##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED: March 31, 2010



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

FOR THE TRANSITION PERIOD FROM              TO

COMMISSION FILE NUMBER: 0-20190





Authentidate Holding Corp.

(Exact name of registrant as specified in its charter)







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

(908)
787-1700

(Registrants telephone number, including area code)



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





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



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

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

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





|                                         |  |                        
|---------------------------------------- |  | -----------------------
|Class                                    |  | Outstanding May 7, 2010
|Common Stock, $0.001 par value per share |  | 38,436,207 shares      









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##### Table of Contents

Authentidate Holding Corp.

Form 10-Q

Table of Contents



|                             |  |                                                                                       |  |     
|---------------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|                             |  |                                                                                       |  | Page
|                             | 
|Part I Financial Information |  |                                                                                      
|                             |  |                                                                                      
|Item 1.                      |  | Financial Statements                                                                  |  |     
|                             |  |                                                                                      
|                             |  | Condensed Consolidated Balance Sheets (Unaudited)                                     |  | 3   
|                             |  |                                                                                      
|                             |  | Condensed Consolidated Statements of Operations (Unaudited)                           |  | 4   
|                             |  |                                                                                      
|                             |  | Condensed Consolidated Statements of Cash Flows (Unaudited)                           |  | 5   
|                             |  |                                                                                      
|                             |  | Notes to Condensed Consolidated Financial Statements (Unaudited)                      |  | 6   
|                             |  |                                                                                      
|Item 2.                      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 17  
|                             |  |                                                                                      
|Item 3.                      |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 25  
|                             |  |                                                                                      
|Item 4.                      |  | Controls and Procedures                                                               |  | 26  
|                             | 
|Part II Other Information    |  |                                                                                      
|                             |  |                                                                                      
|Item 1.                      |  | Legal Proceedings                                                                     |  | 27  
|                             |  |                                                                                      
|Item 1A.                     |  | Risk Factors                                                                          |  | 28  
|                             |  |                                                                                      
|Item 2.                      |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 38  
|                             |  |                                                                                      
|Item 3.                      |  | Defaults upon Senior Securities                                                       |  | 38  
|                             |  |                                                                                      
|Item 4.                      |  | Removed and Reserved                                                                  |  | 38  
|                             |  |                                                                                      
|Item 5.                      |  | Other Information                                                                     |  | 38  
|                             |  |                                                                                      
|Item 6.                      |  | Exhibits                                                                              |  | 38  
|                             | 
|Signatures                   |  | 39                                                                                   



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##### Table of Contents

Authentidate Holding Corp. and Subsidiaries

Condensed Consolidated Balance Sheets





|                                                                                                                                                    |  |               |          |   |              |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ------------ | - | -------- | -
|( in thousands, except per share data )                                                                                                             |  | March 31,2010 |          |   | June 30,2009 |  
|                                                                                                                                                    |  | (Unaudited)   |          |   |              |  
|Assets                                                                                                                                              |  |               |          |   |              |   |          |  
|Current assets                                                                                                                                      |  |               |          |   |              |   |          |  
|Cash and cash equivalents                                                                                                                           |  | $             | 1,397    |   |              | $ | 461      |  
|Restricted cash                                                                                                                                     |  |               | 256      |   |              |   | 512      |  
|Marketable securities                                                                                                                               |  |               | 1,679    |   |              |   | 6,103    |  
|Accounts receivable, net                                                                                                                            |  |               | 1,207    |   |              |   | 1,024    |  
|Inventory                                                                                                                                           |  |               | 4,420    |   |              |   | 288      |  
|Prepaid expenses and other current assets                                                                                                           |  |               | 933      |   |              |   | 589      |  
|                                                                                                                                                    |  |               |          |   |              |   |          |  
|Total current assets                                                                                                                                |  |               | 9,892    |   |              |   | 8,977    |  
|Property and equipment, net                                                                                                                         |  |               | 588      |   |              |   | 549      |  
|Note receivable, net of deferred gain of $2,000                                                                                                     |  |               |         |   |              |   |         |  
|Other assets                                                                                                                                        |  |               |          |   |              |   |          |  
|Software development costs, net                                                                                                                     |  |               | 1,693    |   |              |   | 2,182    |  
|Goodwill                                                                                                                                            |  |               | 7,341    |   |              |   | 7,341    |  
|Other assets                                                                                                                                        |  |               | 1,129    |   |              |   | 1,221    |  
|Assets held for sale                                                                                                                                |  |               | 2,000    |   |              |   | 2,000    |  
|                                                                                                                                                    |  |               |          |   |              |   |          |  
|Total assets                                                                                                                                        |  | $             | 22,643   |   |              | $ | 22,270   |  
|                                                                                                                                                    |  |               |          |   |              |   |          |  
|Liabilities and Shareholders Equity                                                                                                                |  |               |          |   |              |   |          |  
|Current liabilities                                                                                                                                 |  |               |          |   |              |   |          |  
|Accounts payable and accrued expenses                                                                                                               |  | $             | 4,649    |   |              | $ | 1,585    |  
|Deferred revenue                                                                                                                                    |  |               | 1,084    |   |              |   | 823      |  
|Other current liabilities                                                                                                                           |  |               | 163      |   |              |   | 182      |  
|                                                                                                                                                    |  |               |          |   |              |   |          |  
|Total current liabilities                                                                                                                           |  |               | 5,896    |   |              |   | 2,590    |  
|Long-term deferred revenue                                                                                                                          |  |               | 140      |   |              |   | 140      |  
|                                                                                                                                                    |  |               |          |   |              |   |          |  
|Total liabilities                                                                                                                                   |  |               | 6,036    |   |              |   | 2,730    |  
|                                                                                                                                                    |  |               |          |   |              |   |          |  
|Commitments and contingencies (Note 12)                                                                                                             |  |               |          |   |              |   |          |  
|Shareholders equity                                                                                                                                |  |               |          |   |              |   |          |  
|Preferred stock $.10 par value; 5,000 shares authorized Series B, 28 shares issued and outstanding                                                  |  |               | 3        |   |              |   | 3        |  
|Common stock, $.001 par value; 75,000 shares authorized, 38,428 and 34,286 issued and outstanding on March 31, 2010 and
June 30, 2009, respectively |  |               | 38       |   |              |   | 34       |  
|Additional paid-in capital                                                                                                                          |  |               | 170,388  |   |              |   | 166,052  |  
|Accumulated deficit                                                                                                                                 |  |               | (153,697 | ) |              |   | (146,443 | )
|Accumulated other comprehensive loss                                                                                                                |  |               | (125     | ) |              |   | (106     | )
|                                                                                                                                                    |  |               |          |   |              |   |          |  
|Total shareholders equity                                                                                                                          |  |               | 16,607   |   |              |   | 19,540   |  
|                                                                                                                                                    |  |               |          |   |              |   |          |  
|Total liabilities and shareholders equity                                                                                                          |  | $             | 22,643   |   |              | $ | 22,270   |  
|                                                                                                                                                    |  |               |          |   |              |   |          |  

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



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##### Table of Contents

Authentidate Holding Corp. and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited)





|                                      |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                      |  | Three Months EndedMarch 31, |        |   | Nine Months EndedMarch 31, |  
|(in thousands, except per share data) |  | 2010                        |        |   | 2009                       |   |        | 2010 |  |   | 2009   |  
|Revenues                              |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Software licenses and support         |  | $                           | 875    |   |                            | $ | 1,195  |      |  | $ | 3,275  |   |  | $ | 3,115  |  
|Hosted software services              |  |                             | 610    |   |                            |   | 820    |      |  |   | 1,760  |   |  |   | 2,194  |  
|                                      |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Total revenues                        |  |                             | 1,485  |   |                            |   | 2,015  |      |  |   | 5,035  |   |  |   | 5,309  |  
|                                      |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses                    |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Cost of revenues                      |  |                             | 720    |   |                            |   | 915    |      |  |   | 2,266  |   |  |   | 2,261  |  
|Selling, general and administrative   |  |                             | 2,297  |   |                            |   | 2,511  |      |  |   | 7,355  |   |  |   | 8,284  |  
|Product development                   |  |                             | 472    |   |                            |   | 380    |      |  |   | 1,449  |   |  |   | 1,189  |  
|Depreciation and amortization         |  |                             | 360    |   |                            |   | 417    |      |  |   | 907    |   |  |   | 1,121  |  
|                                      |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses              |  |                             | 3,849  |   |                            |   | 4,223  |      |  |   | 11,977 |   |  |   | 12,855 |  
|                                      |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Operating loss                        |  |                             | (2,364 | ) |                            |   | (2,208 | )    |  |   | (6,942 | ) |  |   | (7,546 | )
|Other income (expense), net           |  |                             | 96     |   |                            |   | 113    |      |  |   | (258   | ) |  |   | 451    |  
|                                      |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Net loss                              |  | $                           | (2,268 | ) |                            | $ | (2,095 | )    |  | $ | (7,200 | ) |  | $ | (7,095 | )
|                                      |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted loss per share      |  | $                           | (0.06  | ) |                            | $ | (0.06  | )    |  | $ | (0.20  | ) |  | $ | (0.21  | )
|                                      |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  

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



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Authentidate Holding Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)





|                                                                           |  |                   |        |   |      |   |        |  
|-------------------------------------------------------------------------- |  | ----------------- | ------ | - | ---- | - | ------ | -
|                                                                           |  | Nine Months Ended |       
|                                                                           |  | March 31,         |       
|(in thousands)                                                             |  | 2010              |        |   | 2009 |  
|Cash flows from operating activities                                       |  |                   |        |   |      |   |        |  
|Net loss                                                                   |  | $                 | (7,200 | ) |      | $ | (7,095 | )
|Adjustments to reconcile net loss to net cash used by operating activities |  |                   |        |   |      |   |        |  
|Depreciation and amortization                                              |  |                   | 907    |   |      |   | 1,121  |  
|Share-based compensation                                                   |  |                   | 221    |   |      |   | 390    |  
|Restricted shares issued for services                                      |  |                   | 45     |   |      |   | 70     |  
|Amortization of deferred financing cost warrants                           |  |                   | 533    |   |      |   |       |  
|Changes in assets and liabilities                                          |  |                   |        |   |      |   |        |  
|Accounts receivable                                                        |  |                   | (183   | ) |      |   | 258    |  
|Inventory                                                                  |  |                   | (4,132 | ) |      |   |       |  
|Prepaid expenses and other current assets                                  |  |                   | (344   | ) |      |   | (471   | )
|Accounts payable, accrued expenses and other liabilities                   |  |                   | 3,027  |   |      |   | 345    |  
|Deferred revenue                                                           |  |                   | 261    |   |      |   | (2     | )
|                                                                           |  |                   |        |   |      |   |        |  
|Net cash used in operating activities                                      |  |                   | (6,865 | ) |      |   | (5,384 | )
|                                                                           |  |                   |        |   |      |   |        |  
|Cash flows from investing activities                                       |  |                   |        |   |      |   |        |  
|Restricted cash                                                            |  |                   | 256    |   |      |   |       |  
|Purchases of property and equipment and other assets                       |  |                   | (280   | ) |      |   | (22    | )
|Other intangible assets acquired                                           |  |                   | (4     | ) |      |   | (11    | )
|Capitalized software development costs                                     |  |                   | (81    | ) |      |   | (444   | )
|Purchase of common stock                                                   |  |                   |       |   |      |   | (148   | )
|Net sales of marketable securities                                         |  |                   | 4,424  |   |      |   | 2,382  |  
|                                                                           |  |                   |        |   |      |   |        |  
|Net cash provided by investing activities                                  |  |                   | 4,315  |   |      |   | 1,757  |  
|                                                                           |  |                   |        |   |      |   |        |  
|Cash flows from financing activities                                       |  |                   |        |   |      |   |        |  
|Proceeds from issuance of common stock                                     |  |                   | 3,536  |   |      |   |       |  
|Proceeds from exercise of options                                          |  |                   | 5      |   |      |   |       |  
|Dividends paid                                                             |  |                   | (36    | ) |      |   | (52    | )
|                                                                           |  |                   |        |   |      |   |        |  
|Net cash provided (used) by financing activities                           |  |                   | 3,505  |   |      |   | (52    | )
|                                                                           |  |                   |        |   |      |   |        |  
|Effect of exchange rate changes on cash flows                              |  |                   | (19    | ) |      |   | (84    | )
|                                                                           |  |                   |        |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                       |  |                   | 936    |   |      |   | (3,763 | )
|Cash and cash equivalents, beginning of period                             |  |                   | 461    |   |      |   | 4,493  |  
|                                                                           |  |                   |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                   |  | $                 | 1,397  |   |      | $ | 730    |  
|                                                                           |  |                   |        |   |      |   |        |  

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



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)



1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared by the company pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The
condensed consolidated financial statements include the accounts of Authentidate Holding Corp. (AHC) and its subsidiaries and joint venture (collectively, the company). All significant intercompany transactions and balances have been
eliminated in consolidation. The results of operations for the period ended March 31, 2010 are not necessarily indicative of the results to be expected for the full year. Certain information and footnote disclosures normally included in the
annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the
annual consolidated financial statements and notes thereto included in the companys Form 10-K for the fiscal year ended June 30, 2009 and the attached Managements Discussion and Analysis of Financial Condition and Results of
Operations.

The unaudited condensed consolidated financial statements are presented on a going concern basis which
contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For a number of years the company has experienced net losses and negative cash flow from operating activities as we focused on developing
new products and services, refining our business strategies, expanding our addressable markets and repositioning the company for future growth. During this period our primary sources of funds have been the issuance of equity and the incurrence of
third party debt. As discussed more fully in Note 19 of Notes to the Condensed Consolidated Financial Statements, we received net proceeds of approximately $3.5 million from the sale of common stock and warrants in a registered direct offering in
December 2009 and the subsequent exercise of related warrants through the March 10, 2010 expiration date for such warrants. For the three and nine months ended March 31, 2010, the company incurred a net loss of $2,268,000 and $7,200,000,
respectively. As of March 31, 2010, cash, cash equivalents and marketable securities were $3,076,000 the company had working capital of $3,996,000, an accumulated deficit of $153,697,000 and total shareholders equity of
$16,607,000. These conditions indicate that the company may be unable to continue as a going concern. Based on our business plan, resources available at March 31, 2010 and estimated proceeds from the expected sale of certain assets,
management of the company believes that we have sufficient working capital to fund our operations for the next twelve months. However, if the companys cash flows from operations and asset sales are less than expected, the company may need to
downsize operations, incur debt or raise additional capital. There can be no assurance, however, that the company will be successful in raising additional capital or securing financing when needed or on terms satisfactory to the company.

2. Loss Per Share

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



|                                           |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------ |  | --------------------------- | ------ | - | -------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                           |  | Three Months EndedMarch 31, |        |   | Nine Months EndedMarch 31, |  
|                                           |  | 2010                        |        |   | 2009                       |   |        | 2010 |  |   | 2009   |  
|Net loss                                   |  | $                           | (2,268 | ) |                            | $ | (2,095 | )    |  | $ | (7,200 | ) |  | $ | (7,095 | )
|Preferred stock dividends                  |  |                             | (18    | ) |                            |   | (17    | )    |  |   | (54    | ) |  |   | (52    | )
|                                           |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Net loss applicable to common shareholders |  | $                           | (2,286 | ) |                            | $ | (2,112 | )    |  | $ | (7,254 | ) |  | $ | (7,147 | )
|                                           |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Weighted average shares                    |  |                             | 38,178 |   |                            |   | 34,685 |      |  |   | 35,849 |   |  |   | 34,642 |  
|                                           |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted loss per common share    |  | $                           | (0.06  | ) |                            | $ | (0.06  | )    |  | $ | (0.20  | ) |  | $ | (0.21  | )
|                                           |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  

All potential common shares were excluded from the calculation of net loss per share for the periods
presented because their impact is antidilutive. At March 31, 2010, employee and non-executive director options (4,590,000), warrants (720,000), performance based consultant options (375,000) and convertible preferred stock
(500,000) were outstanding. At March 31, 2009, employee and non-executive director options (3,720,000), warrants (150,000), performance based consultant options (375,000) and convertible preferred stock (500,000) were
outstanding.



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##### Table of Contents

Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





3. Share-Based Compensation

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



|                                 |  |                             |    |                            |   |      |  |      |     |  |   |    
|-------------------------------- |  | --------------------------- | -- | -------------------------- | - | ---- |  | ---- | --- |  | - | ---
|                                 |  | Three Months EndedMarch 31, |    | Nine Months EndedMarch 31,
|                                 |  | 2010                        |    | 2009                       |   | 2010 |  | 2009
|SG&A                             |  | $                           | 88 |                            | $ | 59   |  | $    | 189 |  | $ | 352
|Product development              |  |                             |   |                            |   |     |  |      | 23  |  |   | 33 
|Cost of revenues                 |  |                             |   |                            |   | 1    |  |      | 9   |  |   | 5  
|                                 |  |                             |    |                            |   |      |  |      |     |  |   |    
|Share-based compensation expense |  | $                           | 88 |                            | $ | 60   |  | $    | 221 |  | $ | 390
|                                 |  |                             |    |                            |   |      |  |      |     |  |   |    

The company computed the estimated fair values of all
share-based compensation using the Black-Scholes option pricing model and the assumptions set forth in the following table. The company based its estimate of the life of these options on historical averages over the past five years and estimates of
expected future behavior. The expected volatility was based on the companys historical stock volatility. The assumptions used in the companys Black-Scholes calculations for fiscal 2010 and 2009 are as follows:



|                 |  |                        |   |  |               |   |  |                  |   |  |                                   
|---------------- |  | ---------------------- | - |  | ------------- | - |  | ---------------- | - |  | ----------------------------------
|                 |  | Risk FreeInterest Rate |   |  | DividendYield |   |  | VolatilityFactor |   |  | WeightedAverageOption Life(Months)
|Fiscal year 2010 |  | 2.5                    | % |  | 0             | % |  | 103              | % |  | 48                                
|Fiscal year 2009 |  | 3.2                    | % |  | 0             | % |  | 66               | % |  | 48                                

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

Stock option activity under
the Employees and Non-Executive Directors Stock Option Plans (the Plans) for the period ended March 31, 2010 is as follows (in thousands, except per share and average life data):



|                                   |  |                  |   |  |                              |      |                                                 |      |                         |   |    
|---------------------------------- |  | ---------------- | - |  | ---------------------------- | ---- | ----------------------------------------------- | ---- | ----------------------- | - | ---
|Employees Plan                     |  | Number ofOptions |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualLife (Years) |      | AggregateIntrinsicValue
|Outstanding, June 30, 2009         |  | 3,648            |   |  | $                            | 3.49 |                                                 | 5.36 |                         | $ | 405
|Granted                            |  | 1,535            |   |  |                              | 1.44 |                                                 |      |                         |   |    
|Exercised                          |  | (8               | ) |  |                              | 0.61 |                                                 |      |                         |   |    
|Expired/forfeited                  |  | (1,077           | ) |  |                              | 2.62 |                                                 |      |                         |   |    
|                                   |  |                  |   |  |                              |      |                                                 |      |                         |   |    
|Outstanding, March 31, 2010        |  | 4,098            |   |  | $                            | 2.96 |                                                 | 7.00 |                         | $ | 217
|                                   |  |                  |   |  |                              |      |                                                 |      |                         |   |    
|Exercisable at March 31, 2010      |  | 2,335            |   |  | $                            | 4.17 |                                                 | 5.16 |                         | $ | 28 
|                                   |  |                  |   |  |                              |      |                                                 |      |                         |   |    
|Expected to vest at March 31, 2010 |  | 1,398            |   |  | $                            | 1.35 |                                                 | 9.42 |                         | $ | 122
|                                   |  |                  |   |  |                              |      |                                                 |      |                         |   |    



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





|                            |  |                  |   |  |                              |      |                                                 |      |                         |   |   
|--------------------------- |  | ---------------- | - |  | ---------------------------- | ---- | ----------------------------------------------- | ---- | ----------------------- | - | --
|Non-Executive Director Plan |  | Number ofOptions |   |  | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualLife (Years) |      | AggregateIntrinsicValue
|Outstanding, June 30, 2009  |  | 470              |   |  | $                            | 3.50 |                                                 | 5.49 |                         | $ | 37
|Granted                     |  | 90               |   |  |                              | 1.25 |                                                 |      |                         |   |   
|Expired                     |  | (67              | ) |  |                              | 3.72 |                                                 |      |                         |   |   
|                            |  |                  |   |  |                              |      |                                                 |      |                         |   |   
|Outstanding, March 31, 2010 |  | 493              |   |  | $                            | 3.06 |                                                 | 6.38 |                         | $ | 32
|                            |  |                  |   |  |                              |      |                                                 |      |                         |   |   

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

As of March 31, 2010, there was approximately $1,045,000 of total unrecognized compensation expense related to unvested share-based
compensation arrangements granted under the Plans. Approximately $312,000 of this expense is expected to be recognized over a weighted-average period of 22 months. The remaining expense will be recognized if certain vesting conditions are met during
the next 18 months.

The total intrinsic value of options exercised was $3,600 and $0 for the nine month periods ended
March 31, 2010 and 2009, respectively. The weighted average grant date fair value of options granted during the nine month periods ended March 31, 2010 and 2009 was approximately $0.77 and $0.32, respectively. These values were calculated
using the Black-Scholes option-pricing model.

The total fair value of options vested was $195,000 and $352,000 for the nine
month periods ended March 31, 2010 and 2009, respectively.

During fiscal 2006 the company issued 375,000 stock options
to an independent consultant, exercisable at $3.25 per share. These options do not vest until the consultant realizes at least $1.0 million in sales of the companys products; therefore no expense has been recorded as no sales have been
realized through March 31, 2010. These options are not included in the disclosures above. These options expire at the later of seven years from the grant date or five years from the vesting date.

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

On January 17, 2007, the shareholders approved several amendments to the 2001 Non-Executive Director Stock Option Plan whereby
non-executive director stock options expire ten years from the original date of grant, non-executive directors will have up to two years to exercise their options after leaving the board and may elect to receive up to 50% of their cash director
compensation in restricted common stock of the company issued at fair value in accordance with the terms of the Plan. On May 20, 2009, the shareholders approved an amendment to increase this percentage to 100%. During the nine months ended
March 31, 2010, the company issued 28,041 shares of restricted common stock (valued at approximately $34,240) to certain non-executive directors in connection with this program. In May 2010, the company issued 8,370 shares of restricted common
stock (valued at approximately $9,375) to such directors under the program.

4. Comprehensive Loss:



|                                                |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|----------------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                |  | Three Months EndedMarch 31, |        |   | Nine Months EndedMarch 31, |  
|                                                |  | 2010                        |        |   | 2009                       |   |        | 2010 |  |   | 2009   |  
|Net loss as reported                            |  | $                           | (2,268 | ) |                            | $ | (2,095 | )    |  | $ | (7,200 | ) |  | $ | (7,095 | )
|Currency translation adjustment                 |  |                             | (12    | ) |                            |   | (43    | )    |  |   | (19    | ) |  |   | (84    | )
|Unrealized holding gain - marketable securities |  |                             |       |   |                            |   | 100    |      |  |   |       |   |  |   | 500    |  
|                                                |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  
|Comprehensive loss                              |  | $                           | (2,280 | ) |                            | $ | (2,038 | )    |  | $ | (7,219 | ) |  | $ | (6,679 | )
|                                                |  |                             |        |   |                            |   |        |      |  |   |        |   |  |   |        |  



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





5. Marketable Securities

At March 31, 2010 our marketable securities consisted primarily of money market investments. We classify our investments as
available for sale and they have been recorded at cost which approximates fair market value due to their variable interest rates. As a result, we have had no cumulative gross unrealized holding gains (losses) or gross realized gains
(losses) from such investments through March 31, 2010. All income generated from these investments is recorded as interest income.

6.
Discontinued Operations, Note Receivable and Assets Held for Sale

In June 2007, the company completed the sale of its
Document Management Solutions and Systems Integration businesses, to Astria Solutions Group, LLC (Astria). Under the terms of the definitive Asset Purchase Agreement, Astria issued to the company a $2,000,000 seven-year note bearing
interest at a rate of 8.5% (Note). The reported gain on this transaction did not include any value for the Note. The Note is secured by the assets of the acquired businesses sold by the company to Astria and is subordinated to the
interests of the senior creditor and mezzanine lender to Astria as set forth in an intercreditor and subordination agreement among the company, Astria, and the senior creditor and mezzanine lender. The Note provides for monthly interest payments
through May 2010, principal (based on a 15-year amortization) and interest payments thereafter through April 2014 and a final payment of the balance in May 2014. Based on the subordination, the extended collection period and other factors, the
company has no reasonable basis for estimating the degree of collectibility of the Note. Accordingly, the company will recognize, in accordance with the accounting guidance, the additional gain, if any, on the sale of the businesses as management
determines that the debtors cash flows from operations are sufficient to repay the debt.

In connection with the sale,
Astria also entered into a seven-year lease for a portion of the building owned by the company in Schenectady, New York where the acquired businesses are located. Under the terms of the lease, Astria has elected to pay all taxes and operating costs
for the land and building and rent and additional rent of approximately $186,000 per year for the term of lease. Based on the companys intention to dispose of these assets in the next year, the carrying value of the land and building is
classified as assets held for sale for all periods presented.

7. Segment Information

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

The company operates in one reportable segment in the United States and Germany. In the United States the business is
engaged in the development and sale of secure Health Information Exchange, workflow management services and telehealth solutions. The companys software and web-based services enable healthcare organizations and other enterprises to increase
revenues, improve productivity, enhance patient care and reduce costs by eliminating paper and manual work steps from clinical, administrative and other processes and enhancing compliance with regulatory requirements. The web-based services are
delivered as Software as a Service (SaaS) to customers, interfacing seamlessly with billing and document management systems. These solutions incorporate rules-based electronic forms, intelligent routing, transaction management, electronic
signatures, identity credentialing, content authentication, automated audit trails and remote patient monitoring capabilities. Both web and fax based communications are integrated into automated and trusted workflow solutions. In the United States
we offer our proprietary content authentication technology in the form of the USPS Electronic Postmark ® (EPM).
In Germany the business is engaged in the development and sale of software applications that provide electronic signature and time stamping capabilities for a variety of corporate processes including electronic billing and archiving solutions, and
security technology offerings. Our web-based services and software applications are compliant with applicable digital signature rules and guidelines.

Revenues from external customers include revenues from the German operations of approximately $875,000 and $3,275,000 for the three and
nine month periods March 31, 2010 and $1,195,000 and $3,115,000 for the three and nine months ended March 31, 2009, respectively. This operation had assets of approximately $916,000 and $1,327,000 at March 31, 2010 and 2009,
respectively.



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





8. Joint Venture and Inventory

In June 2008 we formed a joint venture with EncounterCare Solutions, Inc., called ExpressMD
Solutions LLC to provide in-home patient vital signs monitoring systems and services. ExpressMD Solutions combines EncounterCares Electronic House Call patient vital signs monitoring appliances with a specially designed web-based
management and monitoring software module based on Authentidates Inscrybe® Healthcare platform. The
service enables unattended measurements of patients vital signs and related health information and is designed to aid wellness and preventative care, and deliver better care to specific patient segments such as the elderly, special needs or
pediatric patients with chronic illnesses who require regular monitoring of serious medical conditions. Using ExpressMD Solutions offerings, health care providers will be able to easily view each specific patients vital statistics and
make adjustments to the patients care plan via the Internet. The service provides intelligent routing to alert on-duty caregivers whenever a patients vital signs are outside of the practitioners pre-set ranges. Health care
providers and health insurers are also expected to benefit by having additional tools to improve patient care and reduce overall in-person and emergency room patient visits. In April 2009, the joint venture received 510(k) market clearance from the
FDA for the monitoring appliance.

The company and EncounterCare Solutions, Inc. each own fifty percent of the joint venture
and neither party has any special rights under the joint venture agreement. At March 31, 2010 and 2009, ExpressMD Solutions did not have any assets or liabilities and EncounterCare Solutions, Inc. does not have any recourse to our general
credit. ExpressMD Solutions is consolidated in our financial statements because we are currently electing to provide the majority of funding for the joint venture and are deemed to be the primary beneficiary. For the three and nine month periods
ended March 31, 2010, we made advances of approximately $139,000 and $361,000, respectively, to the joint venture to cover development and operating expenses. During the three and nine month periods ended March 31, 2009, we advanced
approximately $89,000 and $324,000, respectively, to the joint venture for development and operating purposes. To date, the companys total advances to the joint venture of approximately $895,000 have been in excess of the amounts required
under the joint venture operating agreement entered into by the company. Although we expect to recover these advances as the joint venture generates revenues, there can be no assurance that such amounts will be recovered. Therefore, these amounts
have been expensed as incurred and charged to selling, general and administrative expenses. In addition, we may decide to advance additional amounts to further joint venture activities.

In connection with our manufacturing and sales plans for the ExpressMD telehealth service, the company has purchased certain components
and contract manufacturing services for the production of the monitoring appliance. These inventory amounts are stated at the lower of cost or market and consist of the following (in thousands):



|                     |  |               |       |              |   |    
|-------------------- |  | ------------- | ----- | ------------ | - | ---
|                     |  | March 31,2010 |       | June 30,2009
|Purchased components |  | $             | 4,082 |              | $ | 288
|Finished goods       |  |               | 338   |              |   |   
|                     |  |               |       |              |   |    
|Total inventory      |  | $             | 4,420 |              | $ | 288
|                     |  |               |       |              |   |    

9. Goodwill and Other Intangible Assets

The company performs an annual impairment analysis of goodwill at the end of the fiscal year. Any adverse development or change in its
business during the year would require an interim assessment. For the nine months ended March 31, 2010 there were no adverse developments or changes that required such an assessment. Due to current economic conditions, the company reviewed its
impairment analysis as of March 31, 2010 and concluded that the carrying amount of goodwill has not changed. Goodwill of $7,291,000 relates to our business in Germany.



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





Other intangible assets are included in other assets and consist of the following (in
thousands):



|                      |  |                     |       |                         |   |               |  |                     |     |                         |   |               |  |   |       |  |   |    
|--------------------- |  | ------------------- | ----- | ----------------------- | - | ------------- |  | ------------------- | --- | ----------------------- | - | ------------- |  | - | ----- |  | - | ---
|                      |  | March 31, 2010      |       | June 30, 2009          
|                      |  | GrossCarryingAmount |       | AccumulatedAmortization |   | Net BookValue |  | GrossCarryingAmount |     | AccumulatedAmortization |   | Net BookValue
|Patents               |  | $                   | 342   |                         | $ | 171           |  | $                   | 171 |                         | $ | 342           |  | $ | 157   |  | $ | 185
|Trademarks            |  |                     | 146   |                         |   | 58            |  |                     | 88  |                         |   | 146           |  |   | 52    |  |   | 94 
|Acquired technologies |  |                     | 72    |                         |   | 72            |  |                     |    |                         |   | 72            |  |   | 72    |  |   |   
|Licenses              |  |                     | 1,267 |                         |   | 1,142         |  |                     | 125 |                         |   | 1,263         |  |   | 1,066 |  |   | 197
|                      |  |                     |       |                         |   |               |  |                     |     |                         |   |               |  |   |       |  |   |    
|Total                 |  | $                   | 1,827 |                         | $ | 1,443         |  | $                   | 384 |                         | $ | 1,823         |  | $ | 1,347 |  | $ | 476
|                      |  |                     |       |                         |   |               |  |                     |     |                         |   |               |  |   |       |  |   |    

The company amortizes other intangible assets under
the straight line method. Amortization expense was approximately $27,000 and $96,000 for the three and nine month periods ended March 31, 2010. Amortization expense for the next five fiscal years and thereafter is expected to be as follows (in
thousands):



|           |  |   |    
|---------- |  | - | ---
|2010       |  | $ | 26 
|2011       |  |   | 101
|2012       |  |   | 59 
|2013       |  |   | 27 
|2014       |  |   | 27 
|Thereafter |  |   | 144
|           |  |   |    
|           |  | $ | 384
|           |  |   |    

10. Shareholders Equity

The changes in shareholders equity for the nine months ended March 31, 2010 are summarized as follows (in thousands):



|                                    |  |                |   |             |   |                |  |                    |         |  |                                   |          |   |                          |   |      |   |  |   |        |  
|----------------------------------- |  | -------------- | - | ----------- | - | -------------- |  | ------------------ | ------- |  | --------------------------------- | -------- | - | ------------------------ | - | ---- | - |  | - | ------ | -
|                                    |  | PreferredStock |   | CommonStock |   | Paid-inCapital |  | AccumulatedDeficit |         |  | AccumulatedOtherComprehensiveLoss |          |   | TotalShareholdersEquity |  
|Balance, June 30, 2009              |  | $              | 3 |             | $ | 34             |  | $                  | 166,052 |  | $                                 | (146,443 | ) |                          | $ | (106 | ) |  | $ | 19,540 |  
|Preferred stock dividends           |  |                |   |             |   |                |  |                    |         |  |                                   | (54      | ) |                          |   |      |   |  |   | (54    | )
|Share-based compensation expense    |  |                |   |             |   |                |  |                    | 221     |  |                                   |          |   |                          |   |      |   |  |   | 221    |  
|Issuance of common stock            |  |                |   |             |   | 4              |  |                    | 3,532   |  |                                   |          |   |                          |   |      |   |  |   | 3,536  |  
|Exercise of stock options           |  |                |   |             |   |                |  |                    | 5       |  |                                   |          |   |                          |   |      |   |  |   | 5      |  
|Issuance of restricted common stock |  |                |   |             |   |                |  |                    | 45      |  |                                   |          |   |                          |   |      |   |  |   | 45     |  
|Issuance of warrants for commitment |  |                |   |             |   |                |  |                    | 533     |  |                                   |          |   |                          |   |      |   |  |   | 533    |  
|Currency translation adjustment     |  |                |   |             |   |                |  |                    |         |  |                                   |          |   |                          |   | (19  | ) |  |   | (19    | )
|Net loss                            |  |                |   |             |   |                |  |                    |         |  |                                   | (7,200   | ) |                          |   |      |   |  |   | (7,200 | )
|                                    |  |                |   |             |   |                |  |                    |         |  |                                   |          |   |                          |   |      |   |  |   |        |  
|Balance, March 31, 2010             |  | $              | 3 |             | $ | 38             |  | $                  | 170,388 |  | $                                 | (153,697 | ) |                          | $ | (125 | ) |  | $ | 16,607 |  
|                                    |  |                |   |             |   |                |  |                    |         |  |                                   |          |   |                          |   |      |   |  |   |        |  

During the nine months ended March 31, 2010, approximately 8,140 stock options and 698,986 common stock
warrants related to the companys registered direct offering were exercised.



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Notes to Condensed Consolidated Financial Statements (Unaudited)





11. Preferred Stock

The company has the right to repurchase the outstanding Series B preferred stock at a redemption price equal to $25.00 per share, plus
accrued and unpaid dividends. The holder of such shares has the right to convert shares of preferred stock into an aggregate of 500,000 shares of our common stock at a conversion rate of $1.40 per share. In the event the company elects to redeem
these securities, the holder will be able to exercise its conversion right subsequent to the date that we issue a notice of redemption but prior to the deemed redemption date as would be set forth in such notice. The Series B preferred stock was
originally issued in a private financing in October 1999 and the conversion and redemption features were amended in October 2002 to provide for the rights and obligations described in this note. At March 31, 2010, the company has accrued
dividends in the amount of $17,500 which remain unpaid.

12. Commitments and Contingencies

Between June and August 2005, six purported shareholder class actions were filed in the United States District Court for the Southern
District of New York (S.D.N.Y.) against our company and certain of its current and former directors and former officers. Plaintiffs in those actions alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934 and Sections 11 and 15 of the Securities Act of 1933. The securities law claims were based on the allegations that we failed to disclose that our August 2002 agreement with the USPS contained certain performance metrics, and that the USPS
could cancel the agreement if we did not meet these metrics; that we did not disclose complete and accurate information as to our performance under, and efforts to renegotiate, the USPS agreement; and that when we did disclose that the USPS might
cancel the agreement, the market price of our stock declined. On October 5, 2005 the Court consolidated the class actions under the caption In re Authentidate Holding Corp. Securities Litigation., C.A. No. 05 Civ. 5323 (LTS), and
appointed the Illinois State Board of Investment as lead plaintiff under the Private Securities Litigation Reform Act. The plaintiff filed an amended consolidated complaint on January 3, 2006, which asserted the same claims as the prior
complaints and also alleged that Authentidate violated the federal securities laws by misrepresenting that it possessed certain patentable technology. On July 14, 2006, the Court dismissed the amended complaint in its entirety; certain claims
were dismissed with prejudice and plaintiff was given leave to replead those claims which were not dismissed with prejudice. In August 2006, plaintiff filed a second amended complaint, which did not assert any claims relating to the companys
patents or under the Securities Act of 1933, but which otherwise was substantially similar to the prior complaint. The second amended complaint sought unspecified monetary damages. The company moved to dismiss the second amended complaint on
November 13, 2006. On March 26, 2009, the S.D.N.Y. dismissed, with prejudice, the second amended complaint. The lead plaintiff filed an appeal and a hearing in the case was held before the U.S. Court of Appeals for the Second Circuit on
February 3, 2010. On March 16, 2010, we reported that the U.S. Court of Appeals for the Second Circuit issued an order affirming in part and vacating and remanding in part the March 2009 decision of the S.D.N.Y. which had granted our
motion to dismiss these claims with prejudice.

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

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



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Notes to Condensed Consolidated Financial Statements (Unaudited)





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

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

We have entered into various agreements by which we may be obligated to indemnify the
other party with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses
arising from a breach of representations related to such matters as intellectual property rights. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to
challenge by us and to dispute resolution procedures specified in the particular contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third
parties for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular
agreement. Historically, we have not made any payments under these agreements that have been material individually or in the aggregate. As of March 31, 2010, we are not aware of any obligations under such indemnification agreements that would
require material payments.

13. Income Taxes

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

14. Other Income (Expense)

Other income (expense) consists of the following (in thousands):



|                              |  |                             |    |                            |   |      |  |   |      |   |  |   |    
|----------------------------- |  | --------------------------- | -- | -------------------------- | - | ---- |  | - | ---- | - |  | - | ---
|                              |  | Three Months EndedMarch 31, |    | Nine Months EndedMarch 31,
|                              |  | 2010                        |    | 2009                       |   | 2010 |  |   | 2009
|Interest income               |  | $                           | 45 |                            | $ | 68   |  | $ | 140  |   |  | $ | 316
|Rental income                 |  |                             | 45 |                            |   | 45   |  |   | 135  |   |  |   | 135
|Deferred financing costs      |  |                             |   |                            |   |     |  |   | (533 | ) |  |   |   
|Other                         |  |                             | 6  |                            |   |     |  |   |     |   |  |   |   
|                              |  |                             |    |                            |   |      |  |   |      |   |  |   |    
|Total other income (expenses) |  | $                           | 96 |                            | $ | 113  |  | $ | (258 | ) |  | $ | 451
|                              |  |                             |    |                            |   |      |  |   |      |   |  |   |    

As discussed more fully in Note 18 of Notes to
Condensed Consolidated Financial Statements, deferred financing costs relate to the expiration of a Standby Commitment for financing.

15.
Fair Value Measurements

The company measures fair value for financial assets and liabilities in accordance with the
provisions of the accounting guidance regarding fair value measurements. The guidance utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. A brief description of
those three levels is as follows:



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



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



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



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Notes to Condensed Consolidated Financial Statements (Unaudited)





The companys assets subject to fair value measurements as of March 31, 2010
are as follows (in thousands):



|                                                   |  |                                                   |       |         |   |         |  |         |   |  |   |      
|-------------------------------------------------- |  | ------------------------------------------------- | ----- | ------- | - | ------- |  | ------- | - |  | - | -----
|                                                   |  | Fair Value MeasurementsUsing Fair
Value Hierarchy
|                                                   |  | Fair value                                        |       | Level 1 |   | Level 2 |  | Level 3
|Current marketable securities - available for sale |  | $                                                 | 1,679 |         | $ | 1,679   |  | $       |  |  | $ |     
|Assets held for sale                               |  |                                                   | 2,000 |         |   |        |  |         |  |  |   | 2,000
|                                                   |  |                                                   |       |         |   |         |  |         |   |  |   |      
|Total                                              |  | $                                                 | 3,679 |         | $ | 1,679   |  | $       |  |  | $ | 2,000
|                                                   |  |                                                   |       |         |   |         |  |         |   |  |   |      

At June 30, 2009 and March 31, 2010, the
company has approximately $2.0 million of assets held for sale that are valued on a non-recurring basis using level 3 inputs. For the nine months ended March 31, 2010, no gains or losses resulting from the fair value measurement of financial
assets were included in the companys earnings.

The accounting guidance regarding fair value measurements permits
entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons
between entities that choose different measurement attributes for similar assets and liabilities. The company has elected not to measure any eligible items at fair value.

16. Merger

During
fiscal 2009 we entered into a definitive merger agreement to acquire all of the membership interests of Parascript LLC and certain of its subsidiaries. The agreement also provided that either party could terminate the agreement if the proposed
transaction was not consummated by December 31, 2008. On January 21, 2009 the company received a notice of termination from Parascript. In connection with the termination of the merger agreement we wrote-off deferred deal expenses of
approximately $900,000 during the quarter ended December 31, 2008. These expenses are included in the selling, general and administration expenses.

17. Accounting Standards Adopted in Fiscal 2010

In June 2009, the FASB issued guidance which is included in the Codification in FASB Accounting Standards Codification (ASC) 105,
Generally Accepted Accounting Principlesor collectively known as the Codification. The Codification is considered the single source of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States except for additional authoritative rules and introspective releases issued by the SEC. All guidance
contained in the Codification carries an equal level of authority. This guidance is effective for financial statements issued for interim and annual periods that ended after September 15, 2009. Effective July 1, 2009 the company adopted
the Codification which had no impact on the companys results of operations or financial position. The company also adopted the following FASB Accounting Standards Updates (ASU) during fiscal 2010:



| |  |  | ASU 2009-02, Omnibus Update-Amendments to Various Topics for Technical Corrections which makes a number of technical corrections to
various topics in the Codification.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASU 2009-03, SEC Update-Amendments to Various Topics Containing SEC Staff Accounting Bulletins. This update represents technical
corrections to various topics containing SEC Staff Accounting Bulletins to update cross-references to the Codification text.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASU 2009-04, Accounting for Redeemable Equity Instruments  Amendments to Section 480-10-S99. This update amends Topic
480, Distinguishing Liabilities from Equity, reflecting the SEC staffs views regarding the application of Accounting Series Release No. 268, Presentation in Financial Statements of Redeemable Preferred
Stocks, formerly addressed in EITF Abstracts, Topic D-98, Classification and Measurement of Redeemable Securities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASU 2009-06, Income Taxes (Topic 740)-Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for
Nonpublic Entities. This update provides implementation guidance on accounting for uncertainty in income taxes, as well as eliminates certain disclosure requirements for nonpublic entities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASU 2009-07, Accounting for Various Topics-Technical Corrections to SEC Paragraphs includes technical corrections to various topics
containing SEC guidance based on external comments received.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





| |  |  | ASU 2009-08, Earnings Per Share-Amendments to Section 260-10-S99 includes technical corrections to Topic 260-10-S99,
Earnings Per Share, based on EITF Topic D-53, Computation of Earnings Per Share for a Period that Includes a Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock and EITF Topic D-42, The
Effect on the Calculation of Earnings Per Share for the Redemption or Induced Conversion of Preferred Stock.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASU 2009-09, Accounting for Investments-Equity Method and Joint Ventures and Accounting for Equity-Based payments to
Non-Employees-Amendments to Section 323-10-A99 and 505-50-S99 represents a correction to Section 323-10-S99-4, Accounting by an Investor for Stock-Based compensation Granted to Employees of an Equity Method Investee. An
addition, FASB Accounting Standards Update 2009-09 adds SEC observer comment.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash,which amends
the Codification to clarify when the stock portion of a distribution to shareholders is considered a share issuance that is reflected in earnings per share prospectively versus a stock dividend. ASU 2010-01 codifies the consensus reached in EITF
Issue No. 09-E, Accounting for Stock Dividends, Including Distributions to Shareholders with Components of Stock and Cash.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASU 2010-02, Consolidation (Topic 810) - Accounting and Reporting for Decreases in Ownership of a Subsidiary  A Scope
Clarificationwhich clarifies circumstances where the scope of the decrease in ownership provisions of Subtopic 810-10 and related guidance applies and does not apply. The ASU also expands the disclosure requirements about deconsolidation
of a subsidiary or derecognition of a group of assets.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASU 2010-04, Accounting for Various Topics: Technical Corrections to SEC Paragraphs, and ASU 2010-05, Compensation
 Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. ASU 2010-04 and ASU 2010-05 contain revisions and technical corrections to various S Sections in the Codification which
represent authorative guidance for SEC registrants. ASU 2010-05 updates paragraph 718-10-S99-2 of Codification Topic 718, Compensation  Stock Compensation, to reflect an SEC Staff Announcement on overcoming the presumption that escrowed
share arrangements represent compensation for certain shareholders which codifies the SEC staff view documented in EITF Topic D-110, Escrowed Share Arrangements and the Presumption of Compensation.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASU 2010-06 Fair Value Measurements and Disclosures (Topic 820); Improving Disclosures about Fair Value Measurementsrequires
some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10, including separately disclosing the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and presenting information about purchases, sales , issuances, and settlements in certain reconciliations for Level 3 fair value measurements. In addition, ASU 2010-06 clarifies disclosure requirements about determining the
appropriate classes of assets and liabilities and valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ASU 2010-09 Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements removes the
requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The adoption of ASUs described above had no impact on the companys results of operations or financial position.

18. Standby Commitment and Related Warrants

On September 23, 2009, the company entered into a binding Standby Commitment (the Commitment) with an accredited investor
(the Investor) pursuant to which the Investor agreed to purchase senior secured convertible debentures in an aggregate principal amount of up to $3,000,000 during the 12-month commitment term. The Commitment provided that if the company
closed a financing with a third party or sold certain of its assets then the company would redeem any outstanding convertible debentures and the Commitment amount would be reduced to the extent of the remaining net proceeds from such transactions.
As discussed more fully in Note 19 of Notes to the Condensed Consolidated Financial Statements, the company completed a registered direct offering of common stock and warrants in December 2009. The net proceeds from the offering of approximately
$2.9 million and the subsequent exercise of certain warrants in January 2010 exceeded the Commitment amount whereby such Commitment was reduced to zero. The company did not issue any convertible debentures pursuant to the Commitment. In connection
with the Commitment, the company granted 400,000 warrants to the Investor in consideration of the Commitment to provide the financing. The warrants will be exercisable for five years at an exercise price of $1.20 per share. The Investor is an entity
affiliated with Mr. Douglas Luce, who is a



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Authentidate Holding Corp. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)





brother of Mr. J. David Luce, a member of the companys board of directors. The warrants will be restricted securities issued in reliance upon the exemption from registration provided
by Section 4(2) of the Securities Act of 1933, as amended.

In connection with issuance of the 400,000 warrants related
to the Commitment, the company recorded non-cash deferred financing costs and additional paid-in capital of approximately $533,000. These warrants were valued using the Black-Scholes option pricing model. Since the Commitment amount had been reduced
to zero, the deferred financing costs were fully amortized as other expense during the quarter ended December 31, 2009.

19.
Registered Offering

In December 2009, the company entered into a Placement Agency Agreement in which Rodman &
Renshaw, LLC (the Placement Agent) was engaged as the Placement Agent relating to a registered direct offering by the company of up to an aggregate of 3,400,000 shares of common stock of the company, par value $0.001 per share (the
common stock) and common stock purchase warrants (the warrants) to purchase up to an aggregate of 3,400,000 shares of Common Stock at an exercise price of $1.00 per warrant. On December 7, 2009, the company entered
into a securities purchase agreement with certain institutional and/or accredited investors pursuant to which the company agreed to sell an aggregate of 3,400,000 shares of its common stock and warrants to purchase a total of 3,400,000 shares of its
common stock to the investors for gross proceeds of $3.4 million. The purchase price of a share of common stock and warrant was $1.00 per share. The warrants were exercisable for a period of 90 days following the closing date of the offering at an
exercise price of $1.00. Through March 10, 2010, the expiration date of these warrants, an aggregate of 698,986 warrants were exercised and the remainder expired on the stated expiration date. The company received proceeds of $698,986 from
the exercise of such warrants. The net proceeds to the company from the offering and subsequent warrant exercises, after deducting Placement Agent fees and the companys estimated offering expenses, were approximately $3,536,000. Pursuant to
the Placement Agency Agreement, the company agreed to pay the Placement Agent an aggregate fee equal to 7.0% of the aggregate gross proceeds raised in connection with the offering, excluding warrant exercises, and issued the Placement Agent a
warrant to purchase 170,000 shares of common stock at a per share exercise price of $1.25, which warrants will be exercisable for a period of five years from the effective date of the registration statement. The common stock, warrants to purchase
common stock and shares of common stock issuable upon exercise of the warrants were issued pursuant to a prospectus supplement filed with the Securities and Exchange Commission on December 9, 2009 in connection with a takedown from the
companys shelf registration statement on Form S-3 (File No. 333-161220), which was declared effective by the Securities and Exchange Commission on September 30, 2009.



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

Forward-Looking Statements and Factors That May Affect Future Results

Certain statements in this Form 10-Q, including information set forth under Item 2 Managements Discussion and Analysis of
Financial Condition and Results of Operations constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the Act). We desire to avail ourselves of certain safe
harbor provisions of the Act and are therefore including this special note to enable us to do so. Forward-looking statements in this Form 10-Q or hereafter included in other publicly available documents filed with the Securities and Exchange
Commission, reports to our stockholders and other publicly available statements issued or released by us involving known and unknown risks, uncertainties and other factors which could cause our actual results, performance (financial or operating) or
achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such future results are based upon our managements best estimates based upon current
conditions and the most recent results of operations. These risks include, but are not limited to risks associated with the market acceptance of our software and services, competition, pricing, technological changes, implementation of our business
plan, related decisions by the USPS, and other risks as discussed in our filings with the Securities and Exchange Commission, in particular our Annual Report on Form 10-K for the year ended June 30, 2009, all of which risk factors could
adversely affect our business and the accuracy of the forward-looking statements contained herein.

Overview

Authentidate Holding Corp. (Authentidate or the company) is a worldwide provider of secure Health Information Exchange, workflow
management services and telehealth solutions. Authentidate and its subsidiaries provide software applications and web-based services that address a variety of business needs for our customers, including enabling healthcare organizations and other
enterprises to increase revenues, improve productivity, enhance patient care and reduce costs by eliminating paper and manual work steps from clinical, administrative and other processes and enhancing compliance with regulatory requirements. Our
web-based services are delivered as Software as a Service (SaaS) to our customers interfacing seamlessly with billing and document management systems. These solutions incorporate multiple features and security technologies such as rules based
electronic forms, intelligent routing, transaction management, electronic signatures, identity credentialing, content authentication, automated audit trails and remote patient monitoring capabilities. Both web and fax-based communications are
integrated into automated, secure and trusted workflow solutions.

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

Authentidate
currently operates its business in the United States and Germany with technology and service offerings that address emerging growth opportunities based on the regulatory and legal requirements specific to each market. In the United States the
business is engaged in the development and sale of web-based services largely based on our Inscrybe® platform
and related capabilities and telehealth services through our ExpressMD Solutions joint venture. In the United States, we offer our patent pending content authentication technology in the form of the United States Postal
Service® Electronic
Postmark® (EPM). In Germany the business is engaged in the development and sale of software applications that
provide electronic signature and time stamping capabilities for a variety of corporate processes including electronic billing and archiving solutions and security technology offerings. Our web-based services and software applications are compliant
with applicable digital signature rules and guidelines. We sell our web-based services and software applications through a direct sales effort and reseller arrangements.

For a number of years, we have experienced net losses and negative cash flow from operating activities. Our principal activities during
this period have focused on developing new products and services, hiring management, refining our business strategies and repositioning our businesses for growth. Although we believe we are well positioned for such growth, we expect to continue to
generate net losses and negative cash flow for the foreseeable future as we seek to expand our potential markets and generate increased revenues. See Liquidity and Capital Resources. As described in greater detail below, in December
2009, we closed on the sale of 3,400,000 shares of our common stock and warrants to purchase 3,400,000 shares of our common stock to certain institutional



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and/or accredited investors in a registered direct offering. From this transaction and warrant exercises through March 10, 2010, the warrant expiration date, we received net proceeds of
approximately $3.5 million. We are using these proceeds for working capital and general corporate purposes, including supporting the rollout of our ExpressMD telehealth products and services.

During fiscal 2010 we have continued to take steps to refine our strategic focus, complete our core service
offerings, significantly expand our addressable markets, reduce operating costs and position the company for long-term growth. In the United States we have continued to invest in our
Inscrybe® platform with particular emphasis on refining and marketing
Inscrybe® Healthcare, an automated and trusted Health Information Exchange and workflow management service
targeting the needs of enterprises in the healthcare market, and our ExpressMD telehealth products and services. We believe our business will benefit from the recent federal government healthcare reforms approved in March 2010 as well as trends in
the U.S. healthcare industry to significantly reduce costs, shorten the length of hospital stays, shift patient care towards wellness and preventative care programs and automate healthcare records and processes. Although we have taken steps to focus
our business in these areas, our progress will be impacted by the timing of customer contracts and implementations and the market acceptance of our products and services. Over this same period our business unit in Germany continued to grow
acceptance for its electronic signature and time stamping products, and focused on further penetrating the German healthcare market with its security technology offerings.

During this period we have also advanced the development of our ExpressMD telehealth service offering and continued to refine the
capabilities of our patient vital signs monitoring appliance. We have also identified sources for the materials needed to manufacture the monitoring appliances, completed testing for the appliances and arranged for the production of the appliances
with a contract manufacturer. In April 2009 we announced that we had received 510(k) market clearance from the FDA for the monitoring appliance and have been implementing our manufacturing and sales plans for ExpressMD since that time.

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

We intend to continue our efforts to market our software applications,
web-based services, telehealth solutions and related products in our target markets. We also intend to focus on identifying additional applications and markets where our technology can address customer needs.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the Securities and Exchange Commission. The preparation of our condensed consolidated financial statements and
related notes in accordance with generally accepted accounting principles requires us to make estimates, which include judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure
of contingent assets and liabilities. We have based our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates on a regular basis and make changes
accordingly. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations
will be affected.

A critical accounting estimate is based on judgments and assumptions about matters that are uncertain at
the time the estimate is made. Different estimates that reasonably could have been used or changes in accounting estimates could materially impact our financial statements. We believe that the policies described below represent our critical
accounting policies, as they have the greatest potential impact on our financial statements. However, you should also review our Summary of Significant Accounting Policiesbeginning on page F-7 of Notes to the Consolidated Financial
Statements contained in our Annual Report on Form 10-K for the fiscal year ended June 30, 2009.

Long-Lived Assets

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



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Software Development Costs

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

Goodwill

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

Revenue Recognition

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

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

Management Estimates

Preparing financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. Examples include estimates of loss contingencies and product life cycles, assumptions such as elements comprising a software arrangement, including the distinction between upgrades/enhancements and new
products; when technological feasibility is achieved for our products; the potential outcome of future tax consequences; and determining when investment or other impairments exist. We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We make estimates on the future recoverability of capitalized goodwill which is highly dependent on the future success of marketing and sales, we record a valuation allowance
against deferred tax assets when we believe it is more likely than not that such deferred tax assets will not be realized and we make assumptions in connection with the calculations of share-based compensation expense. Actual results and outcomes
may differ from managements estimates, judgments and assumptions. We have based our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances and we evaluate our estimates on a
regular basis and make changes accordingly. Historically, our estimates relative to our critical accounting estimates have not differed materially from actual results; however, actual results may differ from these estimates under different
conditions. If actual results differ from these estimates and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated
statement of operations, and in certain situations, could have a material adverse effect on liquidity and our financial condition.

Stock-Based Compensation

We apply the accounting guidance regarding stock compensation to account for employee and director stock option plans. Share-based
employee compensation expense is determined using the Black-Scholes option pricing model which values options based on the stock price at the grant date, the exercise price of the option, the expected life of the option, the estimated volatility,
expected dividend payments and the risk-free interest rate over the expected life of the options.

The company computed the
estimated fair values of all share-based compensation using the Black-Scholes option pricing model and the assumptions set forth in the following table. The company based its estimate of the life of these options on historical averages



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over the past five years and estimates of expected future behavior. The expected volatility was based on the companys historical stock volatility. The assumptions used in the companys
Black-Scholes calculations for fiscal 2010 and 2009 are as follows:



|                 |  |                        |   |  |               |   |  |                  |   |  |                                   
|---------------- |  | ---------------------- | - |  | ------------- | - |  | ---------------- | - |  | ----------------------------------
|                 |  | Risk FreeInterest Rate |   |  | DividendYield |   |  | VolatilityFactor |   |  | WeightedAverageOption Life(Months)
|Fiscal year 2010 |  | 2.5                    | % |  | 0             | % |  | 103              | % |  | 48                                
|Fiscal year 2009 |  | 3.2                    | % |  | 0             | % |  | 66               | % |  | 48                                

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

Concentrations of Credit Risk

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

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

Results of Operations

Three and nine months ended March 31, 2010 compared to three and nine months ended March 31, 2009.

Revenues were $1,485,000 for the quarter ended March 31, 2010, compared to $2,015,000 for the prior year period. These results
reflect a decrease in revenues from our German operations due to the timing of certain contract awards and project implementations and a decrease in U.S. revenues due to the Medco acquisition of Liberty Medical and the related expiration of our
contract with Liberty at the end of March 2009 which offset growth from new customers in the U.S. Revenues for the nine months ended March 31, 2010 were approximately $5,035,000 compared to $5,309,000 for the prior year. These results reflect a
decrease in U.S. revenues as a result of the Liberty Medical acquisition referred to above which offset an increase of approximately 5% in German revenues from new customer projects.

Cost of revenues decreased to $720,000 for the quarter ended March 31, 2010, compared to $915,000 for the same period in the prior
year. This decrease is due primarily to lower hardware and professional services costs for certain projects which offset higher license, maintenance and data center expenses. Cost of revenues for the nine months ended March 31, 2010 were
$2,266,000 compared to $2,261,000 for the prior year reflecting the same trends as the quarter as well as additional hardware expenses for certain projects.

Selling general and administrative (SG&A) expenses decreased to $2,297,000 for the quarter ended March 31, 2010, compared to
$2,511,000 for the prior year period. The decrease reflects our cost management activities for the period and the timing of audit and related expenses from period to period. SG&A expenses for the nine months ended March 31, 2010 decreased
to $7,355,000 compared to $8,284,000 for the prior year reflecting the same trends as the quarter and lower share based compensation expense. The prior year period includes a state payroll tax credit of approximately $326,000 offset by the write off
of deferred deal expenses of approximately $900,000 related to the termination of our deal with Parascript.

Product
development expenses were $472,000 for the quarter ended March 31, 2010, compared to $380,000 for the prior year period. Product development spending fluctuates period to period based on the amounts capitalized. Total spending for the quarter,
including capitalized amounts, was $474,000 compared to $483,000 for the prior year reflecting our cost management activities. Product development expenses for the nine months ended March 31, 2010 were $1,449,000 compared to $1,189,000 for the
prior year. Total spending for the period was $1,530,000 compared to $1,633,000 for the prior year reflecting the same trends as the quarter.



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Depreciation and amortization expense was $360,000 for the quarter ended March 31,
2010, compared to $417,000 for the prior year period. This decrease is due primarily to the decrease in spending on capitalized software and fixed assets. For the nine month period depreciation and amortization was $907,000 compared to $1,121,000
for the prior year reflecting the same trends.

Other income (expense) includes interest and other income for the periods and
the amortization of non-cash deferred financing costs for the nine month period ended March 31, 2010. Interest and other income decreased to $96,000 for the quarter ended March 31, 2010, compared to $113,000 for the prior year period. For
the nine months ended March 31, 2010 interest and other income was $275,000 compared to $451,000 for the prior year. The decrease in interest and other income is due primarily to lower interest rates and lower cash and investment balances
during the current period, as we continue to invest in our business. As discussed more fully in Note 18 of Notes to the Condensed Consolidated Financial Statements, during the quarter ended December 31, 2009 we recorded a non-cash expense of
$533,000 to amortize the deferred financing costs related to the Standby Commitment we entered into in September 2009 which expired in connection with our capital raise in December 2009.

Net loss for the quarter ended March 31, 2010 was $2,268,000, or $0.06 per share, compared to $2,095,000, or $0.06 per share, for
the prior year period. For the nine months ended March 31, 2010 net loss was $7,200,000, or $0.20 per share, compared to $7,095,000, or $0.21 per share, for the prior year. The net loss for the periods reflects the revenue fluctuations, cost
management activities and other matters discussed above.

Liquidity and Capital Resources

Overview

Our
operations and product development activities have required substantial capital investment to date. Our primary sources of funds have been the issuance of equity and the incurrence of third party debt. In February 2004, we sold 5,360,370 common
shares in private placements pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506, promulgated thereunder. We realized gross proceeds of approximately $73,700,000 from these transactions and received net proceeds of approximately
$69,100,000 after payment of offering expenses and broker commissions. We have been using the cash raised in this financing to provide funding for our operations and product development activities since that time. In addition, we completed a
$3,400,000 registered direct offering of shares of common stock and warrants in December 2009 and are using the net proceeds of approximately $3,500,000 on from this financing and the related warrant exercises for working capital and general
corporate purposes, including supporting the rollout of our ExpressMD telehealth products and services.

Expenditures for data
center assets and property and equipment totaled approximately $280,000, expenditures for software licenses totaled approximately $4,000 and capitalized software development expenditures totaled approximately $81,000 for the nine months ended
March 31, 2010. We have developed and intend to continue to develop new applications to grow our business and address new markets.

As described in greater detail in Note 18 of Notes to the Condensed Consolidated Financial Statements in this Quarterly Report on Form
10-Q, on September 23, 2009, the company entered into a Standby Commitment with an accredited investor pursuant to which the investor agreed to purchase senior secured convertible debentures in an aggregate principal amount of up to $3,000,000
during the 12-month commitment term, upon prior notice by the company. The Standby Commitment provided that if the company raised capital or received proceeds from this sale of certain assets during the commitment term, the amount of available
borrowings under the Standby Commitment would be reduced by such amounts. Accordingly, following the completion of our registered direct offering in December 2009 and the subsequent exercise in January 2010 of certain common stock purchase warrants
originally issued in such financing, the Standby Commitment automatically terminated in accordance with its terms. No convertible debentures were sold under this arrangement. The company granted 400,000 warrants to the investor in consideration of
the commitment to provide the financing. Such warrants are exercisable for a period of five years at an exercise price of $1.20 per share. In connection with grant of the 400,000 warrants related to the Commitment, the company recorded non-cash
deferred financing costs and additional paid-in capital of approximately $533,000. The non-cash deferred financing costs were expensed as other expense during the quarter ended December 31, 2009.

During the quarter ended September 30, 2009 we filed with the SEC a registration statement on Form S-3 and a pre-effective amendment
to such registration statement under the Securities Act. The shelf registration, was declared effective by the SEC on September 30, 2009 and allows us to sell, from time to time in one or more public offerings, shares of our common stock,
shares of our preferred stock, debt securities or warrants to purchase common stock, preferred stock or debt securities, or any combination of such securities, for proceeds in the aggregate amount of up to $40 million. Following the completion of
our registered direct offering in December 2009, there is approximately $36 million available under this registration statement for future transactions. The terms of any such future offerings, if any, and the type of equity or debt securities would
be established at the time of the offering. This disclosure shall not constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there be any sale of these securities in any jurisdiction in which an offer,
solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Any offer of the securities will be solely by means of the prospectus included in the registration statement and one or
more prospectus supplements that will be issued at the time of the offering.



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Cash Flows

At March 31, 2010, cash, cash equivalents and marketable securities amounted to approximately $3,076,000 and total assets at that
date were $22,643,000. Since June 30, 2009 cash, cash equivalents and marketable securities have decreased by $3,488,000 as we utilized cash principally to fund operating losses, product development activities, joint venture investments,
changes in working capital and capital expenditures during the nine month period ended March 31, 2010. Cash used for the period includes investments in joint venture inventory and operations of approximately $1.1 million and $361,000,
respectively, and the prepayment of certain insurance premiums and maintenance contracts. We expect to continue to use cash to fund operating losses, product development activities, joint venture investments and capital expenditures for the
foreseeable future.

Net cash used by operating activities for the nine months ended March 31, 2010 was approximately
$6,865,000 compared to $5,384,000 for the prior year period. This change reflects the joint venture investments and prepayments discussed above.

Net cash used by investing activities, excluding purchases and sales of marketable securities, was $109,000 for the nine months ended
March 31, 2010, compared to $625,000 for the prior year period. This change is due primarily to decreases in product development spending capitalized in fiscal 2010, lower spending for software licenses and a decrease in restricted cash.

Net cash provided by financing activities for the nine months ended March 31, 2010 was approximately $3,505,000 which
was primarily due to the sale of 3,400,000 shares of our common stock and warrants to purchase 3,400,000 shares of our common stock to certain institutional and/or accredited investors in a registered direct offering in December 2009. The purchase
price for each share and warrant was $1.00. The warrants were exercisable through March 10, 2010, at an exercise price of $1.00 per share. Gross proceeds from the offering and warrant exercises for 698,986 shares of common stock were
approximately $4.1 million and we received approximately $3.5 million in net proceeds, after deducting the placement agents fees and estimated offering expenses. During the quarter ended March 31, 2010 we issued the warrant holders
698,986 shares of common stock and the remainder of the warrants expired on the stated expiration date. In connection with this transaction, we entered into a Placement Agency Agreement with Rodman & Renshaw, LLC and paid them a fee equal
to 7.0% of the aggregate gross proceeds raised in connection with the offering, excluding warrant exercises and issued them a warrant to purchase 170,000 shares of common stock at a per share exercise price of $1.25, which warrants will be
exercisable for a period of five years from the effective date of the registration statement. The shares of common stock, the warrants and the shares of common stock issuable upon exercise of the warrants were offered and sold pursuant to a base
prospectus which is included in the companys shelf registration statement on Form S-3 and the related prospectus supplement filed with the Securities and Exchange Commission on December 9, 2009. In addition, in October 2009, we
received approximately $5,000 in connection with the exercise of employee stock options.

Net cash used in financing
activities for the nine months ended March 31, 2009 was not significant. We did not engage in any external financing activities during the nine months ended March 31, 2009.

To date we have been largely dependent on our ability to sell additional shares of our common stock or other securities to obtain
financing to fund our operating deficits, product development activities, capital expenditures and joint venture activities. Under our current operating plan to grow our business, our ability to improve operating cash flow has been highly dependent
on the market acceptance of our offerings. As mentioned in the Overview Section, we believe that the company will benefit from the recent federal government healthcare reforms and industry trends focused on automation and cost reduction. For the
three and nine months ended March 31, 2010, the company incurred a net loss of $2,268,000 and $7,200,000, respectively. As of March 31, 2010, cash, cash equivalents and marketable securities were $3,076,000, the company had working
capital of $3,996,000, an accumulated deficit of $153,697,000 and total shareholders equity of $16,607,000. These conditions indicate that the company may be unable to continue as a going concern. Based on our business plan, resources
available at March 31, 2010 and estimated proceeds from the expected sale of certain assets, management of the company believes that we have sufficient working capital to fund our operations for the next twelve months. However, if the
companys cash flows from operations and asset sales are less than expected, the company may need to downsize operations, incur debt or raise additional capital. There can be no assurance, however, that the company will be successful in raising
additional capital, or securing financing when needed or on terms satisfactory to the company. If we raise additional funds by selling shares of common stock or convertible securities, the ownership of our existing shareholders will be diluted.
Further, if additional funds are raised through the issuance of equity or debt securities, such additional securities may have powers, designations, preferences or rights senior to our currently outstanding securities. Any inability to obtain
required financing on sufficiently favorable terms could have a material adverse effect on our business, results of operations and financial condition.

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



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



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



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



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



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



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



| |  |  | the level of accounts receivable and inventories, if any, that we maintain;
| | - |  | ---------------------------------------------------------------------------



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



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



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

Other Matters

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

Presently, 28,000 shares of our Series B preferred stock, originally issued in a private financing in October 1999, remain outstanding.
As of October 1, 2004, our right to redeem these shares of Series B preferred stock is vested. Accordingly, we have the right to repurchase such shares at a redemption price equal to $25.00 per share, plus accrued and unpaid dividends. The
holder, however, has the right to convert these shares of preferred stock into an aggregate of 500,000 shares of our common stock at a conversion rate of $1.40. In the event we elect to redeem these securities, the holder will be able to exercise
its conversion right subsequent to the date that we issue a notice of redemption but prior to the deemed redemption date as would be set forth in such notice. As of March 31, 2010, no shares of the Series B preferred stock have been redeemed.

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

Commitments

Office Lease Commitments

We entered into the lease agreement for our executive offices on July 11, 2005. The lease was for a term of ten years and four
months, with a commencement date of October 1, 2005 and covers approximately 19,700 total rentable square feet. The annual rent in the first year was $324,000 increasing to $512,000 in year 2 and increasing at regular intervals until year 10
when the annual rent was approximately $561,000. Effective February 1, 2010, we amended our lease to reduce the annual rent to approximately $512,000 for the remaining lease term and extended the lease term for one year through January 2017.
The lease also provides us with a one-time option to renew the lease for a term of five years at the then-current market rate. As part of the lease agreement, we had posted a letter of credit securing our lease payments which was reduced to
approximately $256,000.

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

Contractual Commitments

A summary of the contractual commitments associated with our lease obligations as of March 31, 2010 is as follows (in thousands):



|                       |  |       |       |                 |   |           |  |           |       |                  |   |       |  |   |    
|---------------------- |  | ----- | ----- | --------------- | - | --------- |  | --------- | ----- | ---------------- | - | ----- |  | - | ---
|                       |  | Total |       | Less than 1year |   | 1-3 years |  | 4-5 years |       | More than 5years
|Total operating leases |  | $     | 4,425 |                 | $ | 807       |  | $         | 2,167 |                  | $ | 1,024 |  | $ | 427
|                       |  |       |       |                 |   |           |  |           |       |                  |   |       |  |   |    

On February 18,
2010, we entered into agreements with each of our president and chief financial officer, in order to implement a compensation modification program approved by the Management Resources and Compensation Committee of the Board of Directors. Pursuant to
these agreements, both officers agreed to accept a reduction in their base salary to 85% of their current base salary until such time as the company achieves cash flow breakeven. Pursuant to these agreements, the term cash flow
breakeven is defined to mean that the company has achieved positive cash flow from operations for two consecutive fiscal quarters ending no later than the end of the fiscal quarter ending September 30, 2011, determined by reference to the
revenues and other amounts received by the company from its operations; provided, however, that the term cash flow from operations shall not include (a) amounts received from the sale, lease or disposition of (i) fixed
or capital assets, including without limitation, the land and building located at 2165 Technology Drive, Schenectady, New York, except for amounts received in the ordinary course of business; or (ii) any subsidiary company; (b) capital
expenditures; (c) interest income and expense; and (d) other non-operating items as determined in



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accordance with generally accepted accounting principles in the United States as consistently applied during the periods involved. In consideration for their agreement to accept a reduction in
their base salary, we granted such officers options to purchase such number of shares of common stock as is equal to 15% of their base salary. Accordingly, we granted our president 43,500 options and granted our chief financial officer 39,000
options. The options were granted under the companys 2000 Employee Stock Option Plan, are exercisable for a period of 10 years at a per share exercise price of $1.01 and shall only vest and become exercisable upon either the date
determined that the company achieves cash flow breakeven or in the event of a termination of employment either without cause or for good reason, as such terms are defined in the employment agreements we previously entered
with each such officer.

Further, in connection with the above-referenced compensation modification program, all employees of
the company were granted options to purchase shares of common stock under the companys 2000 Employee Stock Option Plan in consideration for a reduction in their current salary. Under this program, the company reduced the salaries of
non-executive employees earning $110,000 per annum or less by 10% and reduced the salaries of its other non-executive employees by 15% and in consideration for such modification, awarded such employees options to purchase such number of shares of
common stock as is equal to the foregone salary as measured over a one-year period. Accordingly, we granted our employees a total of approximately 447,150 options. Under this program, employees base salary will revert to its prior level upon
the companys achievement of cash flow breakeven, as defined above, or if otherwise specified by the Board of Directors to be earlier. The options awarded to non-executive employees will vest on the date that the company achieves cash flow
breakeven, and are exercisable for a period of 10 years at a price of $1.00 per share; provided, however that for any employee that has an employment letter governing the terms of his employment with the company, the exercise price of the options
will be equal to the greater of $1.00 or the closing price of the companys common stock, as reported on the Nasdaq Capital Market, on the date such person agrees to the compensation modification program.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring
debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to
materially affect our liquidity or the availability of our capital resources. We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification
provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as intellectual
property rights. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular
contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum
potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, we have not made any payments under these agreements that
have been material individually or in the aggregate. As of March 31, 2010, we were not aware of any obligations under such indemnification agreements that would require material payments.

Effects of Inflation and Changing Prices

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

Present Accounting Standards Not Yet Adopted

In October 2009 the FASB issued Accounting Standards Update (ASU) 2009-13, Revenue Recognition Topic 605)-Multiple-Deliverable
Revenue Arrangements, which addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. Specifically, this guidance amends
the criteria in Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, for separating consideration in multiple-deliverable arrangements. This guidance establishes a selling price hierarchy for determining the selling price of a
deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be
allocated at the inception of the arrangement to all deliverables using the relative selling price method. In addition, this guidance significantly expands disclosures related to a vendors multiple-deliverable revenue arrangements. ASU 2009-13
is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. ASU 2009-13 represents consensuses reached in Issue 08-01 (2009-13) and
Issue 09-3 (2009-14) by the EITF at its September 9-10, 2009 meeting. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

In October 2009 the FASB issued Accounting Standards Update (ASU) 2009-14, Software (Topic 985)-Certain Revenue Arrangements
That Include Software Elements which changes the accounting model for revenue arrangements that include both tangible products and software elements. Under this guidance, tangible products containing software components and nonsoftware



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components that function together to deliver the tangible products essential functionality are excluded from the software revenue guidance in Subtopic 985-605, Software-Revenue
Recognition. In addition, hardware components of a tangible product containing software components are always excluded from the software revenue guidance. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. ASU 2009-14 represents consensuses reached in Issue 08-1 (2009-13) and Issue 09-3 (20009-14) by the EITF at its September 9-10, 2009 meeting. We are
currently evaluating the impact of this standard on our Consolidated Financial Statements.

In December 2009 the FASB issued
Accounting Standards Update (ASU) 2009-17 Consolidations (Topic 810)  Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities which codifies FASB Statement No. 167, a revision to FASB
Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entitys purpose and design and the reporting entitys ability
to direct the activities of the other entity that most significantly impact the other entitys economic performance. ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest
entities and any significant changes in risk exposure due to that involvement. A reporting entity will be required to disclose how its involvement with a variable interest entity affects the reporting entitys financial statements. ASU 2009-17
is effective at the start of a reporting entitys first fiscal year beginning after November 15, 2009 and early adoption is not permitted. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.

In February 2010 the FASB issued Accounting Standards Update (ASU) 2010-08,  Technical Corrections to Various
Topics, thereby amending the FASB Accounting Standards Codification. This ASU resulted from a review by the FASB of its standards to determine if any provisions are outdated, contain inconsistencies, or need clarifications to reflect the
FASBs original intent. The FASB believes the amendments do no fundamentally change U.S. GAAP. However, certain clarifications on embedded derivatives and hedging may cause a change in the application of the guidance in Subtopic 815-15. The ASU
contains various effective dates. The clarifications on the guidance on embedded derivatives and hedging (Subtopic 815-15) are effective for fiscal years beginning after December 15, 2009. The amendments to the guidance on accounting for income
taxes in a reorganization (Subtopic 852-740) applies to reorganizations for which the date of the reorganization is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. All other amendments are
effective as of the first reporting period (including interim periods) beginning after the date this ASU was issued (February 2, 2010). We are currently evaluating the impact of this standard on our Consolidated Financial Statements.



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

We have approximately $1,679,000 invested in high quality, short-term investments as of March 31, 2010. We are not exposed to
significant financial market risks from changes in foreign currency exchange rates and are only minimally impacted by changes in interest rates. However, in the future, we may enter into transactions denominated in non-U.S. currencies or increase
the level of our borrowings, which could increase our exposure to these market risks. We have not used, and currently do not contemplate using, any derivative financial instruments.

Interest Rate Risk

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

At March 31, 2010, our unrestricted cash and marketable securities totaled approximately
$3,076,000, of which approximately $1,679,000 was invested in money market investments. The remainder of our cash was in non-interest bearing checking accounts used to pay operating expenses. For more information on our investments see Note 5 of
Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.



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

Evaluation of
Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

There was no change in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934) during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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Part II Other Information



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

Between June and August 2005, six purported shareholder class actions were filed in the United States District Court for the Southern
District of New York (the S.D.N.Y.) against our company and certain of our current and former directors and former officers. Plaintiffs in those actions alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Sections 11 and 15 of the Securities Act of 1933. The securities law claims were based on the allegations that we failed to disclose that our August 2002 agreement with the USPS contained certain performance metrics, and that the
USPS could cancel the agreement if we did not meet these metrics; that we did not disclose complete and accurate information as to our performance under, and efforts to renegotiate, the USPS agreement; and that when we did disclose that the USPS
might cancel the agreement, the market price of our stock declined. On October 5, 2005 the Court consolidated the class actions under the caption In re Authentidate Holding Corp. Securities Litigation., C.A. No. 05 Civ. 5323 (LTS),
and appointed the Illinois State Board of Investment as lead plaintiff under the Private Securities Litigation Reform Act. The plaintiff filed an amended consolidated complaint on January 3, 2006, which asserted the same claims as the prior
complaints and also alleged that Authentidate violated the federal securities laws by misrepresenting that it possessed certain patentable technology. On July 14, 2006, the Court dismissed the amended complaint in its entirety; certain claims
were dismissed with prejudice and plaintiff was given leave to replead those claims which were not dismissed with prejudice. In August 2006, plaintiff filed a second amended complaint, which did not assert any claims relating to the companys
patents or under the Securities Act of 1933, but which otherwise was substantially similar to the prior complaint. The second amended complaint sought unspecified monetary damages. The company moved to dismiss the second amended complaint on
November 13, 2006. On March 26, 2009, the S.D.N.Y. dismissed, with prejudice, the second amended complaint. The lead plaintiff filed an appeal and a hearing in the case was held before the U.S. Court of Appeals for the Second Circuit on
February 3, 2010. On March 16, 2010, we reported that the U.S. Court of Appeals for the Second Circuit issued an order affirming in part and vacating and remanding in part the March 2009 decision of the S.D.N.Y. which had granted our
motion to dismiss these claims with prejudice.

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

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

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



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

As
provided for under the Private Securities Litigation Reform Act of 1995, we wish to caution shareholders and investors that the following important factors, among others discussed throughout this Report on Form 10-Q and a restated description
of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors associated with our business previously disclosed in Part I,
Item 1A of our Annual Report on Form 10-K for the year ended June 30, 2009.You should carefully consider the risks described below, together with all of following risk factors and the other information included in this
report, in considering our business herein as well as the information included in other reports and prospects. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial also may impair our business operations, financial condition and/or operating results. If any of the matters or events described in the following risks actually occurs, our business, financial
condition or results of operations could be harmed. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment due to any of these risks.

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

We incurred net losses of approximately $9,367,000, $15,811,000 and $15,063,000 for the fiscal years ended June 30, 2009,
2008 and 2007, respectively. We also had a net loss of approximately $7,200,000 for the nine months ended March 31, 2010 and an accumulated deficit of approximately $153,697,000 at March 31, 2010. We have expended, and will continue to be
required to expend, substantial funds to pursue product development projects, enhance our marketing and sales efforts and to otherwise operate our business. Therefore, we will need to generate higher revenues to achieve and maintain profitability
and cannot assure you that we will be profitable in any future period. Our prospects should be considered in light of the difficulties frequently encountered in connection with the establishment of a new business line, which characterizes our
business, such as the difficulty in creating a viable market, the significant related development and marketing costs and the overall competitive environment in which we operate. This risk may be more acute in light of our disposition of our other
operating segments. Accordingly, there can be no assurance that we will be able to achieve profitable operations in future operating periods. Our business results are likely to remain uncertain as we are unable to reliably predict revenues from our
current customers or our ability to derive revenues from our joint venture. Revenue levels achieved from our customers, the mix of products and solutions that we offer, our ability to introduce new products as planned and our ability to reduce and
manage our operating expenses will affect our financial results. Consequently, we cannot assure you that we will be profitable in any future period.

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

Our capital requirements have been and will continue to be significant. We have been substantially dependent upon private placements of
our securities and on short-term and long-term loans from lending institutions to fund such requirements. We are expending significant amounts of capital to develop, promote and market our software, services and products. Due to these expenditures,
we have incurred significant losses to date. We used approximately $7,910,000, $14,903,000 and $14,852,000 in cash for continuing operating activities for the fiscal years ended June 30, 2009, 2008 and 2007, respectively, and $6,865,000 for the
nine months ended March 31, 2010. Our available cash, cash equivalents and marketable securities as of March 31, 2010 totaled approximately $3,076,000. We expect this cash, along with revenues generated from operations and estimated
proceeds from the sale of certain assets, to satisfy our cash needs for at least the next twelve months. No assurances can be given that we will be able to attain sales levels and support our costs through revenues derived from operations and no
assurances can be given that we will be able to sell the subject assets. If we are unable to attain projected revenue levels for our business, it may be necessary to raise additional capital to fund operations and to meet our obligations in the
future. To meet our financing requirements, we may raise funds through public or private equity offerings, debt financings or strategic alliances. Raising additional funds by issuing equity or convertible debt securities may cause our stockholders
to experience substantial dilution in their ownership interests and new investors may have rights superior to the rights of our other stockholders. Raising additional funds through debt financing, if available, may involve covenants that restrict
our business activities and options. There can be no assurance, however, that the company will be successful in raising additional capital or securing financing when needed or on terms satisfactory to the company or that the company will be able to
continue as a going concern. If we are unable to raise additional capital when required, or on acceptable terms, we will need to reduce costs and operations substantially. Our future capital requirements will depend on, and could increase
substantially as a result of many factors, including:



| |  |  | our need to utilize a significant amount of cash to support research and development activities and to make incremental investments in our
organization;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to achieve targeted gross profit margins and cost reduction objectives;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | our ability to reach break-even or profitability;
| | - |  | -------------------------------------------------



| |  |  | the extent to which we consolidate our facilities and relocate employees and assets;
| | - |  | ------------------------------------------------------------------------------------



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| |  |  | the success of our sales and marketing efforts;
| | - |  | -----------------------------------------------



| |  |  | the extent and terms of any development, marketing or other arrangements, including our joint venture relationship; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | changes in economic, regulatory or competitive conditions, including the current financial crisis.
| | - |  | --------------------------------------------------------------------------------------------------

Our revenues may be affected by changes in technology spending levels.

In the past, unfavorable or uncertain macroeconomic conditions and reduced global technology spending rates have adversely affected the
markets in which we operate. The current recession could reduce the demand for our products and negatively impact revenues and operating profit. We are unable to predict changes in general macroeconomic conditions and when global spending rates will
be affected. Furthermore, even if spending rates increase, we cannot be certain that the market for our products and solutions will be positively impacted. If there are future reductions in either domestic or international spending rates, or if
spending rates do not increase, our revenues, operating results and financial condition may be adversely affected.

Recent turmoil in the
credit markets and the financial services industry may negatively impact our business, results of operations, financial condition or liquidity.

Recently, the credit markets and the financial services industry have been experiencing a period of unprecedented turmoil and upheaval
characterized by the bankruptcy, failure, collapse or sale of various financial institutions and an unprecedented level of intervention from the United States federal government. While the ultimate outcome of these events cannot be predicted, they
may have a material adverse effect on our liquidity and financial condition if our ability to obtain financing for operations or obtain credit from trade creditors were to be impaired. In addition, the recent economic crisis could also adversely
impact our customers ability to finance the purchase of our products and solutions, which may negatively impact our business and results of operations.

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

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

This license agreement was effective as of August 1, 2007 and will expire in August 2010 unless it is sooner terminated in
accordance with its terms. Either party may terminate the agreement upon written notice if the other party is in material breach of any provision thereof, subject to applicable cure periods. In addition, either party may terminate this agreement for
any reason, upon 120 days notice to the other party. No assurances can be given that the USPS will not terminate this agreement which termination could adversely affect our ability to commercialize this technology.

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

On
December 20, 2006, the President signed into law PL 109-435. This statute defines as postal services essentially the carriage of paper and printed matter, but grandfathers other services that were being offered by the USPS
as of January 1, 2006, which we believed would include the EPM. However, the legislation further directed the Postal Regulatory Commission (PRC) to review non-postal services within two years to determine whether they should continue
taking into account the public need for the service and the ability of the private sector to meet the public need for the service. In December 2008, the PRC determined that the USPS was authorized to continue the EPM as a
non-postal service.

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

Our software and internet solutions compete with
other software as a service solutions. Demand for our solutions and software offerings is driven by several factors, including an increased focus on protecting business-critical applications, government and industry regulations requiring
data protection and integrity, and the growth in the market for software as a service. Segments of the



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computer and software industry have in the past experienced significant economic downturns and decreases in demand as a result of changing market factors. A change in the market factors that are
driving demand for offerings of software as a service could adversely affect our sales, profitability and financial condition.

We depend
on third parties for the manufacture and distribution of our telehealth appliance, which may result in delays and quality-control issues.

We do not own or lease any manufacturing facilities. Accordingly, in order to market our telehealth solution, ExpressMD Solutions
purchases finished appliances from an unaffiliated supplier. In addition, our joint venture entity has engaged an unaffiliated third party to provide distribution services for this solution. If the agreements with these third parties are terminated
or if they do not perform their obligations under such agreements, it could take several months to establish and qualify alternative manufacturing and distribution partners for our products and we may not be able to fulfill our customers
orders in a timely manner. At the present time we believe that if existing third party relationships terminate, alternative providers are available on commercially reasonable terms. However, there can be no assurance that the future production
capacity of our current manufacturer will be sufficient to satisfy our requirements or that alternative providers of manufacturing or distribution services will be available on commercially reasonable terms, or at all. The failure to identify
suitable alternative manufacturers or distributors could adversely impact our customer relationships and our financial condition. In addition, due to our use of third-party manufacturers and distributors, we do not have control over the timing of
product shipments. Delays in shipment could result in the deferral or cancellation of purchases of our products, which would harm our results of operations in any particular quarter. Net revenue for a period may be lower than predicted if large
orders forecasted for that period are delayed or are not realized, which could impact cash flow or result in a decline in our stock price.

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

As described in detail in Item 1. Legal Proceedings of Part II of this Annual Report on Form
10-Q, several purported class action complaints were filed in federal court alleging our company and certain of our current and former directors and former officers violated the federal securities laws. Subsequently, four purported shareholder
derivative actions were filed against certain of our current and former directors and former officers based on allegations substantially similar to those set forth in the purported class actions. The expense of defending such litigation may be
substantial and the time required to defend the actions could divert managements attention from the day-to-day operations of our business, which could adversely affect our business, results of operations and cash flows. In addition, an
unfavorable outcome in such litigation could have a material adverse effect on our business, results of operations and cash flows. In March 2009, the United States District Court for the Southern District of New York dismissed with prejudice the
second amended complaint that had been filed in a shareholder class action against the company and certain current and former directors and former officers. On March 16, 2010, we reported that the United States Court of Appeals for the Second
Circuit issued an order affirming in part and vacating and remanding in part the March 2009 decision of the S.D.N.Y.

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

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

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

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



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

We evaluate our long-lived assets, including property and equipment,
goodwill, acquired product rights, and other intangible assets, whenever events or circumstances occur which indicate that these assets might be impaired. Goodwill is evaluated annually for impairment at the end of each fiscal year, regardless of
events and circumstances. As of March 31, 2010, we had approximately $7,341,000 of goodwill principally from our acquisition of our German subsidiary, Authentidate International, AG. We will continue to evaluate the recoverability of the
carrying amount of our long-lived assets, and we may incur substantial impairment charges, which could adversely affect our financial results.

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

We have incurred substantial costs in supporting the operation of our German subsidiary, Authentidate International, AG. In June 2009, we
renewed for one-year our employment agreement with Mr. Jan Wendenburg, the CEO of Authentidate International, pursuant to which he will receive a base salary of approximately 210,000 Euros. Further, for the fiscal years ended June 30,
2009, 2008 and 2007 and the nine months ended March 31, 2010, we advanced or made capital investments of approximately $1,927,000 to this subsidiary. We cannot provide any assurance that we will recoup any of these amounts from this subsidiary.
We expect to incur additional costs in the future in connection with the operations of this subsidiary.

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

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

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

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

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

Presently, we have two issued U.S. patents. In addition, we have three U.S. patent applications pending relating to the technology and
business processes underlying our services and applications. However, some of the technology embodied in some of our current products cannot be patented. We have registered the trademarks Authentidate, Inscrybe,
Inscrybe Office and CareCert in the U.S., the trademark Authentidate in Canada, Germany, Mexico and in the European Community, Inscrybe in the European Community and Canada, Inscrybe
Office, and a number of other trademarks as Madrid Protocol international registrations. We have also sought to register a number of additional trademarks in the U.S. and certain foreign markets. We continue to take steps to protect our
intellectual property rights including filing additional trademark and patent applications where appropriate. We rely on confidentiality agreements with our key employees to the extent we deem it to be necessary. We further intend to file patent
applications for any new products we may develop, to the extent that we believe that any technology included in such products is patentable. There can be no assurance that any patents in fact, will be issued or that any such patents that do issue
will be effective to



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protect our products and services from duplication by other manufacturers or developers or to prevent our competitors from offering similar products and services.

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

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

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

We currently derive a majority of our revenues from a limited number of
software and service offerings. In addition, our focus on building our business is concentrated on markets for software and services where content integrity, workflow automation, electronic signatures and time and date stamping are important to
customers. As a result, we are particularly vulnerable to fluctuations in demand for these offerings, whether as a result of competition, product obsolescence, technological change, customer spending, or other factors. If our revenues derived from
our software and service offerings were to decline significantly, our business and operating results would be adversely affected. Additionally, for the year ended June 30, 2009 we reported that two customers accounted for approximately 21% of
our consolidated revenues. As a result, if our relationships with these or other significant customers were disrupted we could lose a significant percentage of our anticipated revenues which could have material adverse effect on our business.

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

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



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



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



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



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



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



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

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



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

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

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

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

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

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



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



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



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



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



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

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

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

We are subject to product liability risks associated with the production, marketing and sale of products used in the healthcare industry.

The production, marketing and sale of devices used in the health-care industry have inherent risks of liability in the
event of product failure or claim of harm caused by product operation. Furthermore, even meritless claims of product liability may be costly to defend against. The commercialization of the telehealth device exposes us to such claims. These types of
product liability claims may result in decreased demand for this product, injury to our reputation, related litigation costs; and substantial monetary awards to plaintiffs. Although we currently maintain product liability insurance, we may not have
sufficient insurance coverage, and we may not be able to obtain sufficient coverage at a reasonable cost. Our inability to obtain product liability insurance at an acceptable cost or to otherwise protect against potential product liability claims
could inhibit the commercialization of any products that we develop. If we are sued for any injury caused by our products or processes, then our liability could exceed our product liability insurance coverage and our total assets.



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We need to comply with ongoing regulatory requirements applicable to our telehealth product and our
ability to generate revenue from this product is subject to our ability to obtain acceptable prices or an adequate level of reimbursement from payors of healthcare costs.

The regulatory clearance for our telehealth product provides for its use for its intended purposes. In addition, the manufacturing,
labeling, packaging, adverse event reporting, storage, advertising, promotion, distribution and record-keeping for approved products are subject to extensive regulation. If the FDA determines that our promotional materials or activities constitute
promotion of an unapproved use or we otherwise fail to comply with other FDA regulations, we may be subject to regulatory enforcement actions, including a warning letter, injunction, seizure, civil fine, suspensions, loss of regulatory clearance,
product recalls or product seizures. In the more egregious cases, criminal sanctions, civil penalties, or disgorgement of profits are possible. The subsequent discovery of previously unknown problems may also result in restrictions on the marketing
of our products, and could include voluntary or mandatory recall or withdrawal of products from the market. Further, we cannot predict the likelihood, nature or extent of adverse government regulation that may arise from future legislation or
administrative action. If we are not able to maintain regulatory compliance, we will not be permitted to market our products and our business would suffer.

In addition, our ability to commercialize our telehealth product successfully will depend in part on the extent to which appropriate
coverage and reimbursement levels for the cost of this product are obtained by us or by our direct customers from governmental authorities, private health insurers and other organizations. The ability of customers to obtain appropriate reimbursement
for their products and services from private and governmental payors is critical to the success of medical technology device companies as the availability of reimbursement affects which products customers purchase and the prices they are willing to
pay. The cost containment measures that health care payors and providers are instituting and the effect of any health care reform could materially and adversely affect our ability to generate revenues from this product and our profitability. In
addition, given ongoing federal and state government initiatives directed at lowering the total cost of health care, the United States Congress and state legislatures will likely continue to focus on health care reform and the reform of the Medicare
and Medicaid payment systems. While we cannot predict whether any proposed cost-containment measures will be adopted, the announcement or adoption of these proposals could reduce the price that we receive for our telehealth product in the future. We
cannot predict the outcomes of any of legislative or regulatory efforts at reducing costs of providing healthcare and regulatory changes in this regard may have a material adverse effect on our business.

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

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



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



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



| |  |  | the markets perception of the ease or difficulty in deploying our software or services, especially in complex, network environments;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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

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

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

The software-based services industry and computer industry are characterized by
extensive research and development efforts which result in the frequent introduction of new products and services which render existing products and services obsolete. Our ability to compete successfully in the future will depend in large part on
our ability to maintain a technically competent research and development staff and our ability to adapt to technological changes in the industry and enhance and improve our software and web-based service offerings and successfully develop and market
new offerings that meet the changing needs of our customers. Although



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we are dedicated to continued improvement of our offerings with a view towards satisfying market needs with the most advanced capabilities, there can be no assurance that we will be able to
continue to do so on a regular basis and remain competitive with products offered by other manufacturers. At the present time, we do not have a targeted level of expenditures for research and development. We will evaluate all opportunities but
believe the majority of our research and development will be devoted to enhancements of our existing software and web-based services.

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

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

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

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

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

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

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

At June 30, 2009, we had net operating loss (NOL) carry forwards for
federal income tax purposes of approximately $113,000,000 available to offset future taxable income. Under Section 382 of the Internal Revenue Code, following an ownership change, special limitations apply to the use by a loss
corporation of its (i) NOL carry forwards arising before the ownership change and (ii) net unrealized built-in losses (if such losses existed immediately before the ownership change and exceed a statutory threshold amount) recognized
during the five years following the ownership change ((i) and (ii) are referred to collectively as the Applicable Tax Attributes). After an ownership change, the amount of the loss corporations taxable income for each
post-change taxable year that may be offset by the Applicable Tax Attributes is limited to the product of the long-term tax-exempt rate (published by the IRS for the month of the ownership change) multiplied by the value of the loss
corporations stock (the Section 382 Limitation). To the extent that the loss corporations Section 382 Limitation in a given taxable year exceeds its taxable income for the year, that excess increases the Section 382
Limitation in future taxable years.



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Risks Related to Our Common Stock

Our stock price is volatile and could decline.

The price of our common stock has been, and is likely to continue to be, volatile. Our stock price during the nine months ended
March 31, 2010 traded as low as $0.38 per share and as high as $1.81 per share. We cannot assure you that your initial investment in our common stock will not fluctuate significantly. The market price of our common stock may fluctuate
significantly in response to a number of factors, some of which are beyond our control, including:



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



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



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



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



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



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



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

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

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

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

Additional financings could result in dilution to existing stockholders and otherwise adversely impact the rights of our common stockholders.

Additional financings that we may require in the future will dilute the percentage ownership interests of our stockholders and
may adversely affect our earnings and net book value per share. In addition, we may not be able to secure any such additional financing on terms acceptable to us, if at all. We have the authority to issue additional shares of common stock and
preferred stock, as well as additional classes or series of warrants or debt obligations which may be convertible into any one or more classes or series of ownership interests. We are authorized to issue 75 million shares of common stock and
5 million shares of preferred stock. Subject to compliance with the requirements of the Nasdaq Stock Market, such securities may be issued without the approval or other consent of our stockholders.

We filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission in August 2009, which was
declared effective by the Commission on September 30, 2009. Under this registration statement, we may sell, from time to time in one or more public offerings, shares of our common stock, shares of our preferred stock, debt securities or
warrants to purchase common stock, preferred stock or debt securities, or any combination of such securities. After giving effect to our recently competed registered direct offering, there is approximately $36 million available for future issuances
under this registration statement. This disclosure shall not constitute an offer to sell or a solicitation of an offer to buy the securities, nor shall there by any sale of these securities in any jurisdiction in which an offer, solicitation or sale
would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. Any offer of the securities will be solely by means of the prospectus included in the registration statement and one or more prospectus
supplements that will be issued at the time of the offering.

In the event that any future financing should be in the form of,
be convertible into or exchangeable for, equity securities, and upon the conversion or exercise of such securities, investors may experience additional dilution. Moreover, in addition to the above referenced shares of common stock, we may issue
undesignated shares of preferred stock, the terms of which may be fixed by our board of directors and which terms may be preferential to the interests of our common stockholders. We have issued preferred stock in the past, and our board of directors
has the authority, without stockholder approval, to create and issue one or more additional series of such preferred stock and to determine the voting, dividend and other rights of holders of such preferred stock. Any debt financing, if available,
may involve restrictive covenants that impact our ability to conduct our business. The issuance of any of such series of preferred stock or debt securities may have an adverse effect on the holders of common stock.



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

As of March 31, 2010, the
following options and warrants were outstanding:



| |  |  | Stock options to purchase approximately 4,590,000 shares of common stock at exercise prices ranging from $0.39 to $7.28 per share, not all of which are
immediately exercisable. The weighted average exercise price of the outstanding stock options is $2.97 per share. These stock options are employee and non-executive director options.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Immediately exercisable warrants to purchase approximately 720,000 shares of common stock with a weighted average exercise price of $1.04 per share.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



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

In addition, there are currently outstanding 28,000 shares of our
Series B Preferred Stock. The holder of the Series B Preferred Stock may convert these shares into shares of our common stock at a conversion price equal to $1.40 per share. Accordingly, the outstanding 28,000 shares of Series B Preferred Stock are
presently convertible into an aggregate of 500,000 shares of our common stock which will be available for immediate resale in accordance with the provisions of Rule 144 under the Securities Act of 1933, as amended.

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

Provisions in our charter documents and Delaware law could discourage or prevent a takeover, even if an acquisition would be beneficial to our
stockholders.

Provisions of our certificate of incorporation and bylaws, as well as provisions of Delaware law, could make
it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions include:



| |  |  | authorizing the issuance of blank check preferred that could be issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director
candidates; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | advance notice provisions in connection with stockholder proposals that may prevent or hinder any attempt by our stockholders to bring business to be
considered by our stockholders at a meeting or replace our board of directors.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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

a) Sales of Unregistered Securities

In February 2010, we issued an aggregate of 10,952 shares of our common stock to those of our non-executive directors that elected to
receive shares of common stock in lieu of a portion of the cash fees earned for their service as members of our board of directors pursuant to our 2001 Non-Executive Director Stock Option Plan, as amended. Such shares were issued for service on our
board during the quarter ended December 31, 2009. These shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.

b) Not applicable

c) Repurchase of Equity Securities

We did not repurchase any of our equity securities during the three months ended March 31, 2010.



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

None.



|Item 4. | Removed and Reserved
|------- | --------------------



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

None.



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

The following
exhibits are filed herewith or incorporated by reference.



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



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SIGNATURES

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



|             |  |  |  |  |  |                                    
|------------ |  |  |  |  |  | -----------------------------------
|             |  |  |  |  |  | AUTHENTIDATE HOLDING CORP.         
|             |  |  | 
|May 13, 2010 |  |  |  |  |  | /s/ OConnell Benjamin             
|Date         |  |  |  |  |  | OConnell Benjamin                 
|             |  |  |  |  |  | President                          
|             |  |  | 
|             |  |  |  |  |  | /s/ William A. Marshall            
|             |  |  |  |  |  | William A. Marshall                
|             |  |  |  |  |  | Chief Financial Officer & Treasurer
|             |  |  | 
|             |  |  |  |  |  |                                    



39