**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark One)** | ** ** | ** **                                                                                    |
|----------------|------------|-----------------------------------------------------------------------------------------------|
| **ý**     | ** ** | **QUARTERLY REPORT UNDER SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**        |
| ** **     | ** ** | ** **                                                                                    |
| ** **     | ** ** | **FOR THE QUARTERLY PERIOD ENDED:  DECEMBER 31, 2005**                                        |
| ** **     | ** ** | ** **                                                                                    |
| **o**          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | ** ** | ** **                                                                                    |
| ** **     | ** ** | **FOR THE TRANSITION PERIOD  FROM     TO**                                |

 

**COMMISSIONFILE NUMBER: 0-20190**

 

**Authentidate Holding Corp.**

(EXACT NAME OFREGISTRANT AS SPECIFIED IN ITS CHARTER)

 
| **Delaware**                             | ** ** | **14-1673067**                       |
|------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of          |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)           |       |                                 |
|                                     |       |                                 |
| **Three Connell Drive, 5th Floor,**      |       |                                 |
| **Berkeley Heights, New Jersey**         | ** ** | **07922**                            |
| (Address of principal executive offices) |       | (Zip Code)                           |

 

**(908) 787-1700**

(Registrant’stelephone number, including area code)

 

**2165Technology Drive, Schenectady, New York 12308**

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to the filing requirements for the past90 days.   Yes ý   No  o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o | Accelerated filer   ý | Non-accelerated filer o |
|---------------------------|---------------------------------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). o Yes ý No

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 
| **Class**                                 | ** ** | **Outstanding at January 31, 2006** | ** ** |
|-------------------------------------------|------------|-------------------------------------|------------|
| Common Stock, $0.001  par value per share |       | 34,399,161 shares                   |       |

 

 

----

 

**AUTHENTIDATEHOLDING CORP.**

**FORM 10-Q**

**INDEX**

 
| ** **                                                                                                                     | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------|
| **Part I  Financial Information**                                                                                              |       |       |
|                                                                                                                           |       |       |
| Item 1 - Financial  Statements                                                                                                 |       |       |
|                                                                                                                           |       |       |
| Consolidated Balance Sheets -                                                                                                  |       |       |
| December 31, 2005 (Unaudited) and  June 30, 2005                                                                               |       |       |
|                                                                                                                           |       |       |
| Consolidated Statements of  Operations -  (Unaudited)                                                                     |       |       |
| Three and six months ended  December 31, 2005                                                                                  |       |       |
| and December 31, 2004                                                                                                          |       |       |
|                                                                                                                           |       |       |
| Consolidated Statements of  Cash Flows - (Unaudited)                                                                           |       |       |
| Six months ended December 31,  2005                                                                                            |       |       |
| and December 31, 2004                                                                                                          |       |       |
|                                                                                                                           |       |       |
| Notes to Unaudited  Consolidated Financial Statements                                                                          |       |       |
|                                                                                                                           |       |       |
| Item 2 - Management’s Discussion and Analysis of  Financial Condition and Results of Operations and Safe Harbor Statement |       |       |
|                                                                                                                           |       |       |
| Item 3 -  Quantitative and Qualitative Disclosures About Market Risk                                                           |       |       |
|                                                                                                                           |       |       |
| Item 4 - Controls  and Procedures                                                                                              |       |       |
|                                                                                                                           |       |       |
| **Part II Other  Information**                                                                                                 |       |       |
|                                                                                                                           |       |       |
| Item 1 - Legal  Proceedings                                                                                                    |       |       |
|                                                                                                                           |       |       |
| Item 1A – Risk Factors                                                                                                    |       |       |
|                                                                                                                           |       |       |
| Item 2 – Changes in  Securities                                                                                           |       |       |
|                                                                                                                           |       |       |
| Item 3 -  Defaults upon Senior Securities                                                                                      |       |       |
|                                                                                                                           |       |       |
| Item 4 -  Submission of Matters to a Vote of Security Holders                                                                  |       |       |
|                                                                                                                           |       |       |
| Item 5 - Other  Information                                                                                                    |       |       |
|                                                                                                                           |       |       |
| Item 6 – Exhibits                                                                                                         |       |       |
|                                                                                                                           |       |       |
| Signatures                                                                                                                     |       |       |

 

2

----

 

**Part I Financial Information**

**Authentidate Holding Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                                                                                           | ** ** | **December 31, 2005** | ** ** | **June 30, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-------------------|------------|
| ** **                                                                                                                                           | ** ** | **(Unaudited)**       | ** ** | ** **        | ** ** |
| **Assets**                                                                                                                                           | ** ** | ** **            | ** ** | ** **        | ** ** |
| Current assets                                                                                                                                       |       |                  |       |              |       |
| Cash and cash  equivalents                                                                                                                           |       | $                     | 20,071,116 |              | $          | 6,429,210 |   |
| Restricted cash                                                                                                                                      |       | 660,096               |       | 141,947           |       |
| Marketable securities                                                                                                                                |       | 32,400,000            |       | 56,075,000        |       |
| Accounts  receivable, net of allowance for doubtful accounts of $466,195 and $406,877  at December 31, 2005 and June 30, 2005, respectively          |       | 3,364,891             |       | 3,230,822         |       |
| Due from related  parties                                                                                                                            |       | 679                   |       | 682               |       |
| Inventories                                                                                                                                          |       | 478,482               |       | 303,678           |       |
| Prepaid expenses  and other current assets                                                                                                           |       | 1,028,867             |       | 478,159           |       |
| Total current  assets                                                                                                                                |       | 58,004,131            |       | 66,659,498        |       |
| Property and  equipment, net                                                                                                                         |       | 3,869,250             |       | 3,878,750         |       |
| Other assets                                                                                                                                         |       |                  |       |              |       |
| Software  development costs, net of accumulated amortization of $1,849,228 and  $1,758,200 at December 31, 2005 and June 30, 2005                    |       | 1,411,742             |       | 411,775           |       |
| Goodwill                                                                                                                                             |       | 7,340,736             |       | 7,340,736         |       |
| Other intangible  assets, net                                                                                                                        |       | 595,661               |       | 663,397           |       |
| Investment in  affiliate                                                                                                                             |       | 750,000               |       | 750,000           |       |
| Other assets                                                                                                                                         |       | 4,449                 |       | 4,449             |       |
| Total assets                                                                                                                                         |       | $                     | 71,975,969 |              | $          | 79,708,605 |   |
| **Liabilities  and Shareholders’ Equity**                                                                                                       |       |                  |       |              |       |
| Current  liabilities                                                                                                                                 |       |                  |       |              |       |
| Accounts payable                                                                                                                                     |       | $                     | 1,178,280  |              | $          | 1,336,840 |   |
| Accrued expenses  and other current liabilities                                                                                                      |       | 2,224,967             |       | 2,739,553         |       |
| Deferred revenue                                                                                                                                     |       | 1,577,308             |       | 2,059,427         |       |
| Current portion  of obligations under capital leases                                                                                                 |       | 13,342                |       | 23,903            |       |
| Current portion  of long-term debt                                                                                                                   |       | —                |       | 48,000            |       |
| Line of credit                                                                                                                                       |       | 420,934               |       | 429,756           |       |
| Income taxes  payable                                                                                                                                |       | 33,159                |       | 15,743            |       |
| Total current  liabilities                                                                                                                           |       | 5,447,990             |       | 6,653,222         |       |
| Long-term  deferred revenue                                                                                                                          |       | 245,000               |       | 446,250           |       |
| Other long-term  accrued liabilities                                                                                                                 |       | 23,839                |       | 243,520           |       |
| Obligations  under capital leases, net of current portion                                                                                            |       | 1,123                 |       | 3,909             |       |
| Total  liabilities                                                                                                                                   |       | 5,717,952             |       | 7,346,901         |       |
| Commitments and  contingencies                                                                                                                       |       |                  |       |              |       |
| Shareholders’  equity                                                                                                                           |       |                  |       |              |       |
| Preferred stock  $.10 par value, 5,000,000 shares authorized Series B - 28,000 shares issued  and outstanding at December 31, 2005 and June 30, 2005 |       | 2,800                 |       | 2,800             |       |
| Common stock,  $.001 par value; 75,000,000 shares authorized, 34,399,161 issued and  outstanding at December 31, 2005 and June 30, 2005              |       | 34,399                |       | 34,399            |       |
| Additional  paid-in capital                                                                                                                          |       | 161,741,253           |       | 160,488,500       |       |
| Accumulated  deficit                                                                                                                                 |       | (95,439,761           | )          | (88,100,574       | )          |
| Accumulated  comprehensive loss                                                                                                                      |       | (80,674               | )          | (63,421           | )          |
| Total  shareholders’ equity                                                                                                                     |       | 66,258,017            |       | 72,361,704        |       |
| Total  liabilities and shareholders’ equity                                                                                                     |       | $                     | 71,975,969 |              | $          | 79,708,605 |   |

 

3

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**Authentidate Holding Corporation and Subsidiaries**

**Consolidated Statement of Operations**

**(Unaudited)**

 
| ** **                                    | ** ** | **For the three months ended** | ** ** | **For the six months ended** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                    | ** ** | **December 31, 2005**          | ** ** | **December 31, 2004**        | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| ** **                                    | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                     |       |                           |       |                         |       |   |   |   |   |
| Products                                      |       | $                              | 3,916,490  |                         | $          | 4,352,382 |   | $ | 7,889,604 |   | $ | 7,695,843 |   |
| Services                                      |       | 294,345                        |       | 409,345                      |       | 624,767 |   | 728,282 |   |
| Total net sales                               |       | 4,210,835                      |       | 4,761,727                    |       | 8,514,371 |   | 8,424,125 |   |
| Cost of sales                                 |       |                           |       |                         |       |   |   |   |   |
| Products                                      |       | 1,521,380                      |       | 2,297,402                    |       | 3,548,661 |   | 4,125,881 |   |
| Services                                      |       | 141,950                        |       | 195,727                      |       | 290,909 |   | 327,033 |   |
| Total cost of  sales                          |       | 1,663,330                      |       | 2,493,129                    |       | 3,839,570 |   | 4,452,914 |   |
| Gross profit                                  |       | 2,547,505                      |       | 2,268,598                    |       | 4,674,801 |   | 3,971,211 |   |
| Selling, general  and administrative expenses |       | 5,844,240                      |       | 6,962,081                    |       | 11,469,039 |   | 11,171,438 |   |
| Product  development expenses                 |       | 817,399                        |       | 600,073                      |       | 1,597,303 |   | 1,301,347 |   |
| Total operating  expenses                     |       | 6,661,639                      |       | 7,562,154                    |       | 13,066,342 |   | 12,472,785 |   |
| Loss from  operations                         |       | (4,114,134                     | )          | (5,293,556                   | )          | (8,391,541 | ) | (8,501,574 | ) |
| Other income  (expense)                       |       |                           |       |                         |       |   |   |   |   |
| Interest and  other income                    |       | 559,973                        |       | 381,054                      |       | 1,090,680 |   | 689,732 |   |
| Interest expense                              |       | (1,038                         | )          | (4,615                       | )          | (3,325 | ) | (8,813 | ) |
|                                          |       | 558,935                        |       | 376,439                      |       | 1,087,355 |   | 680,919 |   |
| Loss before  income taxes                     |       | (3,555,199                     | )          | (4,917,117                   | )          | (7,304,186 | ) | (7,820,655 | ) |
| Income tax  (expense) benefit                 |       | —                         |       | (2,999                       | )          | — |   | (5,550 | ) |
| Net loss                                      |       | $                              | (3,555,199 | )                            | $          | (4,920,116 | ) | $ | (7,304,186 | ) | $ | (7,826,205 | ) |
| Per share  amounts                            |       |                           |       |                         |       |   |   |   |   |
| Basic and  diluted loss per common share      |       | $                              | (.10       | )                            | $          | (.15 | ) | $ | (.21 | ) | $ | (.23 | ) |

 

4

----

 

**Authentidate Holding Corporation and Subsidiaries**

**Consolidated Statements of Cash Flow**

**(Unaudited)**

 
| ** **                                                                  | ** ** | **For the six months ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                                  | ** ** | **December 31, 2005**        | ** ** | **December 31, 2004** | ** ** |
| ** **                                                                  | ** ** | ** **                   | ** ** | ** ** | ** ** |
| **Cash flows from operating activities**                                    |       |                         |       |   |   |
| Net loss                                                                    |       | $                            | (7,304,186 | ) | $ | (7,826,205 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities |       |                         |       |   |   |
| Depreciation and  amortization                                              |       | 609,976                      |       | 606,248 |   |
| Provision for  doubtful accounts receivable                                 |       | 23,951                       |       | 21,967 |   |
| Non-cash  compensation:                                                     |       |                         |       |   |   |
| Employee stock  option expense                                              |       | 1,254,351                    |       | — |   |
| Warrants and  options for services                                          |       | —                       |       | 635,651 |   |
| Accounts  receivable and due from related parties                           |       | (163,113                     | )          | (745,827 | ) |
| Inventories                                                                 |       | (174,881                     | )          | (177,607 | ) |
| Prepaid expenses  and other current assets                                  |       | (553,770                     | )          | (87,029 | ) |
| Accounts  payable, accrued expenses and other current liabilities           |       | (927,537                     | )          | 1,488,538 |   |
| Deferred revenue                                                            |       | (675,310                     | )          | 456,997 |   |
| Income taxes  payable                                                       |       | 17,424                       |       | 4,668 |   |
| Net cash used in  operating activities                                      |       | (7,893,095                   | )          | (5,622,599 | ) |
| **Cash flows from investing activities**                                    |       |                         |       |   |   |
| Restricted cash                                                             |       | (518,149                     | )          | (2,075 | ) |
| Purchases of  property and equipment                                        |       | (395,441                     | )          | (510,729 | ) |
| Other intangible  assets acquired                                           |       | (18,800                      | )          | (403,000 | ) |
| Capitalized  software development costs                                     |       | (1,118,466                   | )          | (161,451 | ) |
| Investment in  affiliated companies                                         |       | —                       |       | (750,000 | ) |
| Net sales /  (purchases) of marketable securities                           |       | 23,675,000                   |       | (2,800,000 | ) |
| Other, net                                                                  |       | —                       |       | (22,501 | ) |
| Net cash  provided by / (used in) investing activities                      |       | 21,624,144                   |       | (4,649,756 | ) |
| **Cash flows from financing activities**                                    |       |                         |       |   |   |
| Stock warrants  exercised                                                   |       | —                       |       | 1,371,536 |   |
| Stock options  exercised                                                    |       | —                       |       | 89,408 |   |
| Dividends paid                                                              |       | (35,001                      | )          | (35,000 | ) |
| Principal  payments on obligations under capital leases                     |       | (13,346                      | )          | (46,079 | ) |
| Payment of  registration costs                                              |       | (1,599                       | )          | (9,624 | ) |
| Net payments  under line of credit                                          |       | (8,822                       | )          | (163,926 | ) |
| Principal  payments on long-term debt                                       |       | —                       |       | (148,239 | ) |
| Net cash  provided by/(used in) financing activities                        |       | (58,768                      | )          | 1,058,076 |   |
| Effect of exchange rate changes on cash flows                               |       | (30,375                      | )          | (48,528 | ) |
| Net increase/(decrease) increase in cash and cash  equivalents              |       | 13,641,906                   |       | (9,262,807 | ) |
| Cash and cash equivalents, beginning of period                              |       | 6,429,210                    |       | 25,064,823 |   |
| Cash and cash equivalents, end of period                                    |       | $                            | 20,071,116 |   | $ | 15,802,016 |   |

 

5

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**AUTHENTIDATEHOLDING CORP.**

**NOTES TO UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

 

1.               Basis ofPresentation

 

In the opinion of management the accompanyingunaudited consolidated financial statements contain all adjustments, consistingof only normal, recurring adjustments, necessary for fair presentation. Theconsolidated financial statements include the accounts of Authentidate HoldingCorp. (AHC) and its subsidiaries DJS Marketing Group, Inc. (DJS), Authentidate,Inc., Authentidate International AG (AG), Trac Medical Solutions, Inc. (TracMed), and its Docstar Division, and are referred to as the Company. The resultsof operations for the three and six months ended December 31, 2005 are notnecessarily indicative of the results to be expected for the full year. Certaininformation and footnote disclosures normally included in the consolidatedfinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted. These consolidated financial statements should be read in conjunctionwith the annual consolidated financial statements and notes thereto included inthe Company’s Form 10-K for the fiscal year ended June 30, 2005.

 

2.               Earnings PerShare

 

The following representsthe reconciliation of the basic and diluted loss per share amounts for thethree and six months ended December 31, 2005 and 2004, respectively:

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **December 31, 2005**  | ** ** | **December 31, 2004** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|                                        |       |                             |       |                            |       |   |   |   |   |
| Net loss                                    |       | $                                | (3,555,199 | )                               | $          | (4,920,116 | ) | $ | (7,304,186 | ) | $ | (7,826,205 | ) |
| Preferred stock  dividends                  |       | (17,500                          | )          | (17,500                         | )          | (35,001 | ) | (35,000 | ) |
| Net loss applicable  to common stockholders |       | $                                | (3,572,699 | )                               | $          | (4,937,616 | ) | $ | (7,339,187 | ) | $ | (7,861,205 | ) |
| Weighted average  shares                    |       | 34,399,161                       |       | 33,763,939                      |       | 34,399,161 |   | 33,626,088 |   |
| Basic and  diluted loss per common share    |       | $                                | (0.10      | )                               | $          | (0.15 | ) | $ | (0.21 | ) | $ | (0.23 | ) |

 

All common stockequivalents were excluded from the loss per share calculation for all periodspresented because the impact is antidilutive. At December 31, 2005, employeeand non-executive director options (4,245,555), warrants (1,262,314),performance based consultant options (375,000) and convertible preferred stock(500,000) were outstanding. At December 31, 2004, employee and non-executivedirector options (5,487,824), warrants (1,580,314), and convertible preferredstock (500,000) were outstanding.

 

3.               Stock BasedCompensation

 

Effective July 1, 2005,the Company adopted Statement of Financial Accounting Standard No. 123R, “ShareBased Payment” (“FAS 123R”), which requires all share-based payments, includinggrants of stock options, to be recognized in the income statement as acompensation expense, based on their fair values. Under the provisions of FAS123R, the estimated fair value of options granted under the Company’s EmployeeStock Option Plan and Non-Executive Director Stock Option Plan are recognizedas compensation expense over the option-vesting period. The Company is usingthe modified prospective method, in which compensation expense is recognizedbeginning with the effective date of adoption of FAS 123R for all share-basedpayments (i) granted after the effective date of adoption and(ii) granted prior to the effective date of adoption and that remainunvested on the date of adoption.

 

Prior to July 1, 2005 theCompany applied APB Opinion No. 25, *Accounting for StockIssued to Employees,* in accounting for its stock option plans. Underthe provisions of APB 25, no compensation expense was recognized when stockoptions were granted with exercise prices equal to or greater than market valueon the date of grant.

 

The following tableillustrates the effect on net income and earnings per share if the fair valuemethod had been applied to the prior period in comparison to the currentperiod, where it was applied:

 

6

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| ** **                                                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                    | ** ** | **December 31, 2005**  | ** ** | **December 31, 2004** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| Net loss as  reported                                                                         |       |                             |       |                            |       |   |   |   |   |
| Applicable to  common shareholders                                                            |       | $                                | (3,572,699 | )                               | $          | (4,937,616 | ) | $ | (7,339,187 | ) | $ | (7,861,205 | ) |
| Add: Total  stock-based employee compensation expense determined under fair value method  (1) |       | —                           |       | (1,024,627                      | )          | — |   | (1,895,984 | ) |
| Proforma net  loss                                                                            |       | $                                | (3,572,699 | )                               | $          | (5,962,243 | ) | $ | (7,339,187 | ) | $ | (9,757,189 | ) |
| Basic and  diluted loss per share                                                             |       |                             |       |                            |       |   |   |   |   |
| As reported                                                                                   |       | $                                | (0.10      | )                               | $          | (0.15 | ) | $ | (0.21 | ) | $ | (0.23 | ) |
| Pro forma                                                                                     |       | N/A                              |       | $                               | (0.18      | ) | N/A |   | $ | (0.29 | ) |

 

----

(1) December 31,2005 net loss for the three and six months ended includes $601,351 and$1,254,351 of stock-based employee compensation expense, respectively.

 

For the three and sixmonths ended December 31, 2005 the Company included $601,351 and $1,254,351 ofshare-based compensation in its Statement of Operations. Had the Companycontinued to account for share-based compensation under APB Opinion No. 25,basic and diluted loss per common share for the three and six months endedDecember 31, 2005 would have been $.09 and $.18 compared to $.10 and $.21,respectively. No stock option expense was included in the Company’s Statementof Operations for the three and six months ended December 31, 2004.

 

The following tableillustrates the breakdown of total stock based compensation by area:

 

**Stock option expense by function:**

 
| ** **            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|-----------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **            | ** ** | **December 31, 2005**  | ** ** | **December 31, 2004** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| S,G&A  expense    |       | $                                | 5,309,678  |                            | $          | 6,962,081 |   | $ | 10,347,735 |   | $ | 11,171,438 |   |
| Stock option  expense |       | 534,562                          |       | —                          |       | 1,121,304 |   | — |   |
| Total                 |       | $                                | 5,844,240  |                            | $          | 6,962,081 |   | $ | 11,469,039 |   | $ | 11,171,438 |   |
|                  |       |                             |       |                            |       |   |   |   |   |
| Product  development  |       | 755,399                          |       | 600,073                         |       | 1,473,835 |   | 1,301,347 |   |
| Stock option  expense |       | 62,000                           |       | —                          |       | 123,468 |   | — |   |
| Total                 |       | $                                | 817,399    |                            | $          | 600,073 |   | $ | 1,597,303 |   | $ | 1,301,347 |   |
|                  |       |                             |       |                            |       |   |   |   |   |
| Cost of sales         |       | 1,658,541                        |       | 2,493,129                       |       | 3,829,991 |   | 4,452,914 |   |
| Stock option  expense |       | 4,789                            |       | —                          |       | 9,579 |   | — |   |
| Total                 |       | $                                | 1,663,330  |                            | $          | 2,493,129 |   | $ | 3,839,570 |   | $ | 4,452,914 |   |

 

Under the modified prospective method of transitionunder FAS 123R, the Company is not required to restate its prior periodfinancial statements to reflect expensing of share-based compensation under FAS123R. Therefore, the results for the period ended are not directly comparableto the same period in the prior year.

 

Prior to the adoption of FASNo. 123R, the Company presented cash flows resulting from the tax benefits ofdeductions resulting from the exercise of stock options as operating cash flowsin the Statement of Cash Flows. FAS No. 123R requires cash flows resulting fromthe tax benefits resulting from tax deductions in excess of the compensationcost recognized for those options (excess tax benefits) to be classified asfinancing cash flows. The Company did not realize any tax benefits from stockoptions during the three and six months ended December 31, 2005.

 

For purposes of the disclosure in the foregoingtable and for purposes of determining estimated fair value under FAS 123R, theCompany has computed the estimated fair values of all share-based compensationusing the Black-Scholes option pricing model and has applied the assumptionsset forth in the following table. The Company based its estimate of life onhistorical averages over the past five years. The Company retained a thirdparty valuation firm to calculate expected volatility which was based on theCompany’s historical stock volatility, historical stock volatility ofcomparable companies in the industry and implied volatilities based on the spotmarket for traded options in the Company and comparable companies in theindustry. The following table illustrates the assumptions used in the Company’sBlack-Scholes calculations to determine the stock option expense in fiscal 2006and fiscal 2005.

 

7

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| ** **       | ** ** | **Risk Free Interest Rate** | ** ** | **Dividend  Yield** | ** ** | **Volatility Factor** | ** ** | **Weighted Average  Option Life (Months)** | ** ** |
|------------------|------------|-----------------------------|------------|---------------------|------------|-----------------------|------------|--------------------------------------------|------------|
| Fiscal year 2006 |       | 3.3% - 4.2                  | %          | 0                   | %          | 70.0% - 102.0         | %          | 33                                         |       |
| Fiscal year 2005 |       | 3.0% - 3.6                  | %          | 0                   | %          | 95.3% - 102.0         | %          | 33                                         |       |

 

The Black-Scholesoption-pricing model requires the input of highly subjective assumptions.Because the Company’s employee stock options have characteristics significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the fair value estimate, in management’sopinion, the existing models may not provide a reliable single measure of thefair value of its employee stock options. In addition, management will continueto assess the assumptions and methodologies used to calculate estimated fairvalue of share-based compensation. Circumstances may change and additional datamay become available over time, which result in changes to these assumptionsand methodologies, which could materially impact the Company’s fair valuedetermination.

 

A combined summary ofoption activity under the Employees and Non-Executive Directors Stock Option Planas of December 31, 2005 and changes during the six-month period then ended ispresented below.

 

**Summary Details for the Employee & Non-Executive DirectorOption Plans**

 
| ** **                                  | ** ** | **Number of  Options** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining Contractual  Life (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|---------------------------------------------|------------|------------------------|------------|--------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|
| Outstanding June 30, 2005                   |       | 4,234,498              |       | $                                    | 5.31       |                                                      |       |                            |       |   |
| Granted                                     |       | 418,600                |       | 4.30                                 |       |                                                      |       |                            |       |
| Exercised                                   |       | —                 |       | 0.00                                 |       |                                                      |       |                            |       |
| Forfeited                                   |       | (407,543               | )          | 7.00                                 |       |                                                      |       |                            |       |
| Outstanding December 31, 2005               |       | 4,245,555              |       | $                                    | 5.05       |                                                      | 2.42       |                            | $          | 1,333 |   |
|                                        |       |                   |       |                                 |       |                                                      |       |                            |       |
| Excercisable shares as of December 31, 2005 |       | 2,833,158              |       |                                 |       |                                                      |       |                            |       |
|                                             |            |                        |            |                                      |            |                                                           |            |                                 |            |  |  |

 

There were no optionexercises over the six month period ended December 31, 2005, therefore, thetotal intrinsic value of options exercised during the six-month period endedDecember 31, 2005 was $0. Additionally, the weighted average, grant date fairvalue of options granted during the six-month period ended December 31, 2005was approximately $405,000 using the Black-Scholes model.

 

A summary of the status of the Company’s unvested shares as of December 31, 2005,and changes during the six month period then ended is presented below.

 

**Unvested shares issued under the Employee and Non-ExecutiveDirector Option Plans**

 
| ** **                          | ** ** | **Number of  Options** | ** ** | **Weighted Average  Exercise Price** | ** ** | **Weighted Average  Remaining Contractual  Life (Years)** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------|------------|
| Unvested  balance, June 30, 2005    |       | 1,539,316                   |       | $                                         | 4.78       |                                                      |       |                            |       |   |
| Granted                             |       | 418,600                     |       | 4.30                                      |       |                                                      |       |                            |       |
| Vested                              |       | (425,877                    | )          | 5.21                                      |       |                                                      |       |                            |       |
| Forfeited                           |       | (119,642                    | )          | 7.11                                      |       |                                                      |       |                            |       |
| Unvested balance  December 31, 2005 |       | 1,412,397                   |       | $                                         | 5.58       |                                                      | 3.58       |                            | $          | 0 |   |
|                                     |            |                             |            |                                           |            |                                                           |            |                                 |            |  |  |

 

As of December 31, 2005,there was $2,590,230 of total unrecognized compensation expense related tounvested share-based compensation arrangements granted under the Plans. Thisexpense is expected to be recognized over a weighted-average period of 15months.

 

During the quarter theCompany issued 375,000 stock options to an independent consultant, exercisableat $3.25 per share. These options do not vest until the consultant realizes atleast $1.0 million in sales of the Company's Security Software products;therefore no expense has been recorded as no sales have been realized to date.These options are not included in the tables above. These options expire at thelater of 7 years from the grant date or 5 years from the vesting date.

 

The following chart showsthe effect of stock option expense on the Statement of Operations:

 
| ** **                                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                    | ** ** | **December 31, 2005**  | ** ** | **December 31, 2004** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
| Loss from  operations before stock option expense             |       | (3,512,783             | )          | (5,293,556            | )          | (7,137,190 | ) | (8,501,574 | ) |
| Stock option  expense                                         |       | (601,351               | )          | —                |       | (1,254,351 | ) | — |   |
| Loss from  operations                                         |       | $                      | (4,114,134 | )                     | $          | (5,293,556 | ) | $ | (8,391,541 | ) | $ | (8,501,574 | ) |
| Net loss before stock  option expense                         |       | (2,953,848             | )          | (4,920,116            | )          | (6,049,835 | ) | (7,826,205 | ) |
| Stock option  expense                                         |       | (601,351               | )          | —                |       | (1,254,351 | ) | — |   |
| Net loss                                                      |       | $                      | (3,555,199 | )                     | $          | (4,920,116 | ) | $ | (7,304,186 | ) | $ | (7,826,205 | ) |
| Basic and  diluted loss per share before stock option expense |       | (.09                   | )          | (0.15                 | )          | (.18 | ) | (0.23 | ) |
| Stock option  expense per share                               |       | (.01                   | )          | 0.00                  |       | (.03 | ) | 0.00 |   |
| Basic and  diluted loss per share                             |       | (0.10                  | )          | (0.15                 | )          | (.21 | ) | (0.23 | ) |

 

Stock option expense hadno effect the Statements of Cash Flow.

 

4.               ComprehensiveIncome

 

Total comprehensive (loss) consist of:

 

8

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| ** **                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**  | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **December 31, 2005**  | ** ** | **December 31, 2004** | ** ** | **December 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|                             |       |                             |       |                            |       |   |   |   |   |
| Net  income/(loss)               |       | $                                | (3,555,199 | )                               | $          | (4,920,116 | ) | $ | (7,304,186 | ) | $ | (7,826,205 | ) |
| Currency  translation adjustment |       | (21,053                          | )          | (41,329                         | )          | (17,253 | ) | (48,528 | ) |
| Total  comprehensive loss        |       | $                                | (3,576,252 | )                               | $          | (4,961,445 | ) | $ | (7,321,439 | ) | $ | (7,874,733 | ) |

 

5.               SegmentInformation

 

The Company manages itsbusiness in three reportable segments: the Document Management Solutions Segment,Systems Integration Segment and Security Software Solutions Segment. Includedin the Security Software Solutions Segment are the operations of Authentidate,Trac Med and AG. The Document Management Solutions Segment operates as Docstar,specifically in document imaging. The Systems Integration Segment operates as DJS.The Document Management Solutions Segment sells through a national network ofdealers (approximately 100 dealers) and anticipates the addition of several newdealers each quarter to expand into markets not currently served. The SystemsIntegration Segment’s market is primarily in the Albany, New York region. The SecuritySoftware Solutions Segment sells their products and services on a global basisusing a direct sales model and reseller arrangements. The Corporate Division’sexpenses are non-operating expenses which include all public company relatedactivities, employee/director stock option expense and apply to all of theCompany’s operating divisions and therefore are stated as a reconciling item inour segment data. The Corporate Division’s assets consist of primarily cash andcash equivalents, marketable securities, real estate, fixed assets, andgoodwill. The Company’s segment information follows:

 

**Segment information for the threemonths ended:**

 
| ** **                                    | ** ** | **Document  Management Solutions** | ** ** | **Systems  Integration** | ** ** | **Security Software  Solutions** | ** ** | **Totals**            | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|-----------------------|------------|
| **December  31, 2005**                        |       |                                    |       |                     |       |                                  |       |                  |       |
| Net sales from  external customers            |       | $                                       | 1,707,792  |                     | $          | 1,249,868                             |       | $                     | 1,253,175  |   | $ | 4,210,835 |   |
| Intersegment  revenues                        |       | —                                  |       | —                   |       | 1,832                                 |       | 1,832                 |       |
| Segment profit  (loss)                        |       | 147,118                                 |       | 44,039                   |       | (931,542                              | )          | (740,385              | )          |
| Segment assets                                |       | 3,088,400                               |       | 2,780,984                |       | 2,658,923                             |       | 8,528,307             |       |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |
| **December  31, 2004**                        |       |                                    |       |                     |       |                                  |       |                  |       |
| Net sales from  external customers            |       | $                                       | 1,803,795  |                     | $          | 1,849,246                             |       | $                     | 1,108,686  |   | $ | 4,761,727 |   |
| Intersegment  revenues                        |       | —                                  |       | 15,375                   |       | —                                |       | 15,375                |       |
| Segment profit  (loss)                        |       | 317,012                                 |       | 7,321                    |       | (3,204,169                            | )          | (2,879,836            | )          |
| Segment assets                                |       | 4,774,435                               |       | 2,580,239                |       | 3,719,994                             |       | 11,074,668            |       |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |
| **Reconciliations:**                          |       |                                    |       |                     |       |                                  |       |                  |       |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |
| ** **                                    | ** ** | ** **                              | ** ** | ** **               | ** ** | **December 31, 2005**                 | ** ** | **December 31, 2004** | ** ** |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |
| Net sales                                     |       |                                    |       |                     |       |                                  |       |                  |       |
| Total net sales  for reportable segments      |       |                                    |       |                     |       | $                                     | 4,212,667  |                  | $          | 4,777,102 |   |
| Elimination of  intersegment revenues         |       |                                    |       |                     |       | (1,832                                | )          | (15,375               | )          |
| Total  consolidated net sales                 |       |                                    |       |                     |       | $                                     | 4,210,835  |                  | $          | 4,761,727 |   |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |
| Total profit or  loss for reportable segments |       |                                    |       |                     |       | $                                     | (740,385   | )                     | $          | (2,879,836 | ) |
| Product  development expenses                 |       |                                    |       |                     |       | (878,867                              | )          | (600,073              | )          |
| Corporate  expenses and other                 |       |                                    |       |                     |       | (1,935,947                            | )          | (1,437,208            | )          |
| Loss before  income taxes                     |       |                                    |       |                     |       | $                                     | (3,555,199 | )                     | $          | (4,917,117 | ) |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |
| Assets                                        |       |                                    |       |                     |       |                                  |       |                  |       |
| Total assets for  reportable segments         |       |                                    |       |                     |       | $                                     | 8,528,307  |                  | $          | 11,074,668 |   |
| Corporate assets                              |       |                                    |       |                     |       | 63,594,031                            |       | 78,941,583            |       |
| Elimination of  intersegment assets           |       |                                    |       |                     |       | (146,369                              | )          | (10,178               | )          |
| Consolidated  total assets                    |       |                                    |       |                     |       | $                                     | 71,975,969 |                  | $          | 90,006,073 |   |

 

9

----

 

**Segment information for the sixmonths ended:**

 
| ** **                                    | ** ** | **Document  Management Solutions** | ** ** | **Systems  Integration** | ** ** | **Security Software  Solutions** | ** ** | **Totals**            | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|---------------------------------------|------------|-----------------------|------------|
| **December  31, 2005**                        |       |                                    |       |                     |       |                                  |       |                  |       |
| Net sales from  external customers            |       | $                                       | 3,202,327  |                     | $          | 2,937,766                             |       | $                     | 2,374,278  |   | $ | 8,514,371 |   |
| Intersegment  revenues                        |       | —                                  |       | —                   |       | 5,882                                 |       | 5,882                 |       |
| Segment profit  (loss)                        |       | 197,872                                 |       | 28,862                   |       | (2,163,982                            | )          | (1,937,248            | )          |
| Segment assets                                |       | 3,088,400                               |       | 2,780,984                |       | 2,658,923                             |       | 8,528,307             |       |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |
| **December  31, 2004**                        |       |                                    |       |                     |       |                                  |       |                  |       |
| Net sales from  external customers            |       | $                                       | 3,209,465  |                     | $          | 3,512,548                             |       | $                     | 1,702,112  |   | $ | 8,424,125 |   |
| Intersegment  revenues                        |       | —                                  |       | 25,469                   |       | —                                |       | 25,469                |       |
| Segment profit  (loss)                        |       | 382,258                                 |       | 20,875                   |       | (5,123,145                            | )          | (4,720,012            | )          |
| Segment assets                                |       | 4,774,435                               |       | 2,580,239                |       | 3,719,994                             |       | 11,074,668            |       |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |
| **Reconciliations:**                          |       |                                    |       |                     |       |                                  |       |                  |       |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |
| ** **                                    | ** ** | ** **                              | ** ** | ** **               | ** ** | **December 31, 2005**                 | ** ** | **December 31, 2004** | ** ** |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |
| Net sales                                     |       |                                    |       |                     |       |                                  |       |                  |       |
| Total net sales  for reportable segments      |       |                                    |       |                     |       | $                                     | 8,520,253  |                  | $          | 8,449,594 |   |
| Elimination of  intersegment revenues         |       |                                    |       |                     |       | (5,882                                | )          | (25,469               | )          |
| Total  consolidated net sales                 |       |                                    |       |                     |       | $                                     | 8,514,371  |                  | $          | 8,424,125 |   |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |   |   |
| Total profit or  loss for reportable segments |       |                                    |       |                     |       | $                                     | (1,937,248 | )                     | $          | (4,720,012 | ) |
| Product  development expenses                 |       |                                    |       |                     |       | (1,597,303                            | )          | (1,301,347            | )          |
| Corporate  expenses and other                 |       |                                    |       |                     |       | (3,775,040                            | )          | (1,806,133            | )          |
| Elimination of  intersegment profits          |       |                                    |       |                     |       | 5,405                                 |       | 6,837                 |       |
| Loss before  income taxes                     |       |                                    |       |                     |       | $                                     | (7,304,186 | )                     | $          | (7,820,655 | ) |
|                                          |       |                                    |       |                     |       |                                  |       |                  |       |   |   |
| Assets                                        |       |                                    |       |                     |       |                                  |       |                  |       |
| Total assets for  reportable segments         |       |                                    |       |                     |       | $                                     | 8,528,307  |                  | $          | 11,074,668 |   |
| Corporate assets                              |       |                                    |       |                     |       | 63,594,031                            |       | 78,941,583            |       |
| Elimination of  intersegment assets           |       |                                    |       |                     |       | (146,369                              | )          | (10,178               | )          |
| Consolidated  total assets                    |       |                                    |       |                     |       | $                                     | 71,975,969 |                  | $          | 90,006,073 |   |

 

6.               MarketableSecurities

 

The Company hasclassified certain investments known as auction rate securities as marketablesecurities on its balance sheet. The auction rate securities the Companypurchases are generally triple A or double A rated. With regard to the auctionrate securities the Company purchases, the interest yield generally resetsevery 35 days or sooner. The securities are purchased at par value and sold atpar value with no adjustment to market value required. Many of the securitiesare insured by a third party insurance company and the issuer is sometimes amunicipality or municipality run corporation.

 

7.               Revisions inClassification of Certain Securities

 

On the Company’s Form 10Qfor the six months ended December 31, 2004, the Company had certain auctionrate securities classified as cash and cash equivalents on its Balance Sheetand Statement of Cash Flows. As reported on the Company’s Form 10K/A for theyear ended June 30, 2004, the Company reclassified these securities from cashand cash equivalents to marketable securities. As a result of this change, theStatement of Cash Flows for the six months ended December 31, 2004 has beenamended in this Form 10Q. The Company has included a line item entitled “Netsales / (purchases) of marketable securities” which totaled $(2,800,000). As aresult, the total “Net cash used / (provided) by investing activities” has beenamended from $1,849,756 of cash used to $4,649,756 of cash used. Total “Netincrease (decrease) in cash and cash equivalents” has been amended from $6,462,807of cash used to $9,262,807 of cash used. Furthermore, “Cash and cashequivalents, end of period” has been amended from $67,527,016 to $15,802,016 as$51,725,000 of auction rate securities were reclassified from cash and cashequivalents to marketable securities as of December 31, 2004.

 

10

----

 

8.               Inventories

 

Inventoriesrelate to Docstar and DJS only and consist of:

 
| ** **                              | ** ** | **December 31, 2005** | ** ** | **June 30, 2005** | ** ** |
|-----------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|
|                                    |       |                            |       |                        |       |
| Purchased  components and raw materials |       | $                               | 386,893    |                        | $          | 229,305 |   |
| Finished goods                          |       | 91,589                          |       | 74,373                      |       |
|                                    |       | $                               | 478,482    |                        | $          | 303,678 |   |

 

9.               Goodwill and OtherIntangible Assets

 

The Company retains athird party valuation firm to perform an annual valuation of goodwill as ofJune 30. An adverse development or change in our business would require aninterim assessment. There were no adverse developments or changes in ourbusiness that required an interim assessment for the six months ended December31, 2005.

 

There were no changes inthe carrying amount of goodwill for the six months ended December 31, 2005. Thevalues at December 31, 2005 were as follows:

 
| ** **                 | ** ** | **Authentidate** | ** ** | **AG** | ** ** | **Total** | ** ** |
|----------------------------|------------|------------------|------------|--------|------------|-----------|------------|
| Balance December  31, 2005 |       | $                | 49,571     |   | $          | 7,291,165 |       | $ | 7,340,736 |   |
|                            |            |                  |            |        |            |           |            |  |  |  |

 

Intangible assetamortization expense for the three and six months ended December 31, 2005 was $43,599and $86,536. Below is a chart of intangible assets:

 
| ** **            | ** ** | **December 31, 2005**      | ** ** | **June 30, 2005**             | ** ** |
|-----------------------|------------|----------------------------|------------|-------------------------------|------------|
| ** **            | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** | **Gross Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net Book  Value** | ** ** |
|                  |       |                       |       |                          |       |   |   |   |   |   |   |   |   |
| Patents               |       | $                          | 368,534    |                          | $          | 99,408 |   | $ | 269,126 |   | $ | 357,164 |   | $ | 87,482 |   | $ | 269,682 |   |
| Trademarks            |       | 182,901                    |       | 43,796                        |       | 139,105 |   | 181,081 |   | 38,884 |   | 142,197 |   |
| Acquired technologies |       | 72,467                     |       | 36,175                        |       | 36,292 |   | 72,467 |   | 18,117 |   | 54,350 |   |
| Licenses              |       | 574,697                    |       | 423,559                       |       | 151,138 |   | 569,087 |   | 371,919 |   | 197,168 |   |
| Total                 |       | $                          | 1,198,599  |                          | $          | 602,938 |   | $ | 595,661 |   | $ | 1,179,799 |   | $ | 516,402 |   | $ | 663,397 |   |

 

The Company amortizesintangible assets under the straight line method. Intangible amortizationexpense is expected to be as follows for the next five fiscal years:

 
| 2006 |   | $       | 169,979 |   |
|------|--------|---------|---------|--------|
| 2007 |   | 136,409 |    |
| 2008 |   | 41,482  |    |
| 2009 |   | 30,247  |    |
| 2010 |   | 30,247  |    |

 

11

----

 

10.         Shareholders’Equity

 

Below is a summary of changes inShareholders’ Equity for the six months ended December 31, 2005:

 
| ** **                       | ** ** | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | **Paid-in  Capital** | ** ** | **Accumulated  Deficit** | ** **  | **Translation  Adjustment** | ** ** | **Total Shareholders’  Equity** | ** ** |
|----------------------------------|------------|----------------------|------------|-------------------|------------|----------------------|------------|--------------------------|-------------|-----------------------------|------------|-------------------------------------------|------------|
| ** **                       | ** ** | ** **           | ** ** | ** **        | ** ** | ** **           | ** ** | ** **               | ** **  | ** **                  | ** ** | ** **                                | ** ** |
| **Balance  June 30, 2005**       |       | $                    | 2,800      |              | $          | 34,399               |       | $                        | 160,488,500 |                        | $          | (88,100,574                               | )          | $ | (63,421 | ) | $ | 72,361,704 |   |
| Cost to register  common shares  |       |                 |       |              |       | (1,598               | )          |                     |        |                        |       | (1,598                                    | )          |
| Currency translation  adjustment |       |                 |       |              |       |                 |       |                     |        | (17,253                     | )          | (17,253                                   | )          |
| Preferred stock  dividends       |       |                 |       |              |       |                 |       | (35,001                  | )           |                        |       | (35,001                                   | )          |
| Employee stock  option expense   |       |                 |       |              |       | 1,254,351            |       |                     |        |                        |       | 1,254,351                                 |       |
| Net loss                         |       |                 |       |              |       |                 |       | (7,304,186               | )           |                        |       | (7,304,186                                | )          |
| **Balance  December 31, 2005**   |       | $                    | 2,800      |              | $          | 34,399               |       | $                        | 161,741,253 |                        | $          | (95,439,761                               | )          | $ | (80,674 | ) | $ | 66,258,017 |   |

 

During the three and six monthsended December 31, 2005, no common stock options or common stock warrants wereexercised.

 

11.         PreferredStock

 

As of October 1, 2004, theCompany has the right to repurchase the outstanding 28,000 shares of Series B preferredstock at a redemption price equal to $25.00 per share, plus accrued and unpaiddividends. The holder, however, has the right to convert these shares ofpreferred stock into an aggregate of 500,000 shares of our common stock at aconversion rate of $1.40 per share. In the event the Company elects to redeemthese securities, the holder will be able to exercise its conversion rightsubsequent to the date that we issue a notice of redemption but prior to thedeemed redemption date as would be set forth in such notice. The Series B preferredstock was originally issued in a private financing which was completed inOctober 1999. The conversion and redemption features of this security wereamended in October 2002 to provide for the rights and obligations describedabove in this note.

 

12.         Commitments andContingencies

 

As described inour report on Form 10-K for the fiscal year ended June 30, 2005, we areinvolved in the following pending and threatened legal proceedings. We are thedefendant in a third party complaint filed by Shore Venture Group, LLC in theUnited States District Court for the Eastern District of Pennsylvania.  The caption of this matter is *Berwyn Capital Investments, Inc. v. Shore Venture Group, LLC et al. (defendantsand Shore Venture Group, LLC as third party plaintiff) v. Authentidate HoldingCorp. and Authentidate, Inc. (third party defendants)*. The thirdparty complaint was filed against us on May 7, 2001. Shore Venture is thedefendant to an action commenced by Berwyn Capital. The third party complaintalleges a claim for breach of contract and seeks indemnification. A trial washeld in October, 2002 and we are currently awaiting the verdict of the judge. Managementbelieves that the claim will not have a material adverse impact on ourfinancial condition, results of operations or cash flows.

 

We are also thedefendant in a claim filed by Shore Venture Group in the federal District Courtfor the District of New Jersey, under the caption *ShoreVenture Group, LLC, et al v. Authentidate Holding Corp., Authentidate, Inc. andJohn T. Botti*. This complaint was filed on March 2, 2005 and anamended complaint was filed on or about April 26, 2005. On October 12, 2005, the partiesentered into an agreement to arbitrate the claims asserted against us byPlaintiffs. On October 19, 2005, the Court approved and entered a Consent Orderreferring the case to arbitration by the American Arbitration Association andstaying the lawsuit pending resolution of the arbitration. Theplaintiffs seek additional shares of the common stock of our subsidiary,Authentidate, Inc., rights under one of our patent applications, and damage inconnection with an alleged copyright infringement. We had conducted extensivesettlement negotiations with Shore Venture in an effort to resolve all claimsbetween the parties. However, negotiations were unable to result in a mutuallyagreeable settlement. Plaintiffshave not yet filed their arbitration brief. We intend to defendthe action vigorously. Management believes that the resolution of all of ourclaims with Shore Venture will not have a materially adverse effect on ourfinancial condition. However, there can be no assurance that such belief willultimately prove to be accurate or that other facts adverse to our positioncurrently not known to management will not be uncovered, in which case theultimate resolution of this claim could potentially have a material adverseeffect on our financial position.

 

In June, July andAugust 2005, six purported shareholder class actions were filed in the UnitedStates District Court for the Southern District of New York against our companyand certain of our current and former officers and directors. Plaintiffs inthese actions allege that defendants violated Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934 and Sections 11, 12(a), and 15 of theSecurities Act of 1933. The alleged class period is August 6, 2002 through May27, 2005. The securities law claims are based on the allegation that we failedto disclose that the USPS could cancel its August 2002 contract with us if wedid not meet certain performance metrics, and when we disclosed on September 8,2004 that we failed to comply with those metrics and on May 27, 2005 that wehad received a second notice from the

 

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USPS that we had failed to obtain the minimum revenue required underthe agreement, the market price of our stock declined. The class action complaintsseek unspecified monetary damages. On October 5, 2005 the Court granted themotion of one plaintiff, the Illinois State Board of Investment, to beappointed as lead plaintiff under the Private Securities Litigation Reform Act.The caption of the case is *in re Authentidate HoldingCorp. Securities Litigation*., C.A. No. 05 Civ. 5323 (LTS). Plaintifffiled an amended consolidated complaint on January 3, 2006. The amendedcomplaint asserts the same claims as the prior complaint and also alleges thatAuthentidate violated the federal securities laws by misrepresenting that itpossessed patentable technology. Defendants’ motion to dismiss the amendedcomplaint is scheduled to be filed on March 4, 2006. Oral argument on themotion to dismiss is scheduled for June 30, 2006.

 

In addition to theclass action complaints, four purported shareholder derivative actions werefiled against certain former and current directors and officers of the companyin June and July 2005 in the United States District Court for the SouthernDistrict of New York. The derivative actions are based on substantially thesame events and factual allegations as the original class actions and assertedclaims that Authentidate was injured by an alleged breach of fiduciary duty,waste, mismanagement, violations of Sarbanes-Oxley, and misappropriation ofinside information. The derivative complaints sought, among other things,damages, equitable relief, restitution, and payment of costs and expensesincurred in the litigation (including legal fees). Plaintiffs in the derivativeactions entered into a Court-approved stipulation providing for theconsolidation of their actions and the selection of Maxine Philips as the leadplaintiff. Plaintiffs filed a consolidated complaint on November 14, 2005. Defendantsmoved to dismiss this complaint on January 13, 2006.

 

On December 13,2005, a purported shareholder derivative action was filed in the Supreme Courtof New York, Schenectady County, entitled *Elkin v. Goldman et al*.,No. 2005-2240. Plaintiff in that action demanded that our Board of Directorsfile a derivative action on behalf of the Company against nine of its currentand former directors and officers. The complaint asserts the same claims thatare alleged in the 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’sbest interest.

 

In addition, inAugust 2005, we were notified of the filing of a complaint in which theplaintiff alleges that our products and systems incorporating secure timestamping technology, including but not limited to our Electronic Postmarksystem, infringes certain of the plaintiff’s patent rights. The complaint wasfiled in the United States District Court for the Middle District of Floridaand is entitled *TimeCertain LLC vs.Authentidate Holding Corporation, Authentidate, Inc. and NCipher Inc*.As relief, the complaint seeks, among other things, injunctive relief anddamages. The complaint wasserved on September 21, 2005, and our Answer was timely filed on November 10,2005. We are in the discovery phase of the case and are vigorously defendingthis action. Based on the facts of which we are currently aware, managementbelieves that the resolution of all of our claims with TimeCertain will nothave a materially adverse effect on our financial condition. However, noassurances can be given that such belief will ultimately prove to be accurateor that other facts adverse to our position currently not known to managementwill not be uncovered, in which case the ultimate resolution of this claimcould potentially have a material adverse effect on our financialcondition.

 

We are engaged inno other litigation which would be anticipated to have a material adverseeffect on our financial condition, results of operations or cash flows.

 

On July 31, 2002, weentered into a strategic alliance agreement with the United States PostalService to serve as the preferred provider of the USPS Electronic Postmark®(EPM) service. Under the terms of the agreement, our subsidiary, Authentidate,Inc., provides the management, technology and support for the United StatesPostal Service’s EPM system. The USPS is the vendor of the EPM to the end user.The USPS Electronic Postmark® provides evidence that the content of a documentor file existed at a specific date and time and is intended to protect theintegrity of the document or file by ensuring that it cannot be altered withoutdetection. The EPM uses our patent pending technology offering highlysophisticated encryption methodology ensuring document authenticity and isintended to be able to be added to any application regardless of the computingplatform or operating system.

 

To date, we have notachieved the revenue metrics required under our agreement with the UnitedStates Postal Service. We received a third letter from the USPS in October2005, which letter stated the Company continues to fail to attain theperformance metrics required by the Strategic Alliance Agreement. However, theUSPS also stated it has elected not to terminate the agreement at this time andwill continue to fulfill its obligations under the agreement as long as itremains in effect. The Company and the United States Postal Service havecontinued to discuss various amendments to the original agreement and webelieve these discussions will lead to changes to the contract that we and theUnited States Postal Service will both agree to and which will enable us tocontinue our relationship with the United States Postal Service. If we areunsuccessful in completing these negotiations and should we fail to satisfy oneor more

 

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of the performance metrics under this agreement, the United StatesPostal Service could, subject to our right to cure any such failure, terminateour agreement.

 

We have entered intovarious agreements by which we may be obligated to indemnify the other partywith respect to certain matters. Generally, these indemnification provisionsare included in contracts arising in the normal course of business under whichwe customarily agree to hold the indemnified party harmless against lossesarising from a breach of representations related to such matters asintellectual property rights. Payments by us under such indemnification clausesare generally conditioned on the other party making a claim. Such claims aregenerally subject to challenge by us and to dispute resolution proceduresspecified in the particular contract. Further, our obligations under thesearrangements may be limited in terms of time and/or amount and, in someinstances, we may have recourse against third parties for certain payments madeby us. It is not possible to predict the maximum potential amount of futurepayments under these indemnification agreements due to the conditional natureof our obligations and the unique facts of each particular agreement. Historically,the Company has not made any payments under these agreements that have beenmaterial individually or in the aggregate. As of December 31, 2005, we were notaware of any obligations under such indemnification agreements that wouldrequire material payments.

 

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**Management’sDiscussion and Analysis ofFinancial Condition and Results of Operations**

 

**Item 2.**

 

***Forward-Looking Statements and Factors That May AffectFuture Results***

 

*Certain statements in this Form 10-Q, includinginformation set forth under Item 2 Management’s Discussion and Analysis ofFinancial Condition and Results of Operations constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995 (the “Act”). We desire to avail ourselves of certain “safe harbor”provisions of the Act and are therefore including this special note to enableus to do so. Forward-looking statements in this Form 10-Q or hereafter includedin other publicly available documents filed with the Securities and ExchangeCommission, reports to our stockholders and other publicly available statementsissued or released by us involving known and unknown risks, uncertainties andother factors which could cause our actual results, performance (financial oroperating) or achievements to differ from the future results, performance(financial or operating) or achievements expressed or implied by suchforward-looking statements. Such future results are based upon our management’sbest estimates based upon current conditions and the most recent results ofoperations. These risks include, but are not limited to risks associated withthe market acceptance of the Docstar, Authentidate and related product lines,competition, pricing, technological changes, technological implementation ofthe Authentidate business plan, related decisions by the USPS, and other risksas discussed in our filings with the Securities and Exchange Commission, inparticular our Annual Report on Form 10-K for the year ended June 30, 2005 andregistration statements we have filed and which have been declared effective bythe Securities and Exchange Commission pursuant to the Securities Act of 1933,as amended, all of which risk factors could adversely affect our business andthe accuracy of the forward-looking statements contained herein.*

 

**ExecutiveOverview**

 

Authentidate HoldingCorp. is a holding company which operates its software, hardware and servicesbusiness in three segments:

 

•                  TheDocument Management Solutions Segment, formerly known as the DocstarTMDivision. This segment develops, assembles and sells document imaging systemsand software products.

 

•                  TheSystem Integration Segment, formerly known as DJS Marketing Group which sellsand integrates computer system, peripheral equipment and provides professionalnetwork and computer solution services.

 

•                  TheSecurity Software Solutions Segment (formerly known as the Authentidate Segmentand consisting of Authentidate, Trac Medical Solutions and AuthentidateInternational AG) develops and sells authentication and security softwareproducts and services.

 

During the three and sixmonths ended December 31, 2005, we derived approximately $1.7 million and $3.2million in revenue from our Document Management Solutions Segment, $1.2 millionand $2.9 million from our Systems Integration Segment, and $1.3 million and$2.4 million from our Security Software Solutions Segment, respectively.

 

The Document ManagementSolutions Segment develops and sells document imaging software nationwide anddepending on the customer, may bundle the software with computer hardware tooffer customers a turn-key solution or may sell the software alone with nocomputer systems.

 

The Systems IntegrationSegment is an authorized sales and support provider for software products suchas Microsoft Solutions and Lotus Notes. This Segment also sells computerhardware and provides software and integration services to businesses to meettheir data management needs, primarily in the Albany, NY region.

 

The Security SoftwareSolutions Segment is engaged in the business of providing end users withsecurity software technology and services designed to accept and store adigital code which enables users to prove the authenticity of the date, timeand the content of any electronic document. The product was released for salein May, 2001. We believe that product integration development work will benecessary for some applications or customers. In April 2005, we launched a newservice to authenticate and verify documents received by fax and in October2005 we announced the introduction of CareFaxTM, an automatedworkflow solution that allows for authenticated communication via fax and isintended to meet the compliance requirements associated with documentprocessing in the healthcare sector.

 

On July 31, 2002, weentered into a strategic alliance agreement with the United States PostalService to serve as the preferred provider of the USPS Electronic Postmark®(EPM) service. Under the

 

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terms of the agreement, our Authentidate, Inc. subsidiary provides themanagement, technology and support for the United States Postal Service’s EPMsystem. The USPS is the vendor of the EPM to the end user. The USPS ElectronicPostmark® provides evidence that the content of a document or file existed at aspecific date and time and is intended to protect the integrity of the documentor file by ensuring that it cannot be altered without detection. The EPM usesour patent pending technology offering highly sophisticated encryptionmethodology ensuring document authenticity and is intended to be able to beadded to any application regardless of the computing platform or operatingsystem. During the 2005 fiscal year, we implemented a solutions-based approachto accelerate development of the market for the USPS EPM and in May 2005, weannounced that the United States Postal Service approved an updated version ofthe USPS EPM service.

 

To date, we have notachieved the revenue metrics required under our agreement with the UnitedStates Postal Service. As previously reported, we received a letter from theUSPS in September 2004, which letter stated that we had six months to cure ournonperformance of the metric standard described in such letter. We begannegotiating with the Postal Service to complete a modification of this metricand in December 2004 believed that we cured the default. Despite those actions,in May 2005 the United States Postal Service notified us that we had failed toattain the performance metrics required by the Strategic Alliance Agreementduring the period February 2005 through April 2005. In its notice, the PostalService has advised us that although it intends to exercise its right toterminate the Strategic Alliance Agreement if we are unable to cure thisdefault, it is willing to discuss further plans that we may have to attain theperformance metrics in the Strategic Alliance Agreement. In October 2005, theUnited States Postal Service again notified us of our continuing failure tosatisfy the performance metrics required by the Strategic Alliance Agreement.However, the USPS also stated that it has elected not to terminate theagreement at this time and will continue to fulfill its obligations under theagreement as long as it remains in effect. We have continued our efforts tocure the default claimed by the USPS and to discuss modifications to theAlliance Agreement. No assurances, however, can be given that we will besuccessful in completing these negotiations or that we will comply with thecurrent performance metric in a timely manner. If we are unsuccessful in eitherof these tasks, the Postal Service may terminate the agreement.

 

AuthentidateInternational sells the Authentidate product in the European marketplace and iscurrently focusing on the German market. As an accredited provider AuthentidateInternational is able to generate legally valid time stamps in accordance withthe German Digital Signature Act and European guidelines. AuthentidateInternational develops and provides software solutions for electronicinvoicing, secure e-mail, archiving, scanning, time stamping and workflowsolutions.

 

Trac Medical Solutionsdeveloped a business model to apply the Authentidate technology to the medicalsupply business relating to the automation and processing of Certificates ofMedical Necessity (CMN). Trac Medical Solutions developed its CareCertTM serviceand has entered into over thirty revenue-generating agreements to date. InFebruary 2004, Trac Medical Solutions entered into an agreement with HomecareAssociation, LLC pursuant to which Trac Medical Solutions markets its CareCertservice directly to the membership community of the American Association forHomecare. In connection with that agreement, Trac Medical Solutions engagedbConnected Software, Inc. to provide development services for an enterpriseversion of its CareCert service and to provide marketing and resellingservices. Trac Medical announced the commercial release of CareCert®ES during the quarter ended December 31, 2004. Trac Medical Solutions generatesrevenues through license fees, maintenance fees, support fees and the sale oftransactions.

 

We are continuing toaddress the challenges of the markets in which the Security Software SolutionsSegment operates, while continuing to grow the established businesses, theDocument Management Solutions Segment and the Systems Integration Segment.

 

**CriticalAccounting Policies**

 

Our discussion andanalysis of our financial condition and results of operations is based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States.

 

*Principlesof Consolidation*

 

The financialstatements include the accounts of Authentidate Holding Corp. and itssubsidiaries. Intercompany transactions and balances have been eliminated. Equityinvestments where we do not exercise significant influence over the investeeare accounted for under the cost method.

 

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*CashEquivalents*

 

We consider allhighly liquid debt instruments with maturities not exceeding three months whenpurchased to be cash equivalents. At December 31, 2005 and June 30, 2005, cashequivalents were composed primarily of investments in high quality short terminvestments such as commercial paper and overnight interest bearing deposits.

 

*MarketableSecurities*

 

Our marketablesecurities are generally comprised of auction rate securities. Theseinvestments are generally rated AAA or AA by one or more national ratingagencies. The auction rate securities have contractual maturities of up to 30years. The auction rate securities that we invest in generally have interestre-set dates that occur every 7, 28 or 35 days and despite the long-term natureof their stated contractual maturity, we have the ability to quickly liquidatethese securities at ongoing auctions every 35 days or less. We classify ourinvestments in auction rate securities as “available for sale.”  These investments are recorded at cost whichapproximates fair market value due to their variable interest rates, whichtypically reset every 7, 28 or 35 days. As a result, we had no cumulative grossunrealized holding gains (losses) or gross realized gains (losses) from ourcurrent investments. All income generated from these current investments wasrecorded as interest income. Because we do not hold any one auction ratesecurity longer than one year, they have been classified as a current asset.

 

*Accounts Receivable*

 

Accounts receivable represents receivables net of allowances for doubtfulaccounts. The allowance for doubtful accounts reflects our best estimate ofprobable losses inherent in the accounts receivable balance. We determine theallowance based on known troubled accounts, historical experience and othercurrently available evidence.

 

*Inventories*

 

Inventories arestated at the lower of cost or market and are valued at average cost.

 

*Long-LivedAssets*

 

Long-lived assetsincluding property and equipment, software development costs, patent costs,trademarks and licenses are reviewed for impairment whenever events such assignificant changes in the business climate, changes in product offerings, orother circumstances indicate that the carrying amount may not be recoverable.

 

*Propertyand Equipment*

 

Property andequipment (including assets held under capital leases) are stated at cost netof accumulated depreciation. Depreciation and amortization are determined usingthe straight-line method. Estimated useful lives of the assets range from threeto forty years.

 

Repairs andmaintenance are charged to expense as incurred. Renewals and betterments arecapitalized. When assets are sold, retired or otherwise disposed of, theapplicable costs and accumulated depreciation or amortization are removed fromthe accounts and the resulting gain or loss, if any, is recognized.

 

*SoftwareDevelopment Costs*

 

Softwaredevelopment and modification costs incurred subsequent to establishingtechnological feasibility are capitalized and amortized based on anticipatedrevenue for the related product with an annual minimum equal to thestraight-line amortization over the remaining economic life of the relatedproducts (generally three years). These expenses are included in cost of sales.

 

*Goodwill*

 

Goodwill isreviewed for impairment annually or whenever events such as significant changesin the business climate, changes in product offerings, or other circumstancesindicate that the carrying amount may not be recoverable. We perform our annualgoodwill impairment test in the fourth quarter of each fiscal year.

 

*IncomeTaxes*

 

Deferred taxassets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases. Deferred taxassets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in income in the period thatincludes the enactment date.

 

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*Revenue Recognition*

 

Revenue from thesale of products is recognized when persuasive evidence of an arrangementexists, delivery has occurred, the selling price is fixed and collectibility isreasonably assured. Service revenue is recognized as services are provided. Weenter into transactions that represent multiple-element arrangements. Thesearrangements may include combinations of software licensing, post-contractcustomer support, software upgrades, transactions, set-up fees, hosting feesand credentialing fees. Multiple-element arrangements are assessed to determinewhether they can be separated into more than one unit of accounting. Amultiple-element arrangement is separated into more than one unit of accountingif 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 undelivereditems in the arrangement; and if the arrangement includes a general right ofreturn relative to the delivered items, delivery or performance of theundelivered item is considered probable and substantially in our control. Ifthese criteria are not met, then revenue is deferred until such criteria aremet or until the period over which the last undelivered element is delivered,which is typically the life of the contract agreement. If these criteria aremet, we allocate total revenue among the elements based on the sales price ofeach element when sold separately or based on fair value of each element ifthey are not sold separately which is referred to as vendor specific objectiveevidence or VSOE.

 

Our Document ManagementSolutions Segment has significant revenue from multiple element arrangements. Docstarsales include computer systems with loaded software (including the perpetualsoftware license) as one deliverable and Docstar Softcare TM as an additionaldeliverable. Each of these deliverables is separately sold products andtherefore has vendor specific objective evidence of fair value. In some casesthe deliverable is just the software and license with no computer. Docstar Softcareis a one year post-contract customer support and upgrade product. We recognizerevenue on the system and perpetual software license when the product isshipped and title to the system passes to the customer. The Softcaredeliverable is considered a when-and-if-available element. Softcare revenue isrecognized ratably over the one year contract. Revenue is allocated to eachelement based on the prices of these two elements when sold separately.

 

The SystemIntegration Segment revenue is mainly derived from the sale of computerhardware and does not generally involve multiple elements. Revenue isrecognized when the hardware is shipped and title passes to the customer. Thissegment also has professional services revenue and this revenue is recognizedwhen the services are completed and accepted by the customer. In some casesthis segment may have a multiple element transaction when professional servicesand hardware are both sold to the customer. The hardware revenue is recognizedwhen it is shipped to the customer and the professional services portion isrecognized when the services are completed and accepted by the customer. Revenuefor each element is allocated based on the sales price we charge for theseelements when sold separately (VSOE).

 

The SecuritySoftware Solutions Segment may have multiple element sales and the separateelements may include licensing, maintenance, set-up, support, transaction feesand hosting services. Our Trac Medical subsidiary generally enters into salescontracts of one year. These contracts, which require customer set-up, maycontain elements including software hosting, licensing, credentialing,transaction and post-contract customer support elements. Additionally, thesecontracts contain a prepaid transaction element and any unused transactions maybe carried over, provided the customer renews their contract for another year. Asthis service/product is new, there is no evidence of value for any element,VSOE has not been established. Additionally, under these arrangements, allelements of the contract are being provided and/or accessed by the customerover our hosting site on a monthly basis over the estimated term of thecontract. Therefore, revenue is deferred until set-up is complete and thenrecognized over the estimated term of the contract.

 

With regard to ourAuthentidate Inc. product, the Electronic Post Mark (EPM), revenue isrecognized on the sale of EPMs to the USPS as EPMs are used by the end-usercustomer. With regard to our Authentidate AG subsidiary some revenue contractsmay involve multiple element arrangements and because the elements cannot beseparated into more than one unit of accounting the revenue is deferred andrecognized ratably over the life of the contract which is generally one year. Themultiple elements may include license fees, support fees, professionalservices, time stamp fees and maintenance fees. Authentidate AG may alsoreceive revenue from professional services (without other elements) and suchrevenue is recognized as the professional services are completed and acceptedby the customer.

 

*WarrantyProvisions*

 

We provide aone-year warranty on hardware products we assemble in our Document Management SolutionsSegment. On products distributed for other manufacturers, the original

 

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manufacturer warranties the product. We provide a limited warranty onthe products and services we sell through our Software Security SolutionsSegment. Warranty expense was not significant to any of the periods presented.

 

*AdvertisingExpenses*

 

We recognizeadvertising expenses as incurred.

 

***ProductDevelopment Expenses***

** **

**These costs represent research and development expense andinclude salary and benefits, professional and consultant fees, amortization oflicenses and supplies.**

** **

***CurrencyTranslation Adjustment***

** **

**Assets and liabilities of non-U.S. operations aretranslated at the exchange rate on the balance sheet date generally and theincome statements are translated at the average rates of exchange for the year.Gains or losses resulting from translating non-U.S. currency financialstatements are recorded in “Comprehensive Income (Loss)” and accumulated inshareholders’ equity in the caption “Accumulated Comprehensive Income (Loss)”.**

** **

***Estimates andAssumptions***

** **

Preparingfinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenue and expenses. Examplesinclude estimates of loss contingencies and product life cycles and assumptionssuch as elements comprising a software arrangement, including the distinctionbetween upgrades/enhancements and new products; when technological feasibilityis achieved for our products; the potential outcome of future tax consequences;and determining when investment impairments are other-than-temporary. Actualresults and outcomes may differ from management’s estimates and assumptions. Wehave based our estimates on historical experience and on various assumptionsthat are believed to be reasonable under the circumstances and we evaluate ourestimates on a regular basis and make changes accordingly. Historically, ourestimates relative to our critical accounting estimates have not differedmaterially from actual results; however, actual results may differ from theseestimates under different conditions. If actual results differ from theseestimates and other considerations used in estimating amounts reflected in ourconsolidated financial statements, the resulting changes could have a materialadverse effect on our consolidated statement of operations, and in certainsituations, could have a material adverse effect on liquidity and our financialcondition.

 

With regard torevenue recognition, revenue from the sale of products is recognized whenpersuasive evidence of an arrangement exists, delivery has occurred, theselling price is fixed and collectibility is reasonably assured. Servicerevenue is recognized as such services are provided. We enter into transactionsthat represent multiple-element arrangements. Those arrangements includecombinations of licensing, transactions, set-up, maintenance, support andhosting services. Multiple-element transactions are assessed to determinewhether they can be separated into more than one unit of accounting. Amultiple-element arrangement is separated into more than one unit of accountingif all of the following criteria are met (a) the delivered item has value tothe customer on a stand alone basis; (b) there is objective and reliableevidence of the fair value of the undelivered item; and (c) if the arrangementincludes a general right of return relative to the delivered item, delivery orperformance of the delivered item is considered probable and substantiallywithin our control. If these criteria are not met, then revenue is deferreduntil such criteria are met or until the period over which the last undeliveredelement is delivered, which is typically the life of the contract agreement.

 

We maintainallowances for doubtful accounts for estimated losses resulting from theinability of our customers to make required payments. We write down inventoryfor estimated obsolescence or unmarketable inventory equal to the differencebetween the cost of the inventory and the estimated market value based onassumptions about future demand and market conditions. We make estimates on thefuture recoverability of capitalized goodwill in the Security SoftwareSolutions Segment which is highly dependent on the future success of themarketing and sales of this segment. We record a valuation allowance againstdeferred tax assets when we believe it is more likely than not that suchdeferred tax assets will not be realized.

 

*Stock-BasedCompensation*

 

We apply FAS No. 123R toaccount for employee and director stock option plans. The stock-based employeecompensation expense was determined using the Black Scholes option-pricingmodel

 

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which values options based on the stock price at the grant date, theexpected life of the option, the estimated volatility, expected dividendpayments and the risk-free interest rate over the expected life of the options.

 

*Concentrations of Credit Risk*

 

Financialinstruments which subject us to concentrations of credit risk consist of cashand cash equivalents, marketable securities and trade accounts receivable. Toreduce credit risk, we place our investments with several high credit qualityfinancial institutions and typically invest in AA or better rated investments. Ourcredit customers are not concentrated in any specific industry or business. Weestablish an allowance for doubtful accounts based upon factors surrounding thecredit risk of specific customers, historical trends and other information.

 

The following analysis ofour financial condition and results of operations should be read in conjunctionwith our consolidated financial statements and notes contained elsewhere inthis Form 10-Q.

 

**Results of Operations**

 

**Three and six months ended December31, 2005 compared to three and six months ended December 31, 2004.**

 

We realized aconsolidated net loss of $3,555,199 ($.10 per share) and $7,304,186 ($.21 pershare) for the three and six months ended December 31, 2005 compared to aconsolidated net loss of $4,920,116 ($.15 per share) and $7,826,205 ($.23 pershare) for the three and six months ended December 31, 2004.

 

As reported in Footnote 5(Segment Information) to the Consolidated Financial Statements appearing inthis Form 10-Q, the net loss is the result of losses incurred primarily by our SecuritySoftware Solutions Segment and Corporate expenses. Our Security SoftwareSolutions Segment continues to incur significant sales, marketing, development,and general and administrative expenses to generate sales, to develop a marketfor its products including personnel, marketing programs and advertising, andto develop additional products including new software products for the content authenticationmarket and for the healthcare market. In October 2005 we announced theintroduction of CareFaxTM, an automated workflow solution that allowsfor authenticated communication via fax and is intended to meet the compliancerequirements associated with document processing in the healthcare sector.

 

The consolidated net lossfor the three months ended December 31, 2005 is approximately $1,365,000 lessthan it was for the same period last year. Most of the decreased loss was dueto $1.2 million of severance costs incurred in the prior year with minor severanceexpense in the current year. Additionally, there was a decrease in cost ofsales of approximately $830,000 for the three months ended December 31, 2005compared to the corresponding period for the prior year. This was offset bystock option expense of approximately $601,000 for the three months endedDecember 31, 2005 with no such expense in the same period last year, and by insignificantchanges in various other categories. The Security Software Solutions Segmentloss decreased by approximately $2.3 million for the three months endedDecember 31, 2005 compared to the corresponding period for the prior year. Thedecrease was primarily due to decreases in cost of goods sold (excludingpersonnel costs) of $184,000, personnel costs of $629,000, consulting fees of$515,000, legal fees of $118,000, recruiting/moving fees of $103,000, travel of$120,000, and an increase in sales of $147,000 for the three months endedDecember 31, 2005, compared to the same period in the prior year. There was anet increase to expenses in the Corporate Division of approximately $499,000mainly due to employee stock option expense of $601,000, compared to the sameperiod in the prior year. The Document Management Solutions Segment profit decreasedapproximately $170,000, while the Systems Integration Segment profit increasedapproximately $37,000 for the three months ended December 31, 2005, compared tothe three months ended December 31, 2004.

 

The consolidated net lossfor the six months ended December 31, 2005 was approximately $522,000 less thanit was for the same period last year. As mentioned above, the decreased losswas primarily due to $1.2 million of severance costs incurred in the prior yearwith minor severance expense in the current year. Additionally, there was adecrease in the cost of sales of $613,000 for the six months ended December 31,2005, compared to the corresponding period for the prior year. This was offsetby employee stock option expense of approximately $1.3 million for the sixmonths ended December 31, 2005 with no stock option expense in the same periodlast year. The Security Software Solutions Segment loss was approximately $3.0million less than for the same period last year. The decrease was primarily dueto an approximate increase in external sales of $672,000, approximate decreasesin cost of sales (excluding personnel costs) of $102,000, personnel costs of $712,000,consulting fees of $497,000, recruiting/moving fees of $266,000, legal fees of$143,000, utilities, rent and storage fees of $173,000,

 

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and travel of $135,000, for the six months ended December 31, 2005compared to the corresponding period for the prior year. There was a netincrease to expenses in the Corporate Division of approximately $2.0 million. Theapproximate increases were primarily employee stock option expense of $1.3million, business insurances of $331,000, legal fees of $487,000, utilities,rent and storage of $329,000, director costs of $176,000, and accounting andaudit fees of $144,000, offset by decreases in personnel costs of approximately$324,000 due to a reduction in severance cost of approximately $1.1 million, forthe six months ended December 31, 2005, compared to the six months endedDecember 31, 2004. The Document Management Solutions Segment six month netincome declined from $382,000 to $198,000 due to an increase in personnel costscomparing December 31, 2004 to December 31, 2005. The Systems IntegrationSegment net income increased by approximately $8,000 comparing the six monthsended December 31, 2005 to the same period in the prior year.

 

Consolidated sales were $4,210,835and $4,761,727 for the three months ended December 31, 2005 and 2004,respectively. The decrease versus the prior year period is primarily a resultof a decrease in the Systems Integration Segment of approximately $599,000, mainlydue to reduced product sales. Sales for the Document Management Solutions Segmentdecreased approximately $96,000 comparing the current period to correspondingperiod for the prior year. Sales for the Security Software Solutions Segmentincreased approximately $144,000 for the three months ended December 31, 2005compared to the corresponding period for the prior year. At the quarter endedDecember 31, 2005, we were notified by a reseller engaged by Trac Medical Solutions,Inc. that the reseller’s customer had elected to convert its agreement forCareCert ES from a fixed-fee basis to a pay-as-you-go model, net of suchcustomer’s right to utilize 500,000 transactions at no additional cost. Accordingly,we will not receive additional transaction revenues under this arrangementunless the customer purchases additional transactions after it consumes theno-cost transactions. However, management expects to continue to receivemonthly license and maintenance revenue. Under the fixed-fee model, we invoicedthis customer $95,625 under this contract per quarter, net of the commissionpaid to our reseller.

 

Consolidated sales were$8,514,371 and $8,424,125 for the six months ended December 31, 2005 and 2004,respectively. The increase versus the prior year is primarily a result of anincrease in the Security Software Solutions Segment of approximately $672,000,offset by a decrease in the Systems Integration Segment of approximately$575,000 and Document Management Solutions Segment of approximately $7,000 forthe six months ended December 31, 2005 compared to the corresponding period forthe prior year.

 

Consolidated gross profitfor the three months ended December 31, 2005 and 2004 was $2,547,505 and $2,268,598,respectively, while the consolidated gross profit for the six months endedDecember 31, 2005 and 2004 was $4,674,801 and $3,971,211, respectively. Theconsolidated gross profit margin was 60.5% and 47.6% for the three months endedDecember 31, 2005 and 2004; the consolidated gross profit margin was 54.9% and47.1% for the six months ended December 31, 2005 and 2004, respectively. Grossprofit margin is defined as gross profit as a percentage of sales. The increasecomparing current year to prior year results from significant increased grossprofit in the Security Software Solutions Segment due to the aforementionedincrease in sales and a decrease in direct material and overhead cost of sales,and a minor increase to the Document Management Solutions Segment. Most of thecost of sales of the Security Software Solutions Segment relate to the data centerwhich are relatively fixed; accordingly, we expect our gross margins in thissegment to increase if sales increase significantly.

 

Selling, general andadministrative expenses (S,G&A) consist of all other Company expensesexcept product development costs and interest. S,G&A expenses amounted to $5,844,240and $6,962,081 for the three months ended December 31, 2005 and 2004,respectively. S,G&A expenses were $11,469,039 and $11,171,438 for the sixmonths ended December 31, 2005 and 2004, respectively. The largest decrease inboth the quarterly and year to date expense was in the Security SoftwareSolutions Segment which had decreased personnel costs ($629,000 and $712,000),consulting fees ($515,000 and $497,000), legal fees ($118,000 and $143,000), recruiting/movingfees ($103,000 and $266,000), and travel ($120,000 and $135,000) for the threeand six months ended December 31, 2005, respectively. These decreases wereoffset by significant increases in the Corporate Division of approximately $2.3million on a year to date basis and approximately $659,000 for the three monthsended due to increased legal fees ($277,000 and $487,000), stock option expense($535,000 and $1,121,000), utilities, rent and storage ($224,000 and $329,000),business insurance ($196,000 and $331,000), and director costs ($133,000 and$176,000), offset by decreased personnel costs including severance ($672,000and $324,000) for the three and six months ended December 31, 2005.

 

These increases in ourCorporate division related to the changes in staff, expenses incurred inconnection with defending litigation, compliance with requirements ofSarbanes-Oxley Act of 2002, including costs related to our internal controlover financial reporting, such as professional fees and internal personnelcosts, and renewing liability insurance coverage.

 

As a percentage of netsales, S,G&A costs were 138.8% and 134.7% for the three and six monthsended December 31, 2005 and 146.2% and 132.6% for the three and six monthsended December 31,

 

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2004. This percentage decrease is primarily due to the decrease inSG&A expenses for the Security Software Solutions Segment as discussedabove.

 

Product developmentexpenses, excluding capitalized costs, primarily relate to software developmentfor the Security Software Solutions Segment. These costs increased to $817,399and $1,597,303 for the three and six months ended December 31, 2005, ascompared to $600,073 and $1,301,347 for the same periods last year. We have apolicy of capitalizing qualified software development costs after technicalfeasibility has been established and amortizing those costs over three years ascost of goods sold once the products are available to customers. Theamortization expense of software development costs amounted to $9,000 and $118,000for the three and six months ended December 31, 2005. Amortization expense ofsoftware development costs amounted to approximately $79,000 and $161,000 forthe three and six months ended December 31, 2004.

 

**Liquidity and Capital Resources**

 

*Overview*

 

Our primary sources offunds to date have been the issuance of equity and the incurrence of thirdparty debt. In February 2004, we sold a total of 5,360,370 common shares inprivate placements pursuant to Section 4(2) of the Securities Act of 1933 andRule 506, promulgated thereunder. We realized gross proceeds of approximately $73,700,000from these transactions and received net proceeds of approximately $69,100,000after payment of offering expenses and broker commissions. We have beenapplying the cash raised in this financing to fund our operations.

 

Our DJS subsidiary has a$2.5 million revolving line of credit with a financial institutioncollateralized by all assets of DJS and guaranteed by Authentidate Holding Corp.The agreement restricts DJS from making cash advances to AHC, without obtaininga waiver from the financial institution. The interest rate is prime plus 1.75%with a minimum prime rate of 7%. DJS may borrow on this line based on a formulaof qualified accounts receivable and inventory. The outstanding balance on thisline of credit is $420,934 at December 31, 2005.

 

Property, plant andequipment expenditures totaled $395,441 and capitalized software developmentexpenditures totaled $1,118,466 for the three months ended December 31, 2005,respectively. We have developed and will continue to develop new applications.We anticipate spending up to an additional amount of approximately $1,750,000to provide the necessary infrastructure to support these products and services.

 

*Cash Flows*

 

Our unrestricted cash andcash equivalents balance at December 31, 2005 was $20,071,116 and total assetswere $71,975,969 compared to unrestricted cash and cash equivalents of $6,429,210and total assets of $79,708,605 at June 30, 2005. Our unrestricted cash andcash equivalents balance at December 31, 2004 was $15,802,016 and our total assetsas of such date were $90,006,073. We have invested our excess cash inmarketable securities, which totaled $56,075,000 at June 30, 2005 and $32,400,000at December 31, 2005 and in interest bearing cash equivalent accounts. The decreasein our total assets from the six months ended December 31, 2004 to the sixmonths ended December 31, 2005 is due primarily to cash used in operatingactivities. Unrestricted cash and cash equivalents increased $4.3 million fromDecember 31, 2004 to December 31, 2005 primarily due to the sale of marketablesecurities of $19.3 million, offset by cash outflows for operating activities of$12.9 million, property and equipment expenditures of $1.1 million, and softwaredevelopment expenditures of $1.5 million. We used $7,893,095 of cash in operatingactivities during the six months ended December 31, 2005. This compares to cashused in operating activities of $5,622,599 for the same period last year. Totalcash flow provided by all activities was $13,641,906 for the six months ended December31, 2005, compared to net cash used of $9,262,807 for the six months ended December31, 2004. This increase in cash and cash equivalents during the six monthsended December 31, 2005 is mainly due to our investing activities whichinvolved the sale of marketable securities ($23,675,000), offset by softwaredevelopment costs ($1,118,466) and cash used in operating activities ($7,893,095).The decrease in cash during the six months ended December 31, 2004 was mainlydue to operating activities, primarily the net loss ($7,826,205) and the purchaseof marketable securities ($2,800,000), offset by the exercise of stock warrants($1,371,536).

 

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To date we have beenlargely dependent on our ability to sell additional shares of our common stockor other securities to obtain financing to fund our operating deficits. Underour current operating plan to introduce the Authentidate technology, ourability to improve operating cash flow has been highly dependent on the marketacceptance of our products. We believe we have enough cash, cash equivalentsand marketable securities to support our operations for at least the nexttwelve months.

 

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

 

•      ourrelationships with suppliers and customers;

 

•      themarket acceptance of our products;

 

•      thelevels of promotion and advertising that will be required to launch our newproducts and achieve and maintain a competitive position in the marketplace;

 

•      Pricediscounts on our products to our customers;

 

•      ourpursuit of strategic transactions;

 

•      ourbusiness, product, capital expenditure and research and development plans andproduct and technology roadmaps;

 

•      thelevels of inventory and accounts receivable that we maintain;

 

•      capitalimprovements to new and existing facilities;

 

•      technologicaladvances; and

 

•      ourcompetitors’ response to our products.

 

FinancingActivities

 

We did not engage in any externalfinancing activities to date in fiscal 2006 and during our 2005 fiscal year.

 

Other Matters 

 

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

 

Presently, 28,000 sharesof our Series B preferred stock, originally issued in a private financing inOctober 1999, remain outstanding. As of October 1, 2004, our right to redeemthe outstanding 28,000 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, hasthe right to convert these shares of preferred stock into an aggregate of500,000 shares of our common stock at a conversion rate of $1.40. In the eventwe  elect to redeem these securities, theholder will be able to exercise its conversion right subsequent to the datethat we issue a notice of redemption but prior to the deemed redemption date aswould be set forth in such notice. As of December 31, 2005, no shares of theSeries B preferred stock have been redeemed.

 

We are the defendant in athird party complaint filed by Shore Venture Group, LLC in the United StatesDistrict Court for the Eastern District of Pennsylvania. The caption of this matteris*Berwyn Capital Investments, Inc. v. Shore VentureGroup, LLC et al. (defendants and Shore Venture Group, LLC as third partyplaintiff) v. Authentidate Holding Corp. and Authentidate, Inc. (third partydefendants).*The third party complaint was filed against us on May7, 2001. Shore Venture is the defendant to an action commenced by BerwynCapital. The third party complaint alleges a claim for breach of contract andseeks indemnification. A trial was held in October, 2002 and we are currentlyawaiting the verdict of the judge. Management believes that the claim will nothave a material adverse impact on our financial condition, results ofoperations or cash flows. However, no assurances can be given that such beliefwill ultimately prove to be accurate or that other facts adverse to ourposition currently not known to

 

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management will not be uncovered, in which case the ultimate resolutionof this claim could potentially have a material adverse effect on our financialcondition.

 

We are also thedefendant in a case filed by Shore Venture Group, LLC in the United StatesDistrict Court for the District of New Jersey, under the caption *Shore Venture Group, LLC, et al v. AuthentidateHolding Corp., Authentidate, Inc. and John T. Botti.* This complaintwas filed on March 2, 2005, and an amended complaint was filed on or aboutApril 26, 2005. On October 12, 2005, the parties entered into an agreement toarbitrate the claims asserted against us by the Plaintiffs. On October 19,2005, the Court approved and entered a Consent Order referring the case toarbitration by the American Arbitration Association and staying the lawsuitpending resolution of the arbitration. The Plaintiffs in this case seekadditional shares of the common stock of our subsidiary, Authentidate, Inc.,the right to exchange its stock in Authentidate, Inc., for publicly tradedstock and securities in us, rights under one or more of our patent applicationsand damages in connection with an alleged copyright infringement. The lawsuitrequested damages, injunctive relief, costs and attorneys’ fees. The Plaintiffshave not yet filed their arbitration brief. We intend to defend the actionvigorously. Based on the facts of which we are currently aware, managementbelieves that the resolution of all of our claims with Shore Venture will nothave a materially adverse effect on our financial condition. However, noassurances can be given that such belief will ultimately prove to be accurateor that other facts adverse to our position currently not known to managementwill not be uncovered, in which case the ultimate resolution of this claimcould potentially have a material adverse effect on our financial condition.

 

Between June and August2005, several purported shareholder class and derivative actions were filedagainst our company and certain current and former officers and directors. Thecomplaints and current status of these actions are described in detail underthe caption “Legal Proceedings,” appearing in Item 1 of Part II of thisQuarterly Report on Form 10-Q. Management is unable to determine at this timewhether these complaints will have a material adverse impact on its financialcondition, results of operations or cash flow.

 

In addition, in August2005, we were notified of the filing of a complaint in which the plaintiffalleges that our products and systems incorporating secure time stampingtechnology, including but not limited to our Electronic Postmark system,infringes certain of the plaintiff’s patent rights. The complaint was filed inthe United States District Court for the Middle District of Florida and isentitled *TimeCertain LLC vs. AuthentidateHolding Corporation, Authentidate, Inc. and NCipher Inc*. As relief,the complaint seeks, among other things, injunctive relief and damages. Thecomplaint was served onSeptember 21, 2005, and our Answer was filed on November 10, 2005. We are inthe discovery phase of the case and are vigorously defending this action. Basedon the facts of which we are currently aware, management believes that theresolution of all of our claims with TimeCertain will not have a materiallyadverse effect on our financial condition. However, no assurances can be giventhat such belief will ultimately prove to be accurate or that other factsadverse to our position currently not known to management will not beuncovered, in which case the ultimate resolution of this claim could potentiallyhave a material adverse effect on our financial condition.

 

*Commitments*

 

Office LeaseCommitment

 

On July 11, 2005, weentered into a lease agreement for general office space consisting of 19,695total rentable square feet located in Berkeley Heights, New Jersey. The leaseis for a term of ten years and four months, with a commencement date of October1, 2005. Starting on October 1, 2005, we began occupying the premises on arent-free basis for four months. For an additional two months we are entitledto occupy a portion of the premises on a rent-free basis. The annual rent inthe first year will be $323,544 and increasing to $512,070 in year 2 andincreasing at regular intervals until year 10 when the annual rent will be$561,308. The lease also provides us with a right of first offer on availablespace on the fifth floor of the corporate center as well as a one-time optionto renew the lease for a term of five years at the then-current market rate forcomparable buildings. We also have an option to terminate the lease five yearsand four month after the commencement date upon 12 months prior notice to thelandlord. If we exercise this option, we would be required to pay an earlytermination fee of $568,202. As part of the lease agreement, we posted a letterof credit securing its lease payments of approximately $512,000.

 

Severance Commitments

 

Effective November 15,2004, John T. Botti departed as our President and Chief Executive Officer.Subsequently, Mr. Botti retired from his position as Chairman of the Board andon February 7, 2005 we entered into an Agreement and Release with Mr. Botti. Underthat agreement, we agreed to pay to Mr. Botti the severance payments as setforth in his employment agreement and to retain him to provide

 

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consulting services to us for a one year term. Under the Agreement andRelease, we agreed to pay Mr. Botti a severance payment equal to the greater ofhis base salary to the expiration date of his employment agreement ortwenty-four months of his base salary. Our additional obligations are describedin greater detail in our Annual Report on Form 10-K for the fiscal year endedJune 30, 2005 under the caption “*Employment, Severance andChange of Control Agreements*.” Under the consulting agreement, weagreed to pay Mr. Botti a monthly retainer of $10,000 in consideration of hisprovision of such services as may be requested by our Chief Executive Officer. Theseverance benefits have been accrued and are expected to be paid over the next13 months.

 

As previously reported,on January 9, 2006, we entered into a Termination Agreement and a separateconsulting agreement with John J. Waters, our Executive Vice President – ChiefAdministrative Officer and a member of our board of directors. Pursuant to theTermination Agreement, Mr. Waters relinquished his employment position in favorof a consulting relationship, effective as of January 1, 2006. We agreed to payand/or provide to Mr. Waters (a) an amount of $350,416.67, in accordance withthe terms and conditions of the consulting agreement; (b) an amount of $5,000for attorneys’ fees; and (c) the accelerated vesting of all options granted tohim, along with the continuation of the exercise period for the duration oftheir original term. Mr. Waters will continue to serve on our board ofdirectors.

 

As previously reported,on January 26, 2006, Dennis H. Bunt, our Chief Financial Officer, entered intoa Termination Agreement and resigned his position effective April 30, 2006.Pursuant to the Termination Agreement, we agreed to pay and/or provide Mr. Bunt(a) a severance payment of $315,372, payable in equal installments over aperiod of twenty-four months; (b) an additional payment of $33,000 asadditional severance and reimbursement of certain expenses; and (c) theaccelerated vesting of all options granted to him and the continuation of theexercise period in which he may exercise such options.

 

On November 23, 2004, weinvested $750,000 in an unaffiliated third party, Health Fusion, Inc. inconnection with a strategic relationship we established with this company. We willinvest an additional $750,000 in Health Fusion, contingent on Health Fusionachieving certain financial and other performance objectives.

 

On December 6, 2004, weassumed certain assets and liabilities of Cryptcom Securities, Inc., aprivately-held technology consulting company, for a purchase price of $125,000.We will be obligated to pay an additional $425,000 to former shareholders ofCryptcom Securities, Inc. in the event our operation of the acquired assetsgenerates certain financial measures by December 31, 2006. Additionally, wewill be required to pay an “earn out” equal to a percentage of net income basedon the performance of this division, commencing on the earlier of December 6,2007 or the fiscal year immediately following the fiscal year during which theadditional purchase price, $425,000, has been earned, and following for a termof five years from either date.

 

**Contractual Commitments**

 

Following is a summaryof the contractual commitments associated with our debt and lease obligations, asof December 31, 2005:

 
| ** **                  | ** ** | **Total** | ** ** | **Less than 1  year** | ** ** | **1-3 years** | ** ** | **4-5 years** | ** ** | **More than 5  years** | ** ** |
|-----------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| Operating leases            |       | 5,857,149 |       | $                               | 818,173    |               | $          | 1,126,221          |       | $                                | 1,080,763  |   | $ | 2,831,992 |   |
| Capital leases (1)          |       | 14,465    |       | 13,342                          |       | 1,123              |       | —             |       | —                           |       |
| Long term debt  obligations |       | —    |       | —                          |       | —             |       | —             |       | —                           |       |
| Total (2)                   |       | $         | 5,871,614  |                            | $          | 831,515            |       | $                  | 1,127,344  |                             | $          | 1,080,763 |   | $ | 2,831,992 |   |
|                             |            |           |            |                                 |            |                    |            |                    |            |                                  |            |  |  |  |  |  |

 

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(1)Capital lease payments exclude interest of $999.34

(2)This table does not reflect contingencies associated with our contract withHealth Fusion, Inc. and in connection with our acquisition of certain assetsand liabilities of Cryptcom Securities, Inc., both of which are describedabove.

 

**Off-BalanceSheet Arrangements**

 

We have not created, andare not party to, any special-purpose or off-balance sheet entities for thepurpose of raising capital, incurring debt or operating parts of our businessthat are not consolidated into our financial statements. We do not have anyarrangements or relationships with entities that are not consolidated into ourfinancial statements that are reasonably likely to materially affect ourliquidity or the availability of our capital resources. We have entered intovarious agreements by which we may be obligated to indemnify the other partywith respect to certain matters. Generally, these indemnification provisionsare included in contracts arising in the normal course of business under whichwe customarily agree to hold the indemnified party harmless against lossesarising from a breach of representations

 

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related to such matters as intellectual property rights. Payments by usunder such indemnification clauses are generally conditioned on the other partymaking a claim. Such claims are generally subject to challenge by us and todispute resolution procedures specified in the particular contract. Further,our obligations under these arrangements may be limited in terms of time and/oramount and, in some instances, we may have recourse against third parties forcertain payments made by us. It is not possible to predict the maximumpotential amount of future payments under these indemnification agreements dueto the conditional nature of our obligations and the unique facts of eachparticular agreement. Historically, we have not made any payments under theseagreements that have been material individually or in the aggregate. As of December31, 2005, we were not aware of any obligations under such indemnificationagreements that would require material payments.

 

**Effects ofInflation and Changing Prices**

 

The impact ofgeneral inflation on our operations has not been significant to date and webelieve inflation will continue to have an insignificant impact on us. However,price deflation in the major categories of components we purchase for the Docstarhas been substantial and is anticipated to continue through fiscal 2006. Typically,new components such as new generations of microprocessors and new optical diskdrive technologies etc. are introduced at premium prices, by its vendors. Duringthis period, we earn lower margins on our products. As the life cycleprogresses, competitive pressures could force vendor prices down and thusimprove our profit margins. Competitive pressures from an evolving documentimaging industry have required us to adjust our marketing model for selling Docstarto accommodate a lower entry point. Because much of DJS’s business isservice-related, price deflation has less of an impact on DJS’s profits. We donot believe that the impact of inflation will have a significant impact on our SecuritySoftware Solutions Segment business lines.

 

# **PresentAccounting Standards Not Yet Adopted**

# ** **

The FASB issued FAS No. 154, “Accounting Changes and Error Corrections – a replacement of Accounting Principles Board (APB) Opinion No. 20 and FASB Statement No. 3” in May 2005. This statement changes the requirements for the accounting for and reporting of a change in accounting principle. FAS No. 154 requires companies that make a voluntary change in accounting principle to apply that change retrospectively to prior period’s financial statements, unless this would be impracticable. This statement will be effective for fiscal years beginning after December 15, 2005. The Company will comply with the provisions of this statement for any future accounting changes or error corrections.

 

# **Item 3.**    Quantitative and Qualitative Disclosures aboutMarket Risk

# ** **

We have approximately $52million invested in high quality, short term investments as of December 31,2005. We do not believe that any of our financial instruments have significantrisk associated with market sensitivity. We are not exposed to significantfinancial market risks from changes in foreign currency exchange rates and areonly minimally impacted by changes in interest rates. However, in the future,we may enter into transactions denominated in non-U.S. currencies or increasethe level of our borrowings, which could increase our exposure to these marketrisks. We have not used, and currently do not contemplate using, any derivativefinancial instruments.

 

**Interest Rate Risk**

 

At any time, fluctuations in interest rates couldaffect interest earnings on our cash and marketable securities. We believe thatthe effect, if any, of reasonably possible near term changes in interest rateson our financial position, results of operations, and cash flows would not bematerial. Currently, we do not hedge these interest rate exposures. The primaryobjective of our investment activities is to preserve capital. We have not usedderivative financial instruments in our investment portfolio.

 

At December 31, 2005, ourunrestricted cash and marketable securities totaled $52,471,116, most of whichwas invested in asset backed short term investments, commercial paper, and moneymarket accounts. The remainder of our cash was in non-interest bearing checkingaccounts used to pay operating expenses.

 

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**Item 4. Controls and Procedures.**

 

*Evaluationof Disclosure Controls and Procedures*

 

Our Chief ExecutiveOfficer and Chief Financial Officer, after evaluating the effectiveness of ourdisclosure 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 reasonableassurance level.

 

Our management, includingour Chief Executive Officer and Chief Financial Officer, does not expect that ourdisclosure controls and procedures or our internal controls will prevent allerror and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within our company have been detected. Our management, however, believesour disclosure controls and procedures are in fact effective to providereasonable assurance that the objectives of the control system are met.

 

*Changes in Internal Control overFinancial Reporting*

 

No changes in our internal control over financial reporting (as definedin Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during thefiscal quarter ended December 31, 2005 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**Part II Other Information**

 

# **Item 1. LegalProceedings:**

# ** **

We are thedefendant in a case filed by Shore Venture Group, LLC in the United StatesDistrict Court for the District of New Jersey, under the caption *Shore Venture Group, LLC, et al v. AuthentidateHolding Corp., Authentidate, Inc. and John T. Botti.* This complaintwas filed on March 2, 2005, and an amended complaint was filed on or aboutApril 26, 2005. On October 12, 2005, the parties entered into an agreement toarbitrate the claims asserted against us by the Plaintiffs. On October 19,2005, the Court approved and entered a Consent Order referring the case toarbitration by the American Arbitration Association and staying the lawsuitpending resolution of the arbitration. The Plaintiffs in this case seekadditional shares of the common stock of our subsidiary, Authentidate, Inc.,the right to exchange its stock in Authentidate, Inc., for publicly tradedstock and securities in us, rights under one or more of our patent applicationsand damages in connection with an alleged copyright infringement. Prior to thecommencement of this case, we had conducted extensive settlement negotiationswith Shore Venture in an effort to resolve all claims between the parties.However, negotiations did not result in a mutually agreeable settlement. Thelawsuit requested damages, injunctive relief, costs and attorneys’ fees. ThePlaintiffs have not yet filed their arbitration brief. We intend to defend theaction vigorously. Based on the facts of which we are currently aware,management believes that the resolution of all of our claims with Shore Venture,in the event decided adversely to us, will not have a materially adverse effecton our financial condition. However, no assurances can be given that suchbelief will ultimately prove to be accurate or that other facts adverse to ourposition currently not known to management will not be uncovered, in which casethe ultimate resolution of this claim could potentially have a material adverseeffect on our financial condition.

 

In June, July andAugust 2005, six purported shareholder class actions were filed in the UnitedStates District Court for the Southern District of New York against our companyand certain of our current and former officers and directors. Plaintiffs inthese actions allege that defendants violated Sections 10(b) and 20(a) of theSecurities Exchange Act of 1934 and Sections 11, 12(a), and 15 of theSecurities Act of 1933. The alleged class period is August 6, 2002 through May27, 2005. The securities law claims are based on the allegation that we failedto disclose that the USPS could cancel its August 2002 contract with us if wedid not meet certain performance metrics, and when we disclosed on September 8,2004 that we failed to comply with those metrics and on May 27, 2005 that we hadreceived a second notice from the USPS that we had failed to obtain the minimumrevenue required under the agreement, the market price of our stock declined. Theclass action complaints seek unspecified monetary damages. On October 5, 2005the Court granted the motion of one plaintiff, the Illinois State Board ofInvestment, to be appointed as lead plaintiff under the Private SecuritiesLitigation Reform Act. The caption of the case is *in reAuthentidate Holding Corp. Securities Litigation*., C.A. No. 05 Civ.5323 (LTS). Plaintiff filed an amended consolidated complaint on January 3,2006. The amended complaint asserts the same claims as the prior complaint andalso alleges that Authentidate violated the federal securities laws bymisrepresenting that it possessed patentable technology. Defendants’ motion todismiss the amended complaint is scheduled to be filed on March 4, 2006. Oralargument on the motion to dismiss is scheduled for June 30, 2006.

 

In addition to theclass action complaints, four purported shareholder derivative actions werefiled against certain former and current directors and officers of the companyin June and July 2005 in the United States District Court for the SouthernDistrict of New York. The derivative actions are based on substantially thesame events and factual allegations as the original class actions and assertedclaims that Authentidate was injured by an alleged breach of fiduciary duty,waste, mismanagement, violations of Sarbanes-Oxley, and misappropriation ofinside information. The derivative complaints sought, among other things,damages, equitable relief, restitution, and payment of costs and expensesincurred in the litigation (including legal fees). Plaintiffs in the derivativeactions entered into a Court-approved stipulation providing for theconsolidation of their actions and the selection of Maxine Philips as the leadplaintiff. Plaintiffs filed a consolidated complaint on November 14, 2005. Defendantsmoved to dismiss this complaint on January 13, 2006.

 

On December 13,2005, a purported shareholder derivative action was filed in the Supreme Courtof New York, Schenectady County, entitled *Elkin v. Goldman et al*.,No. 2005-2240. Plaintiff in that action demanded that our Board of Directorsfile a derivative action on behalf of the Company against nine of its currentand former directors and officers. The complaint asserts the same claims thatare alleged in the 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 ourbest interest.

 

In addition, inAugust 2005, we were notified of the filing of a complaint in which theplaintiff alleges that our products and systems incorporating secure timestamping technology, including but not

 

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limited to our Electronic Postmark system, infringes certain of theplaintiff’s patent rights. The complaint was filed in the United StatesDistrict Court for the Middle District of Florida and is entitled *TimeCertain LLC vs. Authentidate Holding Corporation,Authentidate, Inc. and NCipher Inc*. As relief, the complaint seeks,among other things, injunctive relief and damages. The complaint was served on September 21, 2005,and our Answer was filed on November 10, 2005. We are in the discovery phase ofthe case and are vigorously defending this action. Based on the facts of whichwe are currently aware, management believes that the resolution of all of ourclaims with TimeCertain will not have a materially adverse effect on ourfinancial condition. However, no assurances can be given that such belief willultimately prove to be accurate or that other facts adverse to our positioncurrently not known to management will not be uncovered, in which case theultimate resolution of this claim could potentially***have a material adverse*effect****on our financial condition.

 

In addition, weare subject to other claims and litigation arising in the ordinary course ofbusiness. Our management considers that any liability from any reasonablyforeseeable disposition of such other claims and litigation, individually or inthe aggregate, would not have a material adverse effect on our consolidatedfinancial position, results of operations or cash flows.

 

**Item 1A. Risk Factors**

 

*Our operations and financial results aresubject to various risks and uncertainties, including those described below,that could adversely affect our business, financial condition, results ofoperations and trading price of our common stock and cause them to differmaterially from statements contained in forward-looking statements made in thisQuarterly Report or presented elsewhere by management from time to time. Pleaserefer also to our annual report on Form 10-K for fiscal year ended June 30,2005 for additional information concerning these and other uncertainties thatcould negatively impact our company.*

 

**Failure to increase our revenue and keep ourexpenses consistent with revenues could prevent us from achieving andmaintaining profitability.**

 

We incurred losses of approximately $19,184,000,$15,669,000 and $9,839,000 for the fiscal years ended June 30, 2005, 2004 and2003, respectively and a loss of $3,555,000 and $7,304,000 for the three andsix months ended December 31, 2005. We have expended, and will continue to berequired to expend, substantial funds to pursue research and developmentprojects and enhance marketing and sales efforts for our Security Softwareproducts and otherwise operate our business. Therefore, we will need togenerate higher revenue from our Security Software Solutions segment to achieveand maintain profitability and cannot assure you that we will be profitable inany future period. Our prospects should be considered in light of thedifficulties frequently encountered in connection with the establishment of anew business line, which characterizes our Security Software Solutions segment,such as the difficulty in creating a viable market, the significant relateddevelopment and marketing costs and the overall competitive environment inwhich we operate. Accordingly, there can be no assurance that we will be ableto achieve profitable operations in future operating periods. In 2005, ourrevenue from our security software products was less than anticipated andtherefore we revised and lowered our future revenue projections. As a result,we recognized a non cash impairment charge for goodwill and other long-livedassets aggregating approximately $4.8 million.

 

**Our capital requirements are significant and wehave historically financed our operations through private placements ofsecurities.**

 

Our capital requirements have been and will continueto be significant. We have been substantially dependent upon private placementsof our securities and on short-term and long-term loans from lendinginstitutions to fund such requirements. We are expending significant amounts ofcapital to promote and market the products and services in our SecuritySoftware Solutions segment, including our recently announced CareFaxTM solutionand the products and services offered through our Trac Medical Solutions andAuthentidate International subsidiaries. Due to these expenditures, we haveincurred significant losses to date. For the fiscal years ended June 30, 2005,June 30, 2004 and June 30, 2003, we used approximately $10,632,000, $6,660,000and $5,189,000 in cash for operating activities, respectively and during the threeand six months ended December 31, 2005 we used approximately $3,925,000 and $7,893,000in cash for operating activities respectively. We expect the proceeds receivedfrom our February 2004 private financing, in which we raised approximately $69million in net proceeds, to satisfy our cash needs for the foreseeable future. Noassurances can be given that we will be able to attain sales levels of oursegments and support our costs through revenues derived from operations. If weare unable

 

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to attain projected saleslevels for our Security Software products, it may be necessary to raiseadditional capital to fund operations to meet our obligations in the future.

 

**If the United States Postal Service cancels ouragreement, we will need to incur additional costs in our efforts tosuccessfully commercialize this technology.**

 

We entered into the strategic alliance agreement withthe United States Postal Service to incorporate our content authenticationservice into their Electronic Postmark® Service. The Postal Service has theright to cancel the contract in the event we are unable to perform ourobligations, including recognizing sufficient revenues, as required by theagreement. Further, the Postal Service has the right to terminate the agreementat its convenience. When we initially entered into our agreement with thePostal Service in July 2002, we agreed on certain performance metrics. Theoriginal revenue metric had not been attained and in September 2004 the PostalService notified us of a failure to comply with the revenue metric, whichcommenced a six month period to achieve compliance with the metrics. We begannegotiating with the Postal Service to agree upon a modification of this metricand in December 2004 believed that we cured the default.

 

However, on May 27, 2005, the United States PostalService delivered a second notice stating that we had failed to attain theperformance metrics required by the Strategic Alliance Agreement during theperiod February 2005 through April 2005. In its notice, the Postal Service hasadvised us that although it intends to exercise its right to terminate theStrategic Alliance Agreement if we are unable to cure this default, it iswilling to discuss further plans that we may have to attain the performancemetrics in the Strategic Alliance Agreement. Further, on October 5, 2005, wereceived a third notice from the United States Postal Service confirming thatwe continue to fail to attain the performance metrics required by the StrategicAlliance Agreement. However, the USPS also stated that it has elected not toterminate the agreement at this time and will continue to fulfill itsobligations under the agreement as long as it remains in effect.

 

Our Strategic Alliance Agreement with the USPS mayalso be adversely affected by pending legislation regarding the USPS. Theactivities in which the USPS may engage, including the provision of the EPM,may be regulated or limited by legislation currently pending in the UnitedStates Congress. The eventual outcome of this legislative action can not bedetermined at this time, and there can be no assurance the USPS will beauthorized continue its current level of support of the EPM inthe future.

 

We continue our efforts to attain compliance with theapplicable performance metrics and to discuss modifications to the StrategicAlliance Agreement with the Postal Service. No assurances, however, can begiven that we will reach a mutually acceptable agreement with the PostalService, that the Postal Service will not terminate the agreement at any timeor that we will comply with the current performance metric. If we areunsuccessful in either of these tasks, the Postal Service may terminate theagreement. If the Postal Service terminates the agreement, we will not generateany revenue from the sales of EPMs. Further, if we are unable to commencerealizing revenue from the EPM product, we will incur additional costs inexploring and developing alternative avenues in which to successfully market thistechnology.

 

**We rely to a certain extent on our products’compatibility with Microsoft Corporation’s products for the development of amarket for the USPS EPM.**

 

On October 21, 2003 we launched an interface withMicrosoft Office to provide for an interface with the USPS EPM. This representsan important element of our strategy to develop a market for the USPS EPMproduct. We cannot provide assurance that we will achieve significant salesfrom this relationship. Microsoft is under no obligation for any purchasecommitments or guarantees and the agreement does not obligate Microsoft topurchase USPS EPM transactions. Further, Microsoft may terminate thisinitiative at its convenience. In the event we do not achieve meaningfulresults from this relationship in the foreseeable future or Microsoft elects toterminate this relationship, our business, financial condition, results ofoperations and cash flows will be significantly harmed.

 

**We have been named as a party to several classaction and derivative action lawsuits, and we may be named in additionallitigation, all of which could require significant management time andattention and result in significant legal expenses. An unfavorable outcome inone or more of these lawsuits could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows.**

 

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As described in detail at “Item 1. Legal Proceedings,”above, several purported class action complaints were filed in federal courtalleging that we and certain of our current and former officers and directorsviolated the federal securities laws. Subsequently, four purported shareholderderivative actions were filed against certain current and former officers anddirectors based on allegations substantially similar to those set forth in thepurported class actions. The expense of defending such litigation may besubstantial and the time required to defend the actions could divert management’sattention from the day-to-day operations of our business, which could adverselyaffect our business, results of operations and cash flows. In addition, anunfavorable outcome in such litigation could have a material adverse effect onour business, results of operations and cash flows.

 

**Our success is dependent on the performance andintegration of our new management and the cooperation, performance andretention of our executive officers and key employees.**

 

Our business and operations are substantiallydependent on the performance and integration of our new CEO and seniormanagement team as well as the performance of our other senior managers andexecutive officers. These persons have worked together for only a short periodof time. In addition, we recently announced the departures of our ChiefFinancial Officer and Executive Vice President-Chief Administrative Officer andare in the process of conducting a search for a new Chief Financial Officer.Inherent with changes in management is a change in understanding of the controlenvironment, the business processes and internal controls. If we are unable tosuccessfully integrate new executives into our operations, it may adverselyimpact our results of operations and financial condition. We do not maintain “keyperson” life insurance on any of our executive officers. The loss of one orseveral key employees could seriously harm our business. Any reorganization orreduction in the size of our employee base could harm our ability to attractand retain other valuable employees critical to the success of our business.

 

**If we lose key personnel or fail to integratereplacement personnel successfully, our ability to manage our business could beimpaired.**

 

Our future success depends upon the continued serviceof our key management, technical, sales, finance, and other critical personnel.Other than our CEO and CFO, our key personnel are employees-at-will, and wecannot assure you that we will be able to retain them. Key personnel have leftour company in the past and there likely will be additional departures of keypersonnel from time to time in the future. The loss of any key employee couldresult in significant disruptions to our operations, including adverselyaffecting the timeliness of product releases, the successful implementation andcompletion of company initiatives, the effectiveness of our disclosure controlsand procedures and our internal control over financial reporting, and theresults of our operations. In addition, hiring, training, and successfullyintegrating replacement sales and other personnel could be time consuming, maycause additional disruptions to our operations, and may be unsuccessful, whichcould negatively impact future revenues.

 

**Our reported financial results could be adverselyaffected by changes in financial accounting standards or by the application ofexisting or future accounting standards to our business as it evolves. Forexample, accounting for employee stock options under FAS 123R has had amaterial impact on our consolidated results of operations and earnings pershare.**

 

As a result of the enactment of the Sarbanes-Oxley Actand the review of accounting policies by the SEC and national and internationalaccounting standards bodies, the frequency of accounting policy changes mayaccelerate. For example, the FASB has issued a new standard that will requireus to adopt a different method of determining and accounting for thecompensation expense of our employee stock options. This and other possiblechanges to accounting standards, could adversely affect our reported results ofoperations although not necessarily our cash flows. Further, accountingpolicies affecting software revenue recognition have been the subject offrequent interpretations, which could significantly affect the way we accountfor revenue related to our products. As we enhance, expand and diversify ourbusiness and product offerings, the application of existing or future financialaccounting standards, particularly those relating to the way we account forrevenue, could have a significant adverse effect on our reported resultsalthough not necessarily on our cash flows.

 

As of July 1, 2005, weadopted FAS 123(R) which requires the measurement and recognition ofcompensation expense for all stock-based compensation based on estimated fairvalues. As a result, our quarterly operating results for fiscal 2006 contain,and our operating results for future periods will contain, a charge forstock-based compensation related to employee stock options. The application ofFAS 123(R)

 

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requires the use of an option-pricing model to determine the fair valueof share-based payment awards. This determination of fair value is affected byour stock price as well as assumptions regarding a number of highly complex andsubjective variables. These variables include, but are not limited to, ourexpected stock price volatility over the term of the awards, and actual andprojected employee stock option exercise behaviors. As a result of the adoptionof FAS 123(R), our quarterly earnings during fiscal 2006 have been lower thanthey would have been, had we not been required to adopt FAS 123(R). This willcontinue to be the case for future periods. We cannot predict the effect thatthis adverse impact on our reported operating results will have on the tradingprice of our common stock.

 

**If the carrying value of our long-lived assets isnot recoverable, an impairment loss must be recognized which would adverselyaffect our financial results.**

 

We will evaluate our long-lived assets, includingproperty and equipment, goodwill, acquired product rights, and other intangibleassets, whenever events or circumstances occur which indicate that these assetsmight be impaired. Goodwill is evaluated annually for impairment in the fourthquarter of each fiscal year, regardless of events and circumstances. Werecorded an impairment charge of approximately $4.8 million of goodwill andother long-term intangible assets. As of June 30, 2005, we had approximately$7,300,000 of goodwill remaining from our acquisitions of Authentidate, Inc.and Authentidate International, A.G. We will continue to evaluate therecoverability of the carrying amount of our long-lived assets, and we mayincur substantial impairment charges, which could adversely affect our financialresults.

 

**We have incurred significant additional costsconcerning our international operations and may incur additional costs in thefuture.**

 

We have incurred substantial costs in supporting theoperation of our German subsidiary, Authentidate International, AG. In March2005, we entered into a new two-year employment agreement with Mr. Jan Wendenburg,the Chief Executive Officer of Authentidate International, pursuant to which hewill receive a base salary of approximately, $244,600 through March 31, 2006and $256,900 thereafter, assuming current exchange rates. Further, during thefiscal year ended June 30, 2005, we advanced approximately $1.4 million to thissubsidiary. Of this amount, approximately, $600,000 is an additionalinvestment. We cannot provide any assurance that we will recoup any of theseamounts from this subsidiary. We expect to incur additional costs in the futurein connection with the operations of this subsidiary.

 

**Developing and implementing new or updatedproducts 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 products andservices. The cost of developing new services and technology solutions, such asCareFax, is inherently difficult to estimate. Our development andimplementation of proposed products and services may take longer thanoriginally expected, require more testing than originally anticipated andrequire the acquisition of additional personnel and other resources. If we areunable to develop new or updated products and services on a timely basis andimplement them without significant disruptions to the existing systems andprocesses of our customers, we may lose potential sales and harm ourrelationships with current or potential customers.

 

**New or updated products and services will notbecome profitable unless they achieve sufficient levels of market acceptance,which may require significant efforts and costs.**

 

There can be no assurance that customers and potentialcustomers will accept from us new or updated products and services. The futureresults of our Software Security Solutions segment will depend, in significantpart, on the success of new products and services. Current and potentialcustomers may choose to use similar products and services offered by ourcompetitors or may not purchase new or updated products or services, especiallywhen they are initially offered and if they require changes in equipment orworkflow. For services we are developing or may develop in the future, therecan be no assurance that we will attract sufficient customers or that suchservices will generate sufficient revenues to cover the costs of developing,marketing and providing those services. Furthermore, there can be no assurancethat any pricing strategy that we implement for any new products and serviceswill be economically viable or acceptable to the target markets. Failure toachieve broad penetration in target markets with respect to new or updated productsand services could have a material adverse effect on our

 

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business prospects. Further,achieving market acceptance for new or updated products and services is likelyto require substantial marketing efforts and expenditure of significant fundsto create awareness and demand by potential customers.

 

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

 

We do not currently hold any issued U.S. patents and someof the technology embodied in some of our current products cannot be patented. Wehave one foreign-issued patent and four U.S. and four foreign patentapplications pending relating to the Authentidate technology, includingrelating to verifying the authenticity of digital images and relating to theassociated business processes. We have registered the trademarks “Authentidate,”“DocStar” and the DocStar logo as trademarks in the United States. We have alsosought to register eight additional trademarks in the United States and anumber of trademarks outside of the United States. We have also registered thetrademark “Authentidate” in Germany and Europe. In connection with our TracMedical Solutions business, we have three U.S. and five foreign patent applicationspending, have registered the trademarks “TracMed,” “CareCert,” and “MDKeyBank” andhave sought to register four additional trademarks, including the marks “TracMedical” and “CareFax.”  We rely onconfidentiality agreements with our key employees to the extent we deem it tobe necessary. We further intend to file patent applications for any newproducts we may develop, to the extent that we believe that any technologyincluded in such products is patentable. There can be no assurance that anypatents in fact, will be issued or that any such patents that do issue will beeffective to protect our products and services from duplication by othermanufacturers or developers or to prevent our competitors from offering similarproducts and services.

 

Other companies operating within our business segmentmay independently develop substantially equivalent proprietary information orotherwise obtain access to our know-how, much of which is maintained as tradesecrets. In addition, there can be no assurance that we will be able to affordthe expense of any litigation which may be necessary to enforce our rightsunder any patent. Although we believe that the products we sell do not and willnot infringe upon the patents or violate the proprietary rights of others, itis possible that such infringement or violation has occurred or may occur. OnAugust 25, 2005, we became aware of an action filed against us entitled *TimeCertain LLC vs. Authentidate Holding Corporation, Authentidate,Inc. and NCipher Inc.* The plaintiff in this matter has claimed thatour products and systems incorporating secure time-stamping  technology, including but not limited to theUSPS Electronic Postmark system, infringes certain of its patent rights. We haveresponded to this complaint and are vigorously defending against this action. Wehave investigated other patents held by third parties of which we are aware todetermine whether any of our current products or services infringe on theclaims of these patents and believe that our products and services do notinfringe on these patent claims. Although we have not received notice of anyother claims that our products are infringing, we can not provide anyassurances that our commercial products do not infringe upon any other patents,including the patents we have investigated. As described above, we arecurrently defending a claim by Shore Venture Group, in which it alleges, amongother things, rights under one of our patent applications and damages inconnection with an alleged copyright infringement. Prior to the commencement ofthis case, we had conducted extensive settlement negotiations with ShoreVenture in an effort to resolve all claims between the parties. We aredefending this action vigorously.

 

In theevent that products we sell are deemed to infringe upon the patents orproprietary rights of others, we could be required to modify our products orobtain a license for the manufacture, use and/or sale of such products. Therecan be no assurance that, in such an event, we would be able to do so in atimely manner, upon acceptable terms and conditions, or at all, and the failureto do any of the foregoing could have a material adverse effect upon ourbusiness. Moreover, there can be no assurance that we will have the financialor other resources necessary to defend against a patent infringement orproprietary rights violation action. In addition, if our products or proposedproducts are deemed to infringe upon the patents or proprietary rights ofothers, we could, under certain circumstances, become liable for damages orsubject to an injunction, which could also have a material adverse effect onour business.

 

**Because we derive a majority of our licenserevenues from sales of a few products, any decline in demand for these productscould severely harm our ability to generate revenues.**

 

We derive a majority of our revenues from a limitednumber of software products and solutions, including the EPM and DocSTARsoftware. In addition, our focus on building our Security Software Solutionssegment software products is concentrated within the market for products andsolutions designed to provide data security. As a result, we are particularlyvulnerable to fluctuations in demand for these products, whether as a result ofcompetition, product obsolescence, technological change, customer

 

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spending, or otherfactors. If our revenues derived from these software products were to declinesignificantly, our business and operating results would be adversely affected.

 

**Some of our products and solutions have long andunpredictable sales cycles, which may impact our quarterly operating results.**

 

Transactions for some of our products, especially ourSecurity Software solutions, require customers to undertake customizedinstallations to integrate the solutions into their legacy systems and requirethem to modify existing business practices. The period from our initial contactwith a potential customer until the execution of an agreement is difficult topredict and can be in excess of six months. The sales cycles for thesetransactions can be long and unpredictable due to a number of uncertaintiessuch as:

 

•      customers’ willingness toinvest potentially substantial resources and modify their networkinfrastructures to take advantage of our products;

 

•      customers’ budgetaryconstraints;

 

•      the need to educatepotential customers about our products’ capabilities;

 

•      the timing of customers’budget cycles; and

 

•      delays caused by customers’internal review processes; and

 

•      for sales to governmentcustomers, governmental regulatory, approval and purchasing requirements.

 

We are unable to control or influence many of thesefactors. Further, we have experienced delays in the pace of adoption and use byour customers of our transaction-based offerings, such as CareCert, which hasadversely affected our earnings. During the sales cycle and the implementationperiod, we may expend substantial time, effort and money preparing contractproposals, negotiating contracts and implementing solutions without receivingany related revenue. In addition, many of our expenses are relatively fixed inthe short term, including personnel costs and technology and infrastructurecosts. Accordingly, our inability to generate sufficient revenues from theseofferings has a direct impact on our results of operations.

 

**The failure to properly manage our growth couldcause our business to lose money.**

 

We intend to expand our marketing and distributionefforts relating to our Security Software Solutions segment in the near futurein order to develop and pursue existing and potential market opportunities.This growth is expected to place a significant demand on management andoperational resources. In order to manage growth effectively, we must implementand improve our operational systems and controls on a timely basis. If we failto implement these systems and controls, our business, financial condition,results of operations and cash flows will be materially and adversely affected.

 

**Our software products and web site may be subjectto intentional disruption.**

 

Although we believe we have sufficient controls inplace to prevent intentional disruptions, such as software viruses specificallydesigned to impede the performance of our products, we may be affected byfuture such efforts. Further, despite the implementation of security measures,this infrastructure or other systems that we interface with, including theInternet and related systems, may be vulnerable to physical break-ins, hackers,improper employee or contractor access, programming errors, attacks by thirdparties or similar disruptive problems, resulting in the potentialmisappropriation of our proprietary information or interruptions of ourservices. Any compromise of our security, whether as a result of our ownsystems or systems that they interface with, could substantially disrupt ouroperations, harm our reputation and reduce demand for our services.

 

**Performance problems with our systems or systemfailures could cause us to lose business or incur liabilities.**

 

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Our customer satisfaction and our business could beharmed if we experience transmission delays or failures or loss of data in thesystems we use to provide services to our customers, includingtransaction-related services such as CareCert and CareFax. These systems arecomplex and, despite testing and quality control, we cannot be certain thatproblems will not occur or that they will be detected and corrected promptly ifthey do occur. In providing these services, we rely on internal systems as wellas communications and hosting services provided by third parties, such as theInternet. To operate without interruption, both we and the service providers weuse must guard against:

 

•      damage from fire, power lossand other natural disasters;

 

•      communications failures;

 

•      software and hardwareerrors, failures or crashes;

 

•      security breaches, computerviruses and similar disruptive problems; and

 

•      other potentialinterruptions.

 

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

 

In addition, some of our Web-based services may, attimes, be required to accommodate higher than expected volumes of traffic. Atthose times, we may experience slower response times or system failures. Anysustained or repeated interruptions or disruptions in these systems or increasein 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 theInternet continues to experience increased usage, the Internet infrastructuremay be unable to support the demands placed on it which could harm itsreliability and performance. Any significant interruptions in our services orincreases in response time could result in a loss of potential or existingusers of services and, if sustained or repeated, could reduce theattractiveness of our services.

 

**Our security software products and solutions maynot be accepted by the market, which would seriously harm our business.**

 

Demand and market acceptance for our software securityofferings remain subject to a high level of uncertainty. Achieving widespreadacceptance of these products will continue to require substantial marketingefforts and the expenditure of significant funds to create and maintain brandrecognition and customer demand for such products. Demand for our productsdepends on, among other things:

 

•      the perceived ability of ourproducts to address real customer problems;

 

•      the perceived quality,price, ease-of-use and interoperability of our products as compared to ourcompetitors’ products;

 

•      the market’s perception ofhow easy or difficult it is to deploy our products, especially in complex,network environments;

 

•      the continued evolution ofelectronic commerce as a viable means of conducting business;

 

•      market acceptance and use ofnew technologies and standards;

 

•      the ability of networkinfrastructures to support an increasing number of users and services;

 

•      the pace of technologicalchange and our ability to keep up with these changes;

 

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•      general economic conditions,which, influence how much money our customers and potential customers arewilling to allocate to their information technology budgets.

 

There can be no assurance that adequate marketingarrangements will be made and continued for such products and there can be noassurance that any of these products will ever achieve or maintain widespreadmarket acceptance or that the sale of such products will be profitable.

 

**If we cannot continuously enhance our products inresponse to rapid changes in the market, our business will be harmed.**

 

The software-based services industry and computerindustry are characterized by extensive research and development efforts whichresult in the frequent introduction of new products which render existingproducts obsolete. Our ability to compete successfully in the future willdepend in large part on our ability to maintain a technically competentresearch and development staff and our ability to adapt to technologicalchanges in the industry and enhance and improve existing products andsuccessfully develop and market new products that meet the changing needs ofour customers. Although we are dedicated to continued research and developmentof our products with a view towards offering products with the most advancedcapabilities, there can be no assurance that we will be able to continue todevelop new products on a regular basis which will be competitive with productsoffered by other manufacturers. At the present time, we do not have a targetedlevel of expenditures for research and development. We will evaluate allopportunities but believe the majority of our research and development will bedevoted to enhancements of our existing products.

 

Technological improvements in new products that we andour competitors offer, as well as the general decline in the economy and otherfactors, have resulted in recent declines in retail prices for computerproducts. As competitive pressures have increased, many companies have ceasedoperation and liquidated inventories, further increasing downward pricingpressure. Such declines have, in the past, and may in the future, reduce ourprofit margins.

 

**If our products are not competitive, our businesswill suffer.**

 

Authentidate Holding Corp. and its subsidiaries areengaged in the highly competitive businesses of developing document imagingsoftware and distributing turn-key document imaging systems, developingsoftware-based authentication products, and reselling computer hardware andsoftware as well as technical support services for such businesses. Thesemarkets are also continually evolving and, in some cases, subject to rapidtechnological change. Many of our competitors have greater financial,technical, product development, marketing and other resources than we do. Theseorganizations may be better known than we are and have more customers than wedo. We cannot provide assurance that we will be able to compete successfullyagainst these organizations. We believe that the principal competitive factorsaffecting our markets include fault-tolerance, reliability, performance, easeof use, scalability, manageability, price and customer service and support.There can be no assurance that we will be able to successfully incorporatethese factors into our products and to compete against current or futurecompetitors or that competitive pressure we face will not harm our business. Ifwe are unable to develop and market products to compete with the products ofcompetitors, our business will be materially and adversely affected.

 

The document imaging business is competitive and wecompete with major manufacturers. Many of these companies have substantiallymore experience, greater sales, as well as greater financial and distributionresources than do we. Our Security Software Solutions segment, including theUSPS EPM and the products offered by Trac Medical Solutions and AuthentidateInternational, are relatively new business lines and although the level ofcompetition across the product line is unknown at this point in time, the fieldof software-based security solutions is highly competitive. There can be noassurances, however, that any of these products, including the service offeredthrough the U.S. Postal Service, will achieve market acceptance.

 

Our DJS subsidiary is engaged in the highlycompetitive business of systems integration, computer services and computerreselling. DJS competes with many small and local companies which providesimilar technical services to those offered by DJS. Additionally, DJS mustcompete with other computer resellers, many of whom have greater financial andtechnical resources. There can be no assurance that DJS will be able to competesuccessfully with these competitors.

 

We also expect that competition will increase as aresult of industry consolidations and the formation of new companies with new,innovative product offerings. Current and potential competitors haveestablished or may establish cooperative relationships among themselves or withthird parties to increase the ability of their products to address the needs ofour prospective customers. Accordingly, it is

 

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possible that newcompetitors or alliances among competitors may emerge and rapidly acquiresignificant market share. Increased competition is likely to result in pricereductions, reduced operating margins and loss of market share, any of whichcould harm our business.

 

**Our software products are complex and are operatedin a wide variety of computer configurations, which could result in errors orproduct failures.**

 

Oursoftware products, including our Security Software products and DocSTARproducts are complex and may contain undetected errors, failures or bugs thatmay arise when they are first introduced or when new versions are released.These products may be installed and used in large-scale computing environmentswith different operating systems, system management software and equipment andnetworking configurations, which may cause errors or failures in our productsor may expose undetected errors, failures or bugs in our products. Ourcustomers’ computer environments are often characterized by a wide variety ofconfigurations that make pre-release testing for programming or compatibilityerrors difficult and time-consuming. Despite testing by us and by others,errors, failures or bugs may not be found in new products or releases aftercommencement of commercial shipments. Errors, failures or bugs in our productscould result in negative publicity, product returns, loss of or delay in marketacceptance of our products or claims by customers or others. Alleviating theseproblems could require significant expenditures of our capital and resourcesand could cause interruptions, delays or cessation of our product licensing,which could cause us to lose existing or potential customers and wouldadversely affect our financial conditions, results of operations and cash flows.Most of our license agreements with customers contain provisions designed tolimit our exposure to potential product liability claims. It is possible,however, that these provisions may not prove effective in limiting ourliability.

 

**We depend on others for components of ourproducts, which may result in delays and quality-control issues.**

 

We do not own or lease any manufacturing facilities. Rather,we purchase components and finished products, such as personal computers fromunaffiliated suppliers. DJS and DocStar acquire computer hardware frommanufacturers or third party resellers. We believe that at the present time wehave sufficient sources of supply of computer equipment, and that in the eventany existing supplier ceases to furnish these to us, alternative sources areavailable. In addition, our software products incorporate elements which welicense from unaffiliated third-parties. We believe that adequate alternativesuppliers of these products are available on commercially reasonable terms.However, there can be no assurance that the future production capacity of ourcurrent suppliers and manufacturers will be sufficient to satisfy ourrequirements or that alternate suppliers and manufacturers will be available oncommercially reasonable terms, or at all. Further, there can be no assurancethat the availability of such supplies will continue in the future.

 

**Our stock price is volatile and could decline.**

 

The price of our common stock has been, and is likelyto continue to be, volatile. For example, our stock price during the fiscalyear ended June 30, 2005 traded as low as $2.32 per share and as high as $10.96per share. Subsequently, our stock price has traded in the range of $1.86 to $3.74.We cannot assure you that your initial investment in our common stock will notfluctuate significantly. The market price of our common stock may fluctuatesignificantly in response to a number of factors, some of which are beyond ourcontrol, including:

 

•      quarterly variations in ouroperating results;

 

•      announcements we makeregarding significant contracts, acquisitions, strategic partnerships, or jointventures;

 

•      additions or departures ofkey personnel;

 

•      the introduction ofcompetitive products by existing or new competitors;

 

•      uncertainty about andcustomer confidence in the current economic conditions and outlook;

 

•      reduced demand for any givenproduct; and

 

•      sales of our common stock.

 

In addition, the stock market in general, andcompanies whose stock is listed on The Nasdaq National Market, have experiencedextreme price and volume fluctuations that have often been disproportionate tothe operating performance of these companies. Broad market and industry factors

 

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may negatively affect themarket price of our common stock, regardless of our actual operating performance.

 

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

 

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

 

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

 

As of December 31, 2005, there were outstanding thefollowing options and warrants:

 

•      Stock options to purchase anaggregate of 4,620,555 shares of common stock at exercise prices ranging from$1.75 to $18.20 per share, not all of which are immediately exercisable. Theweighted average exercise price of the outstanding stock options is $4.95.Included in this total are 375,000 stock options issued to a consultant with anexercise price of $3.25. The remainder of the stock options are employee andnon-executive director options.

 

•      Immediately exercisablewarrants to purchase an aggregate of 1,276,314 shares of common stock atexercise prices ranging from $2.50 to $20.00 per share. The weighted averageexercise price of the outstanding warrants is $5.90.

 

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

 

To the extent that these securities are exercised orconverted, dilution to our shareholders will occur. Moreover, the terms uponwhich we will be able to obtain additional equity capital may be adverselyaffected, since the holders of these securities can be expected to exercise orconvert them at a time when we would, in all likelihood, be able to obtain anyneeded capital on terms more favorable to us than the exercise and conversionterms provided by those securities. Further, in the event the conversion priceof the Series B Preferred Stock is lower than the actual trading price on theday of conversion, the holder could immediately sell all of its convertedcommon shares, which would have a dilutive effect on the value of theoutstanding common shares. Furthermore, the significant downward pressure onthe trading price of our common stock as Series B Preferred Stock holdersconverted these securities and sell the common shares received on conversioncould encourage short sales by the holders of Series B Preferred Stock or othershareholders. This would place further downward pressure on the trading price ofour common stock. Even the mere perception of eventual sales of common sharesissued on the conversion of the Series B Preferred Stock could lead to adecline in the trading price of our common stock.

 

**We have sold restricted shares which may depressour stock price when they are sellable under Rule 144.**

 

As of December 31, 2005, there were 1,928,867 sharesof restricted common stock currently outstanding which may be deemed “restrictedsecurities” as that term is defined under the Securities Act of 1933, and inthe future, may be sold pursuant to a registration under the Act, in compliancewith Rule 144 under the Act, or pursuant to another exemption. Rule 144provides, that, in general, a person holding restricted securities for a periodof one year may, every three months thereafter, sell in brokerage transactionsan amount of shares which does not exceed the greater of one percent of ourthen outstanding common stock or the average weekly trading volume of thecommon stock during the four calendar weeks prior to such sale. Rule 144 alsopermits, under certain circumstances, the sale of shares without any quantitylimitations by a person who is not an affiliate of ours and was not anaffiliate at any time during the 90 day period prior to sale and who hassatisfied a two year holding period. Sales of our common stock by certainpresent stockholders under Rule 144 may, in the future, have a depressiveeffect on the market price of our securities. In addition, the sale of sharesby officers and directors and other affiliated shareholders may also have adepressive effect on the market for our securities.

 

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# **Item 2.**    Changes in Securities

# ** **

**(a)****           Salesof Unregistered Securities.**

 

None.

 

**(b)****           Not applicable.**

 

**(c**)           **Repurchase of Equity Securities.**

 

Wedid not repurchase any of our equity securities during the quarter ended December31, 2005.

 

**Item 3****     DefaultsUpon Senior Securities:**

 

None.

 

**Item 4****     Submissionof Matters to a Vote of Securities Holders:**

 

We held our AnnualMeeting of shareholders on December 7, 2005. As of the record date of November4, 2005, there were 34,399,161 shares outstanding and eligible to vote at theAnnual Meeting. At the Annual Meeting, shareholders were requested to vote onthe election of the following eight directors, each of whom was elected by theshareholders as follows:

 
| **Name of Nominee** | ** ** | **Votes Cast In Favor** | ** ** | **Votes Withheld** | ** ** | **% In Favor** | ** ** |
|---------------------|------------|-------------------------|------------|--------------------|------------|----------------|------------|
|                |       |                    |       |               |       |           |       |
| Surendra Pai        |       | 29,094,318              |       | 708,443            |       | 97.6           | %          |
|                |       |                    |       |               |       |           |       |
| John J. Waters      |       | 29,046,797              |       | 755,964            |       | 97.4           | %          |
|                |       |                    |       |               |       |           |       |
| J. Edward Sheridan  |       | 28,787,209              |       | 1,015,552          |       | 96.5           | %          |
|                |       |                    |       |               |       |           |       |
| Charles J. Johnston |       | 29,090,406              |       | 712,355            |       | 97.6           | %          |
|                |       |                    |       |               |       |           |       |
| J. David Luce       |       | 28,880,373              |       | 922,388            |       | 96.9           | %          |
|                |       |                    |       |               |       |           |       |
| F. Ross Johnson     |       | 29,293,883              |       | 508,878            |       | 98.2           | %          |
|                |       |                    |       |               |       |           |       |
| Ranjit C. Singh     |       | 28,833,422              |       | 969,339            |       | 96.7           | %          |
|                |       |                    |       |               |       |           |       |
| Roger O. Goldman    |       | 29,060,806              |       | 748,955            |       | 97.5           | %          |

 

**Item 5****     OtherInformation:**

 

Pursuant to Section 10A(i) (2) of the Securities Exchange Act of 1934, we are responsible for listingthe non-audit services approved by our Audit Committee to be performed by ourindependent registered public accounting firm. During the second quarter of fiscal2006, the Audit Committee did not authorize our independent registered publicaccounting firm to provide any non-audit services.

 

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**Item 6****     Exhibits:**

 

The following exhibitsare filed herewith or incorporated by reference.

 
| ** **          | ** ** | ** **                                                                                                                                                                       | ** ** | **Incorporated by Reference** |
|---------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|
| **Exhibit  Number** | ** ** | **Exhibit Description**                                                                                                                                                          | ** ** | **Form**                      | ** ** | **Dated** | ** ** | **Exhibit** | ** ** | **Filed  Herewith** |
|                |       |                                                                                                                                                                             |       |                          |   |   |   |   |   |   |
| 10.1*               |       | Termination Agreement  between Authentidate Holding Corp. and John J. Waters.                                                                                                    |       | 8-K                           |   | 1/9/06 |   | 10.1 |   |   |
|                |       |                                                                                                                                                                             |       |                          |   |   |   |   |   |   |
| 10.2*               |       | Consulting Agreement  between Authentidate Holding Corp. and John J. Waters.                                                                                                     |       | 8-K                           |   | 1/9/06 |   | 10.2 |   |   |
|                |       |                                                                                                                                                                             |       |                          |   |   |   |   |   |   |
| 10.3*               |       | Termination Agreement  between Authentidate Holding Corp. and Dennis H. Bunt, dated January 26, 2006                                                                             |       | 8-K                           |   | 1/26/06 |   | 10.1 |   |   |
|                |       |                                                                                                                                                                             |       |                          |   |   |   |   |   |   |
| 31.1                |       | Certification of Chief  Executive Officer 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 Chief  Executive Officer 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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* Indicates a managementcontract or compensatory plan or arrangement.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|             | **AUTHENTIDATE HOLDING CORP**.           |
|------------------|------------------------------------------|
|             |                                     |
| February 9, 2006 |                                     | /s/ Surendra Pai |   |
| DATE             | SURENDRA PAI                             |
|             | PRESIDENT & CHIEF  EXECUTIVE OFFICER |
|             |                                     |
|             | /s/ Dennis H. Bunt                       |   |
|             | DENNIS H. BUNT                           |
|             | CHIEF FINANCIAL OFFICER                  |
|                  |                                          |  |  |  |

 

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