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**SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549**

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**FORM 10-Q**

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

For the quarterly period ended:   MARCH 31, 2005

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

For the transition period from  to ______________

Commission File No. 0-20190

| **AUTHENTIDATE HOLDING CORP.**                                    |
|-------------------------------------------------------------------|
|                                                                   |
| (Exact name of small business issuer as specified in its charter) |

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

| 2165 Technology   Dr.,                   |   | Schenectady,   NY, 12308 |
|------------------------------------------|--------|--------------------------|
|                                          |   |                          |
| (Address of principal executive offices) |   | (Zip Code)               |

Registrant’s telephone number, including area code :__(518) 346-7799        

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

Indicate by check mark whether      the issuer (1) filed all reports required to be filed by Section 13 or      15(d) of the Exchange Act during the past 12 months (or for such shorter      period that the registrant was required to file such reports), and (2)      has been subject to such filing requirements for the past 90 days.

|   | Yes |  |   | No |  |   |
|--------|-----|--|--------|----|--|--------|

Indicate by check whether the registrant      is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

|   | Yes |  |   | No |  |   |
|--------|-----|--|--------|----|--|--------|

34,391,815 shares of Common Stock,      par value $.001 per share, were outstanding at May 1, 2005.

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**AUTHENTIDATE HOLDING CORP.FORM 10-QINDEX**

| **Part I Financial Information**                                                                                   |   | **Page No.** |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------|
|                                                                                                                    |        |              |
|                                                                                                               |   |         |
| Item      1 – Financial Statements Consolidated Balance Sheets – March    31, 2005 and June 30, 2004     |   | 3            |
|                                                                                                               |   |         |
| Consolidated      Statements of Operations – Three and nine months ended March 31, 2005    and March 31, 2004 |   | 4            |
|                                                                                                               |   |         |
| Consolidated      Statements of Cash Flows – Nine months ended March 31, 2005 and March    31, 2004           |   | 5            |
|                                                                                                               |   |         |
| Notes    to Consolidated Financial Statements                                                                      |   | 6            |
|                                                                                                               |   |         |
| Item      2 – Management’s Discussion and Analysis of Financial Condition    and Results of Operations   |   | 15           |
|                                                                                                               |   |         |
| Item    3 – Quantitative and Qualitative Disclosures About Market Risk                                        |   | 26           |
|                                                                                                               |   |         |
| Item    4 – Controls and Procedures                                                                           |   | 26           |
|                                                                                                               |   |         |
|                                                                                                               |   |         |
| **Part II Other Information**                                                                                      |   |         |
|                                                                                                               |   |         |
| Item    1 – Legal Proceedings                                                                                 |   | 27           |
|                                                                                                               |   |         |
| Item    2 – Changes in Securities                                                                             |   | 27           |
|                                                                                                               |   |         |
| Item    3 – Defaults upon Senior Securities                                                                   |   | 27           |
|                                                                                                               |   |         |
| Item    4 – Submission of Matters to a Vote of Security Holders                                               |   | 27           |
|                                                                                                               |   |         |
| Item    5 – Other Information                                                                                 |   | 28           |
|                                                                                                               |   |         |
| Item    6 – Exhibits                                                                                          |   | 29           |
|                                                                                                               |   |         |
| Safe    Harbor Statement                                                                                           |   | 30           |
|                                                                                                               |   |         |
| Signatures                                                                                                         |   | 30           |
|                                                                                                               |   |         |

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**Part I Financial Information  Authentidate Holding Corporation and Subsidiaries  Consolidated Balance Sheets  (unaudited except for the June 30, 2004 balance sheet)**

| Assets                                                                                                                                                |   | **March    31, 2005** |        | **June    30, 2004** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|-------------|----------------------|--------|
|                                                                                                                                                  |   |                       |        |                      |   |
| Current    assets                                                                                                                                     |   |                  |        |                 |   |   |   |
| Cash    and cash equivalents                                                                                                                          |   | $                     | 27,800,076  |                 | $      | 42,689,823 |   |
| Restricted    cash                                                                                                                                    |   |                  | 141,307     |                 |   | 365,116 |   |
| Marketable    Securities                                                                                                                              |   |                  | 37,750,000  |                 |   | 31,300,000 |   |
| Accounts      receivable, net of allowance for doubtful accounts of $424,961 and $420,916    at March 31, 2005 and June 30, 2004, respectively        |   |                  | 3,348,890   |                 |   | 3,039,044 |   |
| Inventories                                                                                                                                           |   |                  | 324,521     |                 |   | 125,206 |   |
| Prepaid    expenses and other current assets                                                                                                          |   |                  | 563,632     |                 |   | 474,309 |   |
|                                                                                                                                                  |   |                       |             |                 |        |  |   |
| Total    current assets                                                                                                                               |   |                  | 69,928,426  |                 |   | 77,993,498 |   |
|                                                                                                                                                  |   |                  |        |                 |   |   |   |
| Property    and equipment, net                                                                                                                        |   |                  | 3,733,802   |                 |   | 3,396,454 |   |
| Other    assets                                                                                                                                       |   |                  |        |                 |   |   |   |
| Software    development costs, net                                                                                                                    |   |                  | 637,237     |                 |   | 497,977 |   |
| Goodwill                                                                                                                                              |   |                  | 11,616,736  |                 |   | 11,616,736 |   |
| Other    intangible assets                                                                                                                            |   |                  | 959,489     |                 |   | 727,763 |   |
| Investment    in affiliates                                                                                                                           |   |                  | 750,000     |                 |   | — |   |
| Other    assets                                                                                                                                       |   |                  | 4,449       |                 |   | 4,448 |   |
|                                                                                                                                                  |   |                       |             |                 |        |  |   |
| Total    assets                                                                                                                                       |   | $                     | 87,630,139  |                 | $      | 94,236,876 |   |
|                                                                                                                                                  |   |                       |             |                 |        |  |   |
| Liabilities    and Shareholders’ Equity                                                                                                          |   |                  |        |                 |   |   |   |
| Current    liabilities                                                                                                                                |   |                  |        |                 |   |   |   |
| Accounts    payable                                                                                                                                   |   | $                     | 1,081,730   |                 | $      | 859,360 |   |
| Accrued    expenses and other current liabilities                                                                                                     |   |                  | 2,263,013   |                 |   | 1,838,860 |   |
| Deferred    revenue                                                                                                                                   |   |                  | 2,220,505   |                 |   | 1,881,277 |   |
| Current    portion of obligations under capital leases                                                                                                |   |                  | 34,072      |                 |   | 69,968 |   |
| Current    portion of long-term debt                                                                                                                  |   |                  | 78,000      |                 |   | 208,239 |   |
| Line    of credit                                                                                                                                     |   |                  | 420,696     |                 |   | 571,622 |   |
| Income    taxes payable                                                                                                                               |   |                  | 13,777      |                 |   | 6,130 |   |
|                                                                                                                                                  |   |                       |             |                 |        |  |   |
| Total    current liabilities                                                                                                                          |   |                  | 6,111,793   |                 |   | 5,435,456 |   |
| Long-term    deferred revenue                                                                                                                         |   |                  | 478,125     |                 |   | — |   |
| Long-term    debt, net of current portion                                                                                                             |   |                  | —      |                 |   | 48,000 |   |
| Obligations    under capital leases, net of current portion                                                                                           |   |                  | 9,926       |                 |   | 35,421 |   |
| Other    long term liabilities                                                                                                                        |   |                  | 343,871     |                 |   | — |   |
|                                                                                                                                                  |   |                       |             |                 |        |  |   |
| Total    liabilities                                                                                                                                  |   |                  | 6,943,715   |                 |   | 5,518,877 |   |
|                                                                                                                                                  |   |                       |             |                 |        |  |   |
| Commitments    and contingencies                                                                                                                      |   |                  |        |                 |   |   |   |
| Shareholders’ equity                                                                                                                             |   |                  |        |                 |   |   |   |
| Preferred    stock $.10 par value, 5,000,000 shares authorized:                                                                                       |   |                  |        |                 |   |   |   |
| Series      B – 28,000 shares issued and outstanding at March 31, 2005 and June    30, 2004                                                      |   |                  | 2,800       |                 |   | 2,800 |   |
| Common    stock, $.001 par value;                                                                                                                     |   |                  |        |                 |   |   |   |
| 75,000,000        shares authorized, 34,378,483 and 32,951,656 issued and outstanding at        March 31, 2005 and June 30, 2004,        respectively |   |                  | 34,378      |                 |   | 32,952 |   |
| Additional    paid-in capital                                                                                                                         |   |                  | 160,437,793 |                 |   | 157,602,589 |   |
| Accumulated    deficit                                                                                                                                |   |                  | (79,685,288 | )                    |   | (68,846,528 | ) |
| Currency    translation adjustment                                                                                                                    |   |                  | (103,259    | )                    |   | (73,814 | ) |
|                                                                                                                                                  |   |                       |             |                 |        |  |   |
| Total    shareholders’ equity                                                                                                                    |   |                  | 80,686,424  |                 |   | 88,717,999 |   |
|                                                                                                                                                  |   |                       |             |                 |        |  |   |
| Total        liabilities and shareholders’ equity                                                                                                |   | $                     | 87,630,139  |                 | $      | 94,236,876 |   |
|                                                                                                                                                  |   |                       |             |                 |        |  |   |

The accompanying notes are an integralpart of the consolidated financial statements.

3

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**Authentidate Holding Corporation and Subsidiaries  Consolidated Statements of OperationsUnaudited**

|                                            |   | **For the three months ended** |       | **For    the nine months ended ** |   |
|-------------------------------------------------|--------|--------------------------------|------------|----------------------------------------|--------|
|                                            |   |                                |       |                                        |   |
|                                            |   | **March 31, 2005**             |       | **March 31, 2004**                     |   | **March 31, 2005** |   | **March 31, 2004** |   |
|                                            |   |                                |       |                                        |   |  |   |  |   |
|                                            |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
|                                            |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Net    sales                                    |   | $                              | 4,359,981  |                                   | $      | 6,790,398 |   | $ | 12,784,106 |   | $ | 14,090,689 |   |
| Cost    of sales                                |   |                           | 2,300,894  |                                   |   | 5,095,363 |   |   | 6,753,808 |   |   | 9,543,119 |   |
|                                            |   |                                |            |                                   |        |  |   |  |  |   |  |  |   |
|                                            |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Gross    profit                                 |   |                           | 2,059,087  |                                   |   | 1,695,035 |   |   | 6,030,298 |   |   | 4,547,570 |   |
|                                            |   |                                |            |                                   |        |  |   |  |  |   |  |  |   |
|                                            |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Selling,    general and administrative expenses |   |                           | 4,633,871  |                                   |   | 3,783,166 |   |   | 15,805,309 |   |   | 9,727,163 |   |
|                                            |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Product    development expenses                 |   |                           | 855,049    |                                   |   | 679,027 |   |   | 2,156,396 |   |   | 1,759,054 |   |
|                                            |   |                                |            |                                   |        |  |   |  |  |   |  |  |   |
|                                            |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Loss    from operations                         |   |                           | (3,429,833 | )                                      |   | (2,767,158 | ) |   | (11,931,407 | ) |   | (6,938,647 | ) |
|                                            |   |                                |            |                                   |        |  |   |  |  |   |  |  |   |
|                                            |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Other    income (expense)                       |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Interest    and other income                    |   |                           | 477,104    |                                   |   | 244,358 |   |   | 1,166,836 |   |   | 1,056,395 |   |
| Interest    expense                             |   |                           | (4,326     | )                                      |   | (42,134 | ) |   | (13,139 | ) |   | (6,224,294 | ) |
|                                            |   |                                |            |                                   |        |  |   |  |  |   |  |  |   |
|                                            |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Loss    before income taxes                     |   |                           | (2,957,055 | )                                      |   | (2,564,934 | ) |   | (10,777,710 | ) |   | (12,106,546 | ) |
|                                            |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Income    tax (expense)/benefit                 |   |                           | (3,000     | )                                      |   | (411 | ) |   | (8,550 | ) |   | 17,493 |   |
|                                            |   |                                |            |                                   |        |  |   |  |  |   |  |  |   |
|                                            |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Net    loss                                     |   | $                              | (2,960,055 | )                                      | $      | (2,565,345 | ) | $ | (10,786,260 | ) | $ | (12,089,053 | ) |
|                                            |   |                                |            |                                   |        |  |   |  |  |   |  |  |   |
|                                            |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Per    share amounts:                           |   |                           |       |                                   |   |   |   |   |   |   |   |   |   |
| Basic        and diluted loss per common share  |   | $                              | (.09       | )                                      | $      | (.09 | ) | $ | (.32 | ) | $ | (.49 | ) |
|                                            |   |                                |            |                                   |        |  |   |  |  |   |  |  |   |

The accompanying notes are an integralpart of the consolidated financial statements.

4

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**Authentidate Holding Corporation and Subsidiaries  Consolidated Statements of Cash FlowUnaudited**

|                                                                          |   | **For the nine months ended** |        |
|-------------------------------------------------------------------------------|--------|-------------------------------|-------------|
|                                                                          |   |                               |        |
|                                                                          |   | **March 31, 2005**            |        | **March 31, 2004** |   |
|                                                                          |   |                               |        |  |   |
|                                                                          |   |                          |        |   |   |   |   |
|                                                                          |   |                          |        |   |   |   |   |
| Cash    flows from operating activities                                       |   |                          |        |   |   |   |   |
| Net    loss                                                                   |   | $                             | (10,786,260 | ) | $ | (12,089,053 | ) |
| Adjustments    to reconcile net loss to net cash used in operating activities |   |                          |        |   |   |   |   |
| Depreciation    and amortization                                              |   |                          | 1,013,301   |   |   | 895,736 |   |
| Provision    for doubtful accounts receivable                                 |   |                          | 33,358      |   |   | 30,731 |   |
| Amortization    deferred financing costs and debt discount                    |   |                          | —      |   |   | 5,942,586 |   |
| Interest    paid in stock                                                     |   |                          | —      |   |   | 117,245 |   |
| Non-cash    compensation and other                                            |   |                          | 640,317     |   |   | 634,893 |   |
| NYS    Grant income                                                           |   |                          | —      |   |   | (732,000 | ) |
| Changes    in operating assets and liabilities:                               |   |                          |        |   |   |   |   |
| Accounts    receivable                                                        |   |                          | (343,204    | ) |   | (2,165,716 | ) |
| Inventories                                                                   |   |                          | (199,315    | ) |   | 44,408 |   |
| Prepaid    expenses and other current assets                                  |   |                          | (89,323     | ) |   | 19,766 |   |
| Accounts    payable, accrued expenses and other  liabilities                  |   |                          | 856,287     |   |   | (467,477 | ) |
| Deferred    revenue                                                           |   |                          | 817,353     |   |   | 1,553,342 |   |
| Income    taxes                                                               |   |                          | 7,647       |   |   | (18,119 | ) |
|                                                                          |   |                               |             |   |  |  |   |
| Net    cash used in operating activities                                      |   |                          | (8,049,839  | ) |   | (6,233,658 | ) |
|                                                                          |   |                               |             |   |  |  |   |
| **Cash    flows from investing activities**                                   |   |                          |        |   |   |   |   |
| Net        purchase of marketable securities                                  |   |                          | (6,450,000  | ) |   | — |   |
| Restricted    cash                                                            |   |                          | 223,810     |   |   | — |   |
| Purchases    of property and equipment                                        |   |                          | (865,207    | ) |   | (124,787 | ) |
| Software    development costs                                                 |   |                          | (434,209    | ) |   | (170,122 | ) |
| Other    intangible assets                                                    |   |                          | (422,219    | ) |   | (491,607 | ) |
| Other    long term assets                                                     |   |                          | (2          | ) |   | (208,644 | ) |
| Investment    in affiliates                                                   |   |                          | (750,000    | ) |   | — |   |
|                                                                          |   |                               |             |   |  |  |   |
| Net    cash used in investing activities                                      |   |                          | (8,697,827  | ) |   | (995,160 | ) |
|                                                                          |   |                               |             |   |  |  |   |
| **Cash    flows from financing activities**                                   |   |                          |        |   |   |   |   |
| Proceeds    from sale of common stock, net of expenses ($308,706)             |   |                          | —      |   |   | 69,561,882 |   |
| Stock    options and warrants exercised                                       |   |                          | 2,144,658   |   |   | 8,334,321 |   |
| Preferred    stock dividends                                                  |   |                          | (35,000     | ) |   | (70,000 | ) |
| Sale    of convertible debentures, net of issuance costs ($100,378)           |   |                          | —      |   |   | 2,369,622 |   |
| Principal    payments on obligations under capital leases                     |   |                          | (61,391     | ) |   | (66,672 | ) |
| Payment    of registration costs                                              |   |                          | (9,977      | ) |   | (57,717 | ) |
| Net    (payments)/borrowings under line of credit                             |   |                          | (150,926    | ) |   | 706,585 |   |
| Deferred    financing costs                                                   |   |                          | —      |   |   | (137,300 | ) |
| Principal    payments on long-term debt                                       |   |                          | —      |   |   | (1,486,700 | ) |
| Other                                                                         |   |                          | —      |   |   | 1,482 |   |
|                                                                          |   |                               |             |   |  |  |   |
| Net    cash provided by financing activities                                  |   |                          | 1,887,364   |   |   | 79,155,503 |   |
| Effect    of exchange rate changes on cash flows                              |   |                          | (29,445     | ) |   | (17,352 | ) |
|                                                                          |   |                               |             |   |  |  |   |
| Net    increase (decrease) in cash and cash equivalents                       |   |                          | (14,889,747 | ) |   | 71,909,333 |   |
| Cash    and cash equivalents, beginning of period                             |   |                          | 42,689,823  |   |   | 3,460,446 |   |
|                                                                          |   |                               |             |   |  |  |   |
| Cash        and cash equivalents, end of period                               |   | $                             | 27,800,076  |   |   | $75,369,779 |   |
|                                                                          |   |                               |             |   |  |  |   |

The accompanying notes are an integralpart of the consolidated financial statements.

5

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**AUTHENTIDATE HOLDING CORP.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

| 1. | Basis of Presentation |
|----|-----------------------|

In the opinion of management the      accompanying unaudited consolidated financial statements contain all adjustments,      consisting of only normal, recurring adjustments, necessary for fair presentation.      The consolidated financial statements include the accounts of Authentidate      Holding Corp. (AHC) and its subsidiaries DJS Marketing Group, Inc. (DJS),      Authentidate, Inc., Authentidate International AG (AG), Trac Medical Solutions,      Inc. (Trac Med), and its DocStar Division, and are referred to as “the      Company”. The results of operations for the three and nine months ended      March 31,      2005 are not necessarily indicative of the results to be expected for the      full year. Certain information and footnote disclosures normally included      in the consolidated financial statements prepared in accordance with accounting      principles generally accepted in the United States of America have been      condensed or omitted. These consolidated financial statements should be      read in conjunction with the annual consolidated financial statements and      notes thereto included in the Company’s Form 10-K for the fiscal year      ended June 30, 2004.

| 2. | Earnings Per Share |
|----|--------------------|

The following represents the reconciliation      of the basic and diluted loss per share amounts for the three and nine      months ended March 31, 2005 and 2004, respectively:

|                                |   | **March 31,**    |       |
|-------------------------------------|--------|---------------------------------|------------|
|                                     |        |                                 |            |
|                                |   | **Three Months Ended**          |       | **Nine    Months Ended**  |   |
|                                     |        |                                 |            |  |  |
|                                |   | **2005**                        |       | **2004** |   | **2005** |   | **2004** |   |
|                                |   |                                 |       |  |   |  |   |  |   |
| Net    income/(loss)                |   | $                               | (2,960,055 | ) | $ | (2,565,345 | ) | $ | (10,786,260 | ) | $ | (12,089,053 | ) |
| Preferred    stock dividends        |   |                            | (17,500    | ) |   | (17,500 | ) |   | (52,500 | ) |   | (97,323 | ) |
|                                |   |                                 |            |   |  |  |   |  |  |   |  |  |   |
| Loss    applicable to shareholders  |   | $                               | (2,977,555 | ) | $ | (2,582,845 | ) | $ | (10,838,760 | ) | $ | (12,186,376 | ) |
| Weighted    average shares          |   |                            | 34,082,353 |   |   | 30,283,325 |   |   | 33,827,337 |   |   | 25,051,355 |   |
| Basic    and diluted loss per share |   | $                               | (0.09      | ) | $ | (0.09 | ) | $ | (0.32 | ) | $ | (0.49 | ) |

All common stock equivalents were      excluded from the loss per share calculation for all periods presented      because the impact is antidilutive. At March 31, 2005, options (5,086,065),      warrants (1,352,314) and convertible preferred stock (500,000) were outstanding.      At March 31, 2004, options (4,677,648), warrants (2,298,582), convertible      preferred stock (500,000) were outstanding.

| 3. | Stock Based Compensation |
|----|--------------------------|

The Company applies APB No. 25      for employee and director stock option plans. The Company applies FAS No.123      to determine the compensation cost on a pro-forma basis for footnote disclosure.      The pro-forma amounts in the table below were determined using the Black      Scholes option-pricing model which values options based on the stock price      at the grant date, the expected life of the option, the estimated volatility,      expected dividend payments and the risk-free interest rate over the expected      life of the options.

|                                                                                               |   | **March    31,   ** |       |
|----------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                                    |        |                                    |            |
|                                                                                               |   | **Three Months Ended**             |       | **Nine    Months Ended ** |   |
|                                                                                                    |        |                                    |            |  |  |
| Net    Loss:                                                                                       |   | **2005**                           |       | **2004** |   | **2005** |   | **2004** |   |
|                                                                                               |   |                                    |       |  |   |  |   |  |   |
| As    reported                                                                                     |   | $                                  | (2,960,055 | ) | $ | (2,565,345 | ) | $ | (10,786,260 | ) | $ | (12,089,053 | ) |
| Deduct:      total stock based employee compensation expense determined under fair value    method |   |                               | (940,273   | ) |   | (1,047,545 | ) |   | (2,836,257 | ) |   | (2,382,431 | ) |
|                                                                                               |   |                                    |            |   |  |  |   |  |  |   |  |  |   |
| Proforma                                                                                           |   | $                                  | (3,900,328 | ) | $ | (3,612,890 | ) | $ | (13,622,517 | ) | $ | (14,471,484 | ) |
|                                                                                               |   |                                    |            |   |  |  |   |  |  |   |  |  |   |
| Basic    and diluted net loss per common share:                                                    |   |                               |       |   |   |   |   |   |   |   |   |   |   |
| As    reported                                                                                     |   | $                                  | (0.09      | ) | $ | (0.09 | ) | $ | (0.32 | ) | $ | (0.49 | ) |
| Proforma                                                                                           |   | $                                  | (0.11      | ) | $ | (0.12 | ) | $ | (0.40 | ) | $ | (0.58 | ) |

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| 4. | Comprehensive Income |
|----|----------------------|

Total comprehensive income/(loss)      consist of:

|                               |   | **March    31,   ** |       |
|------------------------------------|--------|------------------------------------|------------|
|                                    |        |                                    |            |
|                               |   | **Three Months Ended**             |       | **Nine Months Ended** |   |
|                                    |        |                                    |            |  |  |
|                               |   | **2005**                           |       | **2004** |   | **2005** |   | **2004** |   |
|                               |   |                                    |       |  |   |  |   |  |   |
| Net    income/(loss)               |   | $                                  | (2,960,055 | ) | $ | (2,565,345 | ) | $ | (10,786,260 | ) | $ | (12,089,053 | ) |
| Currency    translation adjustment |   |                               | 19,083     |   |   | (2,935 | ) |   | (29,445 | ) |   | (17,352 | ) |
|                               |   |                                    |            |   |  |  |   |  |  |   |  |  |   |
| Total    comprehensive loss        |   | $                                  | (2,940,972 | ) | $ | (2,568,280 | ) | $ | (10,815,705 | ) | $ | (12,106,405 | ) |
|                               |   |                                    |            |   |  |  |   |  |  |   |  |  |   |
|                               |   |                               |       |   |   |   |   |   |   |   |   |   |   |

| 5. | Segment Information |
|----|---------------------|

AuthentiDate Holding Corp. (AHC)      is the holding company  which operates its software and services businesses      in three segments: the Security Software  Solutions Segment (formerly reported as the Authentidate Segment, and including      the operations of  AuthentiDate, Inc., Trac Medical Solutions, Inc. and      Authentidate International AG), the  Document Management Solutions Segment (formerly reported as the Docstar Division)      and the  Systems Integration Segment (formerly reported as DJS).

AuthentiDate’s offerings in      the Security Software  Solutions Segment include the United States Postal      Service Electronic Postmark Service (USPS EPM®),  electronic signing solutions, and electronic forms processing solutions offered      on a global basis.  Under the Document Management Solutions Segment, AuthentiDate      provides secure document  management solutions, including its line of DocStar products. The Systems Integration      Segment  includes enterprise network security products and services, primarily      offered to customers in the  Albany, NY region.

The Corporate Division’s expenses       are non-operating expenses which include all public company related activities      and  apply to all of the Company’s operating divisions and therefore are stated  as a  reconciling item in our segment data. The Corporate Division’s assets  consist of primarily  cash and cash equivalents, marketable securities, and  goodwill.

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**Segment Information for the three months ended:**

| **March    31, 2005:**              |   | **DocumentManagement  SolutionsSegment** |      | **Systems  IntegrationSegment** |   | **Security    Software    Solutions Segment** |   | **Totals** |       |
|-------------------------------------|--------|------------------------------------------|-----------|---------------------------------|--------|-----------------------------------------------|--------|------------|------------|
|                                     |        |                                          |           |                                 |        |                                               |        |            |            |  |  |  |  |
|                                |   |                                     |      |                            |   |                                          |   |       |       |   |   |   |   |
| Revenues    from external customers |   | $                                        | 1,650,230 |                            | $      | 1,805,170                                     |   | $          | 904,581    |   | $ | 4,359,981 |   |
| Intersegment    revenues            |   |                                     | —    |                            |   | 57,849                                        |   |       | 840        |   |   |  58,689 |   |
| Segment    profit/(loss)            |   |                                     | 122,455   |                            |   | 70,007                                        |   |       | (1,980,398 | ) |   | (1,787,936 | ) |
| Segment    assets                   |   |                                     | 4,765,135 |                            |   | 2,618,527                                     |   |       | 2,927,149  |   |   | 10,310,811 |   |
|                                     |   |                                     |      |                            |   |                                          |   |       |       |   |   |   |   |
| **March    31, 2004:**              |   | **DocumentManagement  SolutionsSegment** |      | **Systems  IntegrationSegment** |   | **Security      Software  Solutions Segment** |   | **Totals** |       |
|                                     |        |                                          |           |                                 |        |                                               |        |            |            |  |  |  |  |
|                                |   |                                     |      |                            |   |                                          |   |       |       |   |   |   |   |
| Revenues    from external customers |   | $                                        | 1,397,981 |                            | $      | 4,976,316                                     |   | $          | 416,101    |   | $ | 6,790,398 |   |
| Intersegment    revenues            |   |                                     | —    |                            |   | 5,775                                         |   |       | 114        |   |   | 5,889 |   |
| Segment    profit/(loss)            |   |                                     | 96,072    |                            |   | 136,556                                       |   |       | (1,459,022 | ) |   | (1,226,394 | ) |
| Segment    assets                   |   |                                     | 3,911,906 |                            |   | 4,222,877                                     |   |       | 3,092,256  |   |   | 11,227,039 |   |

|                                         |   |                  |       |                  |   |
|----------------------------------------------|--------|-----------------------|------------|-----------------------|--------|
| **Reconciliation:**                          |   | **March    31, 2005** |       | **March    31, 2004** |   |
|                                         |   |                       |       |                       |   |
| Revenues:                                    |   |                  |       |                  |   |   |   |
| Total    revenues for reportable segments    |   | $                     | 4,418,670  |                  | $      | 6,796,287 |   |
| Elimination    of intersegment revenues      |   |                  | (58,689    | )                     |   | (5,889 | ) |
|                                         |   |                       |            |                  |        |  |   |
| Total    consolidated revenues               |   | $                     | 4,359,981  |                  | $      | 6,790,398 |   |
|                                         |   |                       |            |                  |        |  |   |
|                                         |   |                  |       |                  |   |   |   |
| Total    pre-tax loss of reportable segments |   | $                     | (1,787,936 | )                     | $      | (1,226,394 | ) |
| Product    development expenses              |   |                  | (855,049   | )                     |   | (679,027 | ) |
| Corporate    expenses                        |   |                  | (314,070   | )                     |   | (659,513 | ) |
| Elimination    intersegment profits          |   |                  | —     |                  |   | — |   |
|                                         |   |                       |            |                  |        |  |   |
| Loss    before income taxes                  |   | $                     | (2,957,055 | )                     | $      | (2,564,934 | ) |
|                                         |   |                       |            |                  |        |  |   |
|                                         |   |                  |       |                  |   |   |   |
| Total    assets of segments                  |   | $                     | 10,310,811 |                  | $      | 11,227,039 |   |
| Corp    assets                               |   |                  | 77,480,912 |                  |   | 87,646,549 |   |
| Elim-intercompany    sale-assets             |   |                  | (161,584   | )                     |   | (17,015 | ) |
|                                         |   |                       |            |                  |        |  |   |
| Consolidated        assets                   |   | $                     | 87,630,139 |                  | $      | 98,856,573 |   |
|                                         |   |                       |            |                  |        |  |   |

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**Segment Information for the nine months ended:**

| **March 31, 2005:**                 |   | **DocumentManagement  SolutionsSegment** |      | **Systems  IntegrationSegment** |   | **Security    Software     Solutions Segment** |   | **Totals** |       |
|-------------------------------------|--------|------------------------------------------|-----------|---------------------------------|--------|------------------------------------------------|--------|------------|------------|
|                                     |        |                                          |           |                                 |        |                                                |        |            |            |  |  |  |  |
|                                |   |                                     |      |                            |   |                                           |   |       |       |   |   |   |   |
| Revenues    from external customers |   | $                                        | 4,859,695 |                            | $      | 5,317,718                                      |   | $          | 2,606,693  |   | $ | 12,784,106 |   |
| Intersegment    revenues            |   |                                     | —    |                            |   | 83,318                                         |   |       | 840        |   |   | 84,158 |   |
| Segment    profit/(loss)            |   |                                     | 504,713   |                            |   | 90,882                                         |   |       | (7,103,543 | ) |   | (6,507,948 | ) |
| Segment    assets                   |   |                                     | 4,765,135 |                            |   | 2,618,527                                      |   |       | 2,927,149  |   |   | 10,310,811 |   |
|                                     |   |                                     |      |                            |   |                                           |   |       |       |   |   |   |   |
| **March 31, 2004:**                 |   | **DocumentManagement  SolutionsSegment** |      | **Systems  IntegrationSegment** |   | **Security      Software   Solutions Segment** |   | **Totals** |       |
|                                     |        |                                          |           |                                 |        |                                                |        |            |            |  |  |  |  |
|                                |   |                                     |      |                            |   |                                           |   |       |       |   |   |   |   |
| Revenues    from external customers |   | $                                        | 4,311,759 |                            | $      | 8,767,234                                      |   | $          | 1,011,696  |   | $ | 14,090,689 |   |
| Intersegment    revenues            |   |                                     | —    |                            |   | 62,699                                         |   |       | 114        |   |   | 62,813 |   |
| Segment    profit/(loss)            |   |                                     | 387,613   |                            |   | 157,416                                        |   |       | (3,970,212 | ) |   | (3,425,183 | ) |
| Segment    assets                   |   |                                     | 3,911,906 |                            |   | 4,222,877                                      |   |       | 3,092,256  |   |   | 11,227,039 |   |

|                                         |   |                  |        |                  |   |
|----------------------------------------------|--------|-----------------------|-------------|-----------------------|--------|
| **Reconciliation:**                          |   | **March    31, 2005** |        | **March    31, 2004** |   |
|                                         |   |                       |             |                  |        |  |   |
| Revenues:                                    |   |                  |        |                  |   |   |   |
| Total    revenues for reportable segments    |   | $                     | 12,868,264  |                  | $      | 14,153,502 |   |
| Elimination    of intersegment revenues      |   |                  | (84,158     | )                     |   | (62,813 | ) |
|                                         |   |                       |             |                  |        |  |   |
| Total    consolidated revenues               |   | $                     | 12,784,106  |                  | $      | 14,090,689 |   |
|                                         |   |                       |             |                  |        |  |   |
|                                         |   |                  |        |                  |   |   |   |
| Total    pre-tax loss of reportable segments |   | $                     | (6,507,948  | )                     | $      | (3,425,183 | ) |
| Product    development expenses              |   |                  | (2,156,396  | )                     |   | (1,759,054 | ) |
| Corporate    expenses                        |   |                  | (2,120,203  | )                     |   | (6,928,982 | ) |
| Elmination    of intersegment profits        |   |                  | 6,837       |                  |   | 6,673 |   |
|                                         |   |                       |             |                  |        |  |   |
| Loss    before income taxes                  |   | $                     | (10,777,710 | )                     | $      | (12,106,546 | ) |
|                                         |   |                       |             |                  |        |  |   |
|                                         |   |                  |        |                  |   |   |   |
| Total    assets of segments                  |   | $                     | 10,310,811  |                  | $      | 11,227,039 |   |
| Corp    assets                               |   |                  | 77,480,912  |                  |   | 87,646,549 |   |
| Elim-intercompany    sale-assets             |   |                  | (161,584    | )                     |   | (17,015 | ) |
|                                         |   |                       |             |                  |        |  |   |
| Consolidated        assets                   |   | $                     | 87,630,139  |                  | $      | 98,856,573 |   |
|                                         |   |                       |             |                  |        |  |   |

|   |                               |
|--------|------------------------------------|
| 6.     | Service Revenues and Cost of Sales |

Included in net sales and cost      of goods sold are service sales of $421,073 and cost of service sales of      $150,858 for the three months ended March 31, 2005. Included in net sales      and cost of goods sold are service sales of $1,149,355 and cost of service      sales of $477,891 for the nine months ended March 31, 2005.

| 7. | Property and Equipment |
|----|------------------------|

In June 1999, the Company completed      construction of a new office and production facility in Schenectady, New      York for approximately $2,300,000 which was financed with a $1,000,000      grant from the Empire State Development Corporation (ESDC) (an agency of      New York state) and a mortgage loan from a local financial institution.      The grant stipulated that the Company was obligated to achieve certain      annual employment levels between January 1, 2002 and January 1, 2004 or      some or all of the grant will have to be repaid. Although we had not achieved      the agreed upon employment levels, we reached an agreement with the ESDC      in fiscal 2004 to restructure the grant terms relating to this covenant.      We agreed to repay $268,000 of the grant amount at the rate of $10,000      per month, interest free, in consideration of the ESDC’s agreement      to permanently reduce our employment level requirement to 99. At March      31, 2005 the amount due ESDC was $78,000 and is included in debt on the      balance sheet. As a result of this arrangement, we recorded $732,000 as      other income in the Corporate Division during the fiscal year ended June      30, 2004.

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| 8. | Marketable Securities |
|----|-----------------------|

The Company has reclassified certain      investments known as auction rate securities from cash equivalents to marketable      securities on its balance sheet. As a result, $37,750,000 was reclassified      as of March 31, 2005 from cash equivalents to marketable securities and      $31,300,000 was reclassified on the June 30, 2004 balance sheet. The auction      rate securities the Company purchases are generally triple A or double      A rated. With regard to the      auction rate securities we purchase, the interest yield generally resets      every 28 days or sooner. The securities are purchased at par value and      sold at par value with no adjustment to market value required. Most are      insured by a third party insurance company and the issuer is usually a      municipality.

| 9. | Goodwill and Purchased    Intangible Assets |
|----|---------------------------------------------|

Effective July 1, 2001, the Company      adopted FAS 141 and FAS 142. FAS 141 require business combinations initiated      after June 30, 2001 to be accounted for using the purchase method of accounting.      It also specifies the types of acquired intangible assets that are required      to be recognized and reported separate from goodwill. FAS 142 require that      goodwill and certain intangibles no longer be amortized, but instead tested      for impairment at least annually.

There were no changes in the carrying      amount of goodwill for the nine months ended March 31, 2005. The values      at March 31, 2005 were as follows:

|                      |   | **Authentidate** |      | **AG** |   | **Trac Med** |   | **Total** |    |
|---------------------------|--------|------------------|-----------|--------|--------|--------------|--------|-----------|---------|
|                      |   |                  |      |        |   |              |   |           |    |
| Balance    March 31, 2005 |   | $                | 3,987,571 |   | $      | 7,291,165    |   | $         | 338,000 |   | $ | 11,616,736 |   |

The Company retains a third party      valuation firm to perform an annual valuation of goodwill as of June 30.      An adverse development or change in our business would require an interim      assessment. There were no adverse developments or changes in our business      that required an interim assessment for the nine months ended March 31,      2005. Intangible asset amortization expense for the three and nine months      ended March 31, 2005 was $64,222 and $190,492. Below is a chart of intangible      assets:

|                    |   | **March    31, 2005 **         |      | ** June 30, 2004  ** |   |
|-------------------------|--------|-------------------------------------|-----------|-------------------------------------|--------|
|                    |   |                                     |      |                                     |   |
|                    |   | **Gross      Carrying      Amount** |      | **Accumulated  Amortization**       |   | **Net Book Value** |   | **Gross      Carrying      Amount** |   | **Accumulated  Amortization** |   | **Net Book Value** |   |
|                    |   |                                     |      |                                     |   |  |   |  |   |  |   |  |   |
| Patents                 |   | $                                   | 388,487   |                                | $      | 81,777 |   | $ | 306,710 |   | $ | 366,080 |   | $ | 64,663 |   | $ | 301,417 |   |
| Trademarks              |   |                                | 199,346   |                                |   | 36,396 |   |   | 162,950 |   |   | 133,086 |   |   | 28,932 |   |   | 104,154 |   |
| Licenses                |   |                                | 737,569   |                                |   | 311,911 |   |   | 425,658 |   |   | 476,484 |   |   | 154,292 |   |   | 322,192 |   |
| Acquired    Techologies |   |                                | 72,467    |                                |   | 8,296 |   |   | 64,171 |   |   |   |   |   |   |   |   |   |   |
|                    |   |                                     |           |                                |        |  |   |  |  |   |  |  |   |  |  |   |  |  |   |
|                    |   | $                                   | 1,397,869 |                                | $      | 438,380 |   | $ | 959,489 |   | $ | 975,650 |   | $ | 247,887 |   | $ | 727,763 |   |
|                    |   |                                     |           |                                |        |  |   |  |  |   |  |  |   |  |  |   |  |  |   |

The Company amortizes intangible      assets under the straight line method. Intangible amortization expense      is expected to be as follows for the next five fiscal years:

| 2005 |   | $      | 259,521 |   |
|------|--------|--------|---------|--------|
| 2006 |   |   | 275,611 |   |
| 2007 |   |   | 201,860 |   |
| 2008 |   |   | 43,735  |   |
| 2009 |   |   | 32,771  |   |

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| 10. | Shareholders’ Equity |
|-----|---------------------------|

Below is a summary of changes in      Shareholders’ Equity for the nine months ended March 31, 2005:

| ** **                                 | **PreferredStock** |   | **CommonStock** |   | **Paid in Capital** |   | **AccumulatedDeficit** |        | **TranslationAdjustment** |   | **Total Shareholders’Equity** |   |
|--------------------------------------------|--------------------|--------|-----------------|--------|---------------------|--------|------------------------|-------------|---------------------------|--------|------------------------------------|--------|
|                                       |                    |        |            |        |                     |   |                        |             |                      |        |                                    |   |  |  |   |  |  |   |
| Balance, June 30, 2004                     | $                  | 2,800  |            | $      | 32,952              |   | $                      | 157,602,589 |                      | $      | (68,846,528                        | )      | $ | (73,814 | ) | $ | 88,717,999 |   |
| Exercise of options & warrants         |               |   |            |   | 1,420               |   |                   | 2,143,237   |                      |   |                               |   |   |   |   |   | 2,144,657 |   |
| Warrants & options issued for services |               |   |            |   |                |   |                   | 640,317     |                      |   |                               |   |   |   |   |   | 640,317 |   |
| Registration costs                         |               |   |            |   |                |   |                   | (9,977      | )                         |   |                               |   |   |   |   |   | (9,977 | ) |
| Currency translation adjustment            |               |   |            |   |                |   |                   |        |                      |   |                               |   |   | (29,445 | ) |   | (29,445 | ) |
| Preferred stock dividends                  |               |   |            |   |                |   |                   |        |                      |   | (52,500                            | )      |   |   |   |   | (52,500 | ) |
| Dividends paid in stock                    |               |   |            |   | 6                   |   |                   | 61,627      |                      |   |                               |   |   |   |   |   | 61,633 |   |
| Net loss                                   |               |   |            |   |                |   |                   |        |                      |   | (10,786,260                        | )      |   |   |   |   | (10,786,260 | ) |
|                                       |                    |        |            |        |                     |   |                        |             |                      |        |                                    |   |  |  |   |  |  |   |
| Balance,        March 31, 2005             | $                  | 2,800  |            | $      | 34,378              |   | $                      | 160,437,793 |                      | $      | (79,685,288                        | )      | $ | (103,259 | ) | $ | 80,686,424 |   |
|                                       |                    |        |            |        |                     |   |                        |             |                      |        |                                    |   |  |  |   |  |  |   |

During the three months ended March      31, 2005, 547,084 common stock options and 5,000 common stock warrants      were exercised. During the nine months ended March 31, 2005, 579,941 common      stock options and 864,774 common stock warrants were exercised, resulting      in net common stock shares issued of approximately 1,421,000.

Effective October 4, 2004 we issued      an aggregate of 250,000 common stock purchase warrants to a consultant      in partial consideration for services to be provided by such person under      a consulting agreement entered into with such consultant as of such date.      The warrants are fully vested and exercisable as follows:

| **Warrant No.** | ** ****Number    of Shares** | ** ** | ** ****Exercise Price** | ** ** | ** ****Vested      andexercisable as of** | ** **       | ** ****Expiration    Date** |
|-----------------|-----------------------------------|------------|------------------------------|------------|------------------------------------------------|------------------|----------------------------------|
|                 |                                   |       |                              |            |                                           |                  |                             |  |
| 1               | 100,000                           |       | $                            | 15.00      |                                           | October 4, 2004  |                             | October 4, 2008 |
| 2               |   30,000                |       | $                            | 16.00      |                                           | November 4, 2004 |                             | October 4, 2008 |
| 3               |   30,000                |       | $                            | 17.00      |                                           | December 4, 2004 |                             | October 4, 2008 |
| 4               |   30,000                |       | $                            | 18.00      |                                           | January 4, 2005  |                             | October 4, 2008 |
| 5               |   30,000                |       | $                            | 19.00      |                                           | February 4, 2005 |                             | October 4, 2008 |
| 6               |   30,000                |       | $                            | 20.00      |                                           | March 4, 2005    |                             | October 4, 2008 |

The holder was also granted demand      and piggyback registration rights for the shares of common stock issuable      upon exercise of the warrants. The issuance of these warrants was exempt      from registration under the Securities Act of 1933, as amended, under Section      4(2) thereof. During the nine months ended March 31, 2005,      all 250,000 common stock purchase warrants vested. The fair value of the      warrants as determined by the Black Scholes Model was $5,000 and $667,000      for the three months ended and nine months ended March 31, 2005, respectively,      and was charged to operations. No additional charges are expected      in the fourth quarter of fiscal 2005.

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| 11. | Preferred Stock |
|-----|-----------------|

As of October 1, 2004, the Company      has the right to repurchase the outstanding 28,000 shares of Series B preferred      stock at a redemption price equal to $25.00 per share, plus accrued and      unpaid dividends. The holder, however, has the right to convert these shares      of      preferred stock into an aggregate of 500,000 shares of our Common Stock      at a conversion rate of $1.40 per share. In the event the Company elects      to redeem these securities, the holder will be able to exercise its conversion      right      subsequent to the date that we issue a notice of redemption but prior to      the deemed redemption date as would be set forth in such notice. The Series      B Preferred Stock was originally issued in a private financing which was      completed in October 1999. The conversion and redemption features of this      security were amended in October 2002 to provide for the rights and obligations      described above in this note.

| 12. | Private Equity Offerings |
|-----|--------------------------|

In February 2004, the Company completed      a private sale of its common stock to certain accredited investors pursuant      to Section 4(2) of the Securities Act of 1933 (“the Securities Act”),      as amended and Regulation D, promulgated thereunder. The Company sold      a total of 5,360,370 common shares at a price of $13.75 per share and realized      gross proceeds of $73.7 million. After payment of offering expenses and      broker commissions the Company realized $69.1 million in net proceeds.      The Company is currently using the funds to strengthen its balance sheet,      develop a back-up data center for Authentidate Inc. as well as for sales      and marketing activities and general corporate purposes.

In addition to this financing,      on September 22, 2003, the Company sold 166,667 shares of common stock      and warrants to purchase 50,000 shares of Company common stock to an investor      who participated in the May 2003 financing. The shares were sold for $3.00      per share and the investor agreed to a one-year lock-up during which he      was unable to sell or otherwise transfer the securities purchased in this      sale. The 50,000 warrants issued to this investor have an exercise price      of $3.00 and expire in four years. The underlying shares of these warrants      were subject to a one-year lock-up. The Company received $470,000 of net      proceeds after expenses.

The securities sold in each of      the foregoing transactions were restricted securities under the terms of      Regulation D and may not be transferred or resold for a period of one year,      except pursuant to registration under the Securities Act or an exemption      there under. Pursuant to registration rights agreements entered into with      the investors in these financings, registration statements were filed with      and declared effective by the Securities and Exchange Commission registering      the shares of common stock sold in or issuable pursuant to these transactions

| 13. | Private Debt Offerings |
|-----|------------------------|

During fiscal years ended June      30, 2003 and June 30, 2004, the Company sold a total of $8,895,300 of convertible       debentures in three separate transactions. In conjunction      with the sales, warrants to purchase 1,110,279 shares of the Company’s      common stock were issued, with exercise prices ranging from $2.50 – $3.00      per share over a period ranging from 4 to 5 years. All of the issues were      due 3 years from the issuance date and each carried a beneficial conversion      feature, which were subject to adjustment in the event of additional issuances      of common stock or convertible securities.The Company also issued five      year warrants to purchase 49,400 shares of Company common stock to certain      consultants for services rendered in connection with these transactions,      which are exercisable at $3.00 per share. The consultants also received      a cash fee equal to 6% of the gross proceeds the Company received.

In October 2003, the Company exercised      its right to require the convertible debenture holders to convert debentures      issued in October 2002 in the amount of $3,700,000 and the May/June 2003      debentures in the amount of $2,725,300 and issued 2,528,193 common shares      to complete the conversion. In December 2003, the Company exercised its      right to require the convertible debenture holders to convert all remaining      convertible debentures issued in September 2003 in the amount of $2,470,000      and issued 823,334 common shares to complete the conversion. The Company      expensed the entire balance of unamortized beneficial conversion feature      and debt discount and charged operations an aggregate, $5.4 million of      non-cash interest expense. In addition, the Company expensed all unamortized      deferred financing costs in the amount of $500,000 during the fiscal year      ended June 30, 2004 as interest expense.

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Each of the foregoing transactions      was a private transaction exempt from the registration requirements of      the Securities Act of 1933, as amended, by reason of Section 4(2) thereof      and/or Regulation D, promulgated there under.

| 14. | Related Party Transaction |
|-----|---------------------------|

In April 2003, the non executive      Directors approved a plan to purchase all of the outstanding Series A Preferred      Stock from the Company’s Chairman and Chief Executive Officer in exchange      for loans owed to the Company by the Chairman and for cash. The Company’s      Series A Preferred Stock provides the holder with the ability to elect      a majority of the Company’s Board of Directors. The Company and its      Chief Executive Officer agreed on a total purchase price for this transaction      of $850,000 which represents a discount as compared to the appraised value      of the shares of Series A Preferred Stock of $1.1 million which was determined      by an independent nationally recognized appraisal and valuation firm. The      Company’s Board ordered this valuation prior to agreeing upon the      purchase price for the shares of Series A Preferred Stock. Of the purchase      price paid, approximately $485,000 was credited against certain loans owed      to the Company. Of the balance due to the Chief Executive Officer, $70,000      was paid at closing and the balance was paid in monthly installments of      $15,000, and was paid in full during the quarter ended September 30, 2004.

| 15. | Recent Accounting Pronouncements |
|-----|----------------------------------|

In November 2004, the Financial      Accounting Standards Board (FASB) issued FAS No. 151, *Inventory Costs—an      amendment of ARB No. 43, Chapter 4.* This Statement revises the guidance      in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the      accounting for abnormal amounts of idle facility expense, freight, handling      costs, and wasted material. This standard becomes effective for inventory      costs incurred during fiscal years beginning on or after June 15, 2005.      The Company does not expect the adoption of FAS No. 151 to have a material      effect on its financial statements.

In December 2004, the FASB issued      FAS No. 153, *Exchanges of Non-monetary Assets—an amendment of      APB Opinion No. 29 Accounting for Non-monetary transactions*. This Statement      revises Opinion 29 to eliminate the exception for non-monetary exchanges      of similar productive assets and replaces it with a general exception for      exchanges of non-monetary assets that do not have commercial substance.      The provisions of this Statement shall be effective for non-monetary asset      exchanges occurring in fiscal periods beginning after June 15, 2005. The      Company does not expect the adoption of FAS No. 153 to have a material      effect on its financial statements.

In December 2004, the FASB revised      FAS No. 123 and issued FAS No. 123R, *Share Based Payment*. The new      statement requires companies to measure and recognize compensation expense      associated with share-based payments to employees and directors to be recognized      in the financial statements based on their fair values. Stock based payments      include employee and director stock option grants. The Company grants options      to purchase common stock to its employees under stock option plans at prices      equal to the value of the stock the date the options were granted. The      Company currently accounts for the options to purchase shares of common      stock issued to employees of the Company under the recognition and measurement      principles of APB 25, and related interpretations using the fair value      method. Accordingly, no compensation expense has been recognized for the      options in its consolidated statements of operations. Upon the adoption      of FAS 123R, the Company will incur additional expenses related to unvested      option grants and newly awarded grants as of and after the effective date.      This Statement is effective for all interim or annual periods beginning      after June 15, 2005. The Company has not yet adopted this pronouncement      and is currently evaluating the expected impact that the adoption of FAS      123R will have on its consolidated financial position, results of operations      and cash flows, which is expected to be material.

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| 16. | Commitments and Contingencies |
|-----|-------------------------------|

As described in our report on Form      10-K for the fiscal year ended June 30, 2004, we are involved in the following      pending and threatened legal proceedings. We are the defendant in a third      party complaint filed by Shore Venture Group, LLC (Shore Venture) in Federal      District Court in Pennsylvania. The third party complaint was filed against      us on May 7, 2001. Shore Venture is the defendant to an action commenced      by Berwyn Capital. The third party complaint alleges a claim for breach      of contract and seeks indemnification. A trial was held in October, 2002      and we are currently awaiting the verdict of the judge. Management believes      that the claim will not have a material adverse impact on our financial      condition, results of operations or cash flows.

We are the defendant in a case filed    by Shore Venture Group, LLC in the United States District Court for the District    of New Jersey, under the caption *Shore Venture Group, LLC, et al v. Authentidate    Holding Corp., Authentidate, Inc. and John T. Botti.* This complaint was    filed on March 2, 2005, and an amended complaint was filed on or about April    26, 2005. The plaintiffs in this case seek additional shares of the common    stock of our subsidiary, Authentidate, Inc., the right to exchange its stock    in Authentidate, Inc., for publicly traded stock and securities in us, rights    under one of our patent applications and damages in connection with an alleged    copyright infringement. Prior to the commencement of this case, we had conducted    extensive settlement negotiations with Shore Venture in an effort to resolve    all claims between the parties. However, negotiations did not result in a    mutually agreeable settlement. The lawsuit requests damages, injunctive relief,    costs and attorneys’ fees. We intend to defend the action vigorously.    Based on the facts of which we are currently aware, management believes that    the resolution of all of our claims with Shore Venture will not have a materially    adverse effect on our financial condition. However, no assurances can be    given that such belief will ultimately prove to be accurate or that other    facts adverse to our position currently not known to management will not    be uncovered, in which case the ultimate resolution of this claim could potentially    have a material adverse effect on our financial condition. 

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

We invested $750,000 in an unaffiliated      third party, Health Fusion, Inc. in connection with a strategic relationship      we established with this company. The initial investment is being accounted      for under the cost method. We will invest an additional $750,000 in Health      Fusion, contingent on Health Fusion achieving certain financial and other      performance objectives six months from the closing date. This investment      occurred on November 23, 2004.

On December 6, 2004, we assumed      certain assets and liabilities of Cryptcom Securities Inc. for a purchase      price of $125,000. We will be obligated to pay an additional $425,000 to      the shareholders of Cryptcom Securities Inc. in the event our operation      of the acquired assets generates certain financial measures by December      31, 2006. Additionally, we will be required to pay an “earn out” equal      to a percentage of net income based on the performance of the Division      commencing on the earlier of December 6, 2007 or the fiscal year immediately      following the fiscal year during which the additional purchase price (referenced      above) has been earned, and following for a term of five years from either      date.

On July 31, 2002, we entered into      a strategic alliance agreement with the United States Postal Service 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 States      Postal 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 document or file existed at a specific date and time and      is intended to protect the integrity of the document or file by ensuring      that it cannot be altered without detection. The EPM uses our patent pending      technology offering highly sophisticated encryption methodology ensuring      document authenticity and is intended to be able to be added to any application      regardless of the computing platform or operating system.

To date, we have not achieved the      revenue metrics required under our agreement with the United States Postal      Service. As previously reported, we received a letter from the USPS in      September 2004, which letter stated that we had six months to cure our      nonperformance of the metric standard described in such letter. As of December      31, 2004,      management believes it cured the metric deficiency specified in the letter.      However, no assurance can be given that the United States Postal Service      concurs with management’s assessment. The Company and the United States      Postal Service have continued to discuss various amendments to the original      agreement and we believe these discussions will lead to changes to the      contract that we and the United States Postal Service will both agree to      and which will enable us to continue our relationship with the United States      Postal Service. If we are unsuccessful in completing these negotiations      and should we fail to satisfy one or more of the performance metrics under      this agreement, the United States Postal Service could, subject to our      right to cure any such failure, terminate our agreement.

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We have entered into various agreements      by which we may be obligated to indemnify the other party with respect      to certain matters. Generally, these indemnification provisions are included      in contracts arising in the normal course of business under which we customarily      agree to hold the indemnified party harmless against losses arising from      a breach of representations related to such matters as intellectual property      rights. Payments by us under such indemnification clauses are generally      conditioned on the other party making a claim. Such claims are generally      subject to challenge by us and to dispute resolution procedures specified      in the particular contract. Further, our obligations under these arrangements      may be limited in terms of time and/or amount and, in some instances, we      may have recourse against third parties for certain payments made by us.      It is not possible to predict the maximum potential amount of future payments      under these indemnification agreements due to the conditional nature of      our obligations and the unique facts of each particular agreement. Historically,      the Company has not made any payments under these agreements that have      been material individually or in the aggregate. As of March 31, 2005, we      were not aware of any obligations under such indemnification agreements      that would require material payments.

**Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

**Item 2.**

**Executive Overview**

Authentidate    Holding Corp. is a holding company which operates its software and services    business in three segments: the Security Software Solutions Segment (formerly reported    as the Authentidate Segment, and including the operations of AuthentiDate,    Inc., Trac Medical Solutions, Inc. and Authentidate International AG), the    Document Management Solutions Segment (formerly reported as the Docstar Division)    and the Systems Integration Segment (formerly reported as DJS).

AuthentiDate’s    offerings in the Security Software Segment Solutions include the United States    Postal Service Electronic Postmark Service (USPS EPM®), electronic signing    solutions, and electronic forms processing solutions offered on a global    basis. Under the Document Management Solutions Segment AuthentiDate provides    secure document management solutions, including its line of DocStar products.    The Systems Integration Segment includes enterprise network security products    and services primarily offered to customers in the Albany, NY region.

During the three and nine months      ended March 31, 2005, we derived approximately $905,000 and $2.6 million      in revenues from our Security Software Solutions Segment, respectively.      The Document Management Solutions Segment revenues were $1.7 million and      $4.9 million for the three and nine months ended March 31, 2005, respectively.      The Systems      Integration Segment revenues were $1.8 million and $5.3 million for the      three and nine months ended March 31, 2005, respectively.

The Systems Integration Segment      is an authorized sales and support provider for software products such      as      Microsoft Solutions and Lotus Notes. The Segment also sells computer hardware      and provides software and integration services to businesses to meet their      data management needs.

The Document Management Solutions      Segment develops and sells document imaging software and depending on the      customer,      may      bundle the software with computer hardware to offer customers a turn-key      solution.

The Security Software Solutions      Segment  is engaged in the business of providing end users with security      software technology and services designed to accept and store a digital      code through      the Internet which enables users to prove the authenticity of the date,      time and the content of any electronic document. The Authentidate product      was released for sale in May, 2001. We believe that product integration      development work will be necessary for some applications or customers.      We are in the process of selling this product and began to record revenue      during the fiscal year ended June 30, 2002.

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On July 31, 2002, we entered into      a strategic alliance agreement with the United States Postal Service to      serve as the preferred provider of the USPS Electronic Postmark® (EPM)      service. Under the terms of the agreement, our subsidiary, Authentidate,      provides the management, technology and support for the United States      Postal 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 document or file existed at a specific date and time and      is intended to protect the integrity of the document or file by ensuring      that it cannot be altered without detection. The EPM uses our patent pending      technology offering highly sophisticated encryption methodology ensuring      document authenticity and is intended to be able to be added to any application      regardless of the computing platform or operating system.

To date, we have not achieved the      revenue metrics required under our agreement with the United States Postal      Service. As previously reported, we received a letter from the USPS in      September 2004, which letter stated that we had six months to cureour nonperformance      of the metric standard described in such letter. As of December 31, 2004,      management believes it cured the metric deficiency specified in the letter.      However, no assurance can be given that the United States Postal Service      concurs with management’s assessment. The Company and the United States      Postal Service have continued to discuss various amendments to the original      agreement and we believe these discussions will lead to changes to the      contract that we and the United States Postal Service will both agree to      and which will enable us to continue our relationship with the United States      Postal Service. If we are unsuccessful in completing these negotiations      and should we fail to satisfy one or more of the performance metrics under      this agreement, the United States Postal Service could, subject to our      right to cure any such failure, terminate our agreement.

Authentidate International      sells the Authentidate product in the European marketplace and is currently      focusing on the German market. Authentidate International entered into      revenue generating agreements with end users and resellers during the 2004      and 2005 fiscal year through which it expects to realize revenue from a      combination of installation and transactions fees.

Trac Medical Solutions developed      a business model to apply the Authentidate technology to the medical supply      business relating to the automation and processing of Certificates of Medical      Necessity. During the fiscal year ended June 30, 2002, Trac Medical Solutions      developed its CareCertTM service and entered into its first revenue-generating      agreements during the 2003 fiscal year. In March 2003, we acquired the      outstanding minority interest of Trac Medical Solutions (approximately      14%) and now own 100% of Trac Medical Solutions. In February 2004, Trac      Medical Solutions entered into an agreement with Homecare Association,      LLC pursuant to which Trac Medical Solutions markets its CareCert service      directly to the membership community of the American Association for Homecare.      In connection with that agreement, Trac Medical Solutions engaged bConnected      Software, Inc. to develop an enhanced version of its CareCert service and      to provide marketing and reselling services. Trac Medical announced the      commercial release of CareCert® ES during the quarter ended      December 31, 2004. Trac Medical Solutions generates revenues through license      fees, maintenance fees, and the sale of transactions and through professional      services.

We have recently undergone significant      changes in senior management, with the appointment of a new Chief Executive      Officer and Executive Vice President—Chief Administrative Officer      during the nine months ended March 31, 2005. On January 20, 2005, our shareholders      elected two new members to the Board of Directors. We are continuing to      address the challenges of the markets in which our businesses operate.

**Critical Accounting Policies and Estimates**

Our discussion and analysis of      our financial condition and results of operations are based on our consolidated      financial statements, which have been prepared in accordance with accounting      principles generally accepted in the United States of America. The preparation      of these financial statements requires us to make estimates and judgments      that affect reported amounts of assets, liabilities, revenues and expenses,      and related disclosures of contingent assets and liabilities. On an ongoing      basis, we evaluate our estimates, including those related to new product      launches, revenue recognition, bad debts, inventory obsolescence, recoverability      of goodwill, other intangible assets, software capitalization and other      long-lived assets and deferred tax assets and contingencies and litigation.      We base our estimates on historical experience and on various other assumptions      that are believed to be reasonable under the circumstances, the results      for which form the basis for making judgments about the carrying values      of assets and liabilities that are not readily apparent from other sources.      Actual results could differ from these estimates under different assumptions.

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We believe the following critical      accounting policies require significant judgments and estimates used in      the preparation of our consolidated financial statements.

*Revenue Recognition*

The Company recognizes revenue      in accordance with SAB 104 (“Revenue Recognition”), SOP 97-2      (“Software Revenue Recognition”) and EITF 00-21 (“Multiple      Element Arrangements”) when all of the following conditions are met:      (1) persuasive evidence of an arrangement exists, (2) delivery has occurred,      (3) the vendor’s fee is fixed or determinable, and (4) collectibility      is probable. Arrangements that contain certain bundled products and services      are accounted for under SOP-97-2.

*Multiple element arrangements containing a software license element*

Software license revenue*.*We      recognize software license revenue in accordance with Statement of Position      No. 97-2, “Software Revenue Recognition,” and SOP No. 98-9, “Modification      of SOP No. 97-2, Software Revenue Recognition with Respect to Certain      Transactions.” For software license sales for which any services rendered      are not considered essential to the functionality of the software, we recognize      revenue upon delivery of the software, provided (1) there is evidence of      an arrangement, (2) collection of our fee is considered probable and      (3) the fee is fixed or determinable.  In certain of these arrangements,      vendor specific objective evidence of fair value exists to allocate the      total fee to all elements of the arrangement.  If vendor specific      objective evidence of fair value does not exist for the license element,      we use the residual method under SOP No. 98-9 to determine the amount      of revenue to be allocated to the license element.

Support and maintenance revenue.**Revenue      for post-contract customer support and maintenance are recognized ratably      over the contract period. Services provided to customers under customer      support and maintenance agreements include technical support and unspecified      product upgrades and enhancements.

Professional services revenue.**Revenue      derived from arrangements to provide consulting, systems integration, custom      application development or training services on a time and materials basis      are recognized as the related services are performed. Revenues from professional      services provided on a milestone basis are recognized when each milestone      is completed.

*Multiple element arrangements that do not contain a software element*

Revenue from multiple element arrangements      that do not contain a software element is recognized in accordance with      Staff Accounting Bulletin 104 (“SAB 104”) and Emerging Issues      Task Force Issue No. 00-21 (“EITF 00-21”).  These multiple      element arrangements are evaluated to determine whether they can be separated      into more than one unit of accounting.  A multiple element arrangement      is separated into more than one unit of accounting if all of the following      criteria are met:  (a) the delivered item has value to the customer      on a stand-alone basis; (b) there is objective and reliable evidence of      fair value of the undelivered item; and (c) if the arrangement contains      a general right of return relative to the delivered item, delivery or performance      of the delivered item is considered probable and substantially in our control.  If      these criteria are not met, then revenue is deferred until such criteria      are met or over the period which the last undelivered element is delivered,      which is typically the life of the contract.

*Judgments and estimates*

Our revenue arrangements are evaluated      on a contract-by-contract basis and often require our judgment and estimates      that affect the classification and timing of revenue recognized in our      statements of operations.  Specifically, we may be required to make      judgments about:

|  | • | whether the fees associated with our products and services are fixed or determinable; |
|--|--------|---------------------------------------------------------------------------------------|

|  |   |                                                         |
|--|--------|--------------------------------------------------------------|
|  | • | whether or not collection of our fees is reasonably assured; |

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|  | • | whether professional services are essential to the functionality of the related software product; |
|--|--------|---------------------------------------------------------------------------------------------------|

|  |   |                                                                                |
|--|--------|-------------------------------------------------------------------------------------|
|  | • | whether elements in our revenue arrangements have stand-alone value to our customer |

|  |   |                                                                                       |
|--|--------|--------------------------------------------------------------------------------------------|
|  | • | whether we have verifiable objective evidence of fair value for our products and services. |

If other judgments or assumptions      were used in the evaluation of our revenue arrangements, the timing and      amounts of revenue recognized may have been significantly different.

*Warranty*

We provide a one year warranty      on hardware products that we assemble. On products distributed for other      manufacturers, the original manufacturer warrants the product. Trac Medical      Solutions provides a warranty to its customers during the term of their      agreement that CareCert, when operated in accordance with its specifications,      will operate substantially in accordance therewith. Warranty expense was      not significant to any of the periods presented.

*Allowance for Doubtful Accounts*

We maintain allowances for doubtful      accounts for estimated losses resulting from the inability of our customers      to make required payments. If the financial condition of our customers      were to deteriorate, resulting in an impairment of their ability to make      payments, additional allowances may be required.

*Inventory*

We write down our inventory for      estimated obsolescence or unmarketable inventory equal to the difference      between the cost of the inventory and the estimated market value based      upon assumptions about future demand and market conditions. If actual market      conditions are less favorable than those projected by management, additional      inventory write downs may be required.

*Software Development Costs*

We capitalize software development      costs when technological feasibility has been established.

*Goodwill*

We have capitalized goodwill related      to our acquisitions of Authentidate, Inc., Authentidate International AG      and Trac Medical Solutions, Inc., for which the recoverability of such      capitalized goodwill is highly dependent on the future success of the marketing      and sales of such product. If the product is not well received by the market      place and our future forecasted revenue and profitability from such product      launch is less than anticipated, the carrying value of goodwill and other      long-lived assets may require an impairment charge.

*Investment*

We made an investment in a start-up      company which has incurred losses since inception. If the investee does      not achieve profitability or obtain additional financing in the near future,      our investment may become impaired and result in a charge to operations.      We hold an approximate 4% share in equity of the investee which has been      accounted for on a cost basis. 

*Deferred Tax Assets*

We record a full valuation against      our deferred tax assets when we believe it is more likely than not that      such deferred tax assets will not be realized.

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

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**Results of Operations**

**Three and nine months ended March 31, 2005 compared to three and nine months ended March 31, 2004.**

The Company realized a consolidated      net loss of $2,960,055 ($.09 per share) and $10,786,260 ($.32 per share)      for the three and nine months ended March 31, 2005 compared to a consolidated      net loss of $2,565,345 ($.09 per share) and $12,089,053 ($.49 per share)      for the three and nine months ended March 31, 2004.

As reported in Footnote 5 (Segment      Information) to the Consolidated Financial Statements appearing in this      Form 10-Q, the net loss is the result of losses incurred primarily by the      Company’s Security Software Solutions Segment. Our Security       Software Solutions Segment has incurred significant sales, marketing,      development and general and administrative expenses this year and last      in an effort to complete the product development efforts, to generate sales,      and to develop a market for its products. Additionally, the Company incurred      significant consulting costs related to the documentation and testing of      the internal control environment as required by the Sarbanes-Oxley Act      of 2002.

The consolidated net loss for the      three months ended March 31, 2005 is approximately $395,000 more than it      was for the same period last year. There was an increase in the loss in      the Security Software Solutions Segment of approximately $521,000      comparing current year third quarter to prior year third quarter. The increase      was primarily due to increased personnel costs of approximately $600,000      and consultant costs of approximately $230,000 in the third quarter, offset      against insignificant decreases in various other categories. The Document      Management Solutions Segment profit increased approximately $26,000, while      the Systems Integration Segment profit decreased approximately $67,000      for the three months ended March 31, 2005, compared to the three months      ended March 31, 2004.

The consolidated net loss for the      nine months ended March 31, 2005 is approximately $1.3 million less than      it was for the same period last year. The Company had approximately $5.9      million in non-cash interest expense related to conversions of debentures      (see footnote 13) during the nine months ended March 31, 2004 (corporate      expenses); the Company had no such expense during the same period in fiscal      year 2005. Additionally, there was an increase in the loss in the Security      Software Solutions Segment of approximately $3.1 million comparing      current year to the corresponding period for the prior year. The increase      was primarily due to increased personnel costs ($2.0 million) and consulting      expense ($1.7 million) in the current year, offset against insignificant      decreases in other various categories. Additionally, the Corporate Division      incurred new severance costs of $1.1 million in the nine months ended March      31, 2005, while incurring none in the corresponding period for the prior      year. The Document Management Solutions Segment profit increased approximately      $117,000 due to higher sales than in the corresponding period for the prior      year, while the Systems Integration Segment profit decreased approximately      $67,000 for the nine months ended March 31, 2005, compared to the nine      months ended March 31, 2004 due to a decrease in sales.

Consolidated sales were $4,359,981      and $12,784,106 for the three and nine months ended March 31, 2005, respectively;      consolidated sales were $6,790,398 and $14,090,689 for the three and nine      months ended March 31, 2004, respectively. The decrease versus the prior      year for both periods is primarily a result of a decrease in the Systems      Integration  Segment of $3.2 million and $3.4 million, mainly as a result      of a one-time large sale of $3.0 million in 2004, offset by an increase      in Security Software Solutions  Segment sales of approximately $488,000      and $1.6 million comparing current year to prior year. Sales for the Document      Management Solutions  Segment increased approximately $252,000 and $548,000      for the three and nine months ended March 31, 2005, respectively, compared      to the      corresponding      period for the prior year.

Consolidated gross profit for the      three months ended March 31, 2005 and 2004 was $2,059,087 and $1,695,035,      respectively, while the consolidated gross profit for the nine months ended      March 31, 2005 and 2004 was $6,030,298 and $4,547,570, respectively. The      consolidated gross profit margin was 47.2% and 25.0% for the three months      ended March 31, 2005 and 2004; the consolidated gross profit margin was      47.1% and 32.3% for the nine months ended March 31, 2005 and 2004, respectively.      Gross profit margin is defined as gross profit as a percentage of sales.      The increase for both periods comparing current year to prior year results      from increased gross profit in the Security Software Solutions  Segment      with a slight increase to the Document Management Solutions Segment.

Selling, general and administrative      expenses (S,G&A) consist of all other Company expenses except product      development costs and interest. S,G&A expenses amounted to $4,633,871      and $3,783,166 for the three months ended March 31, 2005 and 2004, and      $15,805,309 and $9,727,163 for the nine months ended March 31, 2005 and      2004. The largest increase was in the Security Software Solutions Segment      which incurred increased personnel costs ($.6 million and $1.7 million      for the three and nine months ended March 31, 2005, respectively),      along with additional consulting costs ($.2 million and $1.7 million for      the three and nine months ended March 31, 2005). The Corporate Division      also had new severance costs of $1.1 million during the nine months ended      March 31, 2005.

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As a percentage of net sales, S,G&A      costs were 106.3% and 123.6 % for the three and nine months ended March      31, 2005, respectively, and 55.7% and 69.0% for the three and nine months      ended March 31, 2004. This percentage increase is primarily due to the      increase in SG&A expenses for the Security Software Solutions Segment      as discussed above.

Interest expense was $4,326 and      $13,139 for the three and nine months ended March 31, 2005 and 2004, respectively,      compared to $42,134 and $6,224,294 for the three and nine months ended      March 31, 2004, respectively. The decrease is due to non-cash interest      expense on convertible debentures which were written off due to conversion      to common stock which occurred in fiscal 2004, which is more fully discussed      in the footnotes contained herein and due to interest expense from the      building mortgage which was paid off in the third quarter of fiscal 2004.

Product development expenses, excluding      capitalized costs, primarily relate to software development for the Security      Software Solutions Segment. For the three month period March 31,      2005, these costs increased to $855,049, as compared to $679,027 the same      period last year; for the nine month period ended March 31, 2005, these      costs were $2,156,396 compared to $1,759,054 for the same period in prior      year. We have a policy of capitalizing qualified software development costs      after technical feasibility has been established and amortizing those costs      over three years as cost of goods sold. The amortization expense of software      development costs amounted to $133,498 and $294,949 for the three and nine      months ended March 31, 2005. Amortization expense of software development      costs amounted to $135,610 and $170,122 for the three and nine months ended      March 31, 2004.

**Liquidity and Capital Resources**

*Overview*

Our primary sources of funds to      date have been the issuance of equity and the incurrence of third party      debt. The principal balance of long-term debt at March 31, 2005 totaled      $78,000, which relates to a note payable to the Empire State Development      Corporation for the repayment of a grant, as more fully described below

In February 2004, we sold a total      of 5,360,370 common shares in private placements pursuant to Section 4(2)      of the Securities Act and Rule 506, promulgated thereunder. We realized      gross proceeds of approximately $73,700,000 from these transactions and      received      net proceeds of approximately $69,100,000 after payment of offering expenses      and broker commissions

Our DJS subsidiary has a $2.5 million      revolving line of credit with a financial institution collateralized by      all assets of DJS and guaranteed by Authentidate Holding Corp. The agreement      restricts DJS from making cash advances to AHC, without obtaining a 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 formula      of qualified accounts receivable and inventory. The outstanding balance      on this line of credit is $420,696 at March 31, 2005.

Property, plant and equipment expenditures      totaled $865,207 and capitalized software development expenditures totaled      $434,209 for the nine months ended March 31, 2005, respectively. There      are no significant purchase commitments outstanding.

In June 1999, the Company completed      construction of a new office and production facility in Schenectady, New      York for approximately $2,300,000 which was financed with a $1,000,000      grant from the Empire State Development Corporation (ESDC) (an agency of      New York state) and a mortgage loan from a local financial institution.      The grant stipulated that the Company was obligated to achieve certain      annual employment levels between January 1, 2002 and January 1, 2004 or      some or all of the grant will have to be repaid. Although we did not achieved      the agreed upon employment levels, we reached an agreement with the ESDC      in fiscal 2004 to restructure the grant terms relating to this covenant.      We agreed to repay $268,000 of the grant amount at the rate of $10,000      per month, interest free, in consideration of the ESDC’s agreement      to permanently reduce our employment level requirement to 99. At March      31, 2005 the amount due ESDC was $78,000 and is included in debt on the      balance sheet. As a result of this arrangement, we recorded $732,000 as      other income in the Corporate Division during fiscal year ended June 30,      2004.

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**Cash Flows**

Our unrestricted cash and cash      equivalents balance at March 31, 2005 was $27,800,076 and total assets      were $87,630,139 compared to cash and cash equivalents of $42,689,823 and      total assets of $94,236,876 at June 30, 2004. Our unrestricted cash balance      at March 31, 2004 was $75,369,779 and our total assets as of such date      were $98,856,573. We invested our excess cash in marketable securities,      which totaled $31,300,000 at June 30, 2004 and $37,750,000 at March 31,      2005. The decrease from the nine months ended March 31, 2004 to the nine      months ended March 31, 2005 is due primarily to cash used in operating      activities. We used $8,049,839 of cash in operating activities during the      nine months ended March 31, 2005. This compares to cash used in operating      activities of $6,233,658 for the same period last year. Total cash flow      used by all activities was $14,889,747 for the nine months ended March      31, 2005, compared to net cash provided of $71,909,333 for the nine months      ended March 31, 2004. This decrease in cash and cash equivalents during      the nine months ended March 31, 2005 is mainly due to the Company’s      operating activities ($8,049,839), primarily the net loss, which was $10,786,260.      This was coupled with investing outflows relating to the purchase of marketable      securities ($6,450,000), property, plant and equipment ($865,207), software      development costs ($434,209), other      intangible      assets ($422,219), and an investment ($750,000), offset by inflow of cash      off restriction $223,810. We invested $750,000 in an unaffiliated third      party, Health Fusion, Inc. in connection with a strategic relationship      we established with this company. We will invest an additional $750,000      in Health Fusion, provided it achieves certain financial and other performance      objectives six months from the closing date. This investment occurred on      November 23, 2004. The increase in cash during the nine months ended March      31, 2004 is mainly due to the net proceeds of $69,561,882 derived from      the sale of common stock, the sale of convertible debentures of $2,369,622,      and $8,334,321 resulting from the exercise of stock options and warrants,      offset by cash used in operations totaling $6,233,658 and principal payments      on long-term debt $1,486,700.

To date we have been largely dependent      on our ability to sell additional shares of our common stock or other securities      to obtain financing to fund our operating deficits. Under our current operating      plan to introduce the Authentidate technology, our ability to improve operating      cash flow has been highly dependent on the market acceptance of our products.      We believe we have enough cash, cash equivalents and marketable securities      to support our operations for at least the next twelve months.

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

|        | • | our relationships with suppliers and customers;                                                                                                              |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                         |
|        | • | the market acceptance of our products;                                                                                                                       |
|   |   |                                                                                                                                                         |
|        | • | the levels of promotion and advertising that will be required to launch our new products and achieve and maintain a competitive position in the marketplace; |
|   |   |                                                                                                                                                         |
|        | • | price discounts on our products to our customers;                                                                                                            |
|   |   |                                                                                                                                                         |
|        | • | our pursuit of strategic transactions;                                                                                                                       |
|   |   |                                                                                                                                                         |
|        | • | our business, product, capital expenditure and research and development plans and product and technology roadmaps;                                           |
|   |   |                                                                                                                                                         |
|        | • | the levels of inventory and accounts receivable that we maintain;                                                                                            |
|   |   |                                                                                                                                                         |
|        | • | capital improvements to new and existing facilities;                                                                                                         |
|   |   |                                                                                                                                                         |
|        | • | technological advances; and                                                                                                                                  |
|   |   |                                                                                                                                                         |
|        | • | our competitors’ response to our products.                                                                                                              |

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*Financing Activities*

During the 2004 fiscal year we      completed the private financings described below in order to address our      working capital needs.

On September 12, 2003, we completed      the sale of $2,470,000 of our securities to certain accredited investors      pursuant to Section 4(2) of the Securities Act of 1933, as amended, and      Regulation D, promulgated there under. We received net proceeds of approximately      $2,300,000, after paying all fees and expenses. We have applied these proceeds      to working capital and general corporate purposes. In the transaction,      we sold $2,470,000 of convertible debentures to the investors and warrants      to purchase an aggregate of 247,000 shares of common stock. The debentures      were convertible into shares of our common stock at an initial conversion      price of $3.00 per share and the warrants are exercisable into shares of      common stock at an initial price of $3.00 per share. The other terms and      conditions of the debentures and warrants are the same as set forth in      the debentures and warrants issued in the first tranche of this transaction      in October 2002. As previously discussed, the convertible debentures issued      in this transaction were converted into shares of common stock during the      fiscal quarter ended December 31, 2003.

We also issued warrants to purchase      an aggregate of 49,400 shares of common stock to certain consultants for      services rendered in connection with this transaction which are exercisable      at $3.00 per share. The consultants also received a cash fee equal to 6%      of the gross proceeds we received.

Further, on September 22, 2003,      we completed the sale of 166,667 shares of common stock to an additional      accredited investor pursuant to Section 4(2) of the Securities Act of 1933,      as amended, and Regulation D, promulgated thereunder for $500,000. We      have applied these proceeds to working capital and general corporate purposes.      In addition, we also issued warrants to purchase an aggregate of 50,000      shares of common stock to the investor in this transaction. The per share      purchase price of the common stock and the per share exercise price of      the warrants is $3.00. The investor also agreed to a twelve-month “lock-up” provision      restricting the resale of the securities, which expired in September 2004.      We also issued warrants to purchase an aggregate of 10,000 shares of our      common stock to a consultant for services rendered in connection with this      transaction which are exercisable at $3.00 per share. The consultants also      received a cash fee equal to 6% of the gross proceeds we received.

In February 2004, we completed      private offerings of our common stock to certain accredited investors pursuant      to Section 4(2) of the Securities Act of 1933, as amended and Regulation      D, promulgated there under. We sold a total of 5,360,370 common shares      at a price of $13.75 per share and realized gross proceeds of $73,705,000.      After payment of offering expenses and broker commissions we realized approximately      $69.1 million in net proceeds. We are applying the proceeds to strengthen      our balance sheet, develop a back-up data center for Authentidate Inc.      as well as for sales and marketing activities and general corporate purposes.

The securities sold in each of      the foregoing transactions were restricted securities under the terms of      Regulation D and may not be transferred or resold for a period of one year,      except pursuant to registration under the Securities Act or an exemption      there under. Pursuant to registration rights agreements entered into with      the investors in these financings, registration statements were filed with      and declared effective by the Securities and Exchange Commission registering      the shares of common stock sold in or issuable pursuant to these transactions.

*Other Matters*

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

During the quarter ended December      31, 2003, we exercised our right to require the holders of an aggregate      amount of $8,895,300 of convertible debentures to convert the entire outstanding      principal amount of their debentures into shares of our common stock. The      conversion of these debentures has resulted in our issuance of an aggregate      amount of 3,351,527 shares of our common stock to the holders of the debentures.      The specific debentures subject to this conversion requirement are an aggregate      principal amount of $3,700,000 of convertible debentures issued in October      2002, an aggregate principal amount of $2,725,300 of convertible debentures      issued in May 2003 and an aggregate principal amount of $2,470,000 of convertible      debentures issued in September 2003. We expensed the debt discount as interest      expense related to these debenture issues during the quarter ended December      31, 2003. During the year ended June 30, 2004 and prior to the conversions,      we recognized approximately $300,000 of amortization expense related to      the beneficial conversion feature and debt discount. During the year ended      June 30, 2004, upon conversion, we expensed the entire balance of unamortized      beneficial conversion feature and debt discount and charged approximately      $5.1 million to interest expense, all of which is a non cash interest charge.      In addition, we expensed all unamortized deferred financing costs related      to these three debenture issues during the year ended June 30, 2004, in      the amount of approximately $500,000 as interest expense. We will save      approximately $623,000 in interest payments annually as a result of these      conversions.

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Presently, 28,000 shares of our      Series B Preferred Stock, originally issued in a private financing in October      1999, remain outstanding. As of October 1, 2004, our right to redeem the      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,      has the right to convert these shares of preferred stock into an aggregate      of 500,000 shares of our common stock at a conversion rate of $1.40. In      the event we elect to redeem these securities, the holder will be able      to exercise its conversion right subsequent to the date that we issue a      notice of redemption but prior to the deemed redemption date as would be      set forth in such notice.

We are the defendant in a third      party complaint filed by Shore Venture Group, LLC in Federal District Court      in Pennsylvania. The third party complaint was filed against us on May      7, 2001. Shore Venture is the defendant to an action commenced by Berwyn      Capital. The third party complaint alleges a claim for breach of contract      and seeks indemnification. A trial was held in October, 2002 and we are      currently awaiting the verdict of the judge. Management believes that the      claim will not have a material adverse impact on our financial condition,      results of operations or cash flows.

We are also the defendant in a      claim filed against by Shore Venture Group in the federal District Court      for the District of New Jersey, under the caption *Shore Venture Group,      LLC, et al v. Authentidate Holding Corp., Authentidate, Inc.**and**John      T. Botti*. This complaint was filed on March 2, 2005. The plaintiffs seek additional      shares of the common stock of our subsidiary, Authentidate, Inc. and rights      under one of our patent applications. We had conducted extensive settlement      negotiations with Shore Venture in an effort to resolve all claims between      the parties. However, negotiations were unable to result in a mutually      agreeable settlement. We are currently preparing an answer to the complaint.      Management believes that the resolution of all of our claims with Shore      Venture will not have a materially adverse effect on our financial condition.

As we previously announced, effective      November 15, 2004, John T. Botti no longer serves as our President and      Chief Executive Officer. In addition, Mr. Botti subsequently retired from      his position as Chairman of the Board. In connection with an employment      agreement we entered into with Mr. Botti, effective July 1, 2003, we are      obligated to pay Mr. Botti certain severance benefits (unless he is terminated      for cause or resigns for other than “good reason”), including      (a) all compensation accrued but not paid as of the termination date; (b)      the greater of (i) his base salary to the termination date or (ii) a severance      payment equal twenty-four months of his base salary, including any regularly      scheduled increases in the base salary; (c) continued participation in      our benefit plans; (d) accelerated vesting of all options granted to him;      and (e) continuation of the exercise period in which he may exercise such      options up to the duration of the original term of the options. On February      7, 2005, we entered into an Agreement and Release with Mr. Botti. Pursuant      to this agreement, we will pay Mr. Botti the severance payments as described      above and agreed to retain him to provide consulting services to us for      a period of one year. Under this consulting arrangement and in accordance      with the terms of a separate consulting agreement, we agreed to pay Mr.      Botti a monthly retainer of $10,000 in consideration of his provision of      such services as may be requested by our Chief Executive Officer. The severance      benefits have been accrued and are expected to be paid over the next two      years.

In addition, as we previously announced      effective December 31, 2004, Mr. Peter Smith no longer serves as our Executive      Vice President – Chief Operating Officer. In connection with our employment      arrangement with Mr. Smith, we are obligated to pay him a severance benefit      of up to twelve months of his base salary unless he is terminated for cause.      On February 8, 2005 we entered into an Agreement and Release with Mr. Smith      in order to more specifically describe our severance obligations. Pursuant      to this agreement, we will pay Mr. Smith a severance payment equal to his      base salary for a period of up to twelve months. If Mr. Smith commences      new full-time employment on or before June 30, 2005, our severance obligation      will expire on June 30, 2005. If he commences full-time employment thereafter,      our severance obligation will cease on the date he commences such new employment.      However, our obligation will expire on December 31, 2005 in the event Mr.      Smith does not secure new full-time employment prior to such date. The      benefits have been accrued for in the second quarter and are expected to      be paid over the next three to nine months.

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We invested $750,000 in an unaffiliated      third party, Health Fusion, Inc. in connection with a strategic relationship      we established with this company. We will invest an additional $750,000      in Health Fusion, contingent on Health Fusion achieving certain financial      and other performance objectives six months from the closing date. This      investment occurred on November 23, 2004.

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

As previously reported, on March      23, 2005 we entered into a new employment agreement with Jan C. E. Wendenburg,      who currently serves as the Chief Executive Officer of our German subsidiary,      Authentidate International, A.G. The agreement, which is effective as of      March 15, 2005 and expires on March 31, 2007, sets forth the terms and      conditions of Mr. Wendenburg’s continued employment as the Chief Executive      Officer of Authentidate International. Under the agreement, Mr. Wendenburg’s      annual base salary will be €200,000 for the period commencing April      1, 2005 through March 31, 2006 and will be €210,000 from April 1,      2007 until expiration. A description of the material terms and conditions      of Mr. Wendenburg’s employment agreement were described in a Current      Report on Form 8-K filed on March 25, 2005.

**Contractual Commitments**

Following is a summary of the contractual      commitments associated with our debt and lease obligations, as well as      our accrued severance as of March 31, 2005:

|                            |   | **Total** |   |   | **Less than 1 year** |   |   | **1-3 years** |   |   | **3-5 years** |   |   | **More than 5 years** |   |
|---------------------------------|--------|-----------|--------|--------|----------------------|--------|--------|---------------|--------|--------|---------------|--------|--------|-----------------------|--------|
|                            |        |           |   |        |                      |   |        |               |   |        |               |   |        |                       |   |
| Long term debt obligations      | $      | 78,000    |   | $      | 78,000               |   |   | —        |   |   | —        |   |   | —                |   |
| Operating leases                |   | 712,960   |   |   | 502,504              |   |   | 210,456       |   |   | —        |   |   | —                |   |
| Capital leases                  |   | 43,998    |   |   | 34,072               |   |   | 9,926         |   |   | —        |   |   | —                |   |
| Long term severance liabilities |   | 991,371   |   |   | 647,500              |   |   | 343,871       |   |   | —        |   |   | —                |   |
|                            |        |           |   |        |                      |   |        |               |   |        |               |   |        |                       |   |
| Total                           | $      | 1,826,329 |   | $      | 1,262,076            |   | $      | 564,253       |   | $      | 0             |   | $      | 0                     |   |
|                            |        |           |   |        |                      |   |        |               |   |        |               |   |        |                       |   |

We invested $750,000 in an unaffiliated      third party, Health Fusion, Inc. in connection with a strategic relationship      we established with this company. We will invest an additional $750,000      in Health Fusion, contingent on Health Fusion achieving certain financial      and other performance objectives six months from the closing date. This      investment occurred on November 23, 2004.

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

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**Off-Balance Sheet Arrangements**

We have not created, and are not      party to, any special-purpose or off-balance sheet entities for the purpose      of raising capital, incurring debt or operating parts of our business that      are not consolidated into our financial statements. We do not have any      arrangements or relationships with entities that are not consolidated into      our financial statements that are reasonably likely to materially affect      our liquidity or the availability of our capital resources. We have entered      into various agreements by which we may be obligated to indemnify the other      party with respect to certain matters. Generally, these indemnification      provisions are included in contracts arising in the normal course of business      under which we customarily agree to hold the indemnified party harmless      against losses arising from a breach of representations related to such      matters as intellectual property rights. Payments by us under such indemnification      clauses are generally conditioned on the other party making a claim. Such      claims are generally subject to challenge by us and to dispute resolution      procedures specified in the particular contract. Further, our obligations      under these arrangements may be limited in terms of time and/or amount      and, in some instances, we may have recourse against third parties for      certain payments made by us. It is not possible to predict the maximum      potential amount of future payments under these indemnification agreements      due to the conditional nature of our obligations and the unique facts of      each particular agreement. Historically, we have not made any payments      under these agreements that have been material individually or in the aggregate.      As of March 31, 2005, we were not aware of any obligations under such indemnification      agreements that would require material payments.

**Effects of Inflation and Changing Prices**

The impact of general inflation      on our operations has not been significant to date and we believe inflation      will continue to have an insignificant impact on us. However, price deflation      in the major categories of components we purchase for the Document Management      Solutions Segment has been substantial and is anticipated to continue through      fiscal 2005. Typically,      new components such as new generations of microprocessors and new optical      disk drive technologies etc. are introduced at premium prices, by its vendors.      During this period, we earn lower margins on our products. As the life      cycle progresses competitive pressures could force vendor prices down and      thus improve our profit margins. Competitive pressures from an evolving      document imaging industry have required us to adjust our marketing model      for selling DocStar to accommodate a lower entry point. Because much of      the Systems Integration Segment        business is service-related,      price deflation has less of an impact on the Systems Integration Segment       profits. We do not believe that the impact of inflation      will have a significant impact on our Security Software Solutions Segment      business lines.

**Present Accounting Standards Not Yet Adopted**

In November 2004, the Financial      Accounting Standards Board (FASB) issued FAS No. 151, *Inventory Costs–an      amendment of ARB No. 43, Chapter 4.* This Statement revises the guidance      in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the      accounting for abnormal amounts of idle facility expense, freight, handling      costs, and wasted material. This standard becomes effective for inventory      costs incurred during fiscal years beginning on or after June 15, 2005.      We do not expect the adoption of FAS No. 151 to have a material effect      on our financial statements.

In December 2004, the FASB issued      FAS No. 153, *Exchanges of Non-monetary Assets—an amendment of      APB Opinion No. 29 Accounting for Non-monetary transactions*. This Statement      revises Opinion 29 to eliminate the exception for non-monetary exchanges      of similar productive assets and replaces it with a general exception for      exchanges of non-monetary assets that do not have commercial substance.      The provisions of this Statement shall be effective for non-monetary asset      exchanges occurring in fiscal periods beginning after June 15, 2005. We      do not expect the adoption of FAS No. 153 to have a material effect on      our financial statements.

In December 2004, the FASB revised      FAS No. 123 and issued FAS No. 123R, *Share Based Payment*. The new      statement requires companies to measure and recognize compensation expense      associated with share-based payments to employees and directors to be recognized      in the financial statements based on their fair values. Stock based payments      include employee and director stock option grants. We grant options to      purchase common stock to our employees under stock option plans at prices      equal to the value of the stock the date the options were granted. We currently      account for the options to purchase shares of common stock issued to our      employees under the recognition and measurement principles of APB 25,      and related interpretations using the fair value method. Accordingly, no      compensation expense has been recognized for the options in our consolidated      statements of operations. Upon the adoption of FAS 123R, we will      incur additional expenses related to unvested option grants and newly awarded      grants as of and after the effective date. This Statement is effective      for all interim or annual periods beginning after June 15, 2005. We have      not yet adopted this pronouncement and are currently evaluating the expected      impact that the adoption of FAS 123R will have on our consolidated financial      position, results of operations and cash flows, which is expected to be      material.

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

We have approximately $62 million      invested in high quality, short term investments as of March 31, 2005.      We do not believe that any of our financial instruments have significant      risk associated with market sensitivity. We are not exposed to significant      financial market risks from changes in foreign currency exchange rates      and are only minimally impacted by changes in interest rates. However,      in the future, we may enter into transactions denominated in non-U.S. currencies      or increase the level of our borrowings, which could increase our exposure      to these market risks. We have not used, and currently do not contemplate      using, any derivative financial instruments.

**Interest Rate Risk**

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

At March 31, 2005, our unrestricted      cash and marketable securities totaled $65,550,076, most of which was invested      in asset backed short term investments, commercial paper, and money market      accounts. The remainder of our cash was in non-interest bearing checking      accounts used to pay operating expenses.

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

*Evaluation of Disclosure Controls and Procedures*

Our management, under the supervision      and with the participation of our chief executive officer and chief financial      officer, conducted an evaluation of our “disclosure controls and procedures” (as      defined in Securities Exchange Act of 1934 (the “Exchange Act”)      Rules 13a-14(c)) as of the end of the period covered by this Quarterly      Report on Form 10-Q. Based on their evaluation, the chief executive officer      and chief financial officer have concluded that our disclosure controls      and procedures are effective to ensure that all material information required      to be filed in this Quarterly Report on Form 10-Q has been made known to      them in a timely fashion.

*Changes in Internal Controls over Financial Reporting*

We are currently undergoing a comprehensive      effort in preparation for compliance with Section 404 of the Sarbanes-Oxley      Act of 2002. This effort includes the documentation, testing and review      of our internal controls under the direction of senior management. During      the course of these activities, senior management has not identified any      weaknesses that it believes are material, but management has identified      certain aspects of its internal control over financial reporting that can      be improved. As previously reported, on April 15, 2005, our Chief Financial      Officer advised certain members of our Board of Directors of the existence      of corporate governance issues, which he believes if not corrected, may      lead to significant problems in the future. In response to the letter of      the Chief Financial Officer, and to assist in the determination of whether      the issues raised warrant any changes to our internal controls and/or Corporate      Governance Principles, our Audit Committee engaged the services of a special      counsel to review the letter and report its findings to the Audit Committee.      This investigation is currently in progress. We do not believe that the      issues raised by the Chief Financial Officer will have a material impact      on any of our preceding financial reports.

As previously reported and in  connection with the foregoing, we      have made enhancements to our internal control over financial reporting      and will continue to do so if appropriate. These enhancements include further      formalization of our policies and procedures, improving the segregation      of duties, controls over the authorization of transactions and the addition      of an internal auditor and other personnel. No changes in our internal      control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)      under the Exchange Act) occurred during the fiscal quarter ended March      31, 2005 that have materially affected, or are reasonably likely to materially      affect, our internal control over financial reporting.

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Our management, including our Chief      Executive Officer and Chief Financial Officer, does not expect that our      disclosure controls and procedures or our internal controls will prevent      all error and all fraud. A control system, no matter how well conceived      and operated, can provide only reasonable, not absolute, assurance that      the objectives of the control system are met. Further, the design of a      control system must reflect the fact that there are resource constraints,      and the benefits of controls must be considered relative to their costs.      Because of the inherent limitations in all control systems, no evaluation      of controls can provide absolute assurance that all control issues and      instances of fraud, if any, within our company have been detected.

**Part II Other Information**

| **Item 1.** | **Legal Proceedings:** |
|-------------|------------------------|

As described in our report on Form      10-K for the fiscal year ended June 30, 2004, we are involved in the following      pending and threatened legal proceedings. We are the defendant in a third      party complaint filed by Shore Venture Group, LLC (Shore Venture) in Federal      District Court in Pennsylvania. The third party complaint was filed against      us on May 7, 2001. Shore Venture is the defendant to an action commenced      by Berwyn Capital. The third party complaint alleges a claim for breach      of contract and seeks indemnification. A trial was held in October, 2002      and we are currently awaiting the verdict of the judge. Management believes      that the claim will not have a material adverse impact on our financial      condition, results of operations or cash flows.

We are the defendant in a case filed    by Shore Venture Group, LLC in the United States District Court for the District    of New Jersey, under the caption *Shore Venture Group, LLC, et al v. Authentidate    Holding Corp., Authentidate, Inc. and John T. Botti.* This complaint was    filed on March 2, 2005, and an amended complaint was filed on or about April    26, 2005. The plaintiffs in this case seek additional shares of the common    stock of our subsidiary, Authentidate, Inc., the right to exchange its stock    in Authentidate, Inc., for publicly traded stock and securities in us, rights    under one of our patent applications and damages in connection with an alleged    copyright infringement. Prior to the commencement of this case, we had conducted    extensive settlement negotiations with Shore Venture in an effort to resolve    all claims between the parties. However, negotiations did not result in a    mutually agreeable settlement. The lawsuit requests damages, injunctive relief,    costs and attorneys’ fees. We intend to defend the action vigorously.    Based on the facts of which we are currently aware, management believes that    the resolution of all of our claims with Shore Venture will not have a materially    adverse effect on our financial condition. However, no assurances can be    given that such belief will ultimately prove to be accurate or that other    facts adverse to our position currently not known to management will not    be uncovered, in which case the ultimate resolution of this claim could potentially    have a material adverse effect on our financial condition. 

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

| **Item 2.** | **Changes in Securities** |
|-------------|---------------------------|

| **(a)** | **Sales of Unregistered Securities.** |
|---------|---------------------------------------|
|    | None.                                 |
|    |                                  |
| **(b)** | **Not applicable.**                   |
|    |                                  |
| **(c)** | **Repurchase of Equity Securities.**  |

We did not repurchase any of our      equity securities during the fiscal quarter ended March 31, 2005.

| **Item 3** | **Defaults Upon Senior Securities:** |
|------------|--------------------------------------|
|       |                                 |
|       | None.                                |

 

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

We held our Annual Meeting of shareholders      on January 20, 2005. As of the record date of December 13, 2004, there      were 33,826,621 shares outstanding and eligible to vote at the Annual Meeting.      At the Annual Meeting, shareholders were requested to vote on the election      of the following eight directors, each of whom was elected by the shareholders      as follows:

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| **Name of Nominee** |   | **Votes Cast In Favor** |   | **Votes Withheld** |   | **% In Favor** |   |
|---------------------|--------|-------------------------|--------|--------------------|--------|----------------|--------|
|                     |        |                         |        |                    |        |                |        |
| Surendra Pai        |   | 27,965,815              |   | 956,585            |   | 82.7%          |   |
| John J. Waters      |   | 27,514,260              |   | 1,408,140          |   | 81.3%          |   |
| J. Edward Sheridan  |   | 27,426,748              |   | 1,495,652          |   | 81.1%          |   |
| Charles J. Johnston |   | 27,740,380              |   | 1,182,020          |   | 82.0%          |   |
| J. David Luce       |   | 27,494,603              |   | 1,427,797          |   | 81.3%          |   |
| F. Ross Johnson     |   | 27,440,335              |   | 1,482,065          |   | 81.1%          |   |
| Ranjit C. Singh     |   | 28,194,886              |   | 727,514            |   | 83.4%          |   |
| Roger O. Goldman    |   | 28,195,302              |   | 727,098            |   | 83.4%          |   |

| **Item 5** | **Other Information:** |
|------------|------------------------|

As we previously announced, effective      November 15, 2004, John T. Botti no longer serves as our President and      Chief Executive Officer. In connection with an employment agreement we      entered into with Mr. Botti, effective July 1, 2003, we are obligated to      pay Mr. Botti certain severance benefits (unless he is terminated for cause      or resigns for other than “good reason”), including (a) all compensation      accrued but not paid as of the termination date; (b) the greater of (i)      his base salary to the termination date or (ii) a severance payment equal      twenty-four months of his base salary, including any regularly scheduled      increases in the base salary; (c) continued participation in our benefit      plans; (d) accelerated vesting of all options granted to him; and (e) continuation      of the exercise period in which he may exercise such options up to the      duration of the original term of the options. On February 7, 2005, we entered      into an Agreement and Release with Mr. Botti. Pursuant to the Agreement,      we will pay him the severance payments as described above and agreed to      retain Mr. Botti to provide consulting services to us for a period of one      year. Under this consulting arrangement and in accordance with the terms      of a separate consulting agreement, we agreed to pay Mr. Botti a monthly      retainer of $10,000 in consideration of his provision of such services      as may be requested by our Chief Executive Officer.

In addition, as we previously announced,      effective December 31, 2004, Mr. Peter Smith no longer serves as our Executive      Vice President—Chief Operating Officer. In connection with our employment      arrangement with Mr. Smith, we are obligated to pay him a severance benefit      of up to twelve months of his base salary unless he is terminated for cause.      On February 8, 2005 we entered into an Agreement and Release with Mr. Smith      in order to more specifically describe our severance obligations. Pursuant      to this agreement, we will pay Mr. Smith a severance payment equal to his      base salary for a period of up to twelve months. If Mr. Smith commences      new full-time employment on or before June 30, 2005, our severance obligation      will expire on June 30, 2005. If he commences full-time employment thereafter,      our severance obligation will cease on the date he commences such new employment.      However, our obligation will expire on December 31, 2005 in the event Mr.      Smith does not secure new full-time employment prior to such date.

On April 13, 2005, we announced      that we entered into an agreement with Liberty Healthcare Group Inc., a      national medical products company for the use of a new authentication service      to enable clients and other authorized parties to verify Doctor Orders      that are received via fax. Authentidate’s service enables the faxed      records to be verified online for compliance and audit purposes by utilizing      the United States Postal Service Electronic Postmark Service (USPS® EPM®).      It is anticipated that the Liberty implementation will utilize 1.5 to 2      million EPMs annually. A Doctor Order supports the medical need for issuance      of supplies and services that are reimbursed under the Medicare Program.

As previously reported, on March      23, 2005 we entered into a new employment agreement with Jan C. E. Wendenburg,      who currently serves as the Chief Executive Officer of our German subsidiary,      Authentidate International, A.G. The agreement, which is effective as of      March 15, 2005 and expires on March 31, 2007, sets forth the terms and      conditions of Mr. Wendenburg’s continued employment as the Chief Executive      Officer of Authentidate International. Under the agreement, Mr. Wendenburg’s      annual base salary will be €200,000 for the period commencing April      1, 2005 through March 31, 2006 and will be €210,000 from April 1,      2006 until expiration. A description of the material terms and conditions      of Mr. Wendenburg’s employment agreement were described in a Current      Report on Form 8-K filed on March 25, 2005.

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Pursuant to Section 10A (i)      (2) of the Securities Exchange Act of 1934, we are responsible for listing      the non-audit services approved by our Audit Committee to be performed      by our independent registered public accounting firm. During the first      quarter of fiscal 2005, the Audit Committee pre-approved the following      non-audit services to be performed by PricewaterhouseCoopers LLP: tax consulting      in connection with certain corporate initiatives, including structuring      a joint venture and in determining state and local tax treatments for revenues      derived from electronic postmark and CareCert transactions, and revenue      recognition consulting for the electronic postmark and CareCert transactions.      Each of the permitted non-audit services has been pre-approved by the Audit      Committee or the Audit Committee’s Chairman pursuant to delegated      authority by the Audit Committee. These services were performed prior to      close of the second quarter of fiscal 2005. The Audit Committee has not      authorized our independent registered public accounting firm to provide      any additional non-audit services. As previously reported, subsequent to      the end of our third quarter for our 2005 fiscal year, our Audit Committee      dismissed PricewaterhouseCoopers, LLP as our independent registered public      accounting firm and engaged Eisner LLP as our new independent registered      public accounting firm.

| **Item 6** | **Exhibits:** |
|------------|---------------|

| (a) | Exhibits |
|-----|----------|

The exhibits designated with an      asterisk (*) are filed herewith. All other exhibits have been previously      filed with the Commission and, pursuant 17 C.F.R. § 230.411, are incorporated      by reference to the document referenced in brackets following the description      of such exhibits.

| **Exhibit No.** |   | **Description**                                                                                                                                                                                             |   |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|            |   |                                                                                                                                                                                                        |   |
| 10.1            |   | Agreement and Release between Authentidate Holding Corp. and John T. Botti dated February 7, 2005 (Filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2004).     |   |
| 10.2            |   | Consulting Agreement between Authentidate Holding Corp. and John T. Botti dated as of February 1, 2005(Filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2004). |   |
| 10.3            |   | Agreement and Release between Authentidate Holding Corp. and Peter R. Smith, dated February 8, 2005 (Filed as Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended December 31, 2004).   |   |
| 10.4            |   | Employment Agreement between Authentidate Holding Corp., Authentidate International A.G. and Jan C. E. Wendenburg (Filed as Exhibit 10.1 to our Current Report on Form 8-K filed March 25 2005).            |   |
| *31.1           |   | Certification of Chief Executive Officer                                                                                                                                                                    |   |
| *31.2           |   | Certification of Chief Financial Officer                                                                                                                                                                    |   |
| *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.                             |   |

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**SAFE HARBOR STATEMENT**

Certain statements in this Form      10-Q, including information set forth under Item 2 Management’s Discussion      and Analysis of Financial Condition and Results of Operations constitute “forward-looking      statements” within the meaning of the Private Securities Litigation      Reform Act of 1995 (the Act). We desire to avail ourselves of certain “safe      harbor” provisions of the Act and are therefore including this special      note to enable us to do so. Forward-looking statements in this Form 10-Q      or hereafter included in other publicly available documents filed with      the Securities and Exchange Commission, reports to our stockholders and      other publicly available statements issued or released by us involving      known and unknown risks, uncertainties and other factors which could cause      our actual results, performance (financial or operating) or achievements      to differ from the future results, performance (financial or operating)      or achievements expressed or implied by such forward-looking statements.      Such future results are based upon our management’s best estimates      based upon current conditions and the most recent results of operations.      These risks include, but are not limited to risks associated with the market      acceptance of the DocStar, Authentidate and related product lines, competition,      pricing, technological changes, technological implementation of the Authentidate      business plan and other risks as discussed in our filings with the Securities      and Exchange Commission, in particular our Annual Report on Form 10-K for      the year ended June 30, 2004 and registration statements we have filed      and which have been declared effective by the Securities and Exchange Commission      pursuant to the Securities Act of 1933, as amended, all of which risk factors      could adversely affect our business and the accuracy of the forward-looking      statements contained herein.

**SIGNATURES**

Pursuant to the requirements of      the Securities Exchange Act of 1934, the registrant has duly caused this      report to be signed on its behalf by the undersigned thereunto duly authorized.

|         | **AUTHENTIDATE HOLDING CORP.**          |
|--------------|-----------------------------------------|
|         |                                    |
| May 16, 2005 | /s/ Surendra Pai                        |
| DATE         |                                         |
|         | SURENDRA PAI                            |
|         | PRESIDENT & CHIEF EXECUTIVE OFFICER |
|         |                                    |
|         | /s/ Dennis H. Bunt                      |
|              |                                         |
|         | DENNIS H. BUNT                          |
|         | CHIEF FINANCIAL OFFICER                 |

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