive directors will have up to two years to exercise their options after leaving the board and may elect to receive up to 50% of their cash director
compensation in restricted common stock of the company issued at fair value in accordance with the terms of the Plan. For the three months ending September 30, 2008, the company issued 77,897 shares of restricted common stock (valued at
approximately $32,000) to certain non-executive directors in connection with this program. In October 2008, the company issued 29,892 share of restricted common stock (valued at approximately $13,750) to such directors under the program.

4. Comprehensive Loss:



|                                                |  |                                 |        |   |      |   |        |  
|----------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                |  | Three Months EndedSeptember 30, |       
|                                                |  | 2008                            |        |   | 2007 |  
|Net loss as reported                            |  | $                               | (2,446 | ) |      | $ | (4,583 | )
|Currency translation adjustment                 |  |                                 | (27    | ) |      |   | (11    | )
|Unrealized holding gain - marketable securities |  |                                 | 400    |   |      |   |       |  
|                                                |  |                                 |        |   |      |   |        |  
|Comprehensive loss                              |  | $                               | (2,073 | ) |      | $ | (4,594 | )
|                                                |  |                                 |        |   |      |   |        |  



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





5. Marketable Securities

Our marketable securities are generally comprised of auction rate securities rated AAA or AA by one or more national rating agencies. The auction rate securities have contractual maturities of up to 30 years, but
generally have interest rate reset dates that occur every 7, 28 or 35 days and despite the long-term nature of their stated contractual maturities, we have had the ability to liquidate these securities at ongoing auctions every 35 days or less. We
classify our investments in auction rate securities as available for sale. These investments have been recorded at cost which approximates fair market value due to their variable interest rates, which typically reset every 7, 28 or 35
days and, as a result, we have had no cumulative gross unrealized holding gains (losses) or gross realized gains (losses) from such investments through March 31, 2008. All income generated from these investments is recorded as interest income.

As a result of credit market conditions the market for auction rate securities is currently less liquid than it has been in the past.
Since February 2008, auctions for auction rate securities have been failing and interest rates have reset at contractual rates which are generally higher than market rates. During April, May and September of 2008 we redeemed several of our
investments at par. In addition, recent legal and regulatory investigations of auction rate security dealers have resulted in a number of settlements whereby such dealers will redeem auction rate securities from certain customers at par over the
next six months. Approximately $8.9 million of our auction rate securities are covered by these settlements. We have valued these investments at fair market value and have classified these investments as current assets at September 30, 2008.

Our remaining investments at September 30, 2008 of approximately $1.1 million at par value are AAA rated auction rate securities
consisting of investments in government insured student loan issues. While the credit quality of these investments is sound, current illiquid market conditions may impact our ability to dispose of these investments over the next twelve months and
could impact the value of such investments. Although we believe the market for these investments will recover during this period, we have classified such investments as long-term assets at September 30, 2008. In addition, based on our
impairment testing for investments we have recorded a cumulative gross unrealized holding loss related to these investments of approximately $100,000 in accumulated other comprehensive loss as of September 30, 2008.

6. Note Receivable and Assets Held for Sale

In June
2007, the company completed the sale of its Document Management Solutions and Systems Integration businesses to Astria Solutions Group, LLC (Astria). In connection with the sale, Astria also entered into a seven-year lease for a portion
of the building owned by the company in Schenectady, New York where the acquired businesses are located. Under the terms of the lease, Astria has elected to pay all taxes and operating costs for the land and building and rent and additional rent of
approximately $186,000 per year for the term of lease. Based on the companys intention to dispose of these assets in the next year, the carrying value of the land and building is classified as assets held for sale for all periods presented. In
fiscal 2008 we listed the property for sale and adjusted our carrying value to the propertys estimated market value less estimated cost to sell.

The note received in connection with the sale is secured by the assets of the acquired businesses and is subordinated to the interests of the senior creditor and mezzanine lender to Astria as set forth in an
intercreditor and subordination agreement among the company, Astria, and the senior creditor and mezzanine lender. The note provides for monthly interest payments through May 2010, principal (based on a 15-year amortization) and interest payments
thereafter through April 2014 and a final payment of the balance in May 2014. Based on the subordination, the extended collection period and other factors, the company has no reasonable basis for estimating the degree of collectibility of the note.
Accordingly, the company is using the guidance under Staff Accounting Bulletin No. 103 - Topic 5U Gain Recognition on Sale of a Business or Operating Assets to a Highly Leveraged Entity for the note and will recognize the
additional gain, if any, on the sale of the businesses as management determines either that the debtors cash flows from operations are sufficient to repay the note or actual collections are received.

7. Segment Information

FAS 131, Disclosures about
Segments of an Enterprise and Related Information,requires certain financial and supplementary information to be disclosed about operating segments of an enterprise. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our
President.



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





The company operates in one reportable segment
in the United States and Germany. In the United States the business is engaged in the development and sale of secure workflow management web-based services. The companys automated and trusted workflow solutions enable enterprises and office
professionals to employ rules-based electronic forms, intelligent routing and transaction management, electronic signing, content authentication, identity credentialing and verification and web and fax based communication capabilities. Customer
benefits from the companys offerings include increased revenues, reduced costs, improved productivity and service levels, automated audit trails, enhanced compliance with regulatory requirements and the reduction of paper-based processes. In
the United States we also offer our proprietary content authentication technology in the form of the USPS Electronic Postmark ® (EPM). In Germany the business is engaged in the development
and sale of software applications that provide electronic signature and time stamping capabilities for a variety of corporate processes including electronic billing and archiving solutions. Our web-based services and software applications are
compliant with applicable digital signature rules and guidelines.

Revenues from external customers include revenues from our German
operations of approximately $983,000 and $547,000 for three months ended September 30, 2008 and 2007, respectively. Our German operations had assets of approximately $957,000 and $1,400,000 at September 30, 2008 and 2007, respectively.

8. Goodwill and Other Intangible Assets

The company performs an annual impairment test of goodwill at the end of the fiscal year. Any adverse development or change in our business during the year would require an interim assessment. Due to the current economic events in the
banking industry and stock markets for the three months ended September 30, 2008 the company reviewed its impairment analysis and concluded that the carrying amount of goodwill has not changed. Approximately $7,291,000 of goodwill relates to
our business in Germany.

Other intangible assets consist of the following (in thousands):



|                      |                     |                    |                         |               |               |       |                     |   |                         |  |               |       |  |   |       |  |   |    
|--------------------- | ------------------- | ------------------ | ----------------------- | ------------- | ------------- | ----- | ------------------- | - | ----------------------- |  | ------------- | ----- |  | - | ----- |  | - | ---
|                      |                     | September 30, 2008 |                         | June 30, 2008
|                      | GrossCarryingAmount |                    | AccumulatedAmortization |               | Net BookValue |       | GrossCarryingAmount |   | AccumulatedAmortization |  | Net BookValue
|Patents               |                     | $                  | 342                     |               | $             | 142   |                     | $ | 200                     |  | $             | 342   |  | $ | 137   |  | $ | 205
|Trademarks            |                     |                    | 146                     |               |               | 47    |                     |   | 99                      |  |               | 146   |  |   | 45    |  |   | 101
|Acquired technologies |                     |                    | 72                      |               |               | 72    |                     |   |                        |  |               | 72    |  |   | 72    |  |   |   
|Licenses              |                     |                    | 1,253                   |               |               | 953   |                     |   | 300                     |  |               | 1,247 |  |   | 918   |  |   | 329
|                      |                     |                    |                         |               |               |       |                     |   |                         |  |               |       |  |   |       |  |   |    
|Total                 |                     | $                  | 1,813                   |               | $             | 1,214 |                     | $ | 599                     |  | $             | 1,807 |  | $ | 1,172 |  | $ | 635
|                      |                     |                    |                         |               |               |       |                     |   |                         |  |               |       |  |   |       |  |   |    

The company amortizes other intangible assets under the straight line method. Amortization expense
was approximately $42,000 for the three month period ended September 30, 2008. Amortization expense for the next five fiscal years and thereafter is expected to be as follows (in thousands):



|           |  |   |    
|---------- |  | - | ---
|2009       |  | $ | 132
|2010       |  |   | 108
|2011       |  |   | 102
|2012       |  |   | 59 
|2013       |  |   | 27 
|Thereafter |  |   | 171
|           |  |   |    
|           |  | $ | 599
|           |  |   |    



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





9. Shareholders Equity

The changes in shareholders equity for the three months ended September 30, 2008 are summarized as follows (in thousands):



|                                                |  |                |   |             |   |                |  |                    |         |  |                                            |          |   |                          |   |      |   |  |   |        |  
|----------------------------------------------- |  | -------------- | - | ----------- | - | -------------- |  | ------------------ | ------- |  | ------------------------------------------ | -------- | - | ------------------------ | - | ---- | - |  | - | ------ | -
|                                                |  | PreferredStock |   | CommonStock |   | Paid-inCapital |  | AccumulatedDeficit |         |  | AccumulatedOtherComprehensiveIncome (Loss) |          |   | TotalShareholdersEquity |  
|Balance, June 30, 2008                          |  | $              | 3 |             | $ | 35             |  | $                  | 165,681 |  | $                                          | (137,006 | ) |                          | $ | (522 | ) |  | $ | 28,191 |  
|Preferred stock dividends                       |  |                |   |             |   |                |  |                    |         |  |                                            | (18      | ) |                          |   |      |   |  |   | (18    | )
|Share-based compensation expense                |  |                |   |             |   |                |  |                    | 270     |  |                                            |          |   |                          |   |      |   |  |   | 270    |  
|Issuance of restricted common stock             |  |                |   |             |   |                |  |                    | 32      |  |                                            |          |   |                          |   |      |   |  |   | 32     |  
|Currency translation adjustment                 |  |                |   |             |   |                |  |                    |         |  |                                            |          |   |                          |   | (27  | ) |  |   | (27    | )
|Unrealized holding gain - marketable securities |  |                |   |             |   |                |  |                    |         |  |                                            |          |   |                          |   | 400  |   |  |   | 400    |  
|Net loss                                        |  |                |   |             |   |                |  |                    |         |  |                                            | (2,446   | ) |                          |   |      |   |  |   | (2,446 | )
|                                                |  |                |   |             |   |                |  |                    |         |  |                                            |          |   |                          |   |      |   |  |   |        |  
|Balance, September 30, 2008                     |  | $              | 3 |             | $ | 35             |  | $                  | 165,983 |  | $                                          | (139,470 | ) |                          | $ | (149 | ) |  | $ | 26,402 |  
|                                                |  |                |   |             |   |                |  |                    |         |  |                                            |          |   |                          |   |      |   |  |   |        |  

During the three months ended September 30, 2008, no stock options or common stock warrants
were exercised.

10. Preferred Stock

The company has the right to repurchase the outstanding Series B preferred stock at a redemption price equal to $25.00 per share, plus accrued and unpaid dividends. The holder of such shares has the right to convert shares of preferred
stock into an aggregate of 500,000 shares of our common stock at a conversion rate of $1.40 per share. In the event the company elects to redeem these securities, the holder will be able to exercise its conversion right subsequent to the date that
we issue a notice of redemption but prior to the deemed redemption date as would be set forth in such notice. The Series B preferred stock was originally issued in a private financing in October 1999 and the conversion and redemption features were
amended in October 2002 to provide for the rights and obligations described in this note. At September 30, 2008, the company has accrued dividends in the amount of $35,000 which remain unpaid.

11. Commitments and Contingencies

Between June and
August 2005, six purported shareholder class actions were filed in the United States District Court for the Southern District of New York against our company and certain of its current and former directors and former officers. Plaintiffs in those
actions alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of 1933. The securities law claims were based on the allegations that we failed to disclose that
our August 2002 agreement with the USPS contained certain performance metrics, and that the USPS could cancel the agreement if we did not meet these metrics; that we did not disclose complete and accurate information as to its performance under, and
efforts to renegotiate, the USPS agreement; and that when we did disclose that the USPS might cancel the agreement, the market price of its stock declined. On October 5, 2005 the Court consolidated the class actions under the caption In re
Authentidate Holding Corp. Securities Litigation., C.A. No. 05 Civ. 5323 (LTS), and appointed the Illinois State Board of Investment as lead plaintiff under the Private Securities Litigation Reform Act. The plaintiff filed an amended
consolidated complaint on January 3, 2006, which asserted the same claims as the prior complaints and also alleged that Authentidate violated the federal securities laws by misrepresenting that it possessed certain patentable technology. On
July 14, 2006, the Court dismissed the amended complaint in its entirety; certain claims were dismissed with prejudice and plaintiff was given leave to replead those claims which were not dismissed with prejudice. In August 2006, plaintiff
filed a second amended complaint, which does not assert any claims relating to the companys patents or under the Securities Act of 1933, but which otherwise is substantially similar to the prior complaint. The second amended complaint seeks
unspecified monetary damages. The company moved to dismiss the second amended complaint on November 13, 2006. The motion is pending before the court.

In addition to the class action complaints, four purported shareholder derivative actions were filed against certain current and former directors and former officers of the company in June and July 2005 in the United
States District Court for the Southern District of New York. These federal court derivative actions were based on substantially the same events and factual allegations as the original class action complaints and asserted claims that Authentidate was
injured by an alleged breach of fiduciary duty, waste, mismanagement, violations of Sarbanes-Oxley, and misappropriation of inside information. The derivative complaints sought, among other things, damages, equitable relief, restitution, and payment
of costs and expenses incurred in the litigation (including legal fees).



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





Plaintiffs in the derivative actions entered into a Court-approved stipulation providing for the consolidation of their actions and the selection of Maxine
Philips as the lead plaintiff. Plaintiffs filed a consolidated complaint on November 14, 2005, which defendants moved to dismiss on January 13, 2006 on the ground that plaintiffs had not made a proper demand on the Board of Directors. On
March 20, 2006, before the motion to dismiss was decided, plaintiffs in the federal court derivative action voluntarily dismissed their complaint without prejudice. On April 6, 2006, the court held a hearing to confirm, among other things,
that plaintiffs had not received any payment or other consideration for the dismissal of their claims. At the hearing plaintiffs agreed to file a motion seeking court approval for the dismissal. Plaintiffs filed this motion on April 18, 2006
and the court entered an order dismissing the consolidated complaint on May 5, 2006. Subsequently, on May 25, 2006, the plaintiffs sent a letter to the Board of Directors demanding that it file a derivative suit on behalf of the company
which asserts the same claims as the complaint which plaintiffs voluntarily dismissed only weeks earlier.

On December 13, 2005, a
purported shareholder derivative action was filed in the Supreme Court of New York, Schenectady County, entitled Elkin v. Goldman et al., No. 2005-2240. Plaintiff in that action demanded that our Board of Directors file a derivative
action on behalf of the company against nine of its current and former directors and former officers. The complaint asserts the same claims that are alleged in the first federal court derivative actions. The Board of Directors, following a
recommendation from a committee of the Board composed of outside, non-employee directors who were advised by independent outside counsel, concluded that commencing litigation, as demanded by Elkin, is not in the companys best interest.

We are engaged in no other litigation which would be anticipated to have a material adverse effect on our financial condition, results of
operations or cash flows.

We have employment agreements with our President, Chief Financial Officer and the Chief Executive Officer of our
German subsidiary that specify the executives current compensation, benefits and perquisites, the executives entitlements upon termination of employment, and other employment rights and responsibilities.

We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these
indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as
intellectual property rights. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the
particular contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict
the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, we have not made any payments under these
agreements that have been material individually or in the aggregate. As of September 30, 2008, we are not aware of any obligations under such indemnification agreements that would require material payments.

12. Income Taxes

In connection with the adoption of
FIN 48, the company has elected an accounting policy to classify interest and penalties related to unrecognized tax benefits as interest expense and income tax expense, respectively. The company continues to fully recognize its tax benefits
which are offset by a valuation allowance due to the uncertainty that the deferred tax assets will be realized. We will continue to evaluate the realizability of our domestic net deferred tax assets and may record additional benefits in future
earnings if we determine the realization of these assets is more likely than not.



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





13. Other Income

Other income consists of the following (in thousands):



|                |  |                                 |     |      |   |    
|--------------- |  | ------------------------------- | --- | ---- | - | ---
|                |  | Three Months EndedSeptember 30,
|                |  | 2008                            |     | 2007
|Interest income |  | $                               | 157 |      | $ | 486
|Rental income   |  |                                 | 45  |      |   | 45 
|                |  |                                 |     |      |   |    
|Total           |  | $                               | 202 |      | $ | 531
|                |  |                                 |     |      |   |    

14. Accounting Standards Adopted in Fiscal 2009

In September 2006, the FASB issued Financial Accounting Standard (FAS) No. 157, Fair Value Measurements. FAS No. 157 defines
fair value, establishes a framework for measuring fair value and expands disclosures about fair value. On February 12, 2008, the FASB issued FASB Staff Position FAS 157-2, that amended FAS Statement No. 157 to delay the effective date of
FAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (that is, at least annually), to fiscal years beginning after
November 15, 2008. On October 10, 2008, the FASB issued FASB Staff Position FAS 157-3 to clarify the application of FAS No. 157 in a market that is not active. On July 1, 2008, the company adopted FAS No. 157 for financial
assets and liabilities. The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. A brief description of those three levels is as follows:



| |  |  | Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Level 2: Inputs other than quoted prices for identical assets or liabilities that are observable for the asset or liability, either directly or indirectly.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3: Significant unobservable inputs.
| | - |  | -----------------------------------------

The companys financial assets subject to fair value measurements as of September 30, 2008 are as follows (in thousands):



|                                                     |  |                                                   |        |         |   |         |  |         |   |  |   |      
|---------------------------------------------------- |  | ------------------------------------------------- | ------ | ------- | - | ------- |  | ------- | - |  | - | -----
|                                                     |  | Fair Value MeasurementsUsing Fair Value
Hierarchy
|                                                     |  | Fair value                                        |        | Level 1 |   | Level 2 |  | Level 3
|Cash and cash equivalents                            |  | $                                                 | 2,836  |         | $ | 2,836   |  | $       |  |  | $ |     
|Restricted cash                                      |  |                                                   | 512    |         |   | 512     |  |         |  |  |   |     
|Current marketable securities - available for sale   |  |                                                   | 8,925  |         |   |        |  |         |  |  |   | 8,925
|Long-term marketable securities - available for sale |  |                                                   | 1,000  |         |   |        |  |         |  |  |   | 1,000
|                                                     |  |                                                   |        |         |   |         |  |         |   |  |   |      
|Total                                                |  | $                                                 | 13,273 |         | $ | 3,348   |  | $       |  |  | $ | 9,925
|                                                     |  |                                                   |        |         |   |         |  |         |   |  |   |      

As discussed more fully in Note 5, our marketable securities consist of AAA rated government
insured student loan auction rate securities. Since June 30, 2008, approximately $3.3 million, at par value, of these securities were covered by a settlement agreement with the security dealer. Accordingly, during the three months ended
September 30, 2008 the company recorded an unrealized holding gain related to these investments of approximately $400,000. For our marketable securities we used level 3 inputs to determine fair value. Our valuation method considered several
factors, including discounted cash flow models, the underlying structure of each security, limited input from brokers and auction rate security market conditions. These investments have been classified within level 3 as their valuation required
substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities. Any adjustment to fair value at September 30, 2008 is immaterial and, accordingly, not recorded. The
valuation may be revised in future periods as market conditions evolve.



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





The reconciliation of our assets measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) is as follows:



|                                                              |  |                                      |        |  
|------------------------------------------------------------- |  | ------------------------------------ | ------ | -
|                                                              |  | Investments inAuction RateSecurities |       
|Balance at June 30, 2008                                      |  | $                                    | 10,325 |  
|Transfers from level 3 to level 1                             |  |                                      | (800   | )
|Unrealized gains recorded to other comprehensive income       |  |                                      | 400    |  
|Losses deemed to be other than temporary recorded in earnings |  |                                      |       |  
|                                                              |  |                                      |        |  
|Balance at September 30, 2008                                 |  | $                                    | 9,925  |  
|                                                              |  |                                      |        |  

At September 30, 2008, the company has approximately $2.0 million of assets held for sale
that are valued on a non-recurring basis using level 2 inputs. The company does not have any financial liabilities. For the three months ended September 30, 2008, no gains or losses resulting from the fair value measurement of financial assets
were included in the companys earnings. The adoption of FAS No. 157 has not impacted the companys results of operations and financial position.

In February 2007, the FASB issued Financial Accounting Standard (FAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. FAS No. 159
permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. FAS 159 also establishes presentation and disclosure requirements designed to
facilitate comparisons between entities that choose different measurement attributes for similar assets and liabilities. FAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The
company has elected not to measure any eligible items at fair value. Accordingly, the adoption of FAS No. 159 has not impacted the companys results of operations and financial position.

15. Pending Merger

In August 2008, Authentidate
entered into a definitive merger agreement to acquire all of the membership interests of Parascript LLC and certain of its subsidiaries for up to $10 million in cash, 30 million shares of New Authentidate common stock, all of the shares of its
German subsidiary Authentidate International AG, a 10%, five year junior unsecured note in the aggregate principal amount of $20 million, subject to adjustments, and contingent consideration based on the financial performance of a newly formed
business unit to exploit certain markets for Parascripts image analysis and pattern recognition technology. Principal and interest on the note are subject to certain restrictions on payment based on available cash flow. The contingent
consideration is payable in New Authentidate common stock valued at $3.00 per share based on ten times the average EBITDA achieved by the new business unit for the fiscal years ending 2010 and 2011. The transaction is contingent upon certain events,
including Authentidate shareholder approval, and there can be no assurance that the transaction will close as anticipated. The definitive merger agreement provides for a break-up fee of up to $3 million under certain circumstances described in the
agreement. Authentidate will account for this transaction using the purchase method of accounting. As a result, the assets and liabilities of Parascript LLC will be recorded at their estimated fair values as of the date that the transaction occurs.
For further information regarding this transaction, see the joint proxy statement/prospectus filed on behalf of New Authentidate on August 13, 2008. As discussed more fully in Note 1, the company is considering a proposal to modify the terms of
the proposed transaction.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Forward-Looking Statements and Factors That May Affect Future Results

Certain statements in this Form 10-Q, including information set forth under Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). We desire to avail ourselves of certain safe harbor provisions of the Act and are therefore including this special note to enable us to do so.
Forward-looking statements in this Form 10-Q or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to our stockholders and other publicly available statements issued or released by us
involving known and unknown risks, uncertainties and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements
expressed or implied by such forward-looking statements. Such future results are based upon our managements best estimates based upon current conditions and the most recent results of operations. These risks include, but are not limited to
risks associated with the market acceptance of our software and services, competition, pricing, technological changes, implementation of our business plan, related decisions by the USPS, and other risks as discussed in our filings with the
Securities and Exchange Commission, in particular our Annual Report on Form 10-K for the year ended June 30, 2008, all of which risk factors could adversely affect our business and the accuracy of the forward-looking statements contained
herein.

Overview

Authentidate Holding Corp. (Authentidate or the company) is a worldwide provider of secure workflow
management software and web-based services. Authentidate and its subsidiaries provide software applications and web-based services that address a variety of business needs for our customers, including increasing revenues, reducing costs, raising
service levels, improving productivity, providing automated audit trails, enhancing compliance with regulatory requirements and reducing paper based processes. Our scalable offerings are primarily targeted at enterprises and office professionals and
incorporate security technologies such as rules based electronic forms, intelligent routing and transaction management, electronic signing, content authentication, identity credentialing and verification and web and fax-based communication
capabilities to electronically facilitate secure and trusted workflows. Authentidate currently operates its business in the United States and Germany with technology and service offerings that address emerging growth opportunities based on the
regulatory and legal requirements specific to each market. In the United States the business is engaged in the development and sale of web-based services largely based on our Inscrybe platform and related capabilities. In the United States, we
offer our patent pending content authentication technology in the form of the United States Postal Service® Electronic Postmark®
(EPM). In Germany the business is engaged in the development and sale of software applications that provide electronic signature and time stamping capabilities for a variety of corporate processes including electronic billing and archiving
solutions. Our web-based services and software applications are compliant with applicable digital signature rules and guidelines. We sell our web-based services and software applications through a direct sales effort and reseller arrangements.

For a number of years, we have experienced net losses and negative cash flow from operating activities. Our principal activities during
this period have focused on developing new products and services, hiring management, refining our business strategies and repositioning our businesses for growth. Although we believe we are well positioned for such growth, we expect to continue to
generate net losses and negative cash flow for the foreseeable future as we expand our operations. See Liquidity and Capital Resources.

During fiscal 2008 and the early part of fiscal 2009, we have continued to take steps to refine our strategic focus, complete our core service offerings, significantly expand our addressable markets, reduce operating costs and position the
company for long-term growth. In the United States we have continued to invest in our Inscrybe platform with particular emphasis on refining and marketing Inscrybe Healthcare, an automated and trusted workflow service targeting the needs
of enterprises in the healthcare market. We believe our business will benefit from trends in the US healthcare industry to significantly reduce costs, shorten the length of hospital stays and shift patient care towards wellness and preventative care
programs. As discussed below we have taken steps to focus our business in these areas, however, our progress will be impacted by the timing of customer contracts and implementations and the market acceptance of our services. We also launched
Inscrybe Office, an electronic signing, document exchange and content authentication service for enterprises and office professionals. Over this same period our business unit in Germany continued to grow acceptance for its electronic invoicing
product, and focused on further penetrating the German healthcare market with its security technology offerings.

In July 2007, we entered
into a new three-year license agreement with the USPS to act as a non-exclusive authorized service provider of the USPS EPM. Pursuant to this license agreement, the USPS granted the company a non-exclusive, worldwide license to use its applicable
trademarks and other intellectual property rights for the EPM service in order to enable the company to offer the EPM service directly to the market. The USPS will define and maintain the technical and operational standards for the EPM service, and
serve as backup verifier for all EPM transactions. Authentidate is the first provider to be authorized in a new standards-based EPM service model created by the USPS to help ensure performance standards and facilitate the development of a
multi-provider environment. The company previously operated the EPM service on behalf of the USPS since March 2003, under a strategic alliance agreement that expired on July 31, 2007.



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On November 26, 2007, our Board of Directors promoted Mr. OConnell Benjamin to the office
of President to fill one of the positions formerly held by Mr. Suren Pai, who departed as our President and Chief Executive Officer and resigned as a member of our Board of Directors. In January 2008, we announced a comprehensive plan intended
to accelerate revenue growth and enhance shareholder value in the second half of fiscal 2008 and beyond. The plan, set forth in a series of strategic initiatives, follows a detailed assessment of the companys business strategy and operations
by senior management and the Board of Directors. Pursuant to this plan, we intend to enhance our sales and customer service capabilities by leveraging our existing resources and adding resources, focus our marketing and sales efforts on additional
segments of the healthcare industry and continue to manage our operating costs. In January 2008, we completed the downsizing of our management team and certain product development resources and recorded severance costs in the second and third
quarters of fiscal 2008.

In June 2008 we formed a joint venture with EncounterCare Solutions, Inc., a provider of technology and services
for the home healthcare marketplace. The joint venture called ExpressMD Solutions will provide in-home patient vital signs monitoring systems and services to improve care for patients with chronic illnesses and reduce the cost of care by
delivering results to their health care providers via the Internet. ExpressMD Solutions combines EncounterCares Electronic House Call patient vital signs monitoring appliances with a specially designed web-based management and monitoring
software module based on Authentidates Inscrybe Healthcare platform. The service enables unattended measurements of patients vital signs and related health information. Patients data is securely sent electronically to each
patients health care provider for review. ExpressMD Solutions is designed to aid wellness and preventative care, and deliver better care to specific patient segments such as the elderly, special needs or pediatric patients with chronic
illnesses who require regular monitoring of serious medical conditions. Using ExpressMD Solutions offerings, health care providers will be able to easily view each specific patients vital statistics and make adjustments to the
patients care plans via the Internet. ExpressMD Solutions easy to use patient monitoring system is intended to provide patients with increased peace of mind and improved condition outcomes through a combination of care plan schedule
reminders and comprehensive disease management education on their in-home communication unit. The service will provide intelligent routing to alert on-duty caregivers whenever a patients vital signs are outside of the practitioners
pre-set ranges. Health care providers and health insurers are also expected to benefit by having additional tools to improve patient care, and reduce overall in-person and emergency room patient visits.

In August 2008, Authentidate entered into a definitive merger agreement to acquire all of the membership interests of Parascript LLC and certain of its
subsidiaries for up to $10 million in cash, 30 million shares of AHC Group Inc. (New Authentidate) common stock, all of the shares of its German subsidiary Authentidate International AG, a 10%, five year junior unsecured note in the
aggregate principal amount of $20 million, subject to adjustments, and contingent consideration based on the financial performance of a newly formed business unit to exploit certain markets for Parascripts image analysis and pattern
recognition technology. Principal and interest on the note are subject to certain restrictions on payment based on available cash flow. The contingent consideration is payable in New Authentidate common stock valued at $3.00 per share based on ten
times the average EBITDA achieved by the new business unit for the fiscal years ending 2010 and 2011. The transaction is contingent upon certain events, including Authentidate shareholder approval, and there can be no assurance that the transaction
will close as anticipated. The definitive merger agreement provides for a break-up fee of up to $3 million under certain circumstances described in the agreement. Authentidate will account for this transaction using the purchase method of
accounting. As a result, the assets and liabilities of Parascript LLC will be recorded at their estimated fair values as of the date that the transaction occurs. For further information regarding this transaction, see the joint proxy
statement/prospectus filed on behalf of New Authentidate on August 13, 2008. As discussed more fully in Note 1 of Notes to the Condensed Consolidated Financial Statements, the company is considering a proposal to modify the terms of the
proposed transaction.

We intend to continue our efforts to develop and market our software applications and web-based services in the
United States and European markets. We also intend to focus on identifying additional applications and markets where our technology can address customer needs.

Our revenues consist principally of transaction fees for web-based services, software license fees, hosting fees and maintenance charges. Growth in our business is affected by a number of factors, including general
economic and business conditions, and is characterized by long sales cycles. The timing of customer contracts, implementations and ramp-up to full utilization can have a significant impact on results and we believe our results over a longer period
of time provide better visibility into our performance.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States and the rules of the Securities and Exchange Commission. The preparation of our condensed consolidated financial statements and related notes in
accordance with generally accepted accounting principles requires us to make estimates, which include judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent
assets



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and liabilities. We have based our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. We
evaluate our estimates on a regular basis and make changes accordingly. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual
results, our financial condition or results of operations will be affected.

A critical accounting estimate is based on judgments and
assumptions about matters that are uncertain at the time the estimate is made. Different estimates that reasonably could have been used or changes in accounting estimates could materially impact our financial statements. We believe that the policies
described below represent our critical accounting policies, as they have the greatest potential impact on our financial statements. However, you should also review our Summary of Significant Accounting Policiesbeginning on page F-7 of the
Notes to our Consolidated Financial Statements contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2008.

Long-Lived
Assets

Long-lived assets, including property and equipment, software development costs, patent costs, trademarks and licenses are
reviewed for impairment using an undiscounted cash flow approach whenever events or changes in circumstances such as significant changes in the business climate, changes in product offerings, or other circumstances indicate that the carrying amount
may not be recoverable.

Software Development Costs

Software development and modification costs incurred subsequent to establishing technological feasibility are capitalized and amortized based on anticipated revenue for the related product with an annual minimum
charge equal to the straight-line amortization over the remaining economic life of the related products (generally three years). Amortization expense is included in depreciation and amortization expense.

Goodwill

Goodwill is reviewed for impairment
annually or whenever events such as significant changes in the business climate, changes in product offerings, or other circumstances indicate that the carrying amount may not be recoverable. We perform our annual goodwill impairment test at the end
of each fiscal year using a discounted cash flow approach.

Revenue Recognition

Revenue is derived from transaction fees for web-based services, software licenses, maintenance arrangements, hosting services, Electronic Postmark (EPM)
sales and post contract customer support services. Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed and collectibility is reasonably assured. Multiple-element arrangements are
assessed to determine whether they can be separated into more than one unit of accounting. A multiple-element arrangement is separated into more than one unit of accounting if all of the following criteria are met: the delivered item has value to
the customer on a stand alone basis; there is objective and reliable evidence of the fair value of the undelivered items in the arrangement; if the arrangement includes a general right of return relative to the delivered items, and delivery or
performance of the undelivered item is considered probable and substantially in our control. If these criteria are not met, then revenue is deferred until such criteria are met or until the period over which the last undelivered element is
delivered, which is typically the life of the contract agreement. If these criteria are met, we allocate total revenue among the elements based on the sales price of each element when sold separately which is referred to as vendor specific objective
evidence or VSOE.

Revenue from web-based services, EPM sales and post contract customer support services is recognized when the related
service is provided and, when required, accepted by the customer. Software license revenue is recognized when the criteria discussed above is met. Maintenance and hosting services revenue is recognized over the period in which the service is
performed. Revenue from multiple element arrangements that cannot be allocated to identifiable items is recognized ratably over the contract term which is generally one year.

Management Estimates

Preparing financial statements requires management to make estimates, judgments
and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Examples include estimates of loss contingencies and product life cycles, assumptions such as elements comprising a software arrangement, including the
distinction between upgrades/enhancements and new products; when technological feasibility is achieved for our products; the potential outcome of future tax consequences; and determining when investment or other impairments exist. We maintain
allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We make estimates on the future recoverability of capitalized goodwill which is highly dependent on the future success of
marketing and sales, we record a valuation allowance against deferred



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tax assets when we believe it is more likely than not that such deferred tax assets will not be realized and we make assumptions in connection with the
calculations of share-based compensation expense. Actual results and outcomes may differ from managements estimates, judgments and assumptions. We have based our estimates on historical experience and on various assumptions that are believed
to be reasonable under the circumstances and we evaluate our estimates on a regular basis and make changes accordingly. Historically, our estimates relative to our critical accounting estimates have not differed materially from actual results;
however, actual results may differ from these estimates under different conditions. If actual results differ from these estimates and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting
changes could have a material adverse effect on our consolidated statement of operations, and in certain situations, could have a material adverse effect on liquidity and our financial condition.

Stock-Based Compensation

We apply Statement of
Financial Accounting Standard No. 123R, Share Based Payment(FAS 123R) to account for employee and director stock option plans. Share-based employee compensation expense is determined using the Black-Scholes option pricing
model which values options based on the stock price at the grant date, the expected life of the option, the estimated volatility, expected dividend payments and the risk-free interest rate over the expected life of the options.

The company computed the estimated fair values of all share-based compensation using the Black-Scholes option pricing model and the assumptions set forth
in the following table. The company based its estimate of the life of these options on historical averages over the past five years and estimates of expected future behavior. The expected volatility was based on the companys historical stock
volatility and historical stock volatility of comparable companies in the industry for the fiscal year ending 2008. The assumptions used in the companys Black-Scholes calculations for fiscal 2009 and 2008 are as follows:



|                 |  |                        |   |  |               |   |  |                  |   |  |                                   
|---------------- |  | ---------------------- | - |  | ------------- | - |  | ---------------- | - |  | ----------------------------------
|                 |  | Risk FreeInterest Rate |   |  | DividendYield |   |  | VolatilityFactor |   |  | WeightedAverageOption Life(Months)
|Fiscal year 2009 |  | 3.2                    | % |  | 0             | % |  | 66               | % |  | 48                                
|Fiscal year 2008 |  | 4.5                    | % |  | 0             | % |  | 74               | % |  | 48                                

The Black-Scholes option-pricing model requires the input of highly subjective assumptions.
Because the companys employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in managements
opinion, the existing models may not provide a reliable single measure of the fair value of share-based compensation for employee stock options. Management will continue to assess the assumptions and methodologies used to calculate estimated fair
value of share-based compensation as circumstances change and additional data becomes available over time, which may result in changes to these assumptions and methodologies. Such changes could materially impact the companys fair value
determination.

Concentrations of Credit Risk

Financial instruments which subject us to concentrations of credit risk consist of cash and cash equivalents, marketable securities and trade accounts receivable. To reduce credit risk, we place our investments with several high credit
quality financial institutions and typically invest in AA or better rated investments. Our credit customers are not concentrated in any specific industry or business. We establish an allowance for doubtful accounts based upon factors surrounding the
credit risk of specific customers, historical trends and other information.

The following analysis of our financial condition and results
of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto contained elsewhere in this Form 10-Q.



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Results of Operations

Three months ended September 30, 2008 compared to three months ended September 30, 2007.

Revenues
increased to $1,690,000 for the quarter ended September 30, 2008, compared to $1,048,000 for the prior year period. These results reflect increases of approximately 41% in US revenues and 80% in German revenues from increases in transaction
volumes and new customers.

Cost of revenues increased to $735,000 for the quarter ended September 30, 2008, compared to $454,000 for
the prior year period. This increase is due primarily to higher license and maintenance expenses and software and hardware expenses for a project during the current quarter.

Selling, general and administrative (SG&A) expenses decreased to $2,827,000 for the quarter ended September 30, 2008, compared to $4,557,000 for
the same period in 2007. This decrease reflects cost management activities. The prior year amount includes incremental legal expenses of approximately $700,000, professional services of approximately $250,000 and accrued severance expense of
approximately $165,000.

Product development expenses decreased to $423,000 for the quarter ended September 30, 2008, compared to
$772,000 for the comparable period in 2007. Product development spending fluctuates period to period based on the amounts capitalized. Total spending for the quarter, including capitalized amounts, was $604,000 compared to $1,072,000 for the prior
year reflecting cost management activities offset in part by the use of contract employees for certain projects.

Depreciation and
amortization expense was $353,000 for the quarter ended September 30, 2008, compared to $379,000 for the prior year period.

Other
income decreased to $202,000 for the quarter ended September 30, 2008, compared to $531,000 for the prior year period. The decrease in interest and other income is due primarily to lower cash and investment balances as we continue to invest in
our business.

Net loss for the quarter ended September 30, 2008 was $2,446,000, or $0.07 per share, compared to $4,583,000, or $0.13
per share, for the quarter ended September 30, 2007. The decrease in the current period net loss reflects the revenue growth and the cost management activities discussed above.

Liquidity and Capital Resources

Overview

Our operations and product development activities have required substantial capital investment to date. Our primary sources of funds have been the
issuance of equity and the incurrence of third party debt. In February 2004, we sold 5,360,370 common shares in private placements pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506, promulgated thereunder. We realized gross
proceeds of approximately $73,700,000 from these transactions and received net proceeds of approximately $69,100,000 after payment of offering expenses and broker commissions. We have been using the cash raised in this financing to fund our
operations and product development activities since that time.

Expenditures for equipment and other assets totaled approximately $6,000,
software license expenditures totaled approximately $6,000 and capitalized software development expenditures totaled approximately $181,000 for the three months ended September 30, 2008. We have developed and intend to continue to develop new
services and applications to grow our business and address new markets.

Cash Flows

At September 30, 2008, cash, cash equivalents and marketable securities, net of gross unrealized holding loss, amounted to approximately $12,761,000
and total assets at that date were $29,578,000. After adjusting for the change in the gross unrealized holding loss, these amounts have decreased since June 30, 2008 by approximately $2,457,000 and $2,373,000, respectively, as we utilized cash
principally to fund operating losses, product development activities, joint venture investments, changes in working capital and capital expenditures during the period ended September 30, 2008. Cash used for the period also includes expenditures
of approximately $402,000 for deferred deal costs and $20,000 for the final payment of accrued severance obligations. We expect to continue to use cash to fund operating losses, product development activities and capital expenditures for the
foreseeable future. See Note 5 of Notes to the Condensed Consolidated Financial Statements for a discussion about our marketable securities which consist of AAA rated auction rate securities in government insured student loss issues.



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Net cash used by operating activities was $2,237,000 for the three months ended September 30, 2008,
compared to $3,251,000 for the comparable period in 2007. This change reflects our working capital and expense management activities during 2008 and lower expenditures for incremental items discussed above.

Net cash used by investing activities, excluding purchases and sales of marketable securities, was $193,000 for the three months ended September 30,
2008, compared to $365,000 for the comparable period in 2007. This decrease is due primarily to the decrease in product development spending capitalized in fiscal 2008 and lower spending for software licenses.

Cash flows from financing activities for the three months ended September 30, 2008 and 2007 were not significant.

To date we have been largely dependent on our ability to sell additional shares of our common stock or other securities to obtain financing to fund our
operating deficits, product development activities and capital expenditures. Under our current operating plan to grow our business, our ability to improve operating cash flow has been highly dependent on the market acceptance of our offerings.

We expect to fund the merger transaction discussed in the Overview section with available cash, long-term seller financing, New
Authentidate common stock and the stock of our wholly-owned subsidiary Authentidate International AG. The combined companys primary future recurring cash needs will be working capital, capital expenditures and debt service. We will use
substantially all of our available cash and marketable securities to complete the transaction and will need to rely on cash flows from combined company operations and available cash and borrowings of the combined company to meet the combined
companys recurring cash needs for the next twelve months. If the combined companys cash flows from operations and available borrowings are less than expected, Authentidate may need to downsize operations, incur additional debt or raise
additional capital. There can be no assurance, however, that the combined company will be successful in raising additional capital or securing sufficient available borrowings. In addition, any financing may result in substantial dilution to our
shareholders and other conditions described in Risk Factors - Risks Related to the Proposed Merger - We may need to raise substantial additional capital to fund our operations following the transaction.As discussed more fully in
Note 1 of Notes to the Condensed Consolidated Financial Statements, if adequate borrowing capacity is not available it raises substantial doubt regarding the combined companys ability to continue as a going concern.

If we do not complete the subject transaction, we believe we have enough cash, cash equivalents and marketable securities to support our operations for
at least the next twelve months.

Our future capital requirements may vary materially from those now planned. The amount of capital that we
will need in the future will depend on many factors, including:



| |  |  | our relationships with suppliers and customers;
| | - |  | -----------------------------------------------



| |  |  | the market acceptance of our software and services;
| | - |  | ---------------------------------------------------



| |  |  | the levels of promotion and advertising that will be required to launch our new offerings and achieve and maintain a competitive position in the marketplace;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | price discounts on our software and services to our customers;
| | - |  | --------------------------------------------------------------



| |  |  | our pursuit of strategic transactions;
| | - |  | --------------------------------------



| |  |  | our business, product, capital expenditure and research and development plans and product and technology roadmaps;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the level of accounts receivable that we maintain;
| | - |  | --------------------------------------------------



| |  |  | capital improvements to new and existing facilities;
| | - |  | ----------------------------------------------------



| |  |  | technological advances; and
| | - |  | ---------------------------



| |  |  | our competitors response to our offerings.
| | - |  | -------------------------------------------

Financing Activities

We have not engaged in any external financing activities in fiscal 2009 and 2008.

Other Matters

The events and contingencies
described below have impacted or may impact our liquidity and capital resources.

Presently, 28,000 shares of our Series B preferred stock,
originally issued in a private financing in October 1999, remain outstanding. As of October 1, 2004, our right to redeem these shares of Series B preferred stock is vested. Accordingly, we have the right to repurchase such shares at a
redemption price equal to $25.00 per share, plus accrued and unpaid dividends. The holder, however, has the right to convert these shares of preferred stock into an aggregate of 500,000 shares of our common stock at a conversion rate of $1.40. In
the event we elect to redeem these securities, the holder will be able to exercise its conversion right subsequent to the date that we issue a notice of redemption but prior to the deemed redemption date as would be set forth in such notice. As of
September 30, 2008, no shares of the Series B preferred stock have been redeemed.



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Between June and August 2005, several purported shareholder class and derivative actions were filed
against our company and certain current and former directors and former officers. The complaints and current status of these actions are described in detail under the caption Legal Proceedings, appearing in Item 1 of Part II of this
Quarterly Report on Form 10-Q. Management is unable to determine at this time whether these complaints will have a material adverse impact on its financial condition, results of operations or cash flow.

Commitments

Office Lease Commitments

We entered into the lease agreement for our executive offices on July 11, 2005. The lease is for a term of ten years and four months, with a
commencement date of October 1, 2005 and covers approximately 19,700 total rentable square feet. The annual rent in the first year was $324,000 increasing to $512,000 in year 2 and increasing at regular intervals until year 10 when the annual
rent will be approximately $561,000. The lease also provides us with a one-time option to renew the lease for a term of five years at the then-current market rate. We also have an option to terminate the lease five years and four months after the
commencement date upon 12 months prior notice to the Landlord. If we exercise this option, we would be required to pay an early termination fee of approximately $568,000. As part of the lease agreement, we posted a letter of credit securing our
lease payments of approximately $512,000.

The offices of our subsidiary Authentidate International, AG are located at Rethelstraße
47, D-40237 Düsseldorf. We lease approximately 1,052 square meters at an annual rent of approximately 200,000 Euros, pursuant to a lease agreement dated December 28, 2007. The lease is for a term of five years and two months commencing on
May 1, 2008 and provides us with options to renew the lease for two additional five year terms at the then-current market rate.

Severance and
Other Commitments

On November 26, 2007, our Board of Directors appointed Mr. OConnell Benjamin to the office of
President, effective immediately. Mr. Benjamins appointment filled one of the positions formerly held by Mr. Suren Pai, who ceased serving as our President and Chief Executive Officer as of such date. Pursuant to the employment
agreement we had with Mr. Pai, in connection with the cessation of his employment with us, Mr. Pai was entitled to: (a) all compensation accrued but not paid as of the termination date; (b) a severance payment equal to the sum of
(i) 12 months of the greater of (A) his base salary in effect on the termination date and (B) the highest base salary in effect at any time during the ninety (90) day period to the date of termination; and (ii) an additional
severance payment of $187,500; and (c) continued participation in our benefit plans through the end of the month of the one-year anniversary of the termination of his employment. In addition, pursuant to his employment agreement, the options we
granted Mr. Pai under such employment agreement which vested as of the date of termination, plus 200,000 options, are deemed vested and exercisable for two years from the date of termination. The full cost of this arrangement was accrued during
the quarter ended December 31, 2007 and paid in full by June 30, 2008.

Contractual Commitments

A summary of the contractual commitments associated with our lease obligations as of September 30, 2008 is as follows (in thousands):



|                       |  |       |       |                 |   |           |  |           |       |                  |   |       |  |   |      
|---------------------- |  | ----- | ----- | --------------- | - | --------- |  | --------- | ----- | ---------------- | - | ----- |  | - | -----
|                       |  | Total |       | Less than1 year |   | 1-3 years |  | 4-5 years |       | More than5 years
|Total operating leases |  | $     | 5,580 |                 | $ | 926       |  | $         | 1,586 |                  | $ | 1,618 |  | $ | 1,450
|                       |  |       |       |                 |   |           |  |           |       |                  |   |       |  |   |      

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or
operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially
affect our liquidity or the availability of our capital resources. We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification provisions are
included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as intellectual property rights.
Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular contract. Further,
our obligations under these arrangements may



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be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not
possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, we have not made any
payments under these agreements that have been material individually or in the aggregate. As of September 30, 2008, we were not aware of any obligations under such indemnification agreements that would require material payments.

Effects of Inflation and Changing Prices

The impact
of general inflation on our operations has not been significant to date and we believe inflation will continue to have an insignificant impact on us.

Present Accounting Standards Not Yet Adopted

FAS No. 157 is effective for fiscal years beginning after
November 15, 2007, except for certain nonfinancial assets and liabilities as to which the date is November 15, 2008. We are currently evaluating the impact of this standard for nonfinancial assets and liabilities on our Consolidated
Financial Statements.

In December 2007, the FASB issued Financial Accounting Standard (FAS) No.141 (Revised 2007), Business
Combination.. Under FAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. FAS 141R also changed the
accounting treatment for certain specific items, including: acquisition costs will generally be expensed as incurred; non controlling interests will be valued at fair value at the acquisition date; acquired contingent liabilities will be recorded at
fair value at the acquisition date and subsequently measured at either the higher of such amount or the amount determined under existing guidance for non-acquired contingencies; in-process research and development will be recorded at fair value as
an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income
tax uncertainties after the acquisition date generally will affect income tax expense. FAS 141R applies prospectively to business combinations for which the acquisition date is on or after the first annual reporting period beginning on or after
December 15, 2008; and early adoption is prohibited. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

In December 2007, the FASB issued Financial Accounting Standard (FAS) No. 160, Noncontrolling Interests in Consolidated Financial Statements  An Amendment of ARB No. 51.FAS
No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority
interest) as equity in the consolidated financial statements and separate from the parents equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income
statement. FAS No.160 clarifies that changes in a parents ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. FAS No. 160 also
includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. FAS No. 160 is effective for fiscal years beginning on or after December 15, 2008 and early adoption is prohibited. We are
currently evaluating the impact of this standard on our Consolidated Financial Statements.

In December 2007, the FASB ratified the
EITFs Consensus for Issue No. 07-1, Accounting for Collaborative Arrangements which defines collaborative arrangements and establishes reporting requirements for transactions between participants in a collaborative
arrangement and between participants in the arrangement and third parties. EITF 07-1 is effective for fiscal years beginning on or after December 15, 2008. We are currently evaluating the impact of this standard on our Consolidated Financial
Statements.

In May 2008, the FASB issued Financial Accounting Standard (FAS) No. 162, The Hierarchy of Generally
Accepted Accounting Standards. FAS No. 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are in
conformity with generally accepted accounting principles for nongovernmental entities. We are currently evaluating the impact of this standard on our Consolidated Financial Statements. Statement 162 is effective 60 days following the SECs
approval of the PCAOB amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

We have approximately $10,025,000, at par value, invested in high quality investments as of September 30, 2008. Although these investments have become less liquid as a result of current credit market conditions, we do not believe that
any of our financial instruments have significant risk associated with market sensitivity. For more information on these investments see Note 5 to our Condensed Consolidated Financial Statements included in this Form 10-Q. We are not exposed to
significant financial market risks from changes in foreign currency exchange rates and are only minimally impacted by changes in interest rates. However, in the future, we may enter into transactions denominated in non-US currencies or increase the
level of our borrowings, which could increase our exposure to these market risks. We have not used, and currently do not contemplate using, any derivative financial instruments.



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Interest Rate Risk

At any time, fluctuations in interest rates could affect interest earnings on our cash and marketable securities. We believe that the effect, if any, of reasonably possible near term changes in interest rates on our
financial position, results of operations, and cash flows would not be material. Currently, we do not hedge these interest rate exposures. The primary objective of our investment activities is to preserve capital. We have not used derivative
financial instruments in our investment portfolio.

At September 30, 2008, our unrestricted cash and marketable securities, net of
gross unrealized holding loss, totaled $12,761,000 of which approximately $2,174,000 was invested in commercial paper and money market accounts and approximately $9,925,000 was invested in auction rate securities. The remainder of our cash was in
non-interest bearing checking accounts used to pay operating expenses. For more information on these investments see Note 5 to our Condensed Consolidated Financial Statements included in this Form 10-Q.



|Item 4. | Controls and Procedures
|------- | -----------------------

Evaluation of Disclosure Controls and
Procedures

Our President and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, have concluded that, based on the evaluation of these controls and procedures, our disclosure controls and procedures were effective
at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
SECs rules and forms and that such information is accumulated and communicated to our management, including our President and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Our management, including our President and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls
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. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. 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. Our management, however, believes our disclosure controls and procedures are in fact effective to provide reasonable assurance that the objectives of the
control system are met.

Changes in Internal Control over Financial Reporting

There was no change in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934)
during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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Part II Other Information



|Item 1. | Legal Proceedings
|------- | -----------------

Between June and August 2005,
six purported shareholder class actions were filed in the United States District Court for the Southern District of New York against our company and certain of our current and former directors and former officers. Plaintiffs in those actions alleged
that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Sections 11 and 15 of the Securities Act of 1933. The securities law claims were based on the allegations that we failed to disclose that our August 2002
agreement with the USPS contained certain performance metrics, and that the USPS could cancel the agreement if we did not meet these metrics; that we did not disclose complete and accurate information as to our performance under, and efforts to
renegotiate, the USPS agreement; and that when we did disclose that the USPS might cancel the agreement, the market price of our stock declined. On October 5, 2005 the Court consolidated the class actions under the caption In re Authentidate
Holding Corp. Securities Litigation., C.A. No. 05 Civ. 5323 (LTS), and appointed the Illinois State Board of Investment as lead plaintiff under the Private Securities Litigation Reform Act. The plaintiff filed an amended consolidated
complaint on January 3, 2006, which asserted the same claims as the prior complaints and also alleged that Authentidate violated the federal securities laws by misrepresenting that it possessed certain patentable technology. On July 14,
2006, the Court dismissed the amended complaint in its entirety; certain claims were dismissed with prejudice and plaintiff was given leave to replead those claims which were not dismissed with prejudice. In August 2006, plaintiff filed a second
amended complaint, which does not assert any claims relating to the companys patents or under the Securities Act of 1933, but which otherwise is substantially similar to the prior complaint. The second amended complaint seeks unspecified
monetary damages. The company moved to dismiss the second amended complaint on November 13, 2006. The motion is pending before the court.

In addition to the class action complaints, four purported shareholder derivative actions were filed against certain current and former directors and former officers of the company in June and July 2005 in the United States District Court
for the Southern District of New York. These federal court derivative actions were based on substantially the same events and factual allegations as the original class action complaints and asserted claims that Authentidate was injured by an alleged
breach of fiduciary duty, waste, mismanagement, violations of Sarbanes-Oxley, and misappropriation of inside information. The derivative complaints sought, among other things, damages, equitable relief, restitution, and payment of costs and expenses
incurred in the litigation (including legal fees). Plaintiffs in the derivative actions entered into a Court-approved stipulation providing for the consolidation of their actions and the selection of Maxine Philips as the lead plaintiff. Plaintiffs
filed a consolidated complaint on November 14, 2005, which defendants moved to dismiss on January 13, 2006 on the ground that plaintiffs had not made a proper demand on the Board of Directors. On March 20, 2006, before the motion to
dismiss was decided, plaintiffs in the federal court derivative action voluntarily dismissed their complaint without prejudice. On April 6, 2006, the court held a hearing to confirm, among other things, that plaintiffs had not received any
payment or other consideration for the dismissal of their claims. At the hearing plaintiffs agreed to file a motion seeking court approval for the dismissal. Plaintiffs filed this motion on April 18, 2006 and the court entered an order
dismissing the consolidated complaint on May 5, 2006. Subsequently, on May 25, 2006, the plaintiffs sent a letter to the Board of Directors demanding that it file a derivative suit on behalf of the company which asserts the same claims as
the complaint which plaintiffs voluntarily dismissed only weeks earlier.

On December 13, 2005, a purported shareholder derivative
action was filed in the Supreme Court of New York, Schenectady County, entitled Elkin v. Goldman et al., No. 2005-2240. Plaintiff in that action demanded that our Board of Directors file a derivative action on behalf of the company
against nine of its current and former directors and former officers. The complaint asserts the same claims that are alleged in the first federal court derivative actions. The Board of Directors, following a recommendation from a committee of the
Board composed of outside, non-employee directors who were advised by independent outside counsel, concluded that commencing litigation, as demanded by Elkin, is not in our best interest.

In addition, we are subject to other claims and litigation arising in the ordinary course of business. Our management considers that any liability from
any reasonably foreseeable disposition of such other claims and litigation, individually or in the aggregate, would not have a material adverse effect on our consolidated financial position, results of operations or cash flows.



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|Item 1A. | Risk Factors
|-------- | ------------

As provided for under the Private
Securities Litigation Reform Act of 1995, we wish to caution shareholders and investors that the following important factors, among others discussed throughout this Report on Form 10-Q and a restated description of the risk factors associated with
our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the
year ended June 30, 2008.You should carefully consider the risks described below, together with all of following risk factors and the other information included in this report, in considering our business herein as well as the
information included in other reports and prospects. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may
impair our business operations, financial condition and/or operating results. If any of the matters or events described in the following risks actually occurs, our business, financial condition or results of operations could be harmed. In such case,
the trading price of our common stock could decline, and you may lose all or part of your investment due to any of these risks.

Risks Related to
Our Business

Failure to increase our revenue and keep our expenses consistent with revenues could prevent us from achieving and maintaining
profitability.

We incurred net losses of approximately $15,811,000, $15,063,000 and $17,823,000 for the fiscal years ended
June 30, 2008, 2007 and 2006, respectively and a net loss of approximately $2,446,000 for the three months ended September 30, 2008. We have expended, and will continue to be required to expend, substantial funds to pursue product
development projects, enhance our marketing and sales efforts and to otherwise operate our business. Therefore, we will need to generate higher revenues to achieve and maintain profitability and cannot assure you that we will be profitable in any
future period. Our prospects should be considered in light of the difficulties frequently encountered in connection with the establishment of a new business line, which characterizes our business, such as the difficulty in creating a viable market,
the significant related development and marketing costs and the overall competitive environment in which we operate. This risk may be more acute in light of our disposition of our other operating segments. Accordingly, there can be no assurance that
we will be able to achieve profitable operations in future operating periods.

Our capital requirements are significant and we have historically
financed our operations through private placements of securities.

Our capital requirements have been and will continue to be
significant. We have been substantially dependent upon private placements of our securities and on short-term and long-term loans from lending institutions to fund such requirements. We are expending significant amounts of capital to develop,
promote and market our software and services, such as our Inscrybe Healthcare platform and related modules and our Inscrybe Office offering. Due to these expenditures, we have incurred significant losses to date. We used approximately $14,903,000,
$14,852,000 and $13,743,000 in cash for continuing operating activities for the fiscal years ended June 30, 2008, 2007 and 2006, respectively, and $2,237,000 for the three months ended September 30, 2008. We expect the proceeds received
from our February 2004 private financing, in which we raised approximately $69,100,000 in net proceeds, and cash generated from operations and asset sales, to satisfy our cash needs at least the next twelve months. No assurances can be given that we
will be able to attain sales levels and support our costs through revenues derived from operations. If we are unable to attain projected revenue levels for our business, it may be necessary to raise additional capital to fund operations and to meet
our obligations in the future.

If the United States Postal Service cancels our new license agreement, we may need to incur additional costs in our
efforts to successfully commercialize this technology.

In July 2007, we entered
into a new three-year license agreement with the U.S. Postal Service® (USPS) to act as a non-exclusive authorized service provider of the USPS Electronic Postmark® (EPM). Pursuant to this license agreement, the USPS granted the company a non-exclusive, worldwide license to use its applicable trademarks and other intellectual property rights for the EPM
service in order to enable us to offer the EPM service directly to the market. The USPS will define and maintain the technical and operational standards for the EPM service, and serve as backup verifier for all EPM transactions. Authentidate is the
first provider to be authorized in a new standards-based EPM service model created by the USPS to help ensure performance standards and facilitate the development of a multi-provider environment. We have operated the EPM service on behalf of the
USPS since March 2003, under a strategic alliance agreement that expired on July 31, 2007.

This license agreement is effective as of
August 1, 2007 and will expire in three years unless it is sooner terminated in accordance with its terms. Either party may terminate the agreement upon written notice if the other party is in material breach of any provision thereof, subject
to applicable cure periods. In addition, either party may terminate this agreement for any reason, upon 120 days notice to the other party. No assurances can be given that the USPS will not terminate this agreement which termination could adversely
affect our ability to commercialize this technology.

The USPS will also have the right to terminate the license agreement upon written
notice in connection with a change in control transaction affecting Authentidate. In accordance with the terms of the license agreement, Authentidate is required to provide prior written notice to the USPS of any merger, acquisition, restructuring,
change of control, sale of all or substantially all of the stock or assets of Authentidate to which the USPS agreement relates, or an assignment to an affiliate, parent or subsidiary. Although such transactions do not require the approval or consent
of USPS, USPS has the right, exercisable within 20 days from its receipt of Authentidates notice, to terminate the license Agreement. Authentidates proposed transaction with Parascript LLC is covered by the foregoing termination right.



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Our license with the USPS may also be adversely affected by recently enacted legislation regarding the
USPS. On December 20, 2006, the President signed into law PL 109-435. This statute defines as postal services essentially the carriage of paper and printed matter, but grandfathers other services that were being offered by
the USPS as of January 1, 2006, which we believe would include the EPM. However, the legislation further directs the Postal Regulatory Commission (PRC) to review non-postal services within two years to determine whether they should
continue taking into account the public need for the service and the ability of the private sector to meet the public need for the service. Based upon this legislation, the PRC may review the current licensing arrangement for
the EPM. Accordingly, there can be no assurance the USPS will not terminate this licensing program, which could adversely affect our ability to commercialize this technology.

We depend on growth in the software as a service market, and lack of growth or contraction in this market could materially adversely affect our sales and financial condition.

Our software and internet solutions compete with other software as a service solutions. Demand for our solutions and software offerings is
driven by several factors, including an increased focus on protecting business-critical applications, government and industry regulations requiring data protection and integrity, and the growth in the market for software as a service. Segments of
the computer and software industry have in the past experienced significant economic downturns and decreases in demand as a result of changing market factors. A change in the market factors that are driving demand for offerings of software as a
service could adversely affect our sales, profitability and financial condition.

We have been named as a party to several class action and derivative
action lawsuits, and we may be named in additional litigation, all of which could require significant management time and attention and result in significant legal expenses. An unfavorable outcome in one or more of these lawsuits could have a
material adverse effect on our business, financial condition, results of operations and cash flows.

As described in detail at
Item 1. Legal Proceedings of Part II of this Quarterly Report on Form 10-Q, several purported class action complaints were filed in federal court alleging our company and certain of our current and former directors and former
officers violated the federal securities laws. Subsequently, four purported shareholder derivative actions were filed against certain of our current and former directors and former officers based on allegations substantially similar to those set
forth in the purported class actions. The expense of defending such litigation may be substantial and the time required to defend the actions could divert managements attention from the day-to-day operations of our business, which could
adversely affect our business, results of operations and cash flows. In addition, an unfavorable outcome in such litigation could have a material adverse effect on our business, results of operations and cash flows.

Our success is dependent on the performance of our management and the cooperation, performance and retention of our executive officers and key employees.

Our business and operations are substantially dependent on the performance of our senior management team and executive officers. If
our management team is unable to perform it may adversely impact our results of operations and financial condition. We do not maintain key person life insurance on any of our executive officers. The loss of one or several key employees
could seriously harm our business. Any reorganization or reduction in the size of our employee base could harm our ability to attract and retain other valuable employees critical to the success of our business.

If we lose key personnel or fail to integrate replacement personnel successfully, our ability to manage our business could be impaired.

Our future success depends upon the continued service of our key management, technical, sales, finance, and other critical personnel. Other than our
President, CFO and the President of our German operation, our key personnel do not have employment agreements and we cannot assure you that we will be able to retain them. Key personnel have left our company in the past and there likely will be
additional departures of key personnel from time to time in the future. The loss of any key employee could result in significant disruptions to our operations, including adversely affecting the timeliness of product releases, the successful
implementation and completion of company initiatives, the effectiveness of our disclosure controls and procedures and our internal control over financial reporting, and the results of our operations. In addition, hiring, training, and successfully
integrating replacement sales and other personnel could be time consuming, may cause additional disruptions to our operations, and may be unsuccessful, which could negatively impact future revenues.



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Our reported financial results could be adversely affected by changes in financial accounting standards or by the
application of existing or future accounting standards to our business as it evolves. For example, accounting for employee stock options under FAS 123R has had a material impact on our consolidated results of operations and earnings per share.

As a result of the enactment of the Sarbanes-Oxley Act and the review of accounting policies by the SEC and national and international
accounting standards bodies, the frequency of accounting policy changes may accelerate. For example, the adoption of FAS123(R) in fiscal 2006 required us to adopt a different method of determining and accounting for the compensation expense of our
employee stock options. As a result of the adoption of FAS 123(R), our losses during fiscal 2008, 2007 and 2006 were higher than they would have been had we not been required to adopt FAS 123(R). This will continue to be the case for future periods.
This and other possible changes to accounting standards, could adversely affect our reported results of operations. Further, accounting policies affecting software revenue recognition have been the subject of frequent interpretations, which could
significantly affect the way we account for revenue related to our products. As we enhance, expand and diversify our business and product offerings, the application of existing or future financial accounting standards, particularly those relating to
the way we account for revenue, could have a significant adverse effect on our reported results although not necessarily on our cash flows.

If the
carrying value of our long-lived assets is not recoverable, an impairment loss must be recognized which would adversely affect our financial results.

We evaluate our long-lived assets, including property and equipment, goodwill, acquired product rights, and other intangible assets, whenever events or circumstances occur which indicate that these assets might be
impaired. Goodwill is evaluated annually for impairment at the end of each fiscal year, regardless of events and circumstances. In fiscal 2005 we recorded an impairment charge of approximately $4,800,000 for goodwill and other long-term intangible
assets. As of September 30, 2008, we had approximately $7,341,000 of goodwill principally from our acquisition of our German subsidiary, Authentidate International, AG. We will continue to evaluate the recoverability of the carrying amount of
our long-lived assets, and we may incur substantial impairment charges, which could adversely affect our financial results.

We have incurred
significant additional costs concerning our international operations and may incur additional costs in the future.

We have incurred
substantial costs in supporting the operation of our German subsidiary, Authentidate International, AG. In June 2008, we renewed for one-year our employment agreement with Mr. Jan Wendenburg, the CEO of Authentidate International, pursuant to
which he received a base salary of approximately, 210,000 Euros. Further, for the fiscal years ended June 30, 2008, 2007 and 2006 and the three months ended September 30, 2008, we advanced or made capital investments of approximately
$4,227,000 to this subsidiary. We cannot provide any assurance that we will recoup any of these amounts from this subsidiary. We expect to incur additional costs in the future in connection with the operations of this subsidiary.

Developing and implementing new or updated software and services may take longer and cost more than expected.

We rely on a combination of internal development, strategic relationships, licensing and acquisitions to develop our software and services. The cost of
developing new software and services, such as Inscrybe Healthcare and related modules and Inscrybe Office, is inherently difficult to estimate. Our development and implementation of proposed software and services may take longer than originally
expected, require more testing than originally anticipated and require the acquisition of additional personnel and other resources. If we are unable to develop new or updated software and services on a timely basis and implement them without
significant disruptions to the existing systems and processes of our customers, we may lose potential revenues and harm our relationships with current or potential customers.

New or updated software and services will not become profitable unless they achieve sufficient levels of market acceptance, which may require significant efforts and costs.

There can be no assurance that customers and potential customers will accept from us new or updated software and services. The future results of our
business will depend, in significant part, on the success of our software and services. Current and potential customers may choose to use similar products and services offered by our competitors or may not purchase new or updated software or
services, especially when they are initially offered and if they require changes in equipment or workflow. For software and services we are developing or may develop in the future, there can be no assurance that we will attract sufficient customers
or that such software and services will generate sufficient revenues to cover the costs of developing, marketing and providing such software and services. Furthermore, there can be no assurance that any pricing strategy that we implement for any new
software and services will be economically viable or acceptable to the target markets. Failure to achieve broad penetration in target markets with respect to new or updated software and services could have a material adverse effect on our business
prospects. Further, achieving market acceptance for new or updated software and services is likely to require substantial marketing efforts and expenditure of significant funds to create awareness and demand by potential customers.



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We do not have patents on all the technology we use, which could harm our competitive position.

On May 2, 2006, we were issued our first U.S. patent. Our second U.S. patent was issued on August 19, 2008. We also have eight issued foreign
patents. In addition, we have seven U.S., six foreign and one PCT patent applications pending relating to the technology and business processes underlying our services and applications. However, some of the technology embodied in some of our current
products cannot be patented. We have registered the trademarks Authentidate and CareCert in the U.S., the trademark Authentidate in Germany, Mexico and in the European Community, Inscrybe in the
European Community and Inscrybe Office and a number of other trademarks as Madrid Protocol international registrations. We have also sought to register a number of additional trademarks in the U.S. and certain foreign markets, including
Inscrybe, MyInscrybe and Inscrybe Office. We continue to take steps to protect our intellectual property rights including filing additional trademark and patent applications where appropriate. We rely on
confidentiality agreements with our key employees to the extent we deem it to be necessary. We further intend to file patent applications for any new products we may develop, to the extent that we believe that any technology included in such
products is patentable. There can be no assurance that any patents in fact, will be issued or that any such patents that do issue will be effective to protect our products and services from duplication by other manufacturers or developers or to
prevent our competitors from offering similar products and services.

Other companies operating within our business segments may
independently develop substantially equivalent proprietary information or otherwise obtain access to our know-how, much of which is maintained as trade secrets. In addition, there can be no assurance that we will be able to afford the expense of any
litigation which may be necessary to enforce our rights under any patent. Although we believe that the products we sell do not and will not infringe upon the patents or violate the proprietary rights of others, it is possible that such infringement
or violation has occurred or may occur. We have investigated patents held by third parties of which we are aware and believe that our products and services do not infringe on the claims of these patents. Although we have not received notice of any
other claims that our products or services are infringing, we cannot provide any assurances that our products and services do not infringe upon any third party patents, including the patents we have investigated.

In the event that products we sell or services we provide are deemed to infringe upon the patents or proprietary rights of others, we could be required
to modify our products and/or services or obtain a license for the manufacture, use and/or sale of such products and services. There can be no assurance that, in such an event, we would be able to do so in a timely manner, upon acceptable terms and
conditions, or at all, and the failure to do any of the foregoing could have a material adverse effect upon our business. Moreover, there can be no assurance that we will have the financial or other resources necessary to defend against a patent
infringement or proprietary rights violation action. In addition, if our products, services or proposed products or services are deemed to infringe upon the patents or proprietary rights of others, we could, under certain circumstances, become
liable for damages or subject to an injunction, which could also have a material adverse effect on our business.

Because we derive a majority of our
revenues from a few software and service offerings, any decline in demand for these offerings could severely harm our ability to generate revenues.

We derive a majority of our revenues from a limited number of software and service offerings. In addition, our focus on building our business is concentrated on markets for software and services where content
integrity, workflow automation, electronic signatures and time and date stamping are important to customers. As a result, we are particularly vulnerable to fluctuations in demand for these offerings, whether as a result of competition, product
obsolescence, technological change, customer spending, or other factors. If our revenues derived from our software and service offerings were to decline significantly, our business and operating results would be adversely affected. Additionally, for
the year ended June 30, 2008 we reported that one customer accounted for approximately 18% of our consolidated revenues. As a result, if our relationships with this or other significant customers were disrupted we could lose a significant
percentage of our anticipated revenues which could have material adverse effect on our business.

Some of our software and service offerings have long
and unpredictable sales cycles, which may impact our quarterly operating results.

Transactions for some of our software and service
offerings require customers to undertake customized installations to integrate the solutions into their legacy systems and require them to modify existing business practices. The period from our initial contact with a potential customer until the
execution of an agreement is difficult to predict and can be in excess of six months. The sales cycles for these transactions can be long and unpredictable due to a number of uncertainties such as:



| |  |  | customers budgetary constraints;
| | - |  | ---------------------------------



| |  |  | the need to educate potential customers about our software and service offerings;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the timing of customers budget cycles;
| | - |  | ---------------------------------------



| |  |  | delays caused by customers internal review processes;
| | - |  | ------------------------------------------------------



| |  |  | customers willingness to invest resources and modify their network infrastructures to take advantage of our offerings; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



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| |  |  | for sales to government customers, governmental regulatory, approval and purchasing requirements.
| | - |  | -------------------------------------------------------------------------------------------------

We are unable to control or influence many of these factors. Further, we have experienced delays in the pace of adoption and use by our customers of our
transaction-based offerings, such as Inscrybe Healthcare, which has adversely affected our earnings. We may experience similar delays with Inscrybe Office as well. During the sales cycle and the implementation period, we may expend substantial time,
effort and money preparing contract proposals, negotiating contracts and implementing solutions without receiving any related revenue. In addition, many of our expenses are relatively fixed in the short term, including personnel costs and technology
and infrastructure costs. Accordingly, our inability to generate sufficient revenues from these offerings has a direct impact on our results of operations.

The failure to properly manage our growth could cause our business to lose money.

We are expanding our sales and marketing
efforts in order to develop and pursue existing and potential market opportunities. This growth is expected to place a significant demand on management and operational resources. In order to manage growth effectively, we must implement and improve
our operational systems and controls on a timely basis. If we fail to implement these systems and controls, our business, financial condition, results of operations and cash flows will be materially and adversely affected.

Our software and web-based services and web site may be subject to intentional disruption.

Although we believe we have sufficient controls in place to prevent intentional disruptions, such as software viruses specifically designed to impede the
performance of our software and web-based services, we may be affected by such efforts in the future. Further, despite the implementation of security measures, this infrastructure or other systems that we interface with, including the Internet and
related systems, may be vulnerable to physical break-ins, hackers, improper employee or contractor access, programming errors, attacks by third parties or similar disruptive problems, resulting in the potential misappropriation of our proprietary
information or interruptions of our services. Any compromise of our security, whether as a result of our own systems or systems that they interface with, could substantially disrupt our operations, harm our reputation and reduce demand for our
services.

Performance problems with our systems or system failures could cause us to lose business or incur liabilities.

Our customer satisfaction and our business could be harmed if we experience transmission delays or failures or loss of data in the systems we use to
provide services to our customers, including transaction-related services. These systems are complex and, despite testing and quality control, we cannot be certain that problems will not occur or that they will be detected and corrected promptly if
they do occur. In providing these services, we rely on internal systems as well as communications and hosting services provided by third parties, such as the Internet. To operate without interruption, both we and the service providers we use must
guard against:



| |  |  | damage from fire, power loss and other natural disasters;
| | - |  | ---------------------------------------------------------



| |  |  | communications failures;
| | - |  | ------------------------



| |  |  | software and hardware errors, failures or crashes;
| | - |  | --------------------------------------------------



| |  |  | security breaches, computer viruses and similar disruptive problems; and
| | - |  | ------------------------------------------------------------------------



| |  |  | other potential interruptions.
| | - |  | ------------------------------

We
have experienced periodic system interruptions in the past, and we cannot guarantee that they will not occur again. In the event of a catastrophic event at one of our data centers or any third party facility we use, we may experience an extended
period of system unavailability, which could negatively impact our business. Further, if such an event caused the loss of stored data, it could have a material adverse impact on our business or cause us to incur material liabilities. Although we
maintain insurance for our business, we cannot guarantee that our insurance will be adequate to compensate us for all losses that may occur or that this coverage will continue to be available on acceptable terms or in sufficient amounts.

In addition, some of our web-based services may, at times, be required to accommodate higher than expected volumes of traffic. At those times, we may
experience slower response times or system failures. Any sustained or repeated interruptions or disruptions in these systems or slow down in their response times could damage our relationships with customers. Further, the Internet has experienced,
and is likely to continue to experience, significant growth in the number of users and the amount of traffic. If the Internet continues to experience increased usage, the Internet infrastructure may be unable to support the demands placed on it
which could harm its reliability and performance. Any significant interruptions in our services or increases in response time could result in a loss of potential or existing users of services and, if sustained or repeated, could reduce the
attractiveness of our services.



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Our software and service offerings may not be accepted by the market, which would seriously harm our business.

Demand and market acceptance for our software and service offerings remain subject to a high level of uncertainty. Achieving widespread
acceptance of these offerings will continue to require substantial marketing efforts and the expenditure of significant funds to create and maintain brand recognition and customer demand for such offerings. Demand for our software and services
depend on, among other things:



| |  |  | the perceived ability of our offerings to address real customer problems;
| | - |  | -------------------------------------------------------------------------



| |  |  | the perceived quality, price, ease-of-use and interoperability of our offerings as compared to our competitors offerings;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the markets perception of how easy or difficult it is to deploy our software or services, especially in complex, network environments;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the continued evolution of electronic commerce as a viable means of conducting business;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | market acceptance and use of new technologies and standards;
| | - |  | ------------------------------------------------------------



| |  |  | the ability of network infrastructures to support an increasing number of users and services;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | the pace of technological change and our ability to keep up with these changes; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | general economic conditions, which influence how much money our customers and potential customers are willing to allocate to their information technology budgets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

There can be no assurance that adequate marketing arrangements will be made and continued for our software and services
and there can be no assurance that any of these offerings will ever achieve or maintain widespread market acceptance or that such offerings will be profitable.

If we cannot continuously enhance our software and web-based service offerings in response to rapid changes in the market, our business will be harmed.

The software-based services industry and computer industry are characterized by extensive research and development efforts which result in the frequent introduction of new products and services which render existing
products and services obsolete. Our ability to compete successfully in the future will depend in large part on our ability to maintain a technically competent research and development staff and our ability to adapt to technological changes in the
industry and enhance and improve our software and web-based service offerings and successfully develop and market new offerings that meet the changing needs of our customers. Although we are dedicated to continued improvement of our offerings with a
view towards satisfying market needs with the most advanced capabilities, there can be no assurance that we will be able to continue to do so on a regular basis and remain competitive with products offered by other manufacturers. At the present
time, we do not have a targeted level of expenditures for research and development. We will evaluate all opportunities but believe the majority of our research and development will be devoted to enhancements of our existing software and web-based
services.

If our software and web-based service offerings are not competitive, our business will suffer.

We are engaged in the highly competitive businesses of developing software-based workflow and authentication offerings. These markets are also
continually evolving and, in some cases, subject to rapid technological change. Many of our competitors have greater financial, technical, product development, marketing and other resources than we do. These organizations may be better known than we
are and have more customers than we do. We cannot provide assurance that we will be able to compete successfully against these organizations. We believe that the principal competitive factors affecting our markets include performance, ease of use,
scalability, manageability, price and customer service and support. There can be no assurance that we will be able to successfully incorporate these factors into our software and web-based services and compete against current or future competitors
or that competitive pressure we face will not harm our business. If we are unable to develop and market products to compete with the products of competitors, our business will be materially and adversely affected.

Our business, including Inscrybe Healthcare, Inscrybe Office and our electronic signing solutions are relatively new business lines and although the
level of competition for these offerings is unknown at this point in time, the field of software-based solutions is highly competitive. There can be no assurances, however, that any of our offerings will achieve market acceptance.

We also expect that competition will increase as a result of industry consolidations and the formation of new companies with new, innovative offerings.
Current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their software and service offerings to address the needs of our prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share. Increased competition is likely to result in price reductions, reduced operating margins and loss of market
share, any of which could harm our business.



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Our software and web-based services are complex and are operated in a wide variety of computer configurations, which
could result in errors or product failures.

Our software and web-based services are complex and may contain undetected errors,
failures or bugs that may arise when they are first introduced or when new versions are released. These offerings may be used in large-scale computing environments with different operating systems, system management software and equipment and
networking configurations, which may cause errors or failures in our software or services or may expose undetected errors, failures or bugs in such offerings. Our customers computer environments are often characterized by a wide variety of
configurations that make pre-release testing for programming or compatibility errors difficult and time-consuming. Despite testing by us and by others, errors, failures or bugs may not be found in new products or releases after commencement of
commercial use. Errors, failures or bugs in our offerings could result in negative publicity, returns, loss of or delay in market acceptance of our software or services or claims by customers or others. Alleviating these problems could require
significant expenditures of our capital and resources and could cause interruptions, delays or cessation of our licenses which could cause us to lose existing or potential customers and would adversely affect our financial conditions, results of
operations and cash flows. Most of our license agreements with customers contain provisions designed to limit our exposure to potential product liability claims. It is possible, however, that these provisions may not prove effective in limiting our
liability.

We have a significant amount of net operating loss carryforwards which we may not be able to utilize in certain circumstances.

At June 30, 2008, we had net operating loss (NOL) carry forwards for federal income tax purposes of approximately
$105,000,000 available to offset future taxable income. Under Section 382 of the Internal Revenue Code, following an ownership change, special limitations apply to the use by a loss corporation of its (i) net
operating loss (NOL) carry forwards arising before the ownership change and (ii) net unrealized built-in losses (NUBILs) (if such losses existed immediately before the ownership change and exceed a statutory threshold
amount) recognized during the five years following the ownership change ((i) and (ii) are referred to collectively as the Applicable Tax Attributes). After an ownership change, the amount of the loss corporations taxable
income for each post-change taxable year that may be offset by the Applicable Tax Attributes is limited to the product of the long-term tax-exempt rate (published by the IRS for the month of the ownership change) multiplied by the value
of the loss corporations stock (the Section 382 Limitation). To the extent that the loss corporations Section 382 Limitation in a given taxable year exceeds its taxable income for the year, that excess increases the
Section 382 Limitation in future taxable years.

As a result of the proposed merger transaction with Parascript discussed in Notes to
the Consolidated Financial Statements and elsewhere in this Quarterly Report on Form 10-Q, we may experience an ownership change. Under Section 382, the determination of whether an ownership change has occurred is based on ownership shifts
involving persons or groups that are or are deemed to be 5% Stockholders. If the merger results in an ownership change for Authentidate a Section 382 Limitation will apply to the Applicable Tax Attributes of Authentidate. We have
not yet determined whether the merger will result in an ownership change. Further, whether or not the merger causes an ownership change, New Authentidate may experience an ownership change after the merger as a result of future changes in the
ownership of its stock that could result in additional Section 382 Limitations.

Risk Related to Proposed Merger

We may need to raise substantial additional capital to fund our operations following the transaction.

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared assuming that the company
will continue as a going concern. As discussed more fully in Note 15 of the notes to the condensed consolidated financial statements set forth in this Quarterly Report on Form 10-Q, in August 2008 we entered into a definitive merger agreement to
acquire the membership interests of Parascript LLC and certain of its subsidiaries. As originally structured, the closing of the merger would have used substantially all of the companys cash and marketable securities. Therefore,
following the merger the combined company would have been dependent on cash flows from operations, the net working capital of Parascript on the closing date, and Parascripts existing line of credit to meet its future cash needs.
Parascripts line of credit expires annually in April. Historically Parascript has been able to obtain a renewal of the line of credit on commercially reasonable terms. However, in light of the uncertainty in the credit markets and changes
in Parascripts business, the board of directors of the company is considering a proposal to change the structure of the proposed merger. However, there can be no assurance that the parties will agree on an amendment to the merger agreement or
that the combined company will have an available credit line or sufficient borrowing capacity under such a line to provide sufficient working capital following the merger to fund operations. This raises substantial doubt regarding the
combined companys ability to continue as a going concern following the proposed merger. The unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



In light of the foregoing, in the event the merger is completed,
of which there can be no assurance, and the combined company is unable to generate sufficient funds through operations and/or obtain a renewal of the existing line of credit, it may need to raise additional funds through private placements or
registered offerings of its securities. However, no assurances can be given that we will be successful in raising additional capital on acceptable terms or at all. If we raise additional funds by selling shares of common stock or convertible
securities, the ownership of our existing shareholders will be diluted. Further, if additional funds are raised through the issuance of preferred stock or debt securities, such additional securities may have powers, designations, preferences or



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rights senior to our currently outstanding securities and may involve restrictive covenants that impact our ability to conduct our business. In
addition, the completion of an additional financing transaction could jeopardize the availability of our net operating loss carryforwards. Additional information regarding limitations on the availability of net operating loss carryforwards is
included above under the caption Risk Factors - Risks Related to our Business - We have a significant amount of net operating loss carryforwards which we may not be able to utilize in certain circumstances.

We have a significant portion of our capital invested in Auction Rate Securities.

Authentidate currently has approximately $10,025,000 at par value invested in Auction Rate Securities (ARS), which represents all of its marketable securities. While the face value of the ARS owned by
Authentidate has not changed, the decline in the U.S. credit markets has impacted the liquidity of financial instruments, including ARS. As a result, the potential value of Authentidates ARS portfolio which may be realized upon the sale
thereof may be less than the face value of the investments. Consequently, in the event the company is unable to receive sufficient cash funds from the sale of its ARS portfolio prior to the closing date of the planned acquisition of Parascript
LLC, it may not be able to pay the closing cash payment for the transaction, and following the payment of the closing cash payment, New Authentidate may not have sufficient net working capital to fund its ongoing business operations and pay expenses
related to the merger and the transactions contemplated by the subject agreement and plan of merger.

Authentidates Stockholders Will Be
Substantially Diluted as a Result of the Proposed Merger with Parascript and the Parascript Members Will Own Approximately 46.4% of the Combined Companys Outstanding Common Shares.

Upon the closing of the proposed merger between Authentidate and Parascript, the combined company, referred to as New Authentidate, will
issue 30,000,000 shares of its common stock as part of the consideration for 100% of Parascripts outstanding units in the merger. As of June 30, 2008, there were 34,614,833 shares of Authentidate common stock outstanding, and 41,056,934
shares of common stock on a fully diluted basis. Upon completion of the merger, Parascript members will collectively own approximately 46.4% of New Authentidates outstanding common stock, and 42.2% of New Authentidate on a fully diluted basis.
Therefore, after the merger, the Parascript members will have significant influence over matters of New Authentidate.

We May Fail to Realize the
Anticipated Benefits of the Merger.

The success of the merger will depend, in part, on New Authentidates ability to realize the
anticipated growth opportunities and synergies from combining Authentidate and Parascript. The integration of Authentidate and Parascript will be a time consuming and expensive process and may disrupt their operations if it is not completed in a
timely and efficient manner. In addition, Authentidate may not achieve anticipated synergies or other benefits of the merger. Following the merger, New Authentidate and Parascript must operate as a combined organization utilizing common information
and communication systems, operating procedures, financial controls and human resources practices. We may encounter the following difficulties, costs and delays involved in integrating these operations:



| |  |  | failure to successfully manage relationships with customers and other important relationships;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | failure of customers to continue using the services of the combined company;
| | - |  | ----------------------------------------------------------------------------



| |  |  | difficulties in successfully integrating the management teams and employees of Authentidate and Parascript;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | challenges encountered in managing larger operations;
| | - |  | -----------------------------------------------------



| |  |  | the loss of key employees;
| | - |  | --------------------------



| |  |  | diversion of the attention of management from other ongoing business concerns;
| | - |  | ------------------------------------------------------------------------------



| |  |  | potential incompatibility of technologies and systems;
| | - |  | ------------------------------------------------------



| |  |  | potential impairment charges incurred to write down the carrying amount of intangible assets generated as a result of the merger; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | potential incompatibility of business cultures.
| | - |  | -----------------------------------------------

If the combined companys operations after the merger do not meet the expectations of existing customers of Authentidate and Parascript, then these customers may cease doing business with the combined company
altogether, which would harm our results of operations and financial condition. If the management team is not able to develop strategies and implement a business plan that successfully addresses these difficulties, we may not realize the anticipated
benefits of the merger.



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Costs Associated with the Merger are Difficult to Estimate, May Be Higher than Expected and May Harm the Financial
Results of the Combined Company.

We will incur substantial direct transaction costs associated with the merger, and additional costs
associated with consolidation and integration of operations. If the total costs of the merger exceed estimates, or the benefits of the merger do not exceed the total costs of the merger, our financial results could be adversely affected.

The Merger May Result in Disruption of Authentidates and Parascripts Existing Businesses, Distraction of Their Management and Diversion of Other
Resources.

The integration of Authentidates and Parascripts businesses may divert management time and resources from the
main businesses of both companies. This diversion of time and resources could cause the market price of New Authentidates common stock to decrease. The new management will need to spend some of their time integrating Parascripts and
Authentidates operations. This could cause New Authentidates business to suffer.

Failure to complete the merger could negatively impact the
stock price of Authentidate common stock and the future business and financial results of Authentidate because of, among other things, the market disruption that would occur as a result of uncertainties relating to a failure to complete the merger.

Although Authentidate and Parascript have agreed to make an effort to obtain stockholder and unit holder approval, respectively, of
the proposals relating to the merger, there is no assurance that these proposals will be approved, and there is no assurance that Authentidate and Parascript will receive the necessary regulatory approvals or satisfy the other conditions to the
completion of the merger. If the merger is not completed for any reason, we will be subject to several risks, including:



| |  |  | Being required to pay the other company a termination fee, which each company is required to do in certain circumstances relating to the termination of the merger
agreement.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Having had the focus of management of each of the companies directed toward the merger and integration planning instead of on each companys core business and
other opportunities that could have been beneficial to the companies.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, we would not realize any of the
expected benefits of having completed the merger.

If the merger is not completed for any reason, the price of Authentidate common stock
may decline to the extent that the current market price of Authentidate common stock reflects a market assumption that the merger will be completed and that the related benefits will be realized, or as a result of the markets perceptions that
the merger was not consummated due to an adverse change in Authentidates business. In addition, Authentidates business may be harmed, and the price of Authentidates stock may decline as a result, to the extent that customers,
suppliers and others believe that we cannot compete in the marketplace as effectively without the merger or otherwise remain uncertain about our future prospects in the absence of the merger. Customers may delay, redirect or defer purchasing
decisions, which could negatively affect the business and results of operations of Authentidate, regardless of whether the merger is ultimately completed. Similarly, current and prospective employees of Authentidate may experience uncertainty about
their future roles with the resulting company and choose to pursue other opportunities that could adversely affect Authentidate if the merger is not completed. This may adversely affect the ability of Authentidate to attract and retain key
management and marketing and technical personnel, which could harm the companies businesses and results.

Some costs related to the
merger, such as legal, accounting, filing, printing and mailing, must be paid and expensed if the merger is not completed. In addition, if the merger is not completed and our board of directors determines to seek another merger or business
combination, there can be no assurance that we will be able to find a partner willing to agree to more attractive terms than those which have been negotiated for in the merger.

The merger agreement limits Authentidates and Parascripts ability to pursue an alternative proposal to the merger and requires Authentidate and Parascript to pay a termination fee of $3 million or
$500,000, depending upon the circumstances surrounding termination.

The merger agreement prohibits Authentidate and Parascript from
soliciting, initiating, encouraging or entertaining certain inquiries or acquisition proposals with any third party, subject to exceptions set forth in the merger agreement. The merger agreement also provides for the payment by Authentidate and
Parascript of a termination fee of $3 million or $500,000 if the merger agreement is terminated in certain circumstances. These provisions limit our ability to pursue offers from third parties that could result in greater value to each company. The
payment of this termination fee could have an adverse effect on the financial condition of our company.



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The Former Principal Members, Officers and Directors of Parascript after the Merger Will Own a Substantial Interest in
Authentidates Voting Stock and Initially Control the Board of Directors.

Upon completion of the merger, Parascripts former
officers, directors and members who had greater than 5% of the voting power of Parascripts common stock will, in the aggregate, beneficially own a substantial interest in Authentidates outstanding voting shares. In addition, former
officers and members of Parascript will initially constitute a majority of the board of directors following the merger. As a result, these stockholders, acting together, will have the ability to substantially influence the outcome of matters
submitted to Authentidates stockholders for approval, including:



| |  |  | election of the board of directors;
| | - |  | -----------------------------------



| |  |  | removal of any of the directors;
| | - |  | --------------------------------



| |  |  | amendment of the articles of incorporation or by-laws; and
| | - |  | ----------------------------------------------------------



| |  |  | adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving Authentidate.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

These stockholders will have substantial influence over the management and affairs of New Authentidate. Accordingly,
this concentration of ownership may have the effect of impeding a merger, consolidation, takeover or other business consolidation involving New Authentidate, or discouraging a potential acquirer from making a tender offer for its shares which would
prevent Stockholders from realizing the benefits of the transaction, such as a purchase price premium or significant increase in stock price.

The
Market Price of Authentidate Common Stock May Decline as a Result of the Merger.

The market price of New Authentidate common stock may
decline as a result of the merger if the integration of the Parascript and Authentidate businesses is unsuccessful or if the costs of implementing the integration are greater than expected. The market price also may decline if New Authentidate does
not achieve the perceived benefits of the merger as rapidly or to the extent anticipated by financial or industry analysts or if the effect of the merger on New Authentidates financial results is not consistent with the expectations of
financial or industry analysts. In addition, our common stock is quoted on the Nasdaq Capital Market and the trading volume of our common stock has fluctuated significantly. Because of this periodic limited trading volume, the former Parascript
members may not be able to sell quickly any significant number of shares of New Authentidate common stock, and any attempted sale of a large number of New Authentidate shares will likely have a material adverse impact on the price of the New
Authentidate common stock. Because of the limited number of shares being traded at times, the price per share is subject to volatility and may continue to be subject to rapid price swings in the future.

Risks Related to Our Common Stock

Our stock price is volatile and
could decline.

The price of our common stock has been, and is likely to continue to be, volatile. For example, our stock price during
the fiscal year ended June 30, 2008 traded as low as $0.37 per share and as high as $1.60 per share. During the three months ended September 30, 2008, our stock traded in the range of $0.27 to $0.80. We cannot assure you that your initial
investment in our common stock will not fluctuate significantly. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including:



| |  |  | quarterly variations in our operating results;
| | - |  | ----------------------------------------------



| |  |  | announcements we make regarding significant contracts, acquisitions, dispositions, strategic partnerships, or joint ventures;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------



| |  |  | the introduction of competitive offerings by existing or new competitors;
| | - |  | -------------------------------------------------------------------------



| |  |  | uncertainty about and customer confidence in the current economic conditions and outlook;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | reduced demand for any given software or web-based service offering; and
| | - |  | ------------------------------------------------------------------------



| |  |  | sales of our common stock.
| | - |  | --------------------------

In
addition, the stock market in general, and companies whose stock is listed on The NASDAQ Capital Market, have experienced extreme price and volume fluctuations that have often been disproportionate to the operating performance of these companies.
Broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance.



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Authentidate is currently not in compliance with The NASDAQ Capital Market $1.00 minimum bid price requirement and
failure to regain and maintain compliance with this standard could result in delisting and adversely affect the market price and liquidity of our common stock.

On June 12, 2008, Authentidate announced that effective June 13, 2008, the listing of the companys common stock would be transferred from The NASDAQ Global Market to The NASDAQ Capital Market. As
previously announced on December 18, 2007, Authentidate received a letter from The NASDAQ Stock Market advising that the company did not meet the minimum $1.00 per share bid price requirement for continued inclusion on The NASDAQ Global Market
pursuant to NASDAQ Marketplace Rule 4450(a)(5). The letter stated that the company had until June 16, 2008 to regain compliance and provided an option for Authentidate to transfer the listing of its common stock to The NASDAQ Capital Market.
Upon such transfer, Authentidate would be afforded an additional 180 calendar days to comply with the minimum bid price requirement while listed on The NASDAQ Capital Market.

Prior to June 11, 2008, Authentidate submitted a transfer application with NASDAQ to transfer listing of its common stock to The NASDAQ Capital
Market. On June 11, 2008, NASDAQ approved the transfer application, and Authentidate was afforded an additional compliance period of 180 calendar days, or until December 12, 2008, to comply with the minimum bid price requirement of The
NASDAQ Capital Market. As a result of extraordinary market conditions, on October 16, 2008, NASDAQ suspended enforcement of the bid price and market value of publically held shares requirements through January 16, 2009. Subsequent to this
suspension NASDAQ advised the company that it would have until March 18, 2009 to regain compliance.

Since we have not paid dividends on our common
stock, you may not receive income from this investment.

We have not paid any dividends on our common stock since our inception and do
not contemplate or anticipate paying any dividends on our common stock in the foreseeable future. Earnings, if any, will be used to finance the development and expansion of our business.

The exercise of our outstanding options and warrants, or conversion of our outstanding shares of Series B Preferred Stock, may depress our stock price.

As of September 30, 2008, the following options and warrants were outstanding:



| |  |  | Stock options to purchase approximately 3,915,000 shares of common stock at exercise prices ranging from $0.41 to $7.28 per share, not all of which are immediately
exercisable. The weighted average exercise price of the outstanding stock options is $3.83 per share. These stock options are employee and non-executive director options.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Immediately exercisable warrants to purchase approximately 400,000 shares of common stock at exercise prices ranging from $0.39 to $20.00 per share. The weighted
average exercise price of the outstanding warrants is $10.65.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Stock options to purchase 375,000 shares of common stock at an exercise price of $3.25 per share to an independent consultant which are exercisable upon achieving
certain sales levels.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, there are currently outstanding 28,000 shares of our Series B Preferred Stock. The
holder of the Series B Preferred Stock may convert these shares into shares of our common stock at a conversion price equal to $1.40 per share. Accordingly, the outstanding 28,000 shares of Series B Preferred Stock are presently convertible into an
aggregate of 500,000 shares of our common stock.

To the extent that these securities are exercised or converted, dilution to our
shareholders will occur. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of these securities can be expected to exercise or convert them at a time when we would, in all
likelihood, be able to obtain any needed capital on terms more favorable to us than the exercise and conversion terms provided by those securities. Further, in the event the conversion price of the Series B Preferred Stock is lower than the actual
trading price on the day of conversion, the holder could immediately sell all of its converted common shares, which would have a dilutive effect on the value of the outstanding common shares. Furthermore, the significant downward pressure on the
trading price of our common stock as Series B Preferred Stock holders converted these securities and sell the common shares received on conversion could encourage short sales by the holders of Series B Preferred Stock or other shareholders. This
would place further downward pressure on the trading price of our common stock. Even the mere perception of eventual sales of common shares issued on the conversion of the Series B Preferred Stock could lead to a decline in the trading price of our
common stock.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



| | a) | Sales of Unregistered Securities
| | -- | --------------------------------

In August 2008
and October 2008, we issued an aggregate of 77,897 and 29,892 shares of our common stock, respectively, to those of our non-executive directors that elected to receive shares of common stock in lieu of a portion of the cash fees earned for their
service as members of our board of directors pursuant to our 2001 Non-Executive Director Stock Option Plan, as amended. The shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933,
as amended.



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| | b) | Not applicable
| | -- | --------------



| | c) | Repurchase of Equity Securities
| | -- | -------------------------------

We did not
repurchase any of our equity securities during the three months ended September 30, 2008.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | Submission of Matters to a Vote of Securities Holders
|------- | -----------------------------------------------------

Not Applicable.



|Item 5. | Other Information
|------- | -----------------

None.



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|Item 6. | Exhibits
|------- | --------

The following exhibits are filed herewith
or incorporated by reference.



|               |                     |                                                                                                                                                                 |      |                           |       |               |         |  |  |  
|-------------- | ------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ------------------------- | ----- | ------------- | ------- |  |  | -
|Exhibit Number |                     |                                                                                                                                                                 |      | Incorporated by Reference |       | FiledHerewith
|               | Exhibit Description |                                                                                                                                                                 | Form |                           | Dated |               | Exhibit | 
|31.1           |                     | Certification of President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                            |      |                           |       |               |         |  |  | X
|               |                     |                                                                                                                                                                 |      |                           |      
|31.2           |                     | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                              |      |                           |       |               |         |  |  | X
|               |                     |                                                                                                                                                                 |      |                           |      
|32.1           |                     | Certification of President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |      |                           |       |               |         |  |  | X



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SIGNATURES

Pursuant to the requirements 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.



|                  |  |  |  |                                    
|----------------- |  |  |  | -----------------------------------
|                  |  |  |  | AUTHENTIDATE HOLDING CORP.         
|                  |  | 
|November 13, 2008 |  |  |  | /s/ OConnell Benjamin             
|Date              |  |  |  | OConnell Benjamin                 
|                  |  |  |  | President                          
|                  |  | 
|                  |  |  |  | /s/ William A. Marshall            
|                  |  |  |  | William A. Marshall                
|                  |  |  |  | Chief Financial Officer & Treasurer



39