|  |
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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: DECEMBER          31, 2004                                      |
|   |                                                                                            |
|        | 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 ofincorporation or organization) |   | (I.R.S.EmployerIdentification No.) |

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

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

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 |  |   |
|-----|--|----|--|--------|

33,832,899 shares of Common Stock, par value $.001 per share, were outstanding at February 2, 2005.

1

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|  |
|  |

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

|                                                                                                           | **Page No.** |   |
|----------------------------------------------------------------------------------------------------------------|--------------|--------|
|                                                                                                                |              |        |
| **Part I Financial Information**                                                                               |         |        |
|                                                                                                           |         |   |
| Item 1 – Financial    Statements                                                                          |         |        |
| Consolidated Balance Sheets -    December 31, 2004 and June 30, 2004                                           | 3            |        |
|                                                                                                           |         |   |
| Consolidated Statements of Operations    -Three and six months ended December 31, 2004and December 31,  2003   | 4            |        |
|                                                                                                                |         |   |
| Consolidated Statements of Cash    Flows -    Six months ended December 31, 2004    and December 31, 2003      | 5            |        |
|                                                                                                                |         |   |
| Notes to Consolidated Financial Statements                                                                     | 6            |        |
|                                                                                                           |         |   |
| Item 2 – Management’s    Discussion and Analysis of    Financial Condition and Results of Operations | 13           |        |
|                                                                                                           |         |   |
| Item 3 – Quantitative      and Qualitative Disclosures About    Market Risk                               | 22           |        |
|                                                                                                           |         |   |
| Item 4 – Controls    and Procedures                                                                       | 22           |        |
|                                                                                                           |         |   |
|                                                                                                           |         |   |
| **Part II Other Information**                                                                                  |         |        |
|                                                                                                           |         |   |
| Item 1 – Legal    Proceedings                                                                             | 23           |        |
|                                                                                                           |         |   |
| Item 2 – Unregistered    sales of equity securities and use of proceeds                                   | 23           |        |
|                                                                                                           |         |   |
| Item 3 – Defaults    Upon Senior Securities                                                               | 23           |        |
|                                                                                                           |         |   |
| Item 4 – Submission    of Matters to a Vote of Security Holders                                           |  23     |        |
|                                                                                                           |         |   |
| Item 5 – Other    Information                                                                             | 23           |        |
|                                                                                                           |         |   |
| Item 6 – Exhibits                                                                                         | 24           |        |
|                                                                                                           |         |   |
| Safe Harbor Statement                                                                                          | 25           |        |
|                                                                                                           |         |   |
| Signatures                                                                                                     | 25           |        |

 

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**Part I Financial InformationAuthentidate Holding Corporation and Subsidiaries    Consolidated Balance Sheets    (unaudited except for the June 30, 2004 balancesheet)**

|                                                                                                                                                                         |   |  **December 31, 2004** |        |  **June 30, 2004** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|-------------|-------------------------|--------|
| **Assets**                                                                                                                                                                   |   |                             |             |                    |        |  |   |
| Current assets                                                                                                                                                               |   |                        |        |                    |   |   |   |
| Cash and cash equivalents                                                                                                                                                    |   | $                           | 67,527,016  |                    | $      | 73,989,823 |   |
| Restricted cash                                                                                                                                                              |   |                        | 367,191     |                    |   | 365,116 |   |
| Accounts receivable, net of allowance    for doubtful accounts of     $372,396 and $420,916 at December 31, 2004 and June    30, 2004, respectively |   |                        | 3,762,904   |                    |   | 3,039,044 |   |
| Inventories                                                                                                                                                                  |   |                        | 302,813     |                    |   | 125,206 |   |
| Prepaid expenses and other current assets                                                                                                                                    |   |                        | 561,338     |                    |   | 474,309 |   |
|                                                                                                                                                                         |   |                             |             |                    |        |  |   |
| Total    current assets                                                                                                                                                      |   |                        | 72,521,262  |                    |   | 77,993,498 |   |
|                                                                                                                                                                         |   |                        |        |                    |   |   |   |
| Property and equipment, net                                                                                                                                                  |   |                        | 3,588,137   |                    |   | 3,396,454 |   |
| Other assets                                                                                                                                                                 |   |                        |        |                    |   |   |   |
| Software development costs, net                                                                                                                                              |   |                        | 498,496     |                    |   | 497,977 |   |
| Goodwill                                                                                                                                                                     |   |                        | 11,616,736  |                    |   | 11,616,736 |   |
| Other intangible assets                                                                                                                                                      |   |                        | 1,004,493   |                    |   | 727,763 |   |
| Investment in affiliates                                                                                                                                                     |   |                        | 750,000     |                    |   | — |   |
| Other assets                                                                                                                                                                 |   |                        | 26,949      |                    |   | 4,448 |   |
|                                                                                                                                                                         |   |                             |             |                    |        |  |   |
| Total assets                                                                                                                                                                 |   | $                           | 90,006,073  |                    | $      | 94,236,876 |   |
|                                                                                                                                                                         |   |                             |             |                    |        |  |   |
|                                                                                                                                                                         |   |                        |        |                    |   |   |   |
| **Liabilities and Shareholders’    Equity**                                                                                                                             |   |                        |        |                    |   |   |   |
| Current liabilities                                                                                                                                                          |   |                        |        |                    |   |   |   |
| Accounts payable                                                                                                                                                             |   | $                           | 1,309,088   |                    | $      | 859,360 |   |
| Accrued expenses and other current liabilities                                                                                                                               |   |                        | 2,319,112   |                    |   | 1,838,860 |   |
| Deferred revenue                                                                                                                                                             |   |                        | 1,930,274   |                    |   | 1,881,277 |   |
| Current portion of obligations under capital leases                                                                                                                          |   |                        | 43,233      |                    |   | 69,968 |   |
| Current portion of long-term debt                                                                                                                                            |   |                        | 108,000     |                    |   | 208,239 |   |
| Line of credit                                                                                                                                                               |   |                        | 407,696     |                    |   | 571,622 |   |
| Income taxes payable                                                                                                                                                         |   |                        | 10,798      |                    |   | 6,130 |   |
|                                                                                                                                                                         |   |                             |             |                    |        |  |   |
| Total current liabilities                                                                                                                                                    |   |                        | 6,128,201   |                    |   | 5,435,456 |   |
|                                                                                                                                                                         |   |                        |        |                    |   |   |   |
| Deferred revenue, long-term                                                                                                                                                  |   |                        | 408,000     |                    |   | — |   |
| Long-term debt, net                                                                                                                                                          |   |                        | —      |                    |   | 48,000 |   |
| Obligations under capital leases, net of current portion                                                                                                                     |   |                        | 16,077      |                    |   | 35,421 |   |
| Other long term liabilities                                                                                                                                                  |   |                        | 496,925     |                    |   | — |   |
|                                                                                                                                                                         |   |                             |             |                    |        |  |   |
| Total liabilities                                                                                                                                                            |   |                        | 7,049,203   |                    |   | 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 December 31, 2004 and June 30, 2004               |   |                        | 2,800       |                    |   | 2,800 |   |
| Common stock, $.001 par value;    75,000,000 shares authorized, 33,828,358 and 32,951,656 issued and outstanding    at December 31, 2004 and June 30, 2004,    respectively  |   |                        | 33,828      |                    |   | 32,952 |   |
| Additional paid-in capital                                                                                                                                                   |   |                        | 159,750,317 |                    |   | 157,602,589 |   |
| Accumulated deficit                                                                                                                                                          |   |                        | (76,707,733 | )                       |   | (68,846,528 | ) |
| Currency translation adjustment                                                                                                                                              |   |                        | (122,342    | )                       |   | (73,814 | ) |
|                                                                                                                                                                         |   |                             |             |                    |        |  |   |
| Total shareholders’ equity                                                                                                                                              |   |                        | 82,956,870  |                    |   | 88,717,999 |   |
|                                                                                                                                                                         |   |                             |             |                    |        |  |   |
| Total liabilities and shareholders’ equity                                                                                                                              |   | $                           | 90,006,073  |                    | $      | 94,236,876 |   |
|                                                                                                                                                                         |   |                             |             |                    |        |  |   |

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

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**Authentidate Holding Corporation and Subsidiaries****Consolidated Statements of Operations****Unaudited**

**     **

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|                                                |   | **For            the three months ended** |       | **For              the six months ended** |   |
|-----------------------------------------------------|--------|-------------------------------------------|------------|-------------------------------------------|--------|
|                                                |   |                                           |            |                                           |        |  |   |  |  |  |  |  |   |
|                                                |   | **December          31, 2004**            |       | **December          31, 2003**            |   | **December          31, 2004** |   | **December          31, 2003** |   |
|                                                |   |                                           |            |                                      |        |  |   |  |  |   |  |  |   |
|                                                |   |                                      |       |                                      |   |   |   |   |   |   |   |   |   |
| Net sales                                           |   | $                                         | 4,761,727  |                                      | $      | 4,029,068 |   | $ | 8,424,125 |   | $ | 7,300,291 |   |
| Cost of sales                                       |   |                                      | 2,493,129  |                                      |   | 2,402,816 |   |   | 4,452,914 |   |   | 4,447,756 |   |
|                                                |   |                                           |            |                                      |        |  |   |  |  |   |  |  |   |
| Gross profit                                        |   |                                      | 2,268,598  |                                      |   | 1,626,252 |   |   | 3,971,211 |   |   | 2,852,535 |   |
|                                                |   |                                           |            |                                      |        |  |   |  |  |   |  |  |   |
| Selling, general and administrative        expenses |   |                                      | 6,962,081  |                                      |   | 3,246,924 |   |   | 11,171,438 |   |   | 5,943,997 |   |
|                                                |   |                                      |       |                                      |   |   |   |   |   |   |   |   |   |
| Product development expenses                        |   |                                      | 600,073    |                                      |   | 500,487 |   |   | 1,301,347 |   |   | 1,080,027 |   |
|                                                |   |                                           |            |                                      |        |  |   |  |  |   |  |  |
| Loss from operations                                |   |                                      | (5,293,556 | )                                         |   | (2,121,159 | ) |   | (8,501,574 | ) |   | (4,171,489 | ) |
|                                                |   |                                           |            |                                      |        |  |   |  |  |   |  |  |   |
| Other income (expense)                              |   |                                      |       |                                      |   |   |   |   |   |   |   |   |   |
| Interest          and other income                  |   |                                      | 381,054    |                                      |   | 22,174 |   |   | 689,732 |   |   | 812,037 |   |
| Interest          expense                           |   |                                      | (4,615     | )                                         |   | (5,724,704 | ) |   | (8,813 | ) |   | (6,182,160 | ) |
|                                                |   |                                           |            |                                      |        |  |   |  |  |   |  |  |   |
| Loss before income taxes                            |   |                                      | (4,917,117 | )                                         |   | (7,823,689 | ) |   | (7,820,655 | ) |   | (9,541,612 | ) |
|                                                |   |                                      |       |                                      |   |   |   |   |   |   |   |   |   |
| Income tax (expense)/benefit                        |   |                                      | (2,999     | )                                         |   | — |   |   | (5,550 | ) |   | 17,904 |   |
|                                                |   |                                           |            |                                      |        |  |   |  |  |   |  |  |   |
| Net          loss                                   |   | $                                         | (4,920,116 | )                                         | $      | (7,823,689 | ) | $ | (7,826,205 | ) | $ | (9,523,708 | ) |
|                                                |   |                                           |            |                                      |        |  |   |  |  |   |  |  |   |
| Per share amounts:                                  |   |                                      |       |                                      |   |   |   |   |   |   |   |   |   |
| Basic and diluted loss per common        share      |   | $                                         | (.15       | )                                         | $      | (.32 | ) | $ | (.23 | ) | $ | (.43 | ) |
|                                                |   |                                           |            |                                      |        |  |   |  |  |   |  |  |   |

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

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**Authentidate HoldingCorporation and SubsidiariesConsolidated Statementsof Cash FlowUnaudited**

|                                                             |   |                                |            |                     |   |           |   |
|------------------------------------------------------------------|--------|-------------------------------------|-----------------|--------------------------|--------|----------------|--------|
|                                                             |   | ****For** the    six months ended** |            |
|                                                             |   |                                |            |                     |   |           |   |
|                                                             |   | **December    31, 2004**            |            | **December    31, 2003** |   |
| **Cash flows from operating activities**                         |   |                                |            |                     |   |           |   |
| Net loss                                                         |        | $                                   | (7,826,205      | )                        | $      | (9,523,708     | )      |
| Adjustments to reconcile net loss to net cash                    |   |                                |            |                     |   |           |   |
| used in operating activities                                     |   |                                |            |                     |   |           |        |
| Depreciation and amortization                                    |   |                                | 606,248         |                     |   | 518,979        |        |
| Provision for doubtful accounts receivable                       |   |                                | 21,967          |                     |   | 20,828         |        |
| Amortization deferred financing costs and debt discount          |   |                                | —          |                     |   | 5,942,586      |   |
| Interest paid in stock                                           |   |                                | —          |                     |   | 117,245        |   |
| Non-cash compensation and other                                  |   |                                | 635,651         |                     |   | 234,313        |   |
| NYS Grant income                                                 |   |                                | —          |                     |   | (732,000       | )      |
| Changes in operating assets and liabilities:                     |   |                                |            |                     |   |           |        |
| Accounts receivable                                              |   |                                | (745,827        | )                        |   | 834,367        |   |
| Inventories                                                      |   |                                | (177,607        | )                        |   | 22,757         |   |
| Prepaid expenses and other current assets                        |   |                                | (87,029         | )                        |   | 48,034         |   |
| Accounts payable, accrued expensesand other current liabilities  |        |                                |  1,488,538 |                     |   |  (674,675 | )      |
| Deferred revenue                                                 |   |                                | 456,997         |                     |   | 1,431,525      |   |
| Income taxes                                                     |   |                                | 4,668           |                     |   | (18,091        | )      |
|                                                             |   |                                     |                 |                     |        |                |   |
| Net cash used in operating activities                            |   |                                | (5,622,599      | )                        |   | (1,777,840     | )      |
|                                                             |   |                                     |                 |                     |        |                |   |
| **Cash flows from investing activities**                         |   |                                |            |                     |   |           |   |
| Restricted cash                                                  |   |                                | (2,075          | )                        |   | (1,099,635     | )      |
| Purchases of property and equipment                              |   |                                | (510,729        | )                        |   | (120,695       | )      |
| Software development costs                                       |   |                                | (161,451        | )                        |   | (34,512        | )      |
| Other intangible assets                                          |   |                                | (403,000        | )                        |   | (24,101        | )      |
| Other long term assets                                           |   |                                | (22,501         | )                        |   | (94,835        | )      |
| Investment in affiliates                                         |   |                                | (750,000        | )                        |   | —         |   |
|                                                             |   |                                     |                 |                     |        |                |   |
| Net cash used in investing activities                            |   |                                | (1,849,756      | )                        |   | (1,373,778     | )      |
|                                                             |   |                                     |                 |                     |        |                |   |
| **Cash flows from financing activities**                         |   |                                |            |                     |   |           |   |
| Proceeds from sale of common stock, net of expenses ($30,000)    |   |                                | —          |                     |   | 470,000        |   |
| Stock options and warrants exercised                             |   |                                | 1,460,944       |                     |   | 5,695,178      |   |
| Dividends                                                        |   |                                | (35,000         | )                        |   | (35,000        | )      |
| Sale of convertible debentures, net of issuance costs ($100,378) |   |                                | —          |                     |   | 2,369,622      |   |
| Principal payments on obligations under capital leases           |   |                                | (46,079         | )                        |   | (73,669        | )      |
| Payment of registration costs                                    |   |                                | (9,624          | )                        |   | (24,693        | )      |
| Net payments under line of credit                                |   |                                | (163,926        | )                        |   | (648,938       | )      |
| Deferred financing costs                                         |   |                                | —          |                     |   | (137,300       | )      |
| Principal payments on long-term debt                             |   |                                | —          |                     |   | (148,994       | )      |
| Payment of other long term debt                                  |   |                                | (148,239        | )                        |   | (2,631         | )      |
|                                                             |   |                                     |                 |                     |        |                |   |
| Net cash provided by financing activities                        |   |                                | 1,058,076       |                     |   | 7,463,575      |   |
| Effect of exchange rate changes on cash flows                    |   |                                | (48,528         | )                        |   | (14,417        | )      |
|                                                             |   |                                     |                 |                     |        |                |   |
| Net increase (decrease) in cash and cash equivalents             |   |                                | (6,462,807      | )                        |   | 4,297,540      |   |
| Cash and cash equivalents, beginning of period                   |   |                                | 73,989,823      |                     |   | 3,460,446      |   |
|                                                             |   |                                     |                 |                     |        |                |   |
| Cash and cash equivalents, end of period                         |   | $                                   | 67,527,016      |                     | $      | 7,757,986      |   |
|                                                             |   |                                     |                 |                     |        |                |   |

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

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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) and Trac Medical Systems, Inc. (Trac Med) and its DocStar Division and are referred to as the Company.  The results of operations for the three and six months ended December 31, 2004 are not necessarily indicative of the results to be expected for the full year. Certain information and footnote disclosures normallyincluded 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 six months ended December 31, 2004 and 2003, respectively:

|                             |   |     | **December 31, ** |     |
|----------------------------------|--------|----------|------------------------|----------|
|                                  |        |          |                        |          |
|                             |   |     | **Three Months Ended** |     |   | **Six Months Ended** |   |
|                                  |        |          |                        |          |  |  |  |
|                             |   | **2004** |                   | **2003** |   | **2004** |   | **2003** |   |
|                             |   |          |                   |          |   |  |   |  |   |
| Net income/(loss)                |   | $        | (4,920,116             | )        | $ | (7,823,689 | ) | $ | (7,826,205 | ) | $ | (9,523,708 | ) |
| Preferred stock dividends        |   |     | (17,500                | )        |   | (26,871 | ) |   | (35,000 | ) |   | (79,823 | ) |
|                             |   |          |                   |          |   |  |   |  |   |
| Loss applicable to shareholders  |   | $        | (4,937,616             | )        | $ | (7,850,560 | ) | $ | (7,861,205 | ) | $ | (9,603,531 | ) |
| Weighted average shares          |   |     | 33,763,939             |     |   | 24,495,904 |   |   | 33,626,088 |   |   | 22,462,881 |   |
|                             |   |     |                   |     |   |   |   |   |   |   |   |   |   |
| Basic and diluted loss per share |   | $        | (0.15                  | )        | $ | (0.32 | ) | $ | (0.23 | ) | $ | (0.43 | ) |
|                             |   |     |                   |     |   |   |   |   |   |   |   |   |   |

     All common stock equivalents were excluded from the loss per share calculation for all periods presented because the impact is antidilutive.  At December 31, 2004, options (5,487,824), warrants (1,580,314) and convertible preferred stock (500,000) were outstanding.  At December 31, 2003, options (4,585,751), warrants (2,991,663), 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.

|                                                                                       |   | ** December    31,** |       |
|--------------------------------------------------------------------------------------------|--------|---------------------------|------------|
|                                                                                            |        |                           |            |
|                                                                                       |   | **Three Months Ended**    |       |   | **Six Months Ended** |   |
|                                                                                            |        |                           |            |  |  |  |  |  |
|                                                                                       |   | **2004**                  | ** ** | **2003** | ** ** |   | **2004** |   | **2003** |   |
|                                                                                       |   |                           |       |  |   |   |  |   |  |   |
| Net Loss:                                                                                  |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |
| As reported                                                                                |   | $                         | (4,920,116 | ) | $ | (7,823,689 | ) |   | $ | (7,826,205 | ) | $ | (9,523,708 | ) |
| Deduct: total stock based employee compensation expense determined under fair value method |   |                      | (1,024,627 | ) |   | (771,840 | ) |   |   | (1,895,984 | ) |   | (1,334,886 | ) |
|                                                                                       |   |                           |       |  |   |   |  |   |  |   |
| Proforma                                                                                   |   | $                         | (5,944,743 | ) | $ | (8,595,529 | ) |   | $ | (9,722,189 | ) | $ | (10,858,594 | ) |
|                                                                                       |   |                           |       |  |   |   |  |   |  |   |
| Basic and diluted net loss per common share:                                               |   |                      |       |   |   |   |   |   |   |   |   |   |   |   |
| As reported                                                                                |   | $                         | (0.15      | ) | $ | (0.32 | ) |   | $ | (0.23 | ) | $ | (0.43 | ) |
| Proforma                                                                                   |   | $                         | (0.18      | ) | $ | (0.35 | ) |   | $ | (0.29 | ) | $ | (0.48 | ) |

 

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4.      Comprehensive Income

Total comprehensive income/(loss) consist of:

| ** **                      | **December 31,**       |       |
|---------------------------------|------------------------|------------|
|                                 |                        |            |
| ** **                      | **Three Months Ended** |       | **Six Months Ended** |   |
|                                 |                        |            |  |  |
| ** **                      | **2004**               |       | **2003** |   | **2004** |   | **2003** |
|                            |                        |       |  |   |  |   |  |   |
| Net income/(loss)               | $                      | (4,920,116 | ) | $ | (7,823,689 | ) | $ | (7,826,205 | ) | $ | (9,523,708 | ) |
| Currency translation adjustment |                   | (41,329    | ) |   | (46,917 | ) |   | (48,528 | ) |   | (14,417 | ) |
|                            |                        |       |  |   |  |   |  |   |
| Total comprehensive loss        | $                      | (4,961,445 | ) | $ | (7,870,606 | ) | $ | (7,874,733 | ) | $ | (9,538,125 | ) |
|                            |                        |       |  |   |  |   |  |   |

5.      Segment Information

The Company manages its business in three reportable segments: DocStar, DJS and Authentidate.  Included in the Authentidate segment are the operations of Authentidate,  Trac Med and AG which are all in the security software business.  DocStar is in the document imaging software business and DJS is in the systems integration business. DocStar sells through a national network of dealers (approximately 100 dealers) and anticipates the addition of several new dealers each quarter to expand into markets not currently served.  DJS’s market is primarily in the Albany, New York region.  Authentidate, Trac Med and AG sell their products and services on a global basis using a direct sales model and reseller arrangements.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 Divisions assets consist of primarily cash and cash equivalents, and goodwill.  The Company’s segment information follows:

|                                                |        |      |    |   |             |   |                  |       |                  |   |       |   |
|-----------------------------------------------------|-------------|-----------|---------|--------|------------------|--------|-----------------------|------------|-----------------------|--------|------------|--------|
|                                                |        |      |    |   |             |   |                  |       |                  |   |       |   |
| **Segment Information for the three months ended:** |        |      |    |   |             |   |                  |       |                  |   |       |   |
|                                                |        |      |    |   |             |   |                  |       |                  |   |       |   |
| **December 31, 2004:**                              | **DocStar** |      | **DJS** |   | **Authentidate** |   | **Totals**            |       |
|                                                     |             |           |         |        |                  |        |                       |            |                       |        |            |        |
| Revenues from external customers                    | $           | 1,803,795 |    | $      | 1,849,246        |   | $                     | 1,108,686  |                  | $      | 4,761,727  |   |
| Intersegment revenues                               |        |      |    |   | 15,375           |   |                  |       |                  |   | 15,375     |   |
| Segment profit/(loss)                               |        | 317,012   |    |   | 7,321            |   |                  | (3,204,169 | )                     |   | (2,879,836 | )      |
| Segment assets                                      |        | 4,774,435 |    |   | 2,580,239        |   |                  | 3,719,994  |                  |   | 11,074,668 |   |
|                                                     |        |      |    |   |             |   |                  |       |                  |   |       |   |
| **December 31, 2003:**                              | **DocStar** |      | **DJS** |   | **Authentidate** |   | **Totals**            |       |
|                                                     |             |           |         |        |                  |        |                       |            |                       |        |            |        |
|                                                |        |      |    |   |             |   |                  |       |                  |   |       |   |
| Revenues from external customers                    | $           | 1,688,577 |    | $      | 1,952,168        |   | $                     | 388,323    |                  | $      | 4,029,068  |   |
| Intersegment revenues                               |        |      |    |   | 42,375           |   |                  |       |                  |   | 42,375     |   |
| Segment profit/(loss)                               |        | 312,440   |    |   | 29,876           |   |                  | (1,417,722 | )                     |   | (1,075,406 | )      |
| Segment assets                                      |        | 3,864,124 |    |   | 2,143,190        |   |                  | 3,422,574  |                  |   | 9,429,888  |   |
|                                                |        |      |    |   |             |   |                  |       |                  |   |       |   |
| Reconciliation:                                     |        |      |    |   |             |   | **December 31, 2004** |       | **December 31, 2003** |   |
|                                                |        |      |    |   |             |   |                       |       |                       |   |
| Revenues:                                           |        |      |    |   |             |   |                  |       |                  |   |       |   |
| Total revenues for reportable segments              |        |      |    |   |             |   | $                     | 4,777,102  |                  | $      | 4,071,443  |   |
| Elimination of intersegment revenues                |        |      |    |   |             |   |                  | (15,375    | )                     |   | (42,375    | )      |
|                                                |        |      |    |   |             |   |                       |       |                       |   |
| Total consolidated revenues                         |        |      |    |   |             |   | $                     | 4,761,727  |                  | $      | 4,029,068  |   |
|                                                |        |      |    |   |             |   |                       |       |                       |   |
|                                                |        |      |    |   |             |   |                  |       |                  |   |       |   |
| Total pre-tax loss of reportable segments           |        |      |    |   |             |   | $                     | (2,879,836 | )                     | $      | (1,075,406 | )      |
| Product development expenses                        |        |      |    |   |             |   |                  | (600,073   | )                     |   | (500,487   | )      |
| Corporate expenses                                  |        |      |    |   |             |   |                  | (1,437,208 | )                     |   | (6,247,796 | )      |
|                                                |        |      |    |   |             |   |                       |       |                       |   |
| Loss before income taxes                            |        |      |    |   |             |   | $                     | (4,917,117 | )                     | $      | (7,823,689 | )      |
|                                                |        |      |    |   |             |   |                       |       |                       |   |
|                                                |        |      |    |   |             |   |                  |       |                  |   |       |   |
|                                                |        |      |    |   |             |   | **December 31, 2004** |       | **June 30, 2004**     |   |
|                                                |        |      |    |   |             |   |                       |       |                       |   |
| Total assets of segments                            |        |      |    |   |             |   | $                     | 11,074,668 |                  | $      | 9,395,221  |   |
| Corporate assets                                    |        |      |    |   |             |   |                  | 78,941,583 |                  |   | 84,858,670 |   |
| Elim-intercompany sale-assets                       |        |      |    |   |             |   |                  | (10,178    | )                     |   | (17,015    | )      |
|                                                |        |      |    |   |             |   |                       |       |                       |   |
| Consolidated assets                                 |        |      |    |   |             |   | $                     | 90,006,073 |                  | $      | 94,236,876 |   |
|                                                |        |      |    |   |             |   |                       |       |                       |   |

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| **Segment Information for the six months ended:** |   |        |      |    |   |             |   |                        |       |                   |       |       |   |
|---------------------------------------------------|--------|-------------|-----------|---------|--------|------------------|--------|-----------------------------|------------|------------------------|------------|------------|--------|
|                                              |   |        |      |    |   |             |   |                        |       |                   |       |       |   |
| **December 31, 2004:**                            |   | **DocStar** |      | **DJS** |   | **Authentidate** |   | **Totals**                  |       |
|                                                   |        |             |           |         |        |                  |        |                             |            |                        |            |            |        |
| Revenues from external customers                  |   | $           | 3,209,465 |    | $      | 3,512,548        |   | $                           | 1,702,112  |                   | $          | 8,424,125  |   |
| Intersegment revenues                             |   |        |      |    |   | 25,469           |   |                        |       |                   |       | 25,469     |   |
| Segment profit/(loss)                             |   |        | 382,258   |    |   | 20,875           |   |                        | (5,123,145 | )                      |       | (4,720,012 | )      |
| Segment assets                                    |   |        | 4,774,435 |    |   | 2,580,239        |   |                        | 3,719,994  |                   |       | 11,074,668 |   |
|                                                   |   |        |      |    |   |             |   |                        |       |                   |       |       |   |
| **December 31, 2003:**                            |   | **DocStar** |      | **DJS** |   | **Authentidate** |   | **Totals**                  |       |
|                                                   |        |             |           |         |        |                  |        |                             |            |                        |            |            |        |
| Revenues from external customers                  |   | $           | 2,913,778 |    | $      | 3,790,918        |   | $                           | 595,595    |                   | $          | 7,300,291  |   |
| Intersegment revenues                             |   |        |      |    |   | 56,924           |   |                        |       |                   |       | 56,924     |   |
| Segment profit/(loss)                             |   |        | 291,541   |    |   | 20,860           |   |                        | (2,511,190 | )                      |       | (2,198,789 | )      |
| Segment assets                                    |   |        | 3,864,124 |    |   | 2,143,190        |   |                        | 3,422,574  |                   |       | 9,429,888  |   |
|                                              |   |        |      |    |   |             |   |                        |       |                   |       |       |   |
| Reconciliation:                                   |   |        |      |    |   |             |   | **December 31, 2004**       |       | **December 31, 2003**  |       |
|                                              |   |        |      |    |   |             |   |                             |       |                        |       |
| Revenues:                                         |   |        |      |    |   |             |   |                        |       |                   |       |       |   |
| Total revenues for reportable segments            |   |        |      |    |   |             |   | $                           | 8,449,594  |                   | $          | 7,357,215  |   |
| Elimination of intersegment revenues              |   |        |      |    |   |             |   |                        | (25,469    | )                      |       | (56,924    | )      |
|                                              |   |        |      |    |   |             |   |                             |       |                        |       |
| Total consolidated revenues                       |   |        |      |    |   |             |   | $                           | 8,424,125  |                   | $          | 7,300,291  |   |
|                                              |   |        |      |    |   |             |   |                             |       |                        |       |
|                                              |   |        |      |    |   |             |   |                        |       |                   |       |       |   |
| Total pre-tax loss of reportable segments         |   |        |      |    |   |             |   | $                           | (4,720,012 | )                      | $          | (2,198,789 | )      |
| Product development expenses                      |   |        |      |    |   |             |   |                        | (1,301,347 | )                      |       | (1,080,027 | )      |
| Corporate expenses                                |   |        |      |    |   |             |   |                        | (1,806,133 | )                      |       | (6,269,469 | )      |
| Elmination of intersegment profits                |   |        |      |    |   |             |   |                        | 6,837      |                   |       | 6,673      |   |
|                                              |   |        |      |    |   |             |   |                             |       |                        |       |
| Loss before income taxes                          |   |        |      |    |   |             |   | $                           | (7,820,655 | )                      | $          | (9,541,612 | )      |
|                                              |   |        |      |    |   |             |   |                             |       |                        |       |
|                                              |   |        |      |    |   |             |   |                        |       |                   |       |       |   |
|                                              |   |        |      |    |   |             |   | **  December 31,2004** | ** ** | ** June 30,2004** | ** ** |
|                                              |   |        |      |    |   |             |   |                             |       |                        |       |
| Total assets of segments                          |   |        |      |    |   |             |   | $                           | 11,074,668 |                   | $          | 9,395,221  |   |
| Corporate assets                                  |   |        |      |    |   |             |   |                        | 78,941,583 |                   |       | 84,858,670 |   |
| Elim-intercompany sale-assets                     |   |        |      |    |   |             |   |                        | (10,178    | )                      |       | (17,015    | )      |
|                                              |   |        |      |    |   |             |   |                             |       |                        |       |
| Consolidated assets                               |   |        |      |    |   |             |   | $                           | 90,006,073 |                   | $          | 94,236,876 |   |
|                                              |   |        |      |    |   |             |   |                             |       |                        |       |

6.      Service Revenues and Cost of Sales

Included in net sales and cost of goods sold are service sales of $409,345 and cost of service sales of $195,727 for the three months ended December 31, 2004.  Included in net sales and cost of goods sold are service sales of $728,282 and cost of service sales of $327,033 for the six months ended December 31, 2004.

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 ofthe 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 December 31, 2004 the amount due ESDC was $108,000 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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8.      Goodwill and Purchased Intangible Assets

Effective July 1, 2001, the Company adopted FAS 141 and FAS 142.  FAS 141 requires 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 requires 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 six months ended December 31, 2004.  The values at December 31, 2004 were as follows:

| ** **                | **Authentidate** |   | **AG**     |   | **Trac Med** |   | **Total**   |
|---------------------------|------------------|--------|------------|--------|--------------|--------|-------------|
|                      |                  |   |            |   |              |   |             |
| Balance December 31, 2004 | $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 six months ended December 31, 2004.

Intangible asset amortization expense for the three and six months ended December 31, 2004 was $83,310 and $126,270.  Below is a chart of intangible  assets:

|                 |   | **December 31, 2004**     |      | **June 30, 2004**            |   |
|----------------------|--------|---------------------------|-----------|------------------------------|--------|
|                 |   |                           |      |                              |   |
| ** **           |   | **Gross Carrying Amount** |      | **Accumulated Amortization** |   | **Net Book Value** |   | **Gross Carrying Amount** |   | **Accumulated Amortization** |   | **Net Book Value** |   |
|                 |   |                           |      |                              |   |  |   |  |   |  |   |  |   |
| Patents              |   | $                         | 388,487   |                         | $      | 76,843 |   | $ | 311,644 |   | $ | 366,080 |   | $ | 64,663 |   | $ | 301,417 |   |
| Trademarks           |   |                      | 192,786   |                         |   | 33,071 |   |   | 159,715 |   |   | 133,086 |   |   | 28,932 |   |   | 104,154 |   |
| Licenses             |   |                      | 737,569   |                         |   | 264,242 |   |   | 473,327 |   |   | 476,484 |   |   | 154,292 |   |   | 322,192 |   |
| Acquired Techologies |   |                      | 59,807    |                         |   |   |   |   | 59,807 |   |   |   |   |   |   |   |   |   |   |
|                 |   |                           |      |                              |   |  |   |  |   |  |   |  |   |
|                 |   | $                         | 1,378,649 |                         | $      | 374,156 |   | $ | 1,004,493 |   | $ | 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 |   | $      | 239,616 |   |
|------|--------|--------|---------|--------|
| 2006 |   |   | 239,115 |   |
| 2007 |   |   | 181,955 |   |
| 2008 |   |   | 40,422  |   |
| 2009 |   |   | 29,458  |   |

9.        Shareholders’ Equity

Below is a summary of changes in Shareholders' Equity for the six months ended December 31, 2004:

| ** **                                 |   | **Preferred Stock** |   | **Common Stock** |   | **Paid in Capital** |   | **Accumulated Deficit** |        | **Translation Adjustment** |   | **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         |   |                |   |             |   | 870                 |   |                    | 1,460,074   |                       |   |                           |   |   |   |   |   | 1,460,944 |   |
| Warrants & options issued for services |   |                |   |             |   |                |   |                    | 635,651     |                       |   |                           |   |   |   |   |   | 635,651 |   |
| Registration costs                         |   |                |   |             |   |                |   |                    | (9,624      | )                          |   |                           |   |   |   |   |   | (9,624 | ) |
| Currency translation adjustment            |   |                |   |             |   |                |   |                    |        |                       |   |                           |   |   | (48,528 | ) |   | (48,528 | ) |
| Preferred stock dividends                  |   |                |   |             |   |                |   |                    |        |                       |   | (35,000                        | )      |   |   |   |   | (35,000 | ) |
| Dividends paid in stock                    |   |                |   |             |   | 6                   |   |                    | 61,627      |                       |   |                           |   |   |   |   |   | 61,633 |   |
| Net loss                                   |   |                |   |             |   |                |   |                    |        |                       |   | (7,826,205                     | )      |   |   |   |   | (7,826,205 | ) |
|                                       |   |                     |   |                  |   |                     |   |                         |        |                            |   |                                |   |
| Balance, December 31, 2004                 |   | $                   | 2,800  |             | $      | 33,828              |   | $                       | 159,750,317 |                       | $      | (76,707,733                    | )      | $ | (122,342 | ) | $ | 82,956,870 |   |
|                                       |   |                     |   |                  |   |                     |   |                         |        |                            |   |                                |   |

During the three months ended December 31, 2004, 20,857 common stock options and 478,028 common stock warrants were exercised.  During the six months ended December 31, 2004; 32,857 common stock options and 859,774 common stock warrants were exercised, resulting in net common stock shares issued ofapproximately 870,000.  

 

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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 and exercisable 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 three months ended December 31, 2004, the consultant vested in 160,000 common stock purchase warrants.  The fair value of the warrants as determined by the Black Scholes Model was $662,000 and was charged to operations under FIN 28.  Additional charges are expected in the third quarter of fiscal 2005.

10.      Preferred Stock

As of October 1, 2004, the Company’s right to redeem the outstanding 28,000 shares of Series B Preferred Stock is vested.  Accordingly, the Company has 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 the Company elects to redeem these securities, the holder will be able to exercise its conversion right subsequent to 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 Stockwas 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.  

11.      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 thereunder.  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

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12.      Private Debt Offerings

During fiscal years ended June 30, 2003 and June 30, 2004, the Company sold $8,895,300 of convertible debentures in aggregate 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 forservices 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    during the six months ended December 31, 2004. 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.

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 thereunder.

13.      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 Boardordered 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.

14.      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 Nonmonetary Assets – an amendment of APB    Opinion No. 29 Accounting for Nonmonetary transactions*.  This Statement    revises Opinion 29 to eliminate the exception for nonmonetary exchanges of    similar productive assets and replaces it with a general exception for exchanges    of nonmonetary assets that do not have commercial substance.  The provisions    of this Statement shall be effective for nonmonetary asset exchangesoccurring 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 andmeasurement 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 SFAS 123R, the Company will be required to apply the provisions of the statement prospectively for any newly issued, modified or settled award after the date of initial adoption. 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 SFAS 123R will have on its consolidated financial position, results of operations and cash flows, which is expected to be material. 

 

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15.      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 have also been advised of a claim    by Shore Venture concerning additional shares of the common stock of our    subsidiary, Authentidate, Inc. and one of our patent applications.We have    been conducting settlement negotiations with Shore Venture in an effort to    resolve all claims between    the parties and believed we had reached an agreement in principle. However,    we have been unable to agree with Shore Venture on the specific terms of    a settlement agreement and negotiations have not yet resulted in a final    agreement.    If    we reach a settlement with Shore Venture that results in    our purchase of Shore Venture’s    interest in Authentidate in excess of the then fair value of the Authentidate    shares, such excess may be recorded as a charge to operations. Based on the    settlement negotiations held between the parties to date, management believes    that the resolution of all of Shore Venture’s claims will not have a    material adverse effect on theCompany’s 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 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 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 eitherdate.

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.

As previously reported in our annual    report Form 10-K, in the period ended June 30, 2004, we did not    achieve a revenue metric as required under this agreement with the United States Postal Service. As of December    31, 2004, management believes it is in compliance with this metric.    However, no assurances can be given that the United States Postal Service    concurs in 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 the Company and the United States Postal Service will both agree to    and which will enable the Company to continue its relationship with the United    States Postal Service. If we    are unsuccessful in completing these negotiations and should the Company    fail to satisfy one or more of the performance metrics under this agreement,    the United States Postal Service could, subject to the Company's right to    cure any such failure, terminate our agreement.

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 belimited 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 December 31, 2004, we were not aware of any obligations under such indemnification agreements that would require material payments.

 

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

**Item 2.Executive Overview**

We are involved in the development    of security software technology, document imaging software products and systems    integration services and products. Our products include DocStar document    imaging software products, the Authentidate authentication and security software    products and services and system integration services and sale of computer    products through our DJS subsidiary. We also offer, through our Trac Medical    Solutions subsidiary, the CareCert®ES Internet-based medical    forms processing service. Our Authentidate segment includes products and    services sold by Authentidate, Inc. (including its Cryptcom division as discussed    below), Trac Medical Solutions, Inc., and Authentidate International, AG.    During the three and six months ended December 31, 2004, we derived approximately    $1.1 million and $1.7 million in revenues from our Authentidate segment,    respectively. Combined DocStar and DJS segments revenues were $3.7 million    and $6.7 million for the three and six months ended December 31, 2004, respectively.

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

DocStar 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.

We established our Authentidate subsidiary during the fiscal year ended June 30, 2000 to engage 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 contemplate 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. We currently own approximately 98% of Authentidate, Inc.

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.

As previously reported in our annual    report Form 10-K, in the period ended June 30, 2004, we did not    achieve a revenue metric as required under this agreement with the United States Postal Service. As of December    31, 2004, management believes it is in compliance with this metric.    However, no assurances can be given that the United States Postal Service    concurs in 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 the company 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.

 

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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 themembership 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, 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 six months ended December 31, 2004.  Subsequent to December 31, 2004, our shareholders elected two new members to the Board of Directors.  We are continuing  to address the challenges of the markets in which the Authentidate segment operates, while continuing to grow the established businesses, DocStar and DJS.

**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 otherlong-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.

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. 

 

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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; |

|  |   |                                                                                              |
|--|--------|---------------------------------------------------------------------------------------------------|
|  | • | 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 in fiscal 2005.

 

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*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.

*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.

**Results of OperationsThree and six months ended December 31, 2004 compared to three and six months ended December 31, 2003.**

The Company realized a consolidated net loss of $4,920,116 ($.15 per share) and $7,826,205 ($.23 per share) for the three and six months ended December 31, 2004 compared to a consolidated net loss of $7,823,689 ($.32 per share) and $9,523,708 ($.43 per share) for the three and six months ended December 31, 2003.

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 Authentidate segment.  Our Authentidate segment has incurred significant sales, marketing, development and general administrative expenses this year and last in an effort to complete the product development efforts, generate sales and develop a market for its products.

The consolidated net loss for the    three months ended December 31, 2004 is approximately $2.9 million less than    it was for the same period last year. The Company had approximately $5.6    million in non-cash interest expense related to conversions of debentures    and which    included approximately $300,000 of amortization expense related to such debt    (see Footnote 12) during the three months ended December 31, 2003 (corporate    expenses); the Company had no such expense during the same period in 2004.    Additionally, there was an increase in the loss in the Authentidate segment    of approximately $1.8 million comparing current year second quarter to prior    year second quarter. The increase was primarily due to increased personnel    costs ($1.0 million) and consultant costs ($1.2 million) in the current    year, offset against insignificant decreases in other various categories.    The Corporate    Division incurred new severance costs of $1.1 million, while incurring none    in the prior year. DocStar segment profit increased approximately $5,000,    while DJS segment profit decreased approximately $22,000 for the three months    ended December 31, 2004, compared to the three months ended December 31,    2003.

The consolidated net loss for the    six months ended December 31, 2004 is approximately $1.7 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 12) during the six months ended December 31, 2003 (corporate    expenses); the Company had no such expense during the same period in 2004.    Additionally, there was an increase in the loss in the Authentidate segment    of approximately $2.6 million comparing current year to prior year. The increase    was primarily due to increased personnel costs ($1.4 million) and consulting    expense ($1.5 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. DocStar segment profit increased    approximately $91,000 due to higher sales than prior year, while DJS segment    profit remained unchanged for the six months ended December 31, 2004, compared    to the six months ended December 31, 2003.

Consolidated sales were $4,761,727 and $8,424,125 for the three and six months ended December 31, 2004, respectively; consolidated sales were $4,029,068 and $7,300,291 for the three and six months ended December 31, 2003, respectively.  The increase versus the prior year for both periods is a result of an increase in Authentidate and DocStar segment sales, offset by a decline in DJS low margin hardware sales.    

Consolidated gross profit for the three months ended December 31, 2004 and 2003 was $2,268,598 and $1,626,252, respectively, while the consolidated gross profit for the six months ended December 31, 2004 and 2003 was $3,971,211 and $2,852,535, respectively.  The consolidated gross profit margin was 47.6% and 40.4% for the three months ended December 31, 2004 and 2003; the consolidated gross profit margin was 47.1% and 39.1% for the six months ended December 31, 2004 and 2003, 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 sales in the Authentidate segment.

 

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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 $6,962,081    and $3,246,924 for the three months ended December 31, 2004 and 2003, and    $11,171,438 and $5,943,997 for the six months ended December 31, 2004 and    2003. The largest increase was in the Authentidate segment which incurred    increased personnel costs ($1.0 million and $1.4 million for the three    and six months ended December 31, 2004, respectively), along with additional    consulting    costs ($1.2 million and $1.5 million for the three and six months ended December    31, 2004). The Corporate Division also had new severance costs of $1.1 millionduring both the three and six months ended December 31, 2004. 

As a percentage of net sales, S,G&A costs were 146.2% and 132.6 % for the three and six months ended December 31, 2004, respectively, and 80.6% and 81.4% for the three and six months ended December 31, 2003.  This percentage increase is primarily due to the increase in SG&A expenses for the Authentidate segment as discussed above.               

Interest expense was $4,615 and $8,813 for the three and six months ended December 31, 2004 and 2003, respectively, compared to $5,724,704 and $6,182,160 for the three and six months ended December 31, 2003, 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. 

Product development expenses, excluding capitalized costs, primarily relate to software development for the Authentidate segment.  For the three month period December 31, 2004, these costs increased to $600,073, as compared to $500,487 the same period last year; for the six month period ended December 31, 2004, these costs were $1,301,347 compared to $1,080,027 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 approximately $79,000 and $161,000 for the three and six months endedDecember 31, 2004.  Amortization expense of software development costs amounted to approximately $54,000 and $134,000 for the three and six months ended December 31, 2003.   

**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 December 31, 2004 totaled $108,000,    which relates to a note payable to the Empire State Development Corporation    for the repayment of a grant, as more fully described below. Other long term liabilities relate to severance accruals.

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 $407,696 at December 31, 2004.

Property, plant and equipment expenditures totaled $510,729 and capitalized software development expenditures totaled $161,451 for the six months ended December 31, 2004, 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 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 ofthe 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 December 31, 2004 the amount due ESDC was $108,000 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 December 31, 2004 was $67,527,016 and total assets were $90,006,073    compared to cash and cash equivalents of $73,989,823 and total assets of    $94,236,876 at June 30, 2004. Our unrestricted cash balance at December 31,    2003 was $7,757,986 and our total assets as of such date was $29,004,710.    The increase from the six months ended December 31, 2003 to the six months    ended December 31, 2004 is due to the completion of private financings during    the fiscal year ended June 30, 2004, offset by our operating losses. We used    $5,622,599 of cash in operating activities during the six months ended December    31, 2004. This compares to cash used in operating activities of $1,777,840    for the same period last year. Total cash flow used by all activities was    $6,462,807 for the six months ended December 31, 2004 compared to net cash    provided of $4,297,540 for the six months ended December 31, 2003. This decrease    in cash and cash equivalents during the six months ended December 31, 2004    is mainly due to the Company’s operating activities ($5,622,599), primarily    the net loss, which was $7,826,205. This was coupled with investing outflows    relating to property, plant and equipment ($510,729), software development    costs ($161,451), other intangible assets ($403,000), other long term assets    ($22,501), and an investment ($750,000). 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 six months ended December    31, 2003 is mainly due to the sale of convertible debentures of $2,369,622,    stock options & warrants exercised of $5,695,178, offset by cash used    in operations totaling $1,777,840. 

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 and cash equivalents 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;                                                                                                                       |
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|  | • | 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;                                                                                                            |
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|  | • | our pursuit of strategic transactions;                                                                                                                       |
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|  | • | our business, product, capital expenditure and research and development plans and product and technology roadmaps;                                           |
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|  | • | 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.                                                                                                              |

*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 thereunder.   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 are 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 stockat 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.

 

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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 thereunder.  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 have been and will continue to use the proceeds to strengthen our balance sheet 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 thereunder.  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 ofconvertible 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.

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 redemptionbut prior to the deemed redemption date as would be set forth in such notice. 

 

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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 have also been advised of a claim by Shore Venture Group concerning additional shares of the common stock of our subsidiary, Authentidate, Inc. and one of our patent applications.  We are continuing to conduct settlement negotiations with Shore Venture in an effort to resolve all claims between the parties.  If the settlement results in our purchase of Shore Venture’s interest in Authentidate in excess of the then fair value of the Authentidate shares, such excess may be recorded as a charge to operations.  Based on the settlement negotiations held between the parties to date, management believes that the resolution of all of our claims with Shore Venture will not have a materially adverse effect on ourfinancial condition.  

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 option. Further, as reported on our Current Report on Form 8-K    for December 7, 2004, John T. Botti informed the Board of Directors that    he will retire from his position as Chairman of the Board at our annual meeting    of stockholders, which was held on January 20, 2005.	On February 7, 2005, we entered into an Agreement    and Release (the “Agreement”) 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. The foregoing description    of the Agreement and consulting agreement is qualified in its entirety by    reference to the provisions of the Agreement and consulting agreement attached    as Exhibits 10.2 and 10.3, respectively, to this Quarterly Report on Form    10-Q. The severance benefits have been accrued and are expected to be paid    over the next two years.

In addition, as we previously announced    on our Current Report on Form 8-K for December 20, 2004, effective December    31, 2004, Mr. Peter Smith is no longer serving 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 enteredinto an Agreement and Release with Mr. Smith in order to more specifically describeour severance obligations. Pursuant to this agreement, we will pay Mr. Smitha 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, ourseverance obligation will expire on June 30, 2005. If he commences full-timeemployment thereafter, our severance obligation will cease on the date he commencessuch new employment. However, our obligation will expire on December 31, 2005in the event Mr. Smith does not secure new full-time employment prior to suchdate. The benefits have been accrued for in the current period and are expectedto be paid over the next six to twelve months. The foregoing description of thisseverance agreement is qualified in its entirety by reference to the provisionsof the severance agreement attached as Exhibit 10.4 to this Quarterly Reporton Form 10-Q.

**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 December 31, 2004:

| ** **                 |   | **Total** |      | **Less than 1 year** |   | **1-3 years** |   | **3-5 years** |      | **More than 5 years** |   |
|----------------------------|--------|-----------|-----------|----------------------|--------|---------------|--------|---------------|-----------|-----------------------|--------|
| ** **                 |   |
|                       |   |           |      |                      |   |               |   |               |      |                       |   |
| Long term debt obligations |   | $         | 108,000   |                 | $      | 108,000       |   |          | —    |                  |   | — |   |   | — |   |
| Operating leases           |   |      | 839,206   |                 |   | 266,499       |   |          | 572,707   |                  |   | — |   |   | — |   |
| Capital leases             |   |      | 59,310    |                 |   | 43,233        |   |          | 16,077    |                  |   | — |   |   | — |   |
| Accrued severance          |   |      | 1,221,114 |                 |   | 724,189       |   |          | 496,925   |                  |   | — |   |   | — |   |
|                       |   |           |      |                      |   |               |   |               |      |                       |   |
| Total                      |   | $         | 2,227,630 |                 | $      | 1,141,921     |   | $             | 1,085,709 |                  | $      | 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 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 eitherdate.

 

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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 eachparticular agreement.  Historically, we have not made any payments under these    agreements that have been material individually or in the aggregate. As of    December    31, 2004, 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 DocStar 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. We do not believe that competitive pressures will require usto lower our DocStar selling price.  Because much of DJS's business is service-related, price deflation has less of an impact on DJS's profits.  We do not believe that the impact of inflation will have a significant impact on our Authentidate 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 Nonmonetary Assets – an amendment of APB    Opinion No. 29 Accounting for Nonmonetary transactions*.  This Statement    revises Opinion 29 to eliminate the exception for nonmonetary exchanges of    similar productive assets and replaces it with a general exception for exchanges    of nonmonetary assets that do not have commercial substance. The provisions    of this Statement shall be effective for nonmonetary asset exchanges	occurring in fiscal periods beginning    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 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 SFAS 123R, we will be required to apply the provisions of the statement prospectively for any newly issued, modified or settled award after the date of initial adoption. 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 SFAS 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 $66 million invested in high quality, short term investments as of December 31, 2004.  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 financialinstruments.

**Interest Rate Risk**

At any time, fluctuations in interest rates could affect interest earnings on our cash and cash equivalents. 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 December 31, 2004, our unrestricted cash and cash equivalents totaled $67,527,016, most of which was invested in asset backed short term investments 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 a result, 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 thesegregation 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 December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 ourcompany have been detected.

 

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**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 have also been advised of a claim    by Shore Venture concerning additional shares of the common stock of our    subsidiary, Authentidate, Inc. and one of our patent applications.We have    been conducting settlement negotiations with Shore Venture in an effort to    resolve all claims between    the parties and believed we had reached an agreement in principle. However,    we have been unable to agree with Shore Venture on the specific terms of a settlement    agreement and negotiations have not yet resulted in a final agreement. If    we reach a settlement with Shore Venture that results in    our purchase of Shore Venture’s    interest in Authentidate in excess of the then fair value of the Authentidate    shares, such excess may be recorded as a charge to operations. Based on the    settlement negotiations held between the parties to date, management believes    that the resolution of all of Shore Venture’s claims will not have a    material adverse effect on theCompany’s 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.**

     As previously reported on our Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, 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 exercisable as follows: 

| **Warrant No.** |   | **Number of Shares** |   | **Exercise Price** |   | **Exercisable 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.

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

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

We did not repurchase any of our equity securities during the fiscal quarter ended December 31, 2004.

**Item 3.****Defaults      Upon Senior Securities:**

None

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

None 

**Item 5.****Other      Information:**

On October 27, 2004, we issued a press release announcing that Mr. Surendra Pai has been named as our President and Chief Executive Officer, effective November 15, 2004.  Effective October 27, 2004, Mr. Pai was also appointed to our Board of Directors.  We entered into a two-year employment agreement with Mr. Pai, dated October 27, 2004 and effective November 15, 2004, pursuant to which Mr. Pai will serve as our Chief Executive Officer and President.  The terms and conditions of Mr. Pai’s employment agreement were disclosed in our Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 1, 2004.

 

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As reported in our Current Report on Form 8-K for October 27, 2004, our Board of Directors also determined to change our fiscal year from December 31 back to June 30 commencing with the fiscal year ending June 30, 2005.   In light of the fact that we have historically reported our financial statements on the basis of a June 30 fiscal year and filed an Annual Report on Form 10-K for the fiscal year ended June 30, 2004 on September 13, 2004, we will continue to file all periodic reports under the Securities and Exchange Act of 1934, as amended, on the basis of a June 30 fiscal year end.

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. Further, as reported on our Current Report on Form 8-K    for December 7, 2004, John T. Botti informed the Board of Directors that    he will retire from his position as Chairman of the Board at our annual meeting    of stockholders, which was held on January 20, 2005. On February 7, 2005,    we entered into an Agreement and Release (the “Agreement”) 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. The foregoing description    of the Agreement and consulting agreement is qualified in its entirety by    reference to the provisions of the Agreement and consulting agreement attached    as Exhibits 10.2 and 10.3, respectively, to this Quarterly Report on Form    10-Q.

On December 13, 2004, we issued a press release announcing that the Nominating and Corporate Governance Committee of our Board of Directors nominated Mr. Roger O. Goldman and Mr. Ranjit C. Singh to stand for election to the Board at our annual meeting of stockholders, which was held on January 20th, 2005.  As announced in our Current Report on Form 8-K filed on January 28th , 2005, Messrs. Goldman and Singh were elected to our Board of Directors along with the six additional nominees which our shareholders were asked to approve.

In addition, as we previously announced    on our Current Report on Form 8-K for December 20, 2004, effective December    31, 2004, Mr. Peter Smith is no longer serving 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 foregoing description    of this severance agreement is qualified in its entirety by reference to    the provisions of the severance agreement attached as Exhibit 10.4 to this    Quarterly Report on Form 10-Q.

Pursuant to Section 10A(i)(2)    of the Securities Exchange Act of 1934, we are responsible for listing the    non-audit services approved in the first quarter of 2004 by our Audit Committee    to be performed by PricewaterhouseCoopers LLP, our external auditor. 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. During the first quarter of 2004, the Audit Committee pre-approved    the following non-audit services anticipated 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.

**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.**  |   |                                                                                                                                                                            |   |
|------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|             |   |                                                                                                                                                                            |   |
|   10.1 |   | Employment Agreement between Authentidate Holding Corp. and  Surendra Pai (Filed as Exhibit 10.1 to Current Report on Form 8-K dated October 27, 2004)                          |   |
|             |   |                                                                                                                                                                            |   |
| *10.2            |   | Agreement and Release between Authentidate Holding Corp. and John T. Botti, dated February 7, 2005.                                                                             |   |
|             |   |                                                                                                                                                                            |   |
| *10.3            |   | Consulting Agreement between Authentidate Holding Corp. and John T. Botti dated as of February 1, 2005                                                                          |   |
|             |   |                                                                                                                                                                            |   |
| *10.4            |   | Agreement and Release between Authentidate    Holding Corp. and Peter R. Smith, dated February 8, 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 ourself of certain “safe harbor” provisions of the Act and is 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 usinvolving 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, inparticular 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**.                                                                                                           |
|------------------|------------------------------------------------------------------------------------------------------------------------------------------|
|             |                                                                                                                                     |
| February 9, 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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