10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

Form 10-Q

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

For the Quarterly Period Ended March 31, 2010

OR

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

For the transition period from                 to   

Commission File Number 001-34137

ActivIdentity Corporation

(Exact name of Registrant as specified in its charter)

Delaware	45-0485038
(State or other jurisdiction of	(I.R.S. employer identification no.)
incorporation or organization)
6623 Dumbarton Circle, Fremont, CA	94555
(Address of principal executive offices)	(Zip Code)

(510) 574-0100

(Registrant’s telephone number, including area code)

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 such filing requirements for the past 90 days.   Yes x  No o

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 o  No o

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. (Check One):

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of April 30, 2010 was 48,082,422.

ACTIVIDENTITY CORPORATION

INDEX TO QUARTERLY REPORT ON FORM 10-Q

FOR QUARTER ENDED MARCH 31, 2010

		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	3
	CONDENSED CONSOLIDATED BALANCE SHEETS	3
	CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS	4
	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS	5
	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	6
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35
ITEM 4.	CONTROLS AND PROCEDURES	36
PART II - OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	37
ITEM 1A.	RISK FACTORS	37
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	48
ITEM 6.	EXHIBITS	48
	SIGNATURES	49

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PART I.  FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

ACTIVIDENTITY CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

	March 31,			September 30,
	2010			2009
ASSETS
Current assets:
Cash and cash equivalents	$	65,588		$	75,624
Marketable securities	12,873			3,100
Accounts receivable, net	14,540			13,983
Inventory	698			701
Prepaid and other current assets	1,632			556
Total current assets	95,331			93,964
Restricted cash	1,839			1,746
Investments	—			11,752
Property and equipment, net	2,041			2,353
Intangible assets, net	10,223			1,842
Goodwill	9,416			—
Other long-term assets	727			2,920
Total assets	$	119,577		$	114,577
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,178		$	1,853
Accrued compensation and related benefits	5,022			5,507
Accrued and other current liabilities	3,359			4,135
Current portion of deferred revenue	11,481			12,574
Total current liabilities	22,040			24,069
Other long-term liabilities	3,783			2,261
Total liabilities	25,823			26,330
Commitments and contingencies (Note 17)
Stockholders’ equity:
Preferred stock, $0.001 par value: 10,000,000 shares authorized, none issued and outstanding	—			—
Common stock, $0.001 par value: 75,000,000 shares authorized, 48,082,422 and 45,866,110 issued and outstanding as of March 31, 2010 and September 30, 2009, respectively	46			46
Additional paid-in capital	436,380			429,105
Accumulated deficit	(332,911		)	(328,599		)
Accumulated other comprehensive loss	(10,068		)	(12,616		)
Total ActivIdentity stockholder’s equity	93,447			87,936
Non-controlling interest	307			311
Total stockholders’ equity	93,754			88,247
Total liabilities and stockholders’ equity	$	119,577		$	114,577

See accompanying notes to condensed consolidated financial statements.

3

ACTIVIDENTITY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010			2009
Revenue:
Software	$	6,055		$	6,207		$	11,184		$	11,517
Hardware	2,593			4,148			6,701			8,951
Service	5,586			5,775			11,011			11,963
Total revenue	14,234			16,130			28,896			32,431
Cost of revenue:
Software	394			1,142			846			2,181
Hardware	1,352			2,138			3,474			4,559
Service	2,160			1,891			4,209			3,983
Amortization of developed technology and patents	263			593			446			1,186
Total cost of revenue	4,169			5,764			8,975			11,909
Gross profit	10,065			10,366			19,921			20,522
Operating expenses:
Sales and marketing	4,401			5,294			8,834			10,304
Research and development	4,105			3,505			8,184			8,292
General and administration	4,615			3,204			8,778			6,631
Restructuring expense (net of recoveries)	(356		)	—			(356		)	—
Amortization of other intangible assets	311			41			363			82
Total operating expenses	13,076			12,044			25,803			25,309
Loss from operations	(3,011		)	(1,678		)	(5,882		)	(4,787		)
Other income (expense), net	(962		)	(475		)	1,712			(1,981		)
Loss before income tax and non-controlling interest	(3,973		)	(2,153		)	(4,170		)	(6,768		)
Income tax expense	47			624			149			653
Net loss	(4,020		)	(2,777		)	(4,319		)	(7,421		)
Less: net loss attributable to non-controlling interest	7			5			8			104
Net loss attributable to ActivIdentity stockholders	$	(4,013	)	$	(2,772	)	$	(4,311	)	$	(7,317	)
Basic and diluted net loss per share	$	(0.08	)	$	(0.06	)	$	(0.09	)	$	(0.16	)
Shares used to compute basic and diluted net loss per share	47,639			45,798			46,743			45,792

See accompanying notes to condensed consolidated financial statements.

4

ACTIVIDENTITY CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended March 31,
	2010			2009
Cash flows from operating activities:
Net loss	$	(4,311	)	$	(7,317	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Gain on sale of investments	(2,382		)	—
Stock-based compensation expense	1,953			1,631
Unrealized foreign exchange gain	716			2,831
Depreciation and amortization of fixed assets	550			691
Impairment of marketable securities	507			—
Amortization of developed technology and patents	446			1,186
Amortization of other intangible assets	363			82
Non-controlling interest in ActivIdentity Europe S.A.	(8		)	(104		)
Loss on disposal of property and equipment	—			59
Changes in assets and liabilities, net of assets acquired and liabilities assumed in a business combination:
Accounts receivable	(165		)	(1,472		)
Inventories	(115		)	611
Prepaid and other current assets	1,061			(2,453		)
Accounts payable	206			(140		)
Accrued compensation and related benefits	(557		)	292
Accrued and other liabilities	(1,395		)	637
Deferred revenue	607			2,663
Long-term income taxes receivable	—			2,693
Net cash provided by (used in) operating activities	(2,524		)	1,890
Cash flows from investing activities:
Acquisition, net of cash acquired	(12,751		)	—
Proceeds from sales of investments	5,586			—
Purchases of property and equipment	(272		)	(108		)
Other long-term assets	80			(1		)
Proceeds from sales and maturities of marketable securities	—			6,125
Restricted cash	—			(1,340		)
Net cash provided by (used in) investing activities	(7,357		)	4,676
Cash flows from financing activities	—			—
Effect of exchange rate changes on cash and cash equivalents	(155		)	(254		)
Net increase (decrease) in cash and cash equivalents	(10,036		)	6,312
Cash and cash equivalents, beginning of period	75,624			70,173
Cash and cash equivalents, end of period	$	65,588		$	76,485

See accompanying notes to condensed consolidated financial statements.

5

ACTIVIDENTITY CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2010

(Unaudited)

1. Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of ActivIdentity Corporation (the “Company”, “we”, or “us”) and its subsidiaries. The Company has subsidiaries in Asia, Australia, Canada, Europe and the United States.

The unaudited interim condensed consolidated balance sheet as of March 31, 2010, and statements of operations for the three and six months ended March 31, 2010 and 2009 and cash flows for the six months ended March 31, 2010 and 2009, have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. However, we believe that the disclosures are adequate to ensure the information presented is not misleading. These interim condensed consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as amended.  In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting of only normal recurring adjustments) that management considers necessary for a fair presentation of the Company’s financial position, operating results, and cash flows for the interim periods presented. All inter-company accounts and transactions have been eliminated in consolidation. Operating results and cash flows for interim periods are not necessarily indicative of results to be expected for any subsequent interim period or for the entire fiscal year ending September 30, 2010.

The Company operates on a fiscal year ending September 30. For convenience in this quarterly report, the Company refers to the fiscal year ended September 30, 2009 as fiscal 2009 and fiscal year ending September 30, 2010 as fiscal 2010.

There have been no significant changes in the Company’s significant accounting policies from those that were disclosed in the Annual Report on Form 10-K for fiscal 2009.

On December 14, 2009, the Company completed the acquisition of CoreStreet, Ltd., a Delaware corporation (“CoreStreet”), through the merger of a wholly owned, indirect subsidiary of the Company with and into CoreStreet.  CoreStreet was a privately held company that provides Public Key Infrastructure (“PKI”) certification technology, distributed identity credential validation systems, and physical access control products.  Details of the consideration provided for the acquisition are set forth in Note 6 below.  The financial statements set forth in this Form 10-Q, specifically the statement of operations and statement of cash flows for the six months ended March 31, 2010, reflect the operations of CoreStreet from December 14, 2009 to March 31, 2010.

In accordance with Accounting Standards Codification Topic No. 855 “Subsequent Events” (ASC 855), the financial statements have been evaluated for subsequent events through the date the financial statements are issued. During this period the Company did not have any material recognizable or non-recognizable subsequent events.

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2. Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, reported amounts of revenues and expenses during the reporting period, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates are based on historical experience and on various assumptions that the Company believes are reasonable under current circumstances. However, future events are subject to change and best estimates and judgments may require further adjustments; therefore, actual results could differ from current estimates. Estimates are used for, but not limited to, the fair value of investments, the provision for doubtful accounts, obsolete and excess inventories, depreciation and amortization, valuation of intangible assets and goodwill, sales warranty reserve, income taxes, restructuring liability, valuation of stock-based compensation, and contingencies.

3. Recent Accounting Pronouncements

In October 2009, the FASB issued Accounting Standard Update (ASU) No. 2009-13 (ASU 2009-13), “Revenue Arrangements with Multiple Deliverables” and Accounting Standard Update No. 2009-14 (ASU 2009-14), “Certain Revenue Arrangements That Include Software.” These ASUs revise and clarify accounting for arrangements with multiple deliverables, including how to separate deliverables into units of accounting determining the allocation of revenue to the units of accounting and the application of these provisions to tangible products containing software components. There are also expanded disclosures for significant judgments made in the application of these standards, if material. These pronouncements are effective for fiscal years beginning after June 15, 2010 and earlier application is permitted. The Company is evaluating the impact of applying this pronouncement to its consolidated financial statements, and intends to implement the pronouncement on October 1, 2010.

In January 2010, the FASB issued Accounting Standard Update No. 2010-06 (ASU 2010-06), “Improving Disclosures about Fair Value Measurements” to add additional disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2, and 3. The new disclosures are effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company has implemented provisions of this update related to disclosure of valuation techniques in the second quarter of fiscal 2010 and noted no significant impact in its condensed consolidated financial statements. The Company intends to implement provisions related to additional disclosures in the Level 3 roll forward in the first fiscal quarter of 2012 and does not expect a significant impact on its consolidated financial statements.

4. Fair Value Hierarchy

The Company performs fair value measurements in accordance with Accounting Standards Codification Topic No. 820 “Fair Value Measurements and Disclosures” (ASC 820). ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under ASC 820 are described below:

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Level 1	Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2	Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3	Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

Most of the Company’s financial instruments are classified within Level 1 of the fair value hierarchy and measured using market approach. These instruments are valued using quoted market prices, or broker or dealer quotations. The types of instruments valued based on quoted market prices in active markets include cash, term deposits, money market funds, and U.S. Treasury securities which are classified within Level 1 of the fair value hierarchy.

Financial instruments valued based on quoted prices in markets that are not active include the auction rate securities (ARS) that the Company sold in April 2010. Refer to Note 19 of notes to condensed consolidated financial statements for details about the subsequent sale of these ARS. These instruments are classified within Level 2 of the fair value hierarchy at March 31, 2010. These instruments are valued using the quoted price in the inactive market which equates to the actual sale price of these securities.

Financial instruments valued based on unobservable inputs include some ARS held by the Company.  These instruments are classified within Level 3 of the fair value hierarchy and measured using income approach. The Company estimates the fair value of these ARS using a discounted cash flow model incorporating assumptions regarding expected cash flows, liquidity risk, default risk, recovery risk, and interest rate risk.

Financial assets measured at fair value on a recurring basis as of March 31, 2010, as presented on the Company’s condensed consolidated balance sheet, were as follows (in thousands):

	Quoted Prices in		Significant
	Active Markets for		Other		Significant
	Identical Assets		Observable		Unobservable
	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
Current assets:
Cash and cash equivalents:
Cash	$	6,541	$	—	$	—	$	6,541
Money market funds / U.S. Treasuries	59,047		—		—		59,047
Total cash and cash equivalents	65,588		—		—		65,588
Marketable securities:
Auction rate securities	—		8,312		4,561		12,873
Total marketable securities	—		8,312		4,561		12,873
Non-current assets:
Restricted cash:
Term deposits	1,839		—		—		1,839
Total restricted cash	1,839		—		—		1,839
Total financial assets under ASC 820	$	67,427	$	8,312	$	4,561	$	80,300

8

Financial assets measured at fair value on a recurring basis as of September 30, 2009, as presented on the Company’s condensed consolidated balance sheet, were as follows (in thousands):

	Quoted Prices in		Significant
	Active Markets for		Other		Significant
	Identical Assets		Observable		Unobservable
	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
Current assets:
Cash and cash equivalents:
Cash	$	9,712	$	—	$	—	$	9,712
Money market funds / U.S. Treasuries	65,912		—		—		65,912
Total cash and cash equivalents	75,624		—		—		75,624
Marketable securities:
Auction rate securities	—		—		3,100		3,100
Total marketable securities	—		—		3,100		3,100
Non-current assets:
Restricted cash:
Term deposits	1,746		—		—		1,746
Total restricted cash	1,746		—		—		1,746
Investments:
Auction rate securities	—		—		11,752		11,752
Total investments	—		—		11,752		11,752
Total financial assets under ASC 820	$	77,370	$	—	$	14,852	$	92,222

Changes in the Company’s Level 3 securities for the three months ended March 31, 2010 were as follows (in thousands):

	Amount
Aggregate estimated fair value of Level 3 securities at December 31, 2009	$	11,742
Total realized and unrealized gain (loss):
Included in earnings*	(501		)
Included in other comprehensive loss	1,732
Settlements	(100		)
Transfers out of Level 3	(8,312		)
Aggregate estimated fair value of Level 3 securities at March 31, 2010	$	4,561

Changes in the Company’s Level 3 securities for the six months ended March 31, 2010 were as follows (in thousands):

	Amount
Aggregate estimated fair value of Level 3 securities at September 30, 2009	$	14,852
Total realized and unrealized gain (loss):
Included in earnings*	1,875
Included in other comprehensive loss	1,732
Settlements	(5,586		)
Transfers out of Level 3	(8,312		)
Aggregate estimated fair value of Level 3 securities at March 31, 2010	$	4,561

* Realized gains (losses) and other than temporary impairment charges are included in the line item “Other income (expense), net” in the condensed consolidated statements of operations.

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There was a transfer of some of the Company’s ARS from Level 3 to Level 2 of the fair value hierarchy during the three and six months ended March 31, 2010. As of March 31, 2010, these instruments are classified within Level 2 of the fair value hierarchy due to the availability of quoted prices in the inactive markets for these securities. Refer to Note 19 of notes to condensed consolidated financial statements for details about the subsequent sale of these ARS. These instruments are valued using the quoted price in the inactive market which equates to the actual sale price of these securities.

5. Marketable Securities and Investments

Marketable Securities: The Company held $12.9 million of ARS classified as marketable securities at March 31, 2010. These securities include interests in Collateralized Debt Obligations (CDO), closed-end mutual funds and a student loan agency. The Company has classified these securities as short-term and intends to sell these ARS within the next twelve month period. The original value of these securities was $27.5 million.

During the three and six months ended March 31, 2010, the Company recorded an other-than-temporary impairment charge of $0.5 million in other income (expense), net in the condensed consolidated statements of operations for securities previously held at par. In addition, while marking to market marketable securities at March 31, 2010, the Company recorded other comprehensive income of $1.7 million during the three and six months ended March 31, 2010. Refer to Note 19 of notes to the condensed consolidated financial statements regarding the sale of certain marketable securities after March 31, 2010.

During the six months ended March 31, 2010, the Company sold ARS with a carrying value of $3.1 million for proceeds of $5.5 million resulting in a gain of $2.4 million reported as other income in the condensed consolidated statements of operations. These investments were originally purchased at par for $8.5 million. During the six months ended March 31, 2010, ARS of $0.1 million were redeemed for full par value.

Investments (Long-term): The Company does not have any investments classified as long-term at March 31, 2010 as the Company has classified the entire portfolio of ARS as marketable securities. The Company held $11.8 million in certain ARS classified as investments at September 30, 2009. Contractual maturity for these investments ranges from 2025 to 2052.

The Company believes it has made reasonable judgments in its valuation of marketable securities. However, if the relevant assumptions, estimates, or the related analyses prove incorrect or, if due to additional information received in the future, management’s conclusions would change, the Company may be required to change the recorded value of the marketable securities

6. Business Combinations

The Company accounts for business combinations using the purchase method of accounting. Consideration includes the cash paid, value of common stock issued and warrants for common stock as measured on the acquisition date, less any cash acquired. The common stock and warrants were issued in a private placement.

On December 14, 2009, the company completed the acquisition of CoreStreet for consideration of $18.5 million, net of cash acquired.  Consideration consisted of (i) $12.1 million in cash, net of cash acquired, (ii) 2.2 million shares of the Company’s common stock (of which approximately 1.5 million shares are subject to an escrow to satisfy certain indemnification obligations of the stockholders of CoreStreet), (iii) warrants for 1.0 million shares of the Company’s common stock with a per share exercise price of $4.25 expiring December 31, 2011 with a fair value of $0.4 million, and (iv) warrants for 1.0 million shares of the Company’s common stock with a per share exercise price $5.00 expiring December 31, 2012 with a fair value of $0.4 million.  CoreStreet is a provider of Public Key Infrastructure (PKI) certification technology, distributed identity credential validation systems, and physical access control products. Their products are used primarily by Federal and State agencies in the United States.

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The following table represents the purchase price allocation and summarizes the aggregate estimated fair values of the net assets acquired on December 14, 2009 (in thousands):

	Purchase Price
	Allocation
Cash	$	1,770
Current assets	965
Intangibles:
Customer relationships	6,620
Developed technology	2,530
Trade name	40
Non-current assets	16
Goodwill	9,416
Less liabilities assumed	(1,062		)
Total purchase price	$	20,295

The purchase price was allocated to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. The $9.4 million of goodwill was assigned to the Company’s single reporting unit and is not expected to be deductible for tax purposes. The acquisition is complementary to and we anticipate that it will strengthen our strong authentication and credential management product portfolio. The intangible assets are amortized on a straight line basis over their estimated useful life. Customer relationships represent the fair values of the underlying relationships and agreements with CoreStreet’s customers. Developed technology represents the fair values of CoreStreet products that have reached technological feasibility and are a part of CoreStreet’s product lines. Trade name represents the fair value of brand and name recognition associated with the marketing of CoreStreet’s products and services.

The results of the CoreStreet acquisition are included in the accompanying condensed consolidated financial statements from the date of the acquisition on December 14, 2009.

Summary of the purchase price consideration (in thousands):

	Purchase Price
	Consideration
Cash paid	$	14,521
Cash payments owed	22		(1)
Potential cash value for stock and warrants	430		(2)
Warrants for common stock	665		(3)
Common stock	4,657		(4)
Total purchase price	$	20,295

(1) Cash payments owed and recorded in “Accrued and other current liabilities” at March 31, 2010.

(2) Potential cash value of common stock and warrants for common stock to former CoreStreet stockholders who indicate that they are not accredited investors.

(3) Fair value of warrants issued to former CoreStreet stockholders who are accredited investors.

(4) Fair value of common stock issued to CoreStreet stockholders who are accredited investors. Common stock was valued at the closing price on the date of acquisition, December 14, 2009.

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Pro forma results

The unaudited financial information in the table below summarizes the combined results of operations of ActivIdentity and CoreStreet, on a pro forma basis, as though the companies had been combined as of the beginning of fiscal 2009. ActivIdentity’s results of operations for the three and six months ended March 31, 2010 include the results of CoreStreet since December 14, 2009, the date of acquisition. The unaudited pro forma financial information for the three and six months ended March 31, 2010 combines the results for ActivIdentity for the three and six months ended March 31, 2010, including CoreStreet subsequent to December 14, 2009 and the historical results for CoreStreet from October 1, 2009 to December 14, 2009. The pro forma financial information presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of fiscal 2009 (in thousands, except for per share amounts):

	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010			2009
Total revenue	$	14,234		$	17,439		$	29,957		$	35,628
Net loss attributable to ActivIdentity stockholders	(4,013		)	(3,301		)	(4,847		)	(7,836		)
Basic and diluted net loss per share	$	(0.08	)	$	(0.07	)	$	(0.10	)	$	(0.16	)

7.  Equity Compensation

Warrants

Warrant issued to service provider:  In August 2004, the Company issued a warrant to purchase 50,000 shares at an exercise price of $6.60 to a service provider. The warrant was fully vested and exercisable upon issuance and expires in August 2010. These warrants remain outstanding as of March 31, 2010.

Warrants issued in connection with the CoreStreet acquisition: In December 2009, the Company issued warrants for 1.0 million shares of the Company’s common stock with a per share exercise price of $4.25, expiring December 31, 2011 and valued at $0.4 million, and warrants for 1.0 million shares of the Company’s common stock with a per share exercise price of $5.00, expiring December 31, 2012 and valued at $0.4 million in connection with the CoreStreet acquisition. These warrants were fully vested upon issuance and remain outstanding as of March 31, 2010.

Stock Option Plans

The Company has several stockholder approved stock option plans under which it grants or has granted options to purchase shares of its common stock to employees. These plans are described fully in the notes to consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009. As of March 31, 2010, the Company continues to grant stock options under the 2004 Equity Incentive Plan (2004 Plan). As of March 31, 2010, the Company had 1.5 million shares available for future grants under the Company’s 2004 Plan.

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Stock option activity for the six months ended March 31, 2010 is as follows:

	Number of		Weighted Average		Aggregate Intrinsic
	Stock Options		Exercise Price		Value (in thousands)
Outstanding at September 30, 2009	10,036,770		$	3.51	$	1,977
Granted	1,957,500		2.34
Exercised	—		—
Cancelled/Expired/Forfeited	(422,663	)	4.20
Outstanding at March 31, 2010	11,571,607		3.28		4,546
Exercisable at March 31, 2010	5,080,954		$	4.38	$	1,030

The following table summarizes the ranges of the exercise prices of outstanding and exercisable options at March 31, 2010:

	Options Outstanding				Options Exercisable
		Weighted
		Average
		Remaining
		Contractual	Weighted Average			Weighted Average
Range of Exercise Prices	Number	Term (in Years)	Exercise Price		Number	Exercise Price
$1.45 - $3.00	7,910,939	5.66	$	2.27	1,782,584	$	2.26
$3.01 - $5.00	2,051,010	4.28	4.17		1,760,370	4.13
$5.01 - $7.00	705,158	4.17	6.18		683,500	6.21
$7.00 - $9.99	904,500	3.23	7.93		854,500	7.87
$1.45 - $9.99	11,571,607	5.14	$	3.28	5,080,954	$	4.38

Restricted Stock and Restricted Stock Units

The Company periodically grants awards of restricted stock which are issued but subject to vesting requirements, and restricted stock units which result in the issuance of shares without an exercise price only upon the satisfaction of vesting requirements. Vesting may be time-based, performance-based or a combination of the two.

Activity for the Company’s restricted stock and restricted stock units during the six months ended March 31, 2010 was as follows:

			Weighted Average
			Grant-Date
	Number of Shares		Fair Value
Unvested at September 30, 2009	116,256		$	2.11
Granted	140,000		2.76
Vested	(57,501	)	2.39
Cancelled	—		—
Unvested at March 31, 2010	198,755		$	2.49

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Stock Based Compensation

The following table summarizes stock-based compensation expense for the three and six months ended March 31, 2010 and 2009 related to employee stock options, warrants, restricted stock and restricted stock units included in condensed consolidated statements of operations in accordance with Accounting Standards Codification Topic No. 718 “Compensation - Stock Compensation” (ASC 718) (in thousands):

	Three Months Ended March 31,				Six Months Ended March 31,
	2010		2009		2010		2009
Cost of revenue—hardware	$	6	$	5	$	12	$	11
Cost of revenue—service	41		33		75		83
Stock-based compensation expense included in cost of sales	47		38		87		94
Research and development	220		176		419		456
Sales and marketing	116		164		243		317
General and administrative	732		362		1,204		764
Stock-based compensation expense included in operating expenses	1,068		702		1,866		1,537
Total stock-based compensation expense	$	1,115	$	740	$	1,953	$	1,631

The Company bases its weighted-average fair value of stock-based compensation to employees generally on the single option valuation approach. The Company amortizes the estimated fair value of stock-based compensation time-based awards using graded vesting schedule over the requisite service period of the awards.  The following table summarizes weighted average fair value and weighted average assumptions of stock-based awards granted during the three and six months ended March 31, 2010 and 2009:

	Three Months Ended March 31,		Six Months Ended March 31,
	2010	2009	2010	2009
Weighted average fair value	$1.06	$0.94	$0.92	$0.70
Risk-free interest rate	1.90%	1.5% - 1.8%	2.3%	1.5% - 2.8%
Dividend yield	0%	0%	0%	0%
Estimated life in years	4.3	4.8 – 6.1	4.3	4.8 – 6.1
Volatility	54%	50%	45%	44%
Forfeiture rate	29%	18%	33%	31%

As of March 31, 2010, total unrecognized compensation costs related to non-vested stock options and restricted stock units was $3.4 million, which will be recognized as an expense over a weighted average vesting period of approximately 2 years.

8. Stock Repurchase Program; Treasury Shares

On February 18, 2010, the Company announced that its Board of Directors has approved a stock repurchase program, pursuant to which the Company may repurchase up to $10 million or approximately 8% of its outstanding shares of common stock in the open market from time to time over the next twelve months. All share repurchases subject to this program will be retired upon purchase completion. The Company’s Board of Directors has also authorized that purchases may be made under Rule 10b5-1 of the Securities Exchange Act of 1934. A Rule 10b5-1 plan allows ActivIdentity to repurchase its shares during periods when the Company would normally not be active in the market due to its own internal trading blackout periods. During the three and six months ended March 31, 2010, no repurchases of the Company’s common stock were made and the entire amount remains authorized for repurchase under the repurchase program.

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9. Accounts Receivable and Customer Concentration

Accounts receivable from significant customers in excess of 10% of total account receivable as of March 31, 2010 and September 30, 2009 are summarized as follows:

	March 31,		September 30,
	2010		2009
Customer A	31	%		*
Customer B		*	20	%
Customer C		*	10	%

* Customer accounted for less than 10% of the accounts receivable.

Management believes that the receivable balances from these large customers are collectible based on the assessment of their creditworthiness, account aging and past collection experience. However, these customers represent a significant exposure if one or more of them were unable to pay.

Revenue from significant customers representing revenue in excess of 10% of total revenue for the respective periods is summarized as follows:

	Three Months Ended March 31,				Six Months Ended March 31,
	2010		2009		2010		2009
Customer A	15	%		*		*		*
Customer D	11	%		*	11	%		*
Customer E		*	16	%		*		*

* Customer accounted for less than 10% of revenue.

10. Balance Sheet Components

Accounts receivable, net consists of the following (in thousands):

	March 31,			September 30,
	2010			2009
Accounts receivable	$	14,708		$	14,244
Less allowance for doubtful accounts	(168		)	(261		)
Accounts receivable, net	$	14,540		$	13,983

Inventory consists of the following (in thousands):

	March 31,		September 30,
	2010		2009
Components	$	134	$	280
Finished goods	564		421
Total inventory	$	698	$	701

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Other long term liabilities consist of the following (in thousands):

	March 31,		September 30,
	2010		2009
Deferred revenue, net of current portion	$	2,907	$	1,240
Accrued restructuring liability, net of current portion	—		325
Long-term deferred rent	281		114
Other long-term liabilities	595		582
Total long-term liabilities	$	3,783	$	2,261

11. Intangible Assets, net

Intangible assets, net consist of the following (in thousands):

	March 31,			September 30,
	2010			2009
Gross Carrying Amount:
Developed technology	$	17,823		$	15,294
Customer relationships	8,648			2,028
Patents	3,999			3,999
Trade name	40			—
Intangible assets at cost	30,510			21,321
Accumulated Amortization:
Developed technology	(15,406		)	(15,294		)
Customer relationships	(2,379		)	(2,028		)
Patents	(2,490		)	(2,157		)
Trade name	(12		)	—
Total accumulated amortization	(20,287		)	(19,479		)
Intangible assets, net	$	10,223		$	1,842

Developed technology, customer relationships, patents and trade names are being amortized on a straight-line basis over their weighted average estimated economic or useful lives of 7 years, 10 years, 6 years and 1 year, respectively. The amortization expense for intangible assets was $0.6 million and $0.8 million for the three and six months ended March 31, 2010, respectively, as compared to $0.6 million and $1.3 million for the three and six months ended March 31, 2009, respectively. The intangible assets are reviewed for impairment in accordance with guidance given in Accounting Standards Codification Topic No. 360 “Property, plant and equipment” (ASC 360) whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable.  Based on a review of events and circumstances at March 31, 2010, no indicators of impairment were identified. In assessing the recoverability of intangible assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the intangible assets. It is reasonably possible that these estimates, or their related assumptions, may change in the future, in which case the Company may be required to record impairment charges for these assets. The Company will continue to evaluate the realizability of its intangible assets when events and changes in circumstances indicate that there may be a potential impairment.

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Based on intangible assets recorded at March 31, 2010, and assuming no subsequent additions to, or impairment of, the underlying assets, the future estimated amortization expense of intangible assets, in the next five fiscal years, is as follows (in thousands):

Fiscal years ending September 30,	Total
2010 (6 months remaining)	$	1,148
2011	2,169
2012	1,883
2013	1,254
2014	994
2015	873
Thereafter	1,902
	$	10,223

12. Goodwill

Goodwill of $9.4 million as of March 31, 2010, relates entirely to the Company’s acquisition of Corestreet in December 2009. The Company has accounted for goodwill in accordance with Accounting Standards Codification Topic No. 350 “Intangibles-Goodwill and Other” (ASC 350). Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Under ASC 350, goodwill and intangible assets with indefinite lives are not amortized; rather, they are tested for impairment on at least an annual basis or earlier if there are indicators of impairment. The first annual impairment analysis will be performed during the Company’s fourth fiscal quarter ended September 30, 2010.

13. Comprehensive Loss

Comprehensive loss is comprised of net loss, unrealized gain on the Company’s available for sale securities and foreign currency translation gain. Comprehensive loss for the three and six months ended March 31, 2010 and 2009 was as follows (in thousands):

	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010			2009
Comprehensive loss:
Net Loss	$	(4,013	)	$	(2,772	)	$	(4,311	)	$	(7,317	)
Unrealized gain on marketable securities, net	1,728			—			1,728			152
Foreign currency translation gain	828			819			820			2,764
Total comprehensive loss	$	(1,457	)	$	(1,953	)	$	(1,763	)	$	(4,401	)

14. Other Income (expense)

Other income (expense) for the three and six months ended March 31, 2010 and 2009 was as follows (in thousands):

	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010		2009
Other income (expense):
Interest income	$	180		$	370		$	381	$	1,180
Other non-operating income (expense), net	(1,142		)	(845		)	1,331		(3,161		)
Total other income (expense), net	$	(962	)	$	(475	)	$	1,712	$	(1,981	)

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15.  Income Taxes

Income taxes are accounted for under the liability method in accordance with Accounting Standard Codification Topic No. 740 “Income Taxes” (ASC 740). Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax reporting bases of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. Realization of deferred tax assets is dependent upon future earnings, the timing and amount of which are uncertain.

As of March 31, 2010, the Company continues to provide a full valuation allowance for substantially all of its net deferred tax assets since the Company does not believe that it is more likely than not that they will be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deductible and taxable temporary differences.  We consider, among other available information, historical earnings, scheduled reversals of temporary differences, projected future taxable income, prudent and feasible tax planning strategies and other matters in making this assessment.

The Company recorded income tax expense for the three and six months ended March 31, 2010 of $102,000 and $149,000, respectively. The income tax expense is primarily related to taxes payable in foreign jurisdictions.

The Company or its subsidiaries files income tax returns in the U.S. and California, as well as various other foreign and domestic jurisdictions. The Company recently concluded an examination from the French tax authority covering the fiscal 2005, 2006, and 2007 income tax returns that resulted in no significant tax adjustments.  The Company is currently under examination in Germany for the fiscal 2005, 2006 and 2007 income tax returns.  The Company is currently not the subject of any additional income tax examinations.  In general, the earliest open year subject to examination is the year ended September 30, 2005, although depending upon jurisdiction, earlier tax years may remain open subject to limitations.

16.  Net Loss per Share

Basic loss per share was computed using the net loss and weighted average number of common shares outstanding during the period. Due to the Company’s net loss for the three and six months ended March 31, 2010 and 2009, all of our outstanding securities consisting of stock options, restricted stock units, and warrants, to purchase 14.1 million and 11.1 million potential shares of common stock as of March 31, 2010 and 2009, respectively, were excluded from the diluted loss per share calculation because their inclusion would have been anti-dilutive but could potentially dilute basic earnings per share in the future.

17. Commitments and Contingencies

Operating leases

The Company has entered into various non-cancelable operating leases for office space with original terms upto ten years.

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Future minimum lease payments under these leases are as follows (in thousands):

			Less than						More than
	Total		1 Year (1)		1 to 3 Years		3 to 5 Years		5 years
Operating leases	$	8,587	$	734	$	3,528	$	1,254	$	3,071

(1)       represents remaining six months of the 2010 fiscal year.

Operating lease obligations include management fees which cover common area maintenance charges. Office rent expense under operating leases was $0.3 million and $0.9 million, respectively, for the three and six months ended March 31, 2010 and $0.7 million and $1.4 million, respectively, for the three and six months ended March 31, 2009.

During the three months ended March 31, 2010, the Company entered into an amendment to the lease agreement for its office building in Fremont, California. The amendment extends the lease term to 10 years from the date of amendment, reduces the office space from 41,000 square feet to 29,000 square feet suspends the monthly cash portion of the rent payments for first eight months of the new term and significantly reduces the annual rent expense. The amendment also provides, that subject to a $1.2 million penalty, the Company may terminate the lease at any point after five years from the date of amendment

Contingencies

From time to time, the Company has been named as a defendant in legal actions arising from its normal business activities, which the Company believes will not have a material adverse effect on it or its business.

On October 1, 2008, the Company filed a complaint in the Northern District of California, asserting U.S. Patent No. 6,575,360 against Intercede Group PLC and Intercede Ltd. (collectively, “Intercede”). On January 16, 2009, Intercede filed their answers, including counterclaims seeking declaratory judgment of non-infringement, invalidity, and unenforceability. On February 9, 2009, the Company filed a motion to dismiss Intercede’s counterclaims and to strike certain of Intercede’s defenses. On March 26, 2009, Intercede filed a First Amended Answer and Counterclaims, amending their previously-asserted defenses and counterclaims, and asserting additional counterclaims for monopolization, attempted monopolization, fraud, and unfair competition. On May 15, 2009, the Company filed a second motion to dismiss Intercede’s counterclaims for monopolization, attempted monopolization, fraud and unfair competition. On September 11, 2009, the Court granted in part and denied in part the Company’s motion to dismiss. On September 28, 2009, Intercede filed a Second Amended Answer and Counterclaims. On March 25, 2010, the Company and Intercede entered into a patent license agreement on mutually acceptable terms. This patent license agreement settles the patent infringement case brought by ActivIdentity before the U.S. District Court of Northern California, and a related case brought by Intercede in the United Kingdom High Court. Based on this agreement, all lawsuits over the “360 patents” (ActivIdentity U.S. patent 6,575,360 and ActivIdentity patent EP [UK] 0 981 803) were promptly dismissed, bringing an end to all patent infringement litigation between the two companies. No liability related to the Intercede litigation was recorded at March 31, 2010 or September 30, 2009 other than accrual for legal fees.

The Company enters into standard indemnification agreements with many of its customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third-party to the extent any such claim alleges that an ActivIdentity product infringes a patent, copyright or trademark, or violates any other proprietary rights of that third-party. It is not possible to estimate the maximum potential amount of future payments the Company could be required to make under these indemnification agreements. To date, the Company has not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. No liability for these indemnification agreements was recorded at March 31, 2010 or September 30, 2009.

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As permitted under Delaware law, the Company has agreements indemnifying its executive officers and directors for certain events and occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not estimable. The Company maintains directors and officers’ liability insurance designed to enable it to recover a portion of any future amounts paid. No liability for these indemnification agreements was recorded at March 31, 2010 or September 30, 2009.

18. Segment Information

The Company operates in one segment, Digital Identity Solutions. Accordingly, the Company is disclosing geographic information only.

Geographic revenue information, as presented below, is determined by the customers’ receiving locations:

	Three Months Ended March 31,				Six Months Ended March 31,
	2010		2009		2010		2009
Revenue:
United States	46	%	45	%	45	%	43	%
France	4	%	10	%	6	%	10	%
UK	23	%	10	%	18	%	9	%
Others	27	%	35	%	31	%	38	%
Total revenue	100	%	100	%	100	%	100	%

* Other countries individually accounted for less than 10% of the Company’s total net revenue for the periods presented.

Geographic long-lived assets information is presented below (in thousands):

	March 31,		September 30,
	2010		2009
Property and equipment, net
United States	$	1,354	$	1,549
France	634		782
Others	53		22
Total property and equipment, net	$	2,041	$	2,353

19. Subsequent Events

Sale of Auction Rate Securities

In April 2010, the Company liquidated ARS with a net book value of $6.6 million as of September 30, 2009 and original cost of $22.3 million for net proceeds of $8.3 million. The Company has marked to market these ARS to $8.3 million as at March 31, 2010 and recorded unrealized gain of $1.7 million in other comprehensive income in equity section of its balance sheet. The Company will recognize other income of $1.7 million in the third quarter as realized gain on the sale of marketable securities. These securities were classified as marketable securities at March 31, 2010 and investments at September 30, 2009. After the sale of these ARS, the company holds ARS with a carrying value of $4.6 million and original cost of $5.2 million. The remaining ARS are comprised of securities in closed-end mutual funds and a student loan agency.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. All statements included in this Quarterly Report on Form 10-Q, other than statements that are purely historical, are forward-looking statements. Words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “seeks”, “estimates”, and similar expressions also identify forward-looking statements. Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q include, without limitation, statements regarding operating results, product development, marketing initiatives, business plans, integration of acquired companies and anticipated trends. The forward-looking statements in this Quarterly Report on Form 10-Q are subject to additional risks and uncertainties further discussed under Part II Item 1A “Risk Factors” below and elsewhere in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2009, as amended.  We assume no obligation to update any forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.

The following discussion of our financial condition and results of operations should be read in conjunction with our Condensed Consolidated Financial Statements and related notes included in “Item 1. Financial Statements” in this Quarterly Report on Form 10-Q. In this discussion, “we,” “us” and “our” refer to ActivIdentity Corporation.

OVERVIEW

ActivIdentity is a global leader providing solutions to confidently establish a person’s identity and secure transactions when interacting digitally through credential management and strong authentication platform. For more than two decades the Company’s experience has been leveraged by security-minded organizations in large scale deployments such as the U.S. Department of Defense, Nissan, and Saudi Aramco. The Company’s customers have issued over 100 million credentials, securing the holder’s digital identity. ActivIdentity solutions include a fully integrated platform that enables the organizations to issue, manage and use identity devices and credentials for secure access, secure communications and legally binding digital transactions.

On December 14, 2009, the Company completed the acquisition of CoreStreet. CoreStreet is a provider of Public Key Infrastructure (PKI) certification technology, distributed identity credential validation systems, and physical access control products. Their products are used primarily by Federal and State agencies in the United States.

ActivIdentity has a robust set of five product lines which provide the blocks for securing IT infrastructures and digital transactions to defend against security threats and identity fraud. These five product lines are (1) Credential Management (2) Strong Authentication (3) Security Clients (4) Authentication Devices and (5) Physical Access Control Software.

Credential Management

ActivIdentity Credential Management family of products enable organizations to securely deploy and manage smart cards and USB tokens containing a variety of credentials, including PKI certificates, one-time passwords, static passwords, biometrics, demographic data, and virtually any other application. The ActivIdentity ActivID™ Card Management System is a reliable, proven, and extensible solution that enables organizations to securely issue and manage digital credentials on devices, as well as securely update applications and credentials on devices after they have been issued to end users. For organizations deploying large quantities of smart cards, ActivIdentity bundles three add-on modules into its Advanced Edition of the ActivIdentity ActivID Card Management System.  ActivIdentity ActivID™ Batch Management System enables communication with a service bureau for personalization and encoding of smart cards in centralized high-volume card production environments. ActivIdentity ActivID™ Inventory and Logistics System enables advanced card stock management. ActivIdentity ActivID™ Key Management System enables complete life cycle management of the cryptographic keys that protect access to the content of the authentication device keys and the hardware security modules that hold those keys.

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Together with its Security Client software, Strong Authentication platform, Authentication Device and Physical Access Control offering, ActivIdentity can provide organizations with a complete “Smart Employee ID Solution” that can be leveraged for both physical and logical access control. PIVMAN server software which when combined with the PIVMAN authentication handheld device allows authorized personnel the ability to control access to any site with confidence by quickly authenticating and validating the roles and identities of individuals wishing to enter an area. The PIVMAN System provides mobile authentication and validation for situations such as first responder identification, spot check security for special events, seaports and airports, and remote facility access control.  Credential Management products include the Identity List Publisher, PIV Management Station, PIVMAN Dashboard, PIVMAN for Lenel and PIVMAN Developer Bundle.

Strong Authentication

ActivIdentity offers two distinct strong authentication platforms for organizations that are seeking to implement a cost-effective, flexible, and scalable solution. ActivIdentity 4TRESS™ AAA Server for Remote Access addresses the security risks associated with a mobile workforce accessing systems and data remotely. ActivIdentity 4TRESS™ Authentication Server offers support for many authentication methods (e.g., user name and password, knowledge-based authentication, one-time password, PKI certificates) and diverse audiences across a variety of service channels, making it the preferred versatile authentication platform for customer-facing transactions. PKI certificate validation products are deployed by public and private organizations around the world to validate the credentials of individuals as they interact with their secure IT applications, including secure logon, digitally signed email and secure forms. In doing so, users and administrators can have the highest level of trust in their secure communications and transactions. Company’s credential validation products also include the Validation Authority Server Validation Extensions, Pathbuilder and Responder Appliance.

Security Clients

ActivIdentity Security Clients protect against unauthorized access by providing easy-to-manage enterprise single sign-on capabilities, strong authentication, and an enforcement point for corporate security policy. Using the proven, market-leading ActivIdentity Security Clients, organizations not only can address regulatory requirements by replacing static passwords with two-factor authentication, but also eliminate the need for users to remember multiple static passwords.

Whether using ActivIdentity ActivClient™ to secure workstations with smart cards and smart USB tokens, ActivIdentity ActivClient™ for Common Access Card to do the same in the U.S. federal government, ActivIdentity SecureLogin™ Single Sign-On to provide comprehensive enterprise single sign-on and password management capabilities, or ActivIdentity™ Authentication Client to offer additional authentication, user, and management services. The Desktop Validation Client provides the means for applications to validate the status of a digital certificate when a client requests access to a secure resource or wants to execute a secure transaction.

Authentication Devices

ActivIdentity Authentication Devices range from Smart Cards, Smart Card Readers, Smart USB Tokens, OTP Tokens, DisplayCard Tokens, and Soft Tokens to Hardware Security Modules and Mobile Validation Devices. ActivIdentity Authentication Devices provide the flexibility to deploy any combination of devices to best meet an organization’s specific business needs, security requirements, and budget. The PIVMAN Client Software runs on multiple rugged handheld devices and personal computers. The PIVMAN handheld requires no connectivity and is an approved Department of Homeland Security credentialing system for emergency responders. It supports a wide range of card types and all the major U.S. government credential specifications.

Physical Access Products

Rounding out the ActivIdentity product portfolio, the Company provides technology for the convergence of IT and physical security. The Company provides developer kits to physical access control system (PACS) vendors to enable their products with Federal Information Processing Standards 201 (FIPS-201) functionality using the F5 Solution and low cost access control with Card-Connected™ technology.  This enables PACS manufacturers and their integrators to enable their products to meet government requirements for FIPS-201 compliance.  The Card-Connected Technology uses strong cryptography to extend central access control to standalone doors and mobile locks at a fraction of the cost.

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SIGNIFICANT EVENTS

The following significant events occurred during the three months ended March 31, 2010:

Legal Expenses — During the three months ended March 31, 2010, the Company incurred $1.1 million in legal and related expenses in pursuit of an intellectual property infringement case. The case was settled in March 2010 upon mutual agreement of both parties involved whereby the Company issued a patent license to the other party on mutually acceptable terms. Refer to Note 17 of the notes to condensed consolidated financial statements in this Quarterly report on Form 10-Q for further details.

Amendment to the lease agreement — During the three months ended March 31, 2010, the Company entered into an amendment to the lease agreement for its office building in Fremont, California. The amendment extends the lease term to 10 years from the date of amendment, reduces the office space from 41,000 square feet to 29,000 square feet suspends the monthly cash portion of the rent payments for first eight months of the new term and significantly reduces the annual rent expense. The amendment also provides, that subject to a $1.2 million penalty, the Company may terminate the lease at any point after five years from the date of amendment

Severance expense —The Company recorded $0.4 million in severance expense, primarily through operating expenses, for the second quarter of fiscal 2010 as the Company continues to realign its business in accordance with its revised strategic initiatives.

Stock repurchase program — During the second quarter of fiscal 2010, the Company announced that its Board of Directors approved a stock repurchase program, pursuant to which the Company may repurchase up to $10 million or approximately 8% of its outstanding shares of common stock in the open market from time to time over the next twelve months. No stock was repurchased under the program during the quarter. Refer to Note 8 of the notes to condensed consolidated financial statements in this Form 10-Q for further details.

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RESULTS OF OPERATIONS

REVENUE

Revenue by Product Type:

Revenue by product type for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 was as follows (amounts in thousands):

	Three Months Ended March 31,						$			%
	2010			2009			Change			Change
Product Mix:
Software	$	6,055		$	6,207		$	(152	)	-2	%
Hardware	2,593			4,148			(1,555		)	-37	%
Service	5,586			5,775			(189		)	-3	%
Total revenue	$	14,234		$	16,130		$	(1,896	)	-12	%
Product Mix (as % of total revenue):
Software	43		%	38		%
Hardware	18		%	26		%
Service	39		%	36		%
	100		%	100		%

Revenue by product type for six months ended March 31, 2010 as compared to six months ended March 31, 2009 was as follows (amounts in thousands):

	Six Months Ended March 31,						$			%
	2010			2009			Change			Change
Product Mix:
Software	$	11,184		$	11,517		$	(333	)	-3	%
Hardware	6,701			8,951			(2,250		)	-25	%
Service	11,011			11,963			(952		)	-8	%
Total revenue	$	28,896		$	32,431		$	(3,535	)	-11	%
Product Mix (as % of total revenue):
Software	39		%	35		%
Hardware	23		%	28		%
Service	38		%	37		%
	100		%	100		%

Software revenue is comprised of software license revenue and professional services revenue essential to the functionality of our software. Software revenue declined slightly by $0.2 million (or 2%) and $0.3 million (or 3%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago.

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Hardware revenue is comprised of tokens, readers, smart cards, and related equipment, generally to complement revenue of related software products. Hardware revenue decreased by $1.6 million (or 37%) and $2.3 million (or 25%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease was primarily driven by a decrease in our token sales in Asia Pacific and smart card and reader sales in EMEA and North America.

Service revenue is comprised of post-contract customer support and professional services not essential to the functionality of software, including installation, training and consulting. Service revenue decreased by $0.2 million (or 3%) and $1.0 million (or 8%) respectively during the three and six months ended March 31, 2010, compared to the same periods a year ago. The decrease in service revenue was primarily driven by a change in our licensing arrangement for our Single Sign-On product with one of our significant customers.

Revenue by Geography:

Revenue by geography for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 was as follows (amounts in thousands):

	Three Months Ended March 31,						$			%
	2010			2009			Change			Change
Geographic Mix:
North America	$	7,144		$	7,371		$	(227	)	-3	%
EMEA	6,599			6,999			(400		)	-6	%
Asia Pacific	491			1,760			(1,269		)	-72	%
Total revenue	$	14,234		$	16,130		$	(1,896	)	-12	%
Geographic Mix (as % of total revenue):
North America	50		%	46		%
EMEA	47		%	43		%
Asia Pacific	3		%	11		%
	100		%	100		%

Revenue by geography for the six months ended March 31, 2010 as compared to the six months ended March 31, 2009 was as follows (amounts in thousands):

	Six Months Ended March 31,						$			%
	2010			2009			Change			Change
Geographic Mix:
North America	$	14,291		$	14,758		$	(467	)	-3	%
EMEA	13,131			14,190			(1,059		)	-7	%
Asia Pacific	1,474			3,483			(2,009		)	-58	%
Total revenue	$	28,896		$	32,431		$	(3,535	)	-11	%
Geographic Mix (as % of total revenue):
North America	50		%	45		%
EMEA	45		%	44		%
Asia Pacific	5		%	11		%
	100		%	100		%

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North America revenue is primarily derived from deployments of our smart card-based software products, such as ActivClient™, the ActivIdentity ActivID™ Card Management System and ActivIdentity Secure Login™ Single Sign On, to various departments of the U.S. federal government and our enterprise customers. Revenue in North America declined slightly by $0.2 million (or 3%) and $0.5 million (or 3%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago.

Europe, the Middle East and Africa (EMEA) revenue is primarily derived from deployments of our strong authentication suite of products, such as ActivIdentity 4TRESS™ AAA Server for Remote Access and ActivIdentity 4TRESS™ Authentication Server, and authentication devices to various enterprise and financial customers. Revenue is also derived from deployments of our smart card-based software products to various government and enterprise customers. Revenue in EMEA decreased $0.4 million (or 6%) and $1.1 million (or 7%), respectively, during the three and six months ended March 31, 2010, compared to the same periods a year ago. The decrease was primarily the result of decreased spending by banking customers on our products.

Asia Pacific revenue is primarily derived from deployments of our strong authentication suite of products, authentication devices, and our smart card-based software products to various government, enterprise and financial customers. Revenue in Asia Pacific decreased by $1.3 million (or 72%) and $2.0 million (or 58%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease was driven primarily by a decrease in software customization revenue as a project related to the issuance of smart card driver’s licenses nears completion and a decrease in Token sales to the Asian banking sector.

COST OF REVENUE

Cost of revenue for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 was as follows (amounts in thousands):

	Three Months Ended March 31,						$			%
	2010			2009			Change			Change
Software	$	394		$	1,142		$	(748	)	-65	%
As a percentage of software revenue	7		%	18		%
Hardware	1,352			2,138			(786		)	-37	%
As a percentage of hardware revenue	52		%	52		%
Service	2,160			1,891			269			14	%
As a percentage of service revenue	39		%	33		%
Amortization of developed technology and patents	263			593			(330		)	-56	%
Total cost of revenue	$	4,169		$	5,764		$	(1,595	)	-28	%

Cost of revenue for the six months ended March 31, 2010 as compared to the six months ended March 31, 2009 was as follows (amounts in thousands):

	Six Months Ended March 31,						$			%
	2010			2009			Change			Change
Software	$	846		$	2,181		$	(1,335	)	-61	%
As a percentage of software revenue	8		%	19		%
Hardware	3,474			4,559			(1,085		)	-24	%
As a percentage of hardware revenue	52		%	51		%
Service	4,209			3,983			226			6	%
As a percentage of service revenue	38		%	33		%
Amortization of developed technology and patents	446			1,186			(740		)	-62	%
Total cost of revenue	$	8,975		$	11,909		$	(2,934	)	-25	%

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Cost of software revenue includes the cost of professional services associated with customization essential to the functionality of software. The cost of software revenue decreased $0.7 million (or 65%) and $1.3 million (or 61%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease in software cost of revenue was primarily driven by decreased engineering service costs incurred on a large software customization project for the issuance of smart card driver’s licenses.

Cost of hardware revenue includes costs associated with the manufacturing and shipping of product, logistics, operations, warranty costs and charges related to excess and obsolete inventory. Cost of hardware revenue decreased $0.8 million (or 37%) and $1.1 million (or 24%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease in the cost of hardware revenue was primarily driven by a lower sales volume.

Cost of service revenue consists of personnel costs and expenses incurred in providing post-contract customer support and professional services not essential to software such as installation, training, and consulting. The cost of service revenue increased by $0.3 million (or 14%) and $0.2 million (or 6%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The increase was primarily the result of sustaining and support activities related to customer migrations to new versions of Single Sign On products and deploy large scale card management systems.

Amortization of developed technology and patents includes amortization of technology capitalized in our acquisitions and purchase of certain patents and related intellectual property from third parties. The amortization expense decreased $0.3 million (or 56%) and $0.7 million (or 62%) for the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease was the result of certain items becoming fully amortized and was consistent with the scheduled amortization of developed technology and patents.

OPERATING EXPENSES

A substantial proportion of our operating expenses are fixed. Accordingly, a small variation in the timing of revenue recognition can cause significant variations in operating results across periods.

Sales and marketing

Sales and marketing expenses and period-over-period changes were as follows (amounts in thousands):

	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010			2009
Sales and marketing	$	4,401		$	5,294		$	8,834		$	10,304
Percentage change from comparable prior period	-17		%				-14		%
As a percentage of net revenue	31		%	33		%	31		%	32		%
Headcount, end of period	76			81

Sales and marketing expenses consist primarily of salaries and other payroll expenses, stock-based compensation expense, sales commissions, travel, depreciation, allocations of facilities and information technology costs, and costs associated with marketing programs, promotions, and trade shows.

Sales and marketing expenses decreased $0.9 million (or 17%) and $1.5 million (or 14%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease in sales and marketing expenses was primarily due to reduced compensation and related expenses, specifically bonus and severance expense, partially offset by an increase in trade show expenses during the three and six months ended March 31, 2010 compared to the same periods a year ago.

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Research and development

Research and development expenses and period-over-period changes were as follows (amounts in thousands):

	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010			2009
Research and development	$	4,105		$	3,505		$	8,184		$	8,292
Percentage change from comparable prior period	17		%				-1		%
As a percentage of net revenue	29		%	22		%	28		%	26		%
Headcount, end of period	104			99

Research and development expenses consist primarily of salaries and other payroll expenses, stock-based compensation expense, travel, depreciation, allocations of facilities and information technology costs, and costs of components used in research, and development activities.

Research and development expenses increased by $0.6 million (or 17%) during the three months ended March 31, 2010, compared to the same period a year ago. The increase was primarily due to an increase in average headcount as a result of CoreStreet acquisition and reduced allocation of engineering expenses to cost of revenue as a result of decrease in activity to support a customized software project, during the three months ended March 31, 2010 compared to the same period a year ago.

Research and development expenses decreased marginally by $0.1 million (or 1%) during the six months ended March 31, 2010, compared to the same period a year ago.

General and administration

General and administration expense and period-over-period changes were as follows (amounts in thousands):

	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010			2009
General and administration	$	4,615		$	3,204		$	8,778		$	6,631
Percentage change from comparable prior period	44		%				32		%
As a percentage of net revenue	32		%	20		%	30		%	20		%
Headcount, end of period	41			39

General and administration expenses consist primarily of the following costs related to administration, finance, human resources and legal: salaries and other payroll expenses, stock-based compensation expense, travel, depreciation, allocations of facilities and information technology costs, professional fees related to legal, audit and accounting, and costs associated with Sarbanes Oxley Act compliance.

General and administration expenses increased $1.4 million (or 44%) and $2.1 million (or 32%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The increase was primarily due to an increase in legal and professional service expenses related to intellectual property litigation with Intercede and to the acquisition of CoreStreet.

Restructuring expense (net of recoveries)

Restructuring expenses consist of severance and other costs associated with the reduction of headcount and facility exit costs. Facility exit costs consist primarily of future minimum lease payments net of estimated sub-lease income, if any.

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There was an adjustment of $0.4 million made to the restructuring expense during the three and six months ended March 31, 2010 as a result of the amendment of a facilities lease agreement and projected termination of the sublease for a portion of the office building for which the restructuring reserve was recorded in prior periods. No such adjustment was recorded during the three and six months ended March 31, 2009.

Amortization of other intangible assets

Other intangible assets, namely customer relationships and trade names, were capitalized in acquisitions. During the three and six months ended March 31, 2010, amortization of other intangible assets was $0.3 million and $0.4 million, respectively as compared to $0.04 million and $0.1 million, respectively, during the same periods a year ago.

The amortization expense during the three and six months ended March 31, 2010 increased as compared to the same periods a year ago as a result of additional amortization expense of recently acquired amortizable intangible assets from the Company’s acquisition of CoreStreet during the first quarter of fiscal 2010 partially offset by certain items becoming fully amortized. Refer to Note 11 of notes to condensed consolidated financial statements in this Form 10-Q for further details.

OTHER INCOME (EXPENSE), NET

Other income (expense), net and period-over-period changes were as follows (amounts in thousands):

	Three Months Ended March 31,						Six Months Ended March 31,
	2010			2009			2010			2009
Interest income	$	180		$	370		$	381		$	1,180
Percentage change from comparable prior period	-51		%				-68		%
As a percentage of net revenue	1		%	2		%	1		%	4		%
Other non-operating income (expense)	$	(1,142	)	$	(845	)	$	1,331		$	(3,161	)
Percentage change from comparable prior period	35		%				-142		%
As a percentage of net revenue	-8		%	-5		%	5		%	-10		%
Total other income (expense), net	$	(962	)	$	(475	)	$	1,712		$	(1,981	)

Other income (expense), net consists of interest income on the Company’s cash, cash equivalents, marketable securities and investments, foreign exchange gains and losses primarily caused by the revaluation of inter-company balances and gains and losses on the sale of investments.

Interest income decreased $0.2 million (or 51%) and $0.8 million (or 68%) during the three and six months ended March 31, 2010, respectively, compared to the same periods a year ago. The decrease in interest income was due primarily to lower average cash invested and lower average prevailing market interest rates during the three and six months ended March 31, 2010 compared to the same periods a year ago.

Other non-operating expense was $1.1 million and $0.8 million, respectively, during the three months ended March 31, 2010 and 2009 primarily consisting of foreign exchange gains and losses caused by the revaluation of cash and cash equivalents, receivables and payables denominated in non-functional currencies on the balance sheets of our foreign entities; and write down of marketable securities during the three months ended March 31, 2010. During the six months ended March 31, 2010, the other non-operating income was $1.3 million due to a realized gain of $2.4 million on the sale of long-term investments in auction rate securities with a net book value of $3.1 million, which was sold for $5.5 million, partially offset by impairment of marketable securities of $0.5 million and net foreign exchange losses of $0.6 million. During the six months ended March 31, 2009, the other non-operating expense was $3.1 million.

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INCOME TAX PROVISION

During the three and six months ended March 31, 2010, the Company has recorded an income tax expense of $0.05 million and $0.1 million respectively as compared to an income tax expense of $0.6 million and $0.7 million, respectively, during the same periods a year ago. The income tax expense is primarily related to taxes payable in foreign jurisdictions. Refer to Note 15 in the notes to condensed consolidated financial statements of this Quarterly Report on Form 10-Q for further discussion.

NON-CONTROLLING INTEREST

Non-controlling interest represents the non-controlling interest share in the consolidated net income or loss of ActivIdentity Europe S.A.

LIQUIDITY AND CAPITAL RESOURCES

The following sections discuss the effect of changes in our balance sheet and cash flows and contractual obligations on our liquidity and capital resources.

CASH, CASH EQUIVALENTS, MARKETABLE SECURITIES, RESTRICTED CASH AND INVESTMENTS

The following table summarizes our cash, cash equivalents, marketable securities, restricted cash and investments (amounts in thousands):

	March 31,		September 30,		Increase
	2010		2009		(Decrease)
Cash and cash equivalents	$	65,588	$	75,624	$	(10,036	)
Marketable securities	12,873		3,100		9,773
Long-term restricted cash	1,839		1,746		93
Investments	—		11,752		(11,752		)
	$	80,300	$	92,222	$	(11,922	)

The portfolio of cash, cash equivalents, marketable securities and restricted cash is managed by several financial institutions.  The decrease of $11.9 million was attributable primarily to (i) $12.8 million of cash paid, net of cash acquired, in relation to the CoreStreet acquisition (ii) $2.5 million used in operating activities, net, and (iii) cash received from the sale of investments in ARS for the amount of $5.6 million. The $11.8 million reduction in investments was the result of classification of ARS as marketable securities. Refer to Note 5 of the notes to condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further details of our investment portfolio.

We believe that our cash, cash equivalents and marketable securities will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next twelve months.  From time to time, in the ordinary course of business, we may evaluate potential acquisitions of businesses, products, or technologies.  A portion of our cash may be used to acquire or invest in complementary businesses, or to acquire products or to obtain the right to use complementary technologies.

The following table summarizes cash inflows / outflows by category (amounts in thousands):

	Six Months Ended March 31,						Increase
	2010			2009			(Decrease)
Net cash provided by (used in) operating activities	$	(2,524	)	$	1,890		$	(4,414	)
Net cash provided by (used in) investing activities	(7,357		)	4,676			(12,033		)
Net cash provided by financing activities	—			—			—
Effect of exchange rate changes on cash and cash equivalents	(155		)	(254		)	99
	$	(10,036	)	$	6,312		$	(16,348	)

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Operating Activities

Cash used in operating activities was $2.5 million for the six months ended March 31, 2010, compared to cash provided by operating activities of $1.9 million for the six months ended March 31, 2009. The $4.4 million change in cash provided by (used in) operating activities was driven by (i) a $3.2 million increase in working capital for the six months ended March 31, 2010, compared to the six months ended March 31, 2009; and (ii) a $1.2 million change in the net loss adjusted for non-cash charges and investing gains or losses for the six months ended March 31, 2010 compared to the six months ended March 31, 2009.

Investing Activities

Cash used in investing activities was $7.4 million for the six months ended March 31, 2010, compared to cash provided by investing activities of $4.7 million for the six months ended March 13, 2009. The $12.0 million change in cash provided by (used in) investing activities was driven by the $12.8 million in cash used for the acquisition of CoreStreet, net of cash acquired, during the six months ended March 31, 2010, offset by a $1.3 million long-term deposit classified as restricted cash made during the six months ended March 31, 2009.

Financing Activities

There was no financing activity during the six months ended March 31, 2010 and 2009.

CONTRACTUAL OBLIGATIONS

The following summarizes our contractual obligations under facility leases at March 31, 2010, and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

			Less than						More than
	Total		1 Year (1)		1 to 3 Years		3 to 5 Years		5 years
Operating leases	$	8,586	$	734	$	3,528	$	1,254	$	3,071

(1)represents remaining six months of fiscal 2010.

Refer to Note 17 of notes to condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion of operating leases.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 3 in the notes to condensed consolidated financial statements in this Quarterly Report on Form 10-Q for a discussion of the expected impact of recently issued accounting pronouncements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Basis of Presentation

The above discussion and analysis of the financial condition and results of operations are based on the consolidated financial statements, which have been prepared in accordance U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of SEC Regulation S-X.  We believe there are several accounting policies that are critical to understanding the consolidated financial statements, as these policies affect the reported amounts of revenue and expenses and involve management’s judgment regarding significant estimates.  We have reviewed the critical accounting policies and their application in the preparation of the financial statements and related disclosures with the Audit Committee of the Board of Directors. The critical accounting policies and estimates are described below. The results for the interim periods presented are not necessarily indicative of the results expected for any future period.  The following information should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended September 30, 2009, as amended.

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Revenue Recognition

We recognize revenue in accordance with U.S. GAAP, as set forth in:

·ASC 985-605 (formerly known as and comprised of American Institute of Certified Public Accountants (“AICPA”) Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions and EITF 03-05, Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software),

·ASC 605-25 (formerly known as Emerging Issues Task Force Issue No. (EITF) 00-21, Revenue Arrangements with Multiple Deliverables),

·ASC 605-35 (formerly known as and comprised of Accounting Research Bulletin No. 45 (ARB 45), Long-Term Construction-Type Contracts, SOP 81-1, Accounting for Performance of Construction Type and Certain Production Type Contracts),

·SEC Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, and

·Technical Practice Aid (TPA) interpretations of ASC 985-605 (SOP 97-2) issued by the AICPA (TPAs 5100.38 - 5100.76).

The application of the appropriate accounting principles to revenue is dependent upon the specific transaction and whether the sale includes hardware products, software products, post contract customer support (“PCS”), other professional services, or a combination of some or all of these products and/or services.

Subject to the additional conditions described below, the Company does not recognize revenue until: (1) persuasive evidence of an arrangement exists; (2) the fee is fixed or determinable; (3) delivery has occurred; and (4) collection of the corresponding receivable is reasonably assured.

For multiple element arrangements that contain one or more deliverables for which the functionality is not dependent on the software, the arrangement fee is allocated between the “non-software” and software deliverables in accordance with ASC 605-25 when the following criteria are met:

·The delivered item has stand alone value;

·There is objective and reliable evidence of the fair value of the undelivered elements as demonstrated by vendor specific objective evidence (“VSOE”) of fair value or third party evidence; and

·If the arrangement includes a general return right relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor.

If the above criteria are met, we allocate the arrangement fee to the delivered items using the residual value method. Revenue for the elements whose functionality is not dependent upon the delivered software is recognized in accordance with SAB 104, and revenue for software elements is recognized in accordance with ASC 985-605. If the above criteria are not met, all deliverables are considered a single unit of accounting and revenue is recognized in accordance with ASC 985-605 upon delivery of all elements of the arrangement.

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For multiple element arrangements that contain one or more deliverables for which the functionality is dependent on the software, the arrangement fee is subject to the provisions of ASC 985-605, and is allocated among each element, based on VSOE of fair value of each element if VSOE of each element exists. We determine VSOE of an element based on the price charged when the same element is sold separately. For an element not yet sold separately, VSOE may be established by management having the relevant authority as long as it is probable that the price, once established, will not change before separate introduction of the element in the marketplace. When arrangements contain multiple elements and VSOE exists for all undelivered elements only, we recognize revenue for the delivered elements based on the residual value method. For arrangements containing multiple elements wherein VSOE does not exist for all undelivered elements, revenue for the delivered and undelivered elements is deferred until VSOE exists or all elements have been delivered. Additionally, where VSOE does not exist to allocate the fee to the separate elements and the only undelivered element is PCS, the entire arrangement fee is recognized ratably over the contractual PCS period. For all other transactions not involving software, fair value is determined using the price when sold separately or other methods allowable under ASC 605-25.

Professional service revenue is recognized separately from the software element when the services are performed and when VSOE exists to allocate the revenue to the various elements in a multi-element arrangement, the services are not essential to the functionality of any other element of the arrangement, and the total price of the contract would vary with the inclusion or exclusion of the services. Revenue under these arrangements is presented as a component of service revenue on the statement of operations.

PCS contracts are typically priced as a percentage of the product license fee and generally have a one-year term. Services provided to customers under PCS contracts include technical product support and unspecified product upgrades, on a when and if available basis. Revenue from advance payments for PCS contracts are recognized on a straight-line basis over the term of the contract and are classified as service revenue.

Even though delivery of PCS and services has started, if all of the criteria in ASC 985-605 for revenue recognition have not yet been met, PCS and service revenue recognition may not commence. At the time all the criteria in ASC 985-605 are met, the portion of the deferred amount based on the proportion of the service period that has already expired to the total service period is immediately recognized and the residual amount is recognized ratably over the longer of the remaining PCS or service period.

Except in arrangements where acceptance is considered perfunctory, where we have provided acceptance rights to certain customers, no products or services revenue is recognized until the earlier of the customer formal acceptance or the expiration of the acceptance period granted to the customer.

For arrangements that involve some customization, modification or production services that are considered essential to the functionality of the software element, and separate accounting for these services is not permitted, revenue from the license and professional services essential to the functionality of the software is recognized using the percentage-of-completion method in accordance with ASC 605-35. The percentage-of-completion method is applied when we have the ability to make reasonably dependable estimates of the total cost of effort required for completion using the cost of labor hours incurred as the measure of progress towards completion. The progress toward completion is measured based on the date when the essential product functionality has been delivered or the application enters into a production environment or the point at which no significant additional professional service resources are required for the functionality of the software. Estimates are subject to revisions as the contract progresses to completion and these changes are accounted for as changes in accounting estimates when the information becomes known. Revenue under these arrangements is presented as a component of software revenue on the statement of operations as the related project revenue, including both the license and service components, are less than 10% of total net revenue. Where VSOE exists for professional services not essential to the functionality of the software, revenue is recorded as service revenue. Forecasted losses on contracts are accrued to cost of revenue in the period in which a forecasted loss is deemed probable and estimable. Amounts billed in excess of revenue recognized are recorded as deferred revenue in the consolidated balance sheets. Unbilled work-in-process is recorded as a receivable in the consolidated balance sheets.

For single element arrangements, revenue from stand alone product sales is recognized upon shipment (unless shipping terms determine otherwise), net of estimated returns and/or certain estimated future price changes. Our practice is not to ship product to a reseller or distributor unless the reseller or distributor has a history of selling the products or the end-user is known and has been qualified. In certain specific and limited circumstances, we provide product return and price protection rights to certain distributors and resellers. We have established a reasonable basis through historical experience for estimating future returns and price changes. Actual returns and price protection claims have not been material to date.

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Loss Contingencies

We record loss contingencies in accordance with Accounting Standards Codification Topic No. 450 (ASC 450). ASC 450 10 5 establishes standards of financial accounting and reporting for loss contingencies. It requires accrual by a charge to profit and loss and disclosure for an estimated loss from a loss contingency if two conditions are met: (a) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements, and (b) the amount of loss can be reasonably estimated. Accruals for general or unspecified business risks (“reserves for general contingencies”) are not permitted.

Restricted Cash

Under the terms of a software development contract with a customer, we provide a performance guarantee in the form of a financial security agreement that extends through September 30, 2011.  At March 31, 2010, restricted cash, classified as non-current, included $1.8 million of financial guarantees secured by a term deposit.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. We base our estimates and judgments on historical experience and on various assumptions that we believe are reasonable under current circumstances. Future events, however, are subject to change and estimates and judgments routinely require adjustments, actual results could therefore differ from our current estimates. Estimates are used for, but not limited to, the fair value of investments, the provision for doubtful accounts, obsolete and excess inventories, depreciation and amortization, valuation of intangible assets and goodwill, sales warranty reserve, income taxes, restructuring liability, valuation of stock-based compensation, and contingencies.

Goodwill

In accordance with Accounting Standards Codification Topic No. 350 (ASC 350) “Intangibles — Goodwill and Other”, goodwill is not amortized. Instead, goodwill is tested for impairment at a level of reporting referred to as a reporting unit. Accordingly, we periodically assess goodwill for impairment. Goodwill recorded in business combinations may significantly affect our future operating results to the extent impaired, but the magnitude and timing of any such impairment is uncertain. When we conduct our annual evaluation of goodwill during the fourth quarter of our fiscal year, or if impairment indicators are identified in the interim with respect to goodwill, the fair value of goodwill is re-assessed using valuation techniques that require significant management judgment. The key judgments include analysis of future cash flow which management believes to be an important factor in determination of the fair value of the Company’s sole reporting unit. This analysis takes into consideration certain revenue growth and operating expense forecasts. Should conditions be different than our last assessment, significant write-downs of goodwill may be required which will adversely affect our results of operations.

Off-Balance Sheet Arrangements

The Company does not have off balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K that have, or are reasonably likely to have, a current or future effect upon our financial condition, revenue, expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors, other than contractual obligations discussed above.

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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Exchange Rate Sensitivity

The Company is exposed to currency exchange fluctuations as it sells products and incurs expenses globally. The Company manages the sensitivity of international sales by denominating transactions in U.S. dollars, Euros, Australian dollars and British pounds.  A natural hedge exists in some local currencies to a limited extent as local currency denominated revenue offsets some of the local currency denominated operating expenses. The fluctuation of foreign currencies resulted in a foreign currency exchange loss of $0.6 million and $0.5 million in the three and six months ended March 31, 2010, respectively, and a loss of $0.8 million and $3.2 million in the three and six months ended March 31, 2009, respectively, as recorded in the condensed consolidated statements of operations as a component of other income (expense), net.

During the three and six months ended March 31, 2010, approximately 62% and 63%, respectively of total sales were invoiced in U.S. dollars.  Although the Company purchases many components in U.S. dollars, approximately 35% and 38% of its expenses during the three and six months ended March 31, 2010, respectively, are denominated in other currencies, primarily in Euros and British pounds. Because more revenue is U.S. dollar-denominated than expenses, a decline in the value of the U.S. dollar could adversely affect operating results.

Interest Rate Sensitivity

The Company is exposed to interest rate risk as a result of significant cash, cash equivalents and marketable securities. The rate of return that the Company may be able to obtain on marketable securities will depend on market conditions at the time these investments are made and may differ from the rates secured in the past.

At March 31, 2010, the Company held $65.6 million of cash and cash equivalents, $12.9 million in marketable securities and $1.8 million in long-term restricted cash for a total of $80.3 million. Refer to Notes 4 and 5 of the notes to condensed consolidated financial statements in this Quarterly Report on Form 10-Q for further details of our investment securities.

Concentration of Credit Risk

Financial instruments that potentially expose the Company to a concentration of credit risk consist primarily of cash, cash equivalents, restricted cash, investments and accounts receivable. The Company maintains cash, cash equivalents, and restricted cash with high credit quality financial institutions and investments consist of U.S. government and government agency securities, term deposits, and ARS.

The Company sells the majority of its products and services to a limited number of customers. If the financial conditions or results of operations of any one of the large customers deteriorate substantially, operating results could be adversely affected. To reduce credit risk, management performs ongoing credit evaluations of the financial condition of significant customers. The Company does not generally require collateral and maintains reserves for estimated credit losses on customer accounts when considered necessary.

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ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (Exchange Act) is recorded, processed, summarized and reported within the specified time periods and accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

The Company conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act) (Disclosure Controls) as of the end of the period covered by this Report required by Exchange Act Rules 13a-15(b) or 15d-15(b). The controls evaluation was conducted under the supervision and with the participation of the Company’s management, including the CEO and CFO. Based on this evaluation, the Company’s CEO and CFO have concluded that as of the end of the period covered by this report the Company’s disclosure controls and procedures were effective at a reasonable assurance level.

Definition of Disclosure Controls

Disclosure Controls are controls and procedures designed to reasonably assure that information required to be disclosed in the Company’s reports filed under the Exchange Act, such as this Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls are also designed to reasonably assure that such information is accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. The Company’s Disclosure Controls include components of its internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements in accordance with U.S. generally accepted accounting principles. To the extent that components of the Company’s internal control over financial reporting are included within its Disclosure Controls, they are included in the scope of the Company’s annual controls evaluation.

Limitations on the Effectiveness of Controls

The Company’s management, including the CEO and CFO, does not expect that the Company’s Disclosure Controls or internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be 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 the Company have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control over Financial Reporting

No change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months 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

From time to time, we are involved in disputes or regulatory inquiries that arise in the ordinary course of business. Any claims or regulatory actions against us, whether valid or not, could be time consuming, result in costly litigation, require significant amounts of management time, and result in the diversion of significant operational resources.

On October 1, 2008, the Company filed a complaint in the Northern District of California, asserting U.S. Patent No. 6,575,360 against Intercede Group PLC and Intercede Ltd. (collectively, “Intercede”). On January 16, 2009, Intercede filed their answers, including counterclaims seeking declaratory judgment of non-infringement, invalidity, and unenforceability. On February 9, 2009, the Company filed a motion to dismiss Intercede’s counterclaims and to strike certain of Intercede’s defenses. On March 26, 2009, Intercede filed a First Amended Answer and Counterclaims, amending their previously-asserted defenses and counterclaims, and asserting additional counterclaims for monopolization, attempted monopolization, fraud, and unfair competition. On May 15, 2009, the Company filed a second motion to dismiss Intercede’s counterclaims for monopolization, attempted monopolization, fraud and unfair competition. On September 11, 2009, the Court granted in part and denied in part the Company’s motion to dismiss. On September 28, 2009, Intercede filed a Second Amended Answer and Counterclaims. On March 25, 2010, the Company and Intercede entered into a patent license agreement on mutually acceptable terms. This patent license agreement settles the patent infringement case brought by ActivIdentity before the U.S. District Court of Northern California, and a related case brought by Intercede in the United Kingdom High Court. Based on this agreement, all lawsuits over the “360 patents” (ActivIdentity U.S. patent 6,575,360 and ActivIdentity patent EP [UK] 0 981 803) were promptly dismissed, bringing an end to all patent infringement litigation between the two companies. No liability related to the Intercede litigation was recorded at March 31, 2010 or September 30, 2009 other than accrual for legal fees.

ITEM 1A:  RISK FACTORS

The risks described below are not the only risks facing the Company.  Additional risks and uncertainties not currently known or those are currently deemed to be insignificant also may materially and adversely affect the Company’s business, financial condition or operating results. The descriptions below include any material changes to and supersede the description of the risk factors affecting our business previously disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2009.

We have a history of losses and we may experience losses in the foreseeable future.

We have not achieved profitability and we may incur losses for the foreseeable future. In fiscal 2009 and 2008, we incurred losses of approximately $5.5 million and $76.5 million, respectively. As of September 30, 2009, our accumulated deficit was $328.6 million, which represents our net losses since inception. Although we had approximately $92.2 million in cash and cash equivalents, and investments as of September 30, 2009, we may not be able to raise additional capital in the event that our current cash and cash equivalents are insufficient.

We will need to achieve incremental revenue growth and manage our costs to achieve profitability. Even if we do achieve profitability, we may be unable to sustain profitability on a quarterly or annual basis thereafter. It is possible that our revenue will grow at a slower rate than we anticipate or that operating expenses will increase beyond our current run rate. The current global economic slowdown could slow customer orders, as well as anticipated revenue growth, and could further delay our prospects for operating profitability.

Our cost-reduction initiatives may not result in the anticipated savings or more efficient operations and may harm our long-term viability.

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Over the past several years, we have implemented extensive cost cutting measures and have incurred significant cost-reduction charges as we have attempted to streamline operations, improve efficiency, and reduce costs. We expect that we may undertake further cost-reduction initiatives in the future as we realign our business around areas of strategic focus. Although we believe that it has been and will continue to be necessary to reduce the size and cost of our operations to improve our performance, the reduction in our operations may make it more difficult to develop and market new products and to compete successfully with other companies in our industry. In addition, many of the employees who have been terminated as part of our cost-reduction activities possessed specific knowledge or expertise that may prove to have been important to our operations, and we may be required to rehire them or to hire persons with similar skills in order to develop new products to increase our revenue. These efforts may not result in anticipated cost savings, making it difficult for us to achieve profitability. These cost-reduction initiatives may also preclude us from making complementary acquisitions and/or other potentially significant expenditures that could improve our product offerings, competitiveness or long-term prospects.

Our operating results may continue to be adversely affected by the current economic environment, unfavorable market and economic conditions.

The current global economic environment may continue to have a negative impact on demand for our services, our business and our foreign operations. The economic environment has or may negatively impact, among other things:

· current and future demand for our products;

· our customers’ continued growth and development of their businesses and our customers’ ability to continue as going concerns;

· the ability of our customers to maintain their business;

· price competition for our products and services;

· the price of our common stock;

· our liquidity.

In addition, to the extent that the economic environment impacts specific industry and geographic sectors in which many of our customers are concentrated, that may further negatively impact our business. If the economic and market conditions in the U.S. and globally do not improve, or if they further deteriorate, we may experience material adverse impacts on our business, operating results and financial position as a consequence of the above factors or otherwise.

We derive revenue from only a limited number of products and we do not have a diversified product base.

Substantially all of our revenue is derived from the sale of our credential management and strong authentication systems and products. We anticipate that substantially all of our future revenue, if any, will also be derived from these products. If for any reason our sale of these products is impeded or if we divest existing product lines as part of our ongoing strategic realignment, and we have not diversified our product offerings, our business and results of operations could be harmed.

Our customer base is highly concentrated and the loss of any one of these customers or delay in anticipated orders could adversely affect our business.

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Our customers consist primarily of medium to large enterprises, governments, system integrators, resellers, distributors, and OEMs. Historically, we have experienced a concentration of revenue in certain of our channel partners and customers. In fiscal 2009 and 2008, Novell accounted for more than 10% of our total revenue. Additionally, a substantial portion of our total product revenue is generated from the governmental sector. In fiscal 2009 and 2008, worldwide government business accounted for approximately 19% and 20%, respectively, of total product revenue. Although government spending is currently high in light of various economic recovery initiatives, diversion of government resources to economic recovery programs and reductions in state and local government spending may harm our business. We expect future revenue variability in this sector due to fluctuations in government ordering patterns and frequent delays associated with larger programs.

Our operating results would be adversely affected if any of the following events occur:

· The loss of our significant customers;

· The failure of our significant customers to pay us due to their financial difficulties or for any other reason;

· The failure of any of our significant channel partners to renew their contracts upon expiration, or the termination by these partners of their contracts;

· The divestiture of products or product lines, which would cause the loss of that revenue; or

· Delays in orders from governmental agencies.

We expect to continue to depend upon a small number of large customers for a substantial portion of our revenue and the occurrence of any of the above events could further extend our reliance on remaining customers.

Our quarterly gross and net margins are difficult to predict, and if we miss quarterly financial expectations, our stock price could decline.

Our quarterly revenue, expense levels, and operating results are difficult to predict and fluctuate from quarter to quarter. It is likely that our operating results in some periods will vary from the guidance we have provided, or otherwise not meet investor expectations. If this happens, the market price of our common stock is likely to decline. Fluctuations in our future quarterly operating results may be caused by many factors, including:

· The size and timing of customer orders which are received unevenly and unpredictably throughout a fiscal year and may be subject to seasonality relating to the United States federal government’s fiscal year and related spending patterns;

· The effect of U.S. generally accepted accounting principles on the timing of revenue recognition; for example, if prices for our products or services vary significantly, we may not maintain vendor specific objective evidence of fair value of undelivered elements which could result in deferring revenue to future periods;

· The timing of customer payments;

· The size and timing of revenue recognized in advance of actual customer billings and customers with installment payment schedules that may result in higher accounts receivable balances;

· Changes in financial markets, which could adversely affect the value of our assets and our liquidity;

· The relative mix of our software and services revenue, as well as the relative mix of product offerings, which could change in connection with strategic realignment initiatives;

· The application of new accounting regulations, which could negatively impact results; and

· Changes in currency exchange rates.

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We have a long and often complicated sales cycle, which can result in significant revenue fluctuations between periods.

The sales cycle for our products is typically long and subject to a number of significant risks over which we have little control. The typical sales cycle is six to nine months for an enterprise customer and over twelve months for a network service provider or government. As our operating expenses are based on anticipated revenue levels, a small fluctuation in the timing of sales can cause our operating results to vary significantly between periods. If revenue falls significantly below anticipated levels, our business would be negatively impacted.

Purchasing decisions for our products and systems may be subject to delay due to many factors that are outside of our control, such as:

· Political and economic uncertainties;

· Time required for a prospective customer to recognize the need for our products;

· Time and complexity for us to assess and determine a prospective customer’s IT environment;

· Customer’s requirements for customized features and functionalities;

· Turnover of key personnel at existing and prospective customers;

· Customer’s internal budgeting process; and

· Customer’s internal procedures for the approval of large purchases.

Furthermore, the implementation process can be subject to delays resulting from issues associated with incorporating new technologies into existing networks, deployment of a new network system or preservation of existing network infrastructure and data migration to the new system. Full deployment of our technology and products for such networks, servers, or other host systems can be scheduled to occur over an extended period, and the licensing of systems and products, including client and server software, smart cards, readers, and tokens, and the recognition of maintenance revenue, would also occur over this period. This interaction, thereby can negatively impact the results of our operations in the near term, resulting in unanticipated fluctuations between periods.

The market for some of our products is still developing and if the industry adopts standards or platforms incompatible with our standards or platforms, then our competitive position would be negatively affected.

The market for digital identity products is still emerging and is also experiencing consolidation. The evolution of the market is in a constant state of flux that may result in the development of different network computing platforms and industry standards that are not compatible with our current products or technologies.

We believe smart cards are an emerging platform for providing digital identity for network applications and for the procurement of services from private enterprise and government agencies. A key element of our business model is premised on the smart card becoming a common access platform for network computing in the future. Further, we have focused on developing our products for certain operating systems related to smart card deployment and use. Should platforms or form factors other than the smart card emerge as a preferred platform or should operating systems other than the specific systems we have focused on emerge as preferred operating systems, our current product offerings could be at a disadvantage. If this were to occur, our future growth and operating results would be negatively affected. Additionally, consolidation within this industry has created a more difficult competitive environment and may result in the broader adoption of competing platforms and systems.

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In addition, the digital identity market has evolving industry-wide standards. While we are actively engaged in discussions with industry peers to define what these standards should be, it is possible that any standards eventually adopted could prove disadvantageous to or incompatible with our business model and product lines. Uncertainty surrounding the Homeland Security Presidential Directive No. 12 (HSPD 12) may affect sales of our products to government agencies. If our products do not comply with the requirements of HSPD 12, we may not be able to sell to agencies that must comply with this Directive.

We rely on strategic relationships with other companies to develop and market our products. If we are unable to enter into additional relationships, or if we lose an existing relationship, our business could be harmed.

Our success depends on establishing and maintaining strategic relationships with other companies to develop, market, and distribute our technology and products and, in some cases, to incorporate our technology into their products. Part of our business strategy has been to enter into strategic alliances and other cooperative arrangements with other companies in the industry. We are currently involved in cooperative efforts to incorporate our products into the products of others, to jointly engage in research and development efforts, and to jointly engage in marketing efforts and reseller arrangements. To date, most of these relationships are non-exclusive, and some of our strategic partners have cooperative relationships with certain of our competitors.

If we are unable to enter into cooperative arrangements in the future or if we lose any of our current strategic or cooperative relationships, our business could be adversely affected. We do not control the time and resources devoted to such activities by parties with whom we have relationships. In addition, we may not have the resources available to satisfy our commitments, which may adversely affect these relationships. These relationships may not continue, may not be commercially successful, or may require the expenditure of significant financial, personnel, and administrative resources from time to time. Further, certain of our products and services compete with the products and services of our strategic partners, which may adversely affect our relationships with these partners, which could adversely affect our business.

We may be adversely affected by operating in international markets.

Our international operations subject us to risks associated with operating in foreign markets, including fluctuations in currency exchange rates, which could adversely affect our results of operations and financial condition. International revenue and expenses make up a substantial portion of our business. A severe economic decline in any of our major foreign markets could make it difficult for our customers to pay us on a timely basis. Any such failure to pay, or deferral of payment, could adversely affect our results of operations and financial condition. During fiscal 2009 and 2008, markets outside of North America accounted for 53% and 58%, respectively, of total revenue.

We face a number of additional risks inherent in doing business in international markets, including:

· Unexpected changes in regulatory requirements;

· Potentially adverse tax consequences;

· Export controls relating to encryption technology;

· Tariffs and other trade barriers;

· Difficulties in staffing and managing international operations;

· Laws that restrict our ability, and make it costly, to reduce our workforce;

· Changing political conditions;

· Exposures to different legal standards; and

· Burden of complying with a variety of laws and legal systems.

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While we present our financial statements in U.S. dollars, a significant portion of our business is conducted outside of the United States and we incur a significant portion of our expenses in Euros, Australian dollars and British pounds. Some revenue transactions are denominated in foreign currencies as well. Significant fluctuations in exchange rates between the U.S. dollar and foreign currencies may adversely affect our future operating results. Due to fluctuations in foreign currencies we recorded a loss of $0.8 million in fiscal 2009 and a loss of $2.0 million in fiscal 2008, on our consolidated statements of operations.

We invest in securities that are subject to market risk and the recent problems in the financial markets could adversely affect the value of our assets.

During fiscal 2008, we reclassified $33.0 million at cost of our investments in certain auction rate securities (“ARS”) from short-term to long-term investments as the auctions for these holdings effectively ceased with no indication as to when or if these auctions would resume in the future. Given these developments and the resultant consequences of the lack of liquidity for these investments, coupled with other developments in the credit markets in general, we recorded an other-than-temporary impairment on these holdings of $21.2 million, resulting in a carrying value of $11.8 million at September 30, 2009. As of March 31, 2010, these securities have been reclassified to marketable securities (short-term) on the balance sheet as a secondary market has developed and we are finding opportunities to dispose of these assets. At March 31, 2010, we held $12.9 million of ARS in our investment portfolio classified as marketable securities. The original cost of these ARS was $27.5 million. We have valued these securities based on our experience of receiving quotations in the secondary market. We believe the valuation of our ARS holdings at March 31, 2010 approximate the fair value.

ARS are structured to provide liquidity through a Dutch auction process that resets the interest rates paid at pre-determined intervals, generally every 28 days. The auctions have historically provided a liquid market for these securities. Our investments in ARS represent interests in collateralized debt obligations (“CDO”), closed-end mutual funds, derivative product companies, and student loans. Uncertainty in the financial markets has affected the liquidity of our ARS holdings and resulted in a significant increase in the risks related to the ARS investments, specifically the CDO and derivative product companies securities, and to a lesser degree, the student loan holdings. Historically, the fair value of ARS approximated par value due to the frequent auction events. However, failed auctions that began in August 2007 have resulted, in most cases, in revised estimates of fair value that are less than par.

We believe we have made reasonable judgments in our valuation exercise. If the relevant assumptions, estimates, or the related analyses still prove incorrect or, if due to additional information received in the future, management’s conclusions change, we may be required to change the recorded value of these securities, or other securities that make up the investment portfolio. We will continue to carefully monitor these securities and the ARS markets, and work diligently to recover any lost value through all available means. In fiscal 2010, we sold some of our ARS and the results of those sales may not be indicative of future amounts to be realized.

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If a liquid market for these securities does not develop, the ARS holdings may require us to recognize additional impairment charges. Any of these events could adversely affect our results of operations and our financial condition. A material change in these underlying estimates and assumptions could significantly change the reported value of the securities and could cause us to take charges for additional write-downs in value.

We rely on certain key employees and have faced challenges in the past with employee turnover in senior management. If we are not able to build and maintain a strong management team, our ability to manage and expand our business will be impacted. Employee turnover could adversely impact our revenue, costs and productivity.

In recent years, there has been significant and recurring turnover in all levels of management. In March 2008, our Chief Financial Officer, Mark Lustig, announced his resignation, effective in May 2008. In April 2008, Grant Evans became our Chief Executive Officer following the resignation of Thomas Jahn. In August 2008, we hired a new Chief Financial Officer / Chief Operating Officer, Jacques Kerrest. In November 2008, our President, Yves Audebert, left the Company. We may experience further turnover in management in the future and, as a result, we face challenges in effectively managing our operations during these periods of transition. If new key employees and other members of our senior management team cannot work together effectively, or if other members of our senior management team resign, our ability to effectively manage our business may be impacted.

In part due to our restructuring efforts over the past several years, we have become increasingly dependent on a smaller number of employees. If key employees leave ActivIdentity, we suffer loss of productivity while new employees are hired or promoted into vacant positions. The departure of highly skilled key employees sometimes results in a loss of talent or knowledge that is difficult to replace. There are also costs of recruiting and relocating new employees to fill these positions. For example, the recruiting market for experienced operations personnel is very competitive and we may be limited in our ability to attract and retain key operations talent if the need should arise. New employees must learn the ActivIdentity organization, products, and procedures. All of this takes time, reduces productivity and increases cost. The potential adverse impact of employee turnover is greater for situations involving senior positions in the Company and our turnover rate may be higher if key employees decided to leave on their own accord. If turnover increases, the adverse impact of turnover could materially affect our costs, productivity, or ability to respond quickly to the competitive environment.

We have recorded significant write-downs in recent periods for impairment of acquired intangible assets and goodwill and may have similar write-downs in future periods.

Due to our declining stock price, we conducted a goodwill impairment analysis in fiscal 2008, and determined the full carrying value of our goodwill was impaired. We recorded an impairment charge of $35.9 million to goodwill during fiscal 2008.

We may terminate additional non-core activities in the future or determine that our long-lived assets or acquired intangible assets have been impaired. Any future termination or impairment related charges could have an adverse effect on our financial position and results of operations.

As of March 31, 2010, we have $10.2 million of intangible assets and $9.4 million of goodwill, representing 9% and 8%, respectively of our total assets. If the enterprise value at a future date is lower than the enterprise value as of our last impairment evaluation, the evaluation could result in an impairment of goodwill and/or other intangible assets charge if the circumstances indicate that impairment may exist. Also, if our estimates of future undiscounted cash flows to be derived from the use of our intangible assets drop below the carrying value of intangible assets, an additional impairment charge may be required.

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While we believe we currently have effective internal control over financial reporting, we may identify a material weakness in our internal controls over financial reporting that could cause investors to lose confidence in the reliability of our financial statements and result in a decrease in the value of our securities.

We will continue to evaluate, upgrade and enhance our internal controls. Because of inherent limitations, our internal control over financial reporting may not prevent or detect misstatements, errors or omissions, including those caused by human error, the circumvention of overriding controls, the violation of company policies or practices (whether negligent or willful) or fraud, and any projections of any evaluation of effectiveness of internal controls to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate. We believe that we will not have a material weakness in our internal control over financial reporting which would lead to material errors in our financial statements.  However, if we fail to maintain the adequacy of our internal controls, including any failure to implement or difficulty in implementing required new or improved controls, our business and results of operations could be harmed, the results of operations we report could be subject to adjustments, we could fail to be able to provide reasonable assurance as to our financial results or the effectiveness of our internal controls or meet our reporting obligations and there could be a material adverse effect on our stock price and business.

Implementation of the new FASB rules and the issuance of new laws or other accounting regulations, or reinterpretation of existing laws or regulations, could materially impact our stated results.

From time to time, the government, courts and financial accounting boards issue new laws or accounting regulations, or modify or reinterpret existing ones.

There may be other future changes in FASB rules or in laws, interpretations or regulations that would affect our financial results or the way in which we present them. Additionally, changes in the laws or regulations could have adverse effects on our business that would affect our ability to compete, both nationally and internationally.

We must comply with European governmental regulations setting environmental standards.

Our activities in Europe require that we comply with European Union Directives with respect to product quality assurance standards and environmental standards. Directive 2002/95/ec of the European Parliament on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment, known as the RoHS Directive, became effective on July 1, 2006. If we fail to maintain compliance, we may be restricted from selling our products in the European Union and this could adversely affect our results of operations. European Directive 2002/96/EC on waste, electrical and electronic equipment, known as the WEEE Directive, makes manufacturers of electrical and electronic equipment financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The WEEE Directive became effective on August 13, 2005. We may incur financial responsibility for the collection, recycling, treatment or disposal of products covered under the WEEE Directive. Because the EU member states have not fully implemented the WEEE Directive, the nature and extent of the costs to comply and fees or penalties associated with noncompliance are unknown at this time. Costs to comply with the WEEE Directive and similar future legislation, if applicable, may also include legal and regulatory costs and insurance costs. We may also be required to take additional reserves for costs associated with compliance with these regulations.

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We or our suppliers may be impacted by new regulations related to climate change.

In addition to the European environmental regulations noted above, we or our suppliers may become subject to new laws enacted with regards to climate change. In the event that new laws are enacted or current laws are modified in countries in which we or our suppliers operate, our flow of product may be impacted and/or the costs of handling the potential waste associated with our products may increase dramatically, either of which could result in a significant negative impact on our ability to operate or operate profitably.

The protection of our intellectual property rights is crucial to our business and, if third parties use our intellectual property without our consent, our business could be damaged.

Our success is heavily dependent on protecting intellectual property rights in our proprietary technology, which is primarily our software. It is difficult for us to protect and enforce our intellectual property rights for a number of reasons, including:

· policing unauthorized copying or use of our products is difficult and expensive;

· software piracy is a persistent problem in the software industry;

· our patents may not cover the full scope of our product offerings and may be challenged, invalidated or circumvented, or may be enforceable only in certain jurisdictions; and

· our shrink-wrap licenses may be unenforceable under the laws of certain jurisdictions.

In addition, the laws of many countries do not protect intellectual property rights to as great an extent as those of the United States and France. We believe that effective protection of intellectual property rights is unavailable or limited in certain foreign countries, creating an increased risk of potential loss of proprietary technology due to piracy and misappropriation.

We also seek to protect our confidential information and trade secrets through the use of nondisclosure agreements with our employees, contractors, vendors, and partners. However, there is a risk that our trade secrets may be disclosed or published without our authorization, and in these situations it may be difficult or costly for us to enforce our rights and retrieve published trade secrets.

We sometimes contract with third parties to provide development services to us, and we routinely ask them to sign agreements that require them to assign intellectual property to us that is developed on our behalf. However, there is a risk that they will fail to disclose to us such intellectual property, or that they may have inadequate rights to such intellectual property. This could happen, for example, if they failed to obtain the necessary invention assignment agreements with their own employees.

We are involved in litigation to protect our intellectual property rights, and we may become involved in further litigation in the future. This type of litigation is costly and could negatively impact our operating results. See Item 3 - Legal Proceedings.

Our operating results could suffer if we are subject to intellectual property infringement claims.

We may face claims of infringement on proprietary rights of others that could subject us to costly litigation and possible restriction on the use of such proprietary rights. There is a risk that potential infringement or invalidity claims may be asserted or prosecuted against us and our products may be found to have infringed the rights of third parties. Such claims are costly to defend and could subject us to substantial litigation costs. If any claims or actions are asserted against us, we may be required to modify our products or may be forced to obtain a license for such intellectual property rights. However, we may not be able to modify our products or obtain a license on commercially reasonable terms, or at all.

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We may pursue strategic acquisitions and investments that could have an adverse effect on our business if they are unsuccessful.

As part of our business strategy, we have acquired companies, technologies, product lines and personnel to complement our internally developed products or add new product lines in our business. For example, in December 2009, we acquired CoreStreet, Ltd., a privately held company headquartered in Boston. Critical to the success of this acquisition strategy in the future and, ultimately, our business as a whole, is the orderly, effective integration of acquired businesses, technologies, product lines and employees into our organization.  We expect that we will have a similar business strategy going forward. Acquisitions involve numerous risks, including the following:

· Our acquisitions may not enhance our business strategy nor result in an appropriate business model for integrated companies. Our assumptions about the business model and operations of the acquired company were incorrect, or its role in our business does not develop as we planned;

· We may apply overly optimistic valuation assumptions and models for the acquired businesses, and we may not realize anticipated cost synergies and revenue as quickly as we expected or at all. Customer demand for the acquired company’s products may not meet our expectations and we may incur higher than anticipated costs for the support and development of acquired products resulting in insufficient revenue to offset the increased expenses associated with acquisitions;

· We may not integrate acquired businesses, technologies, products, personnel and operations effectively. Our integration effort is not completed in a timely and efficient manner. We may have trouble integrating our sales channels and training our sales force for new product offerings. The acquired products may not be compatible with our existing products, making integration of acquired products difficult and costly and potentially delaying the release of other internally developed products. Ineffective internal controls of the acquired company may require remediation as part of the integration process;

· Management’s attention may be diverted from our day to day operations, resulting in disruption of our ongoing business;

·  Shareholders that hold relatively large interests in our company decided to dispose of their shares because the results of the acquisition are not consistent with their expectations.

· We may not retain key employees, customers, distributors and vendors of the companies we acquire. We may be required to assume pre-existing contractual relationships, which would be costly for us to terminate and disruptive for our customers; and

· The acquisitions may result in infringement, trade secret, product liability or other litigation.

As a result, it is possible that the contemplated benefits of these or any future acquisitions may not materialize within the time periods or to the extent anticipated.

We may have exposure to additional tax liabilities as a result of inter-company transfer pricing policies.

As a multinational organization, we conduct business and are subject to income taxes in both the United States and various foreign jurisdictions. Significant judgment and analysis is required in determining our worldwide income tax provision and related tax liabilities. In the ordinary course of a global business, inter-company transactions and calculations result in a variety of uncertain tax positions. Our inter-company pricing policies are subject to audits in the various foreign tax jurisdictions. Although we believe that our tax estimates are reasonable, there is no assurance that the final determination of tax audits or potential tax disputes will not be different from what is reflected in our historical income tax provisions and accruals.

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It may be difficult for a third party to acquire the Company, which could affect the price of our common stock.

In July 2008, we adopted a stockholder rights agreement, which is sometimes also called a “poison pill.” This agreement has the effect of discouraging a stockholder from acquiring more than 20% of our issued and outstanding common stock without prior approval of our Board of Directors. We are also afforded the protections of Section 203 of the Delaware General Corporation Law, which will prevent us, for a period of three years, from engaging in a business combination with a person who acquires more than 15% of our common stock unless our Board of Directors’ or stockholders’ approval is obtained. Defensive measures such as the stockholder rights agreement and Section 203 are expected to have the effect of discouraging coercive hostile takeover attempts where the Board of Directors does not support the transaction. Any delay or prevention of a change of control transaction could deter potential acquirers or prevent the completion of a transaction in which our stockholders could receive a premium over the then current market price for their shares.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On December 14, 2009, the Company issued the following securities in connection with the acquisition of CoreStreet; (i) approximately 2.2 million shares of the Company’s common stock (the “Shares”) (of which approximately 1.5 million shares were subject to an escrow to satisfy certain indemnification obligations of the stockholders of CoreStreet), (ii) warrants for 1.0 million shares of the Company’s common stock with a per share exercise price of $4.25 expiring December 31, 2011 (the “2011 Warrants”) and valued at $0.4 million and (iii) warrants for 1.0 million shares of the Company’s common stock with a per share exercise price $5.00 expiring December 31, 2012 and valued at $0.4 million (the “2012 Warrants” and, together with the 2011 Warrants, the “Warrants”).  The Shares and Warrants shall be collectively referred to herein as the “Securities.” The aggregate offering price of the unregistered securities issued or to be issued in connection with the acquisition of CoreStreet was $5.0 million, or $2.27 per share.

The Securities were all issued in a private placement pursuant to exemptions from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”).  The Company is relying on the exemptions provided by Regulation D promulgated under the Securities Act in connection with such issuances based on the representations made by the recipients of the Securities as to their status as accredited investors.

The Securities and the underlying shares of common stock issuable upon conversion of the Warrants have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.

ITEM 6. EXHIBITS

ExhibitNumber	Description
10.2	Lease Agreement, as amended, between the John Arrillaga Survivor’s Trust and the Richard T. Peery Separate Property Trust, collectively as Landlord, and ActivIdentity, Inc. dated February 9, 2010
31.1	Certification of Chief Executive Officer Pursuant to Section 302(a) of The Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer Pursuant to Section 302(a) of The Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, ActivIdentity Corporation has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Fremont, State of California, on the 10th day of May 2010.

ActivIdentity Corporation
By:	/s/ JACQUES KERREST
	Jacques Kerrest
	Chief Financial Officer

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EX-10.2

Exhibit 10.2

Ardenwood III-G

AMENDMENT NO. 1
TO LEASE

THIS AMENDMENT NO. 1 (“Amendment”) is made and entered into this 9th day of February, 2010, by and between JOHN ARRILLAGA, Trustee, or his Successor Trustee UTA dated 7/20/77 (.JOHN ARRILLAGA SURVIVOR’S TRUST) as amended, and RICHARD T. PEERY, Trustee, or his Successor Trustee UTA dated 7/20/77 (RICHARD T. PEERY SEPARATE PROPERTY TRUST) as amended, collectively as LANDLORD, and ACTIVIDENTITY, INC., a California corporation, as TENANT.

RECITALS

A.WHEREAS, by Lease Agreement dated April 11, 2000 Landlord leased to Tenant all of that certain 41,075+ square foot building located at 6623 Dumbarton Circle, Fremont, California, the details of which are more particularly set forth in said April 11, 2000 Lease Agreement, and

B.WHEREAS, said Lease was amended by the Commencement Letter dated February 12, 2001 which changed the Commencement Date of the Lease from January 1, 2001 to February 12, 2001, and changed the Termination Date from December 31, 2010 to February 28, 2011, and

C.WHERESAS, said Lease was amended by Letter Agreement dated December 28, 2005, whereby Landlord acknowledged Tenant’s name change from “ActivCard, Inc., a California corporation” to “ActivIdentity, Inc., a California corporation” (“ActivIdentity Letter Agreement”), and

D.WHEREAS, Tenant subleased the Relinquished Premises (defined below) to eTouch Systems Corporation (“eTouch”) pursuant to a Sublease dated June 3, 2005 (the “eTouch Sublease”) and Landlord consented to such sublease under certain terms and conditions pursuant to a letter agreement dated July 7, 2005, and

E.WHEREAS, it is now the desire of the parties hereto to further amend the Lease by (i) extending the Term for nine (9) years, changing the Termination Date from February 28, 2011 to February 29, 2020; (ii) reducing the square footage of the Leased Premises effective March 1, 2011 by 12,075+ square feet, or from 41,075+ square feet to 29,000+ square feet; (iii) as of March 1, 2010 reducing the Security Deposit required under the Lease; (iv) amending the Basic Rent schedule and Aggregate Basic Rent; (v) effective March 1, 2011 reducing Tenant’s non-exclusive parking spaces; (vi) amending Lease Paragraphs 4.D (“Rent: Additional Rent”), 5 (“Acceptance and Surrender of Premises”), 40 (“As-Is Basis”), 7 (“Tenant Maintenance”), 8 (“Utilities”), 12 (“Property Insurance”), 14 (“Compliance”), 16 and 42 (“Assignment and Subletting”), 21 (“Destruction”), 31 (“Notices”), 45 (“Hazardous Materials”) and (vii) adding paragraphs (“Rules and Regulations and Common Area”), (“Parking”), (“Brokers”), (“Tenant’s Option to Terminate Lease”) and (“Option to Extend Lease for Five (5) Years”) to the Lease as hereinafter set forth (the Lease Agreement, Construction Agreement, Commencement Letter dated February 12, 2001, ActivIdentity Letter Agreement dated December 28, 2005 and this Amendment No. 1

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hereinafter are referred to collectively as the “Lease”).

AGREEMENT

NOW THEREFORE, for valuable consideration, receipt of which is hereby acknowledged, and in consideration of the hereinafter mutual promises, the parties hereto do agree as follows:

1.TERM OF LEASE: It is agreed between the parties that the Term of the Lease shall be extended for an additional nine (9) year period (the “Extended Term”), and the Lease Termination Date shall be changed from February 28, 2011 to February 29, 2020 (the “Revised Termination Date”). Tenant shall be responsible for paying all Basic Rent and Additional Rent and fulfilling all Lease obligations as contained in said Lease through the Revised Termination Date. Notwithstanding the above, Tenant’s obligations as stated in Lease Paragraphs 9 (“Taxes”), 13 (“Indemnification”), 14 (“Compliance”) and 45 (“Hazardous Materials”) shall survive the termination of the Lease.

2.REDUCED PREMISES: Subject to the terms of this Amendment No. 1, effective March 1, 2011 (the scheduled “Surrender Date”), the size of the Leased Premises will be reduced by 12,075+ square feet (the “Relinquished Premises”), or from 41,075+ square feet to 29,000+ square feet of space (“Retained Premises”) (including Tenant’s Proportionate Share of the Common Area of the Building). The remaining 29,000+ square feet of currently leased space is shown in Red on Exhibit B attached hereto (“Remaining Square Footage”). The Remaining Square Footage of the Premises is more particularly shown within the area outlined in Red on Exhibit A attached hereto. Tenant shall be responsible for relinquishing the Relinquished Space in the condition required under Lease Paragraphs 5 (“Acceptance and Surrender of Premises”), 6 (“Alterations and Additions”) and 45 (“Hazardous Materials”). As soon as possible following the full execution of this Amendment, Landlord and Tenant shall conduct a joint inspection of the Relinquished Premises to determine the extent of the work required by Tenant to comply with the provisions of said Lease Paragraphs 5 and 6 (“Restoration Work”) and Landlord shall obtain the required bid from its contractors to complete said Restoration Work. In lieu of Tenant completing the required Restoration Work, Tenant agrees (i) to pay to Landlord a fee equal to the total estimates received from Landlord’s contractors for the Restoration Work (“Restoration Fee”) within ten (10) days after Tenant receives Landlord’s statement of said Restoration Fee Notwithstanding the above, Tenant’s obligations as stated in Lease Paragraphs 9 (“Taxes”), 13 (“Indemnification”), 14 (“Compliance”) and 45 (“Hazardous Materials”) shall survive the Surrender Date of the Relinquished Premises.

A.Taxes. Tenant’s ongoing obligation related to Lease Paragraph 9 (“Taxes”) shall include all regularly assessed Real Estate Taxes and any supplemental taxes related to the period of Tenant’s Lease Term whenever levied, including any such taxes that may be levied on the Relinquished Premises and/or the Remaining Premises after the Lease Surrender Date with respect to the Lease Term.

B.Hazardous Materials. In the event any Hazardous Materials were used and/or stored on the Relinquished Premises during the Term of the Lease by Tenant, Tenant’s assignor (if any) or subtenants (if any), prior to the Surrender Date, Tenant shall provide Landlord, concurrently with the

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return of this executed Amendment No. 1, with (i) a list of Hazardous Materials used and/or stored on the Relinquished Premises, including the quantities so used and/or stored, (ii) copies of all Hazardous Materials permits, (iii) copies of all related Hazardous Materials manifests, (iv) a copy of the floor and site plan of the Relinquished Premises reflecting the location where any and all Hazardous Materials were used, stored and/or disposed, and (v) a copy of the preliminary and final Hazardous Materials Closure Plan filed with and approved by the City of Fremont. If no Hazardous Materials were used and/or stored on the Relinquished Premises, Tenant shall provide Landlord with a written statement representing and warranting the same. For purposes of this Paragraph 2.B, the term “Hazardous Materials” shall exclude customary office and janitorial supplies.

3.REDUCED SECURITY DEPOSIT: Effective March 1, 2010 Tenant’s Security Deposit shall be reduced by $354,395.00 (“Security Deposit Reduction Amount”), or from $435,395.00 to $81,000.00. Said Security Deposit Reduction Amount shall be applied as credit to the Basic Rent due as shown in Paragraph 4. C below commencing March 1, 2010 until one hundred percent (100%) of said Security Deposit Reduction Amount is applied in full to Basic Rent.

4.BASIC RENT SCHEDULE: Subject to Paragraph 18 (“Tenant’s Option to Terminate Lease”) herein, the Basic Rent schedule, as shown in Paragraph 39 of the Lease, shall be amended as follows:

A.Deferred Basic Rent. Subject to the terms and conditions stated herein, the total Basic Rent due under Lease Paragraph 39 (“Basic Rent”) for the period commencing March 1, 2010 through February 28, 2011 (the “Basic Rent Deferral Period”) is $2,602,370.00 ($217,697.50 x 12 months less $10,000.00 reduction for Basic Rent due under the original Lease Term for period March 1, 2010 through March 31, 2010) net of the Sublease Basic Rent of $187,899.30 ($20,877.70 x 9 months) for a net total Deferred Basic Rent of $2,414,470.70 shall be amortized and paid to Landlord over one hundred twenty (120) months commencing March 1, 2010 through February 29, 2020 (the “Basic Rent Repayment Period”). The monthly amortized amount of the Deferred Basic Rent to be repaid during the Basic Rent Repayment Period is $20,120.59 per month and is included in the monthly Basic Rent detailed in Paragraph 4.C below. In the event of a monetary default that is not cured within the period allowed in the Lease, the full amount of the then remaining unamortized and/or unpaid portion of the Deferred Basic Rent shall be due in full upon the occurrence of such uncured monetary default.

B.Application of Reduction Amount in Reduced Security Deposit. Effective March 1, 2010, and pursuant to Amendment No. 1, Paragraph 3 (Reduced Security Deposit) the Security Deposit required under the Lease is reduced from $435,395.00 to $81,000.00 or by $354,395.00 (“Security Deposit Reduction Amount”). The Security Deposit Reduction Amount shall be applied to the Basic Rent due commencing March 1, 2010 and each month thereafter until the full Security Deposit Reduction Amount has been applied in full to the Basic Rent due.

C.Revised Basic Rent Schedule. The monthly Basic Rent Schedule of the Lease shall be as follows.

The Basic Rent of $217,697.50 due for the period March 1, 2010 through March 31, 2010

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reflected in Lease Paragraph 39 is reduced by $10,000.00 to $207,697.50. Said Basic Rent shall be further amended as reflected below:

On March 1, 2010, the sum of FORTY THOUSAND NINE HUNDRED N1NETY-EIGHT AND 29/100 DOLLARS ($40,998.29) shall he due less the Security Deposit Reduction Amount of FORTY THOUSAND NINE HUNDRED NINETY-EIGHT AND 29/100 DOLLARS ($40,998.29), with a net amount of ZERO DOLLARS ($0.00) due each month for the period March 1, 2010 through October 1, 2010.

On November 1, 2010, the sum of FORTY THOUSAND NINE HUNDRED NINETY- EIGHT AND 29/100 DOLLARS ($40,998.29) shall be due less the Security Deposit Reduction Amount of TWENTY-SIX THOUSAND FOUR HUNDRED EIGHT AND 68/100 DOLLARS ($26,408.68), with a net amount of FOURTEEN THOUSAND FIVE HUNDRED EIGHTY-NINE AND 61/100 DOLLARS ($14,589.61) due for the period November 1, 2010 through November 30, 2010.

On December 1, 2010, the sum of TWENTY THOUSAND ONE HUNDRED TWENTY AND 59/100 DOLLARS ($20,120.59) shall be due, and a like sum due on the first day of each month thereafter through and including April 1, 2011.

On May 1, 2011, the sum of FORTY-SIX THOUSAND TWO HUNDRED TWENTY AND 59/100 DOLLARS ($46,220.59) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2012.

On March 1, 2012, the sum of FORTY-SEVEN THOUSAND SIX HUNDRED SEVENTY AND 59/100 DOLLARS ($47,670.59) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2013.

On March 1, 2013, the sum of FORTY-NINE THOUSAND ONE HUNDRED TWENTY AND 59/100 DOLLARS ($49,120.59) shall be due, and a like sum due on the first day of each month thereafter though and including February 1, 2014.

On March 1, 2014, the sum of FIFTY THOUSAND FIVE HUNDRED SEVENTY AND 59/100 DOLLARS ($50,570.59) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2015.

On March 1, 2015, the sum of FIFTY-TWO THOUSAND TWENTY AND 59/100 DOLLARS ($52,020.59) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2016.

On March 1, 2016, the sum of FIFTY-THREE THOUSAND FOUR HUNDRED SEVENTY AND 59/100 DOLLARS ($53,470.59) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2017.

On March 1, 2017, the sum of FIFTY-FOUR THOUSAND NINE HUNDRED TWENTY

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AND 59/100 DOLLARS ($54,920.59) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2018.

On March 1, 2018, the sum of FIFTY-SEVEN THOUSAND EIGHT HUNDRED TWENTY AND 59/100 DOLLARS ($57,820.59) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2019.

On March 1, 2019, the sum of SIXTY THOUSAND SEVEN HUNDRED TWENTY AND 59/100 DOLLARS ($60,720.59) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2020;

The Aggregate Basic Rent for the Lease shall be increased by $3,435,200.10 or from $21,774,884.38 to $25,210,084.48.

D. Management Fee. Notwithstanding anything to the contrary in Lease Paragraph 4.E (“Management Fee”), effective March 1, 2010, the management fee shall be amended to reflect the amount due each month as follows:

On March 1, 2010, the sum of ONE THOUSAND TWO HUNDRED TWENTY-NINE AND 95/100 DOLLARS ($1,229.95) shall be due, and a like sum due on the first day of each month thereafter through and including November 1, 2010.

On December 1, 2010, the sum of SIX HUNDRED THREE AND 62/100 DOLLARS ($603.62) shall be due, and a like sum due on the first day of each month thereafter through and including April 1, 2011.

On May 1, 2011, the sum of ONE THOUSAND THREE HUNDRED EIGHTY-SIX AND 62/100 DOLLARS ($1,386.62) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2012.

On March 1, 2012, the sum of ONE THOUSAND FOUR HUNDRED THIRTY AND 12/100 DOLLARS ($1,430.12) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2013.

On March 1, 2013, the sum of ONE THOUSAND FOUR HUNDRED SEVENTY-THREE AND 62/100 DOLLARS ($1,473.62) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2014.

On March 1, 2014, the sum of ONE THOUSAND FIVE HUNDRED SEVENTEEN AND 12/100 DOLLARS ($1,517.12) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2015.

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On March 1, 2015, the sum of ONE THOUSAND FIVE HUNDRED SIXTY AND 62/100 DOLLARS ($1,560.62) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2016.

On March 1, 2016, the sum of ONE THOUSAND SIX HUNDRED FOUR AND 12/100 DOLLARS ($1,604.12) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2017.

On March 1, 2017, the sum of ONE THOUSAND SIX HUNDRED FORTY-SEVEN AND 62/100 DOLLARS ($1,647.62) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2018.

On March 1, 2018, the sum of ONE THOUSAND SEVEN HUNDRED THIRTY-FOUR AND 62/100 DOLLARS ($1,734.62)( shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2019.

On March 1, 2019, the sum of ONE THOUSAND EIGHT HUNDRED TWENTY-ONE AND 62/100 DOLLARS ($1,821.62) shall be due, and a like sum due on the first day of each month thereafter through and including February 1, 2020.

E. Return of Basic Rent Paid to Landlord. Prior to this Amendment No. 1, the Basic Rent payment as scheduled in the Lease for March 1, 2010 was $217,697.50. Tenant paid said amount to Landlord and Landlord agrees within ten (10) business days following the full execution of this Amendment to return said $217,697.50 payment to Tenant due to the adjustment in the Basic Rent amount due for said period as reflected in Paragraphs 4.B and 4.C above.

5.TENANT’S REVISED PROPORTIONATE SHARE AS A PERCENTAGE OF THE  BUILDING: Due to the reduction in the square footage of the Premises, effective March 1, 2011, the reference to Tenant’s Proportionate Share as a percentage of the Building shall be changed to 70.60% (29,000+ square foot Leased Premises divided by 41,075+ square foot Building), or such other equitable basis, as reasonably calculated by Landlord. For example: If a tenant is solely responsible for damage to a specific Common Area item, said tenant will be one hundred percent (100%) liable for the cost to repair and in such event, the non-responsible tenant would not be required to pay its Proportionate Share of said cost.

6.ADDITIONAL RENT: Lease Paragraph 4.D (“Rent: Additional Rent”) shall be amended to include the following language related to Tenant’s audit rights:

Tenant’s right to audit period shall be changed from thirty (30) days to sixty (60) days after receipt of Landlord’s most recent reconciliation. In the event Tenant assigns this Lease and obtains Landlord’s written consent to said assignment, the audit rights provided to Tenant may be assigned to such assignee by Tenant; however, the audit rights of the assignee shall only be applicable to the period that commences after the date of assignment.

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7.AS-IS BASIS: Lease Paragraph 40 (“As-Is Basis”) shall be amended to include the following language:

A.Interior Improvements to be Completed by Landlord. Landlord has agreed to complete, at Landlord’s cost and expense, the following interior improvements as listed below in the Retained Premises, (“Interior Improvements”).

1)Remove and replace existing VCT tiled floor, with new VCT tile (the color and material to be determined by Landlord and reasonably approved by Tenant), in the following areas: lobby, kitchen, kitchenette, copy room and side entry as shown in Green Crosshatch on Exhibit B attached hereto;

2)Remove and replace the chipped and/or cracked hard surface tiles in the lobby;

3)Clean, seal and re-grout, as necessary, the existing tile countertops in the restrooms;

4)Remove and replace existing carpet throughout Retained Premises (with color and type carpet to be determined by Landlord and reasonably approved by Tenant) and

5)Remove two walls in the area shown in Pink dashed lines on Exhibit B attached hereto if so requested by Tenant provided the request is received prior to Landlord replacing the carpet as referenced above.

Landlord shall commence the construction of the Interior Improvements within thirty (30) days of Landlord’s receipt of notice from Tenant advising Landlord to commence the construction of the Interior Improvements. Tenant shall be responsible for removing any and all personal property from the above work areas and for the reinstallation of any personal property Tenant may want to reinstall in said areas. The Interior Improvements referenced above shall become a part of the Premises upon completion and Tenant shall not be required or allowed to remove said Interior Improvements upon Lease Termination. In the event this Lease is terminated early due to an uncured default by Tenant and/or a written agreement between Landlord and Tenant to terminate the Lease prior to the scheduled Termination Date (but specifically excluding a termination of the Lease by Tenant pursuant to Paragraph 18 of this Amendment), Tenant agrees to reimburse Landlord for one hundred percent (100%) of the balance of the unamortized cost of the Interior Improvements (amortized over the Extended Term) paid for by Landlord outstanding as of the early termination date. Said amount shall be paid by Tenant to Landlord by the termination date and/or Landlord may, at its option, deduct part or all of said unamortized Interior Improvement cost from Tenant’s Security Deposit. The Interior Improvements shall be constructed during normal business hours, in a good and workmanlike manner, free of defects and using new materials. Prior to the commencement of construction of the Interior Improvements, Landlord and Tenant shall mutually agree upon a construction schedule that reasonably minimizes interference with Tenant’s operations in the Premises. Within thirty (30) days following Landlord’s completion of the Interior Improvements, Tenant shall have the right to submit a written “punch list” to Landlord, setting forth any defective item of construction, and Landlord shall promptly cause such items to be corrected subject to any damage, wear and tear caused by Tenant, its employees, agents and/or contractors, subtenant and/or assignee, if any.

B. New Interior Improvements to be Constructed by Tenant. Landlord acknowledges that Tenant intends to make certain initial improvements to the Premises, at Tenant’s sole cost and expense (“Tenant’s New Interior Improvements”). Tenant shall provide Landlord with detailed construction plans,

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which plans shall be prepared at Tenant’s sole cost and expense, subject to reimbursement from the New Interior Improvement Allowance referenced in Paragraph 7.C below. Tenant’s New Interior Improvements shall not be subject to restoration, unless Landlord upon its review and approval of Tenant’s plans designates and approves certain of the proposed Tenant’s New Interior Improvements as non-standard office installations in the Premises (“Non-Standard Improvements”), then Landlord may require Tenant in Landlord’s written approval of Tenant’s New Interior Improvements, to remove the Non- Standard Improvements, by the Revised Termination Date, at Tenant’s expense or at Tenant’s option, Tenant may pay Landlord a fee equal to the average of two (2) estimates received by Landlord to perform such removal work after bidding such work to at least two (2) contractors, in lieu of Tenant removing the Non-Standard Improvements and restoring the impacted areas to the configuration that existed prior to said modifications being made; however Landlord shall not obtain the estimates until Tenant has notified Landlord that it wants to pay the fee versus doing the work itself.

C. Tenant’s New Interior Improvement Allowance. In addition to the Interior Improvements to be made by Landlord as referenced in Paragraph 7.A above, Landlord shall provide Tenant with an allowance towards Tenant’s New Interior Improvements costs (the “Allowance”) not to exceed Two Hundred Seventeen Thousand Five Hundred and No/100 Dollars ($217,500.00) [29,000+ square foot Premises x $7.50 allowance per square foot]. Said Allowance is to be applied to the design and construction cost of the New Interior Improvements to the real property to be approved by Landlord as well as the cost of any new furniture, fixtures, equipment, or cabling purchased by Tenant and to be installed in the Leased Premises (the “Construction Cost Items”) provided Tenant gives Landlord a descriptive list of said Construction Cost Items, the price per item and paid invoices. Landlord, at its election, may require said Construction Cost Items to become the property of Landlord upon Lease Termination or shall have the right to require Tenant to remove said items from the Premises. Tenant shall determine from Landlord thirty (30) days prior to Lease Termination if Landlord wants said Construction Cost Items to remain. All other construction costs in excess of the Allowance contributed by Landlord shall be paid one hundred percent (100%) by Tenant. Upon Tenant’s completion of the New Interior Improvements, Landlord shall pay Tenant the Allowance equal to the amount supported by the following documents but not more than Two Hundred Seventeen Thousand Five Hundred and No/100 Dollars ($217,500.00): (1) copy of Tenant’s related invoices, (2) signed lien release from the applicable contractors performing such New Interior Improvements or evidence of payment by Tenant to the respective contractor, (3) full lien release signed by the general contractor and (4) recorded copy of Filed Notice of Completion, collectively (“Required Disbursement Documents”). Tenant, or Tenant’s representative on behalf of Tenant, shall, upon final approval by Landlord of the new interior improvement plans, enter into a contract for the construction of the New Interior Improvements with a licensed contractor reasonably approved by Landlord. Landlord shall disburse the appropriate portion of the Allowance within fifteen (15) business days after Tenant provides the Required Disbursement Documentation. Landlord’s payment to Tenant shall be contingent upon receiving copies of the Required Disbursement Documents.

8. RULES AND REGULATIONS AND COMMON AREA: Subject to the terms and conditions of the Lease and such Rules and Regulations as Landlord may from time to time prescribe, Tenant and Tenant’s employees, invitees and customers shall, in common with other occupants of the Parcel/Building in which the Premises are located, and their respective employees, invitees and customers, and others entitled to the use thereof, have the non-exclusive right to use the access roads, parking areas, and facilities

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provided and designated by Landlord for the general use and convenience of the occupants of the Parcel/Building in which the Premises are located, which areas and facilities are referred to herein as “Common Area”. The Common Area comprised of respective Common Area hallways shall be used only for applicable (i) access to and from the respective tenant’s suite to the common area restrooms; and (ii) entering into and exiting from the Building by tenants who share said Common Area. Tenant shall not use or allow use of any such Common Area to store supplies, materials, inventory or any other item of any type whatsoever. This non-exclusive right to use the Common Area shall terminate upon the termination of this Lease. Landlord reserves the right from time to time to make changes in the shape, size, location, amount and extent of Common Area, including changing the location and number of parking spaces allocated to Tenant. Landlord further reserves the right to promulgate such reasonable rules and regulations relating to the use of the Common Area, and any part or parts thereof, as Landlord may reasonably deem appropriate for the best interests of the occupants of the Parcel/Building (“Rules and Regulations”). Such Rules and Regulations may be amended by Landlord from time to time, with or without advance notice, and all amendments shall be effective upon delivery of a copy to Tenant. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of the Parcel/Building of any of said Rules and Regulations.

Landlord shall operate, manage and maintain the Common Areas within the Building and/or Parcel in good condition as reasonably determined by Landlord.

Notwithstanding anything to the contrary contained in the Lease, effective as of March 1, 2011, (i) the Common Areas of the Parcel shall include all areas of the Parcel exterior to the Building, including driveways, pathways, sidewalks, fountains and landscaping and (ii) the Common Areas of the Building shall include but not be limited to the electrical/MPOE room identified in red cross hatch on Exhibit B  attached hereto, and such electrical/MPOE room shall be excluded from the non common areas of the Leased Premises.

9. REDUCED PARKING: Effective March 1, 2011, Tenant shall have the right to the nonexclusive use of a maximum of one hundred sixteen (116) parking spaces (which number shall be amended to reflect Tenant’s Proportionate Share in the event the square footage of the Premises is amended in the future) in the common parking area of the Parcel, which common parking area may be used by Tenant in common with other tenants or occupants of the Building. Tenant agrees that Tenant, Tenant’s employees, agents, representatives, and/or invitees shall not use parking spaces in excess of said one hundred sixteen (116) parking spaces allocated to Tenant hereunder. Landlord shall have the right, at Landlord’s reasonable discretion, to specifically designate the location of Tenant’s parking spaces within the Parcel, in which event Tenant agrees that Tenant, Tenant’s employees, agents, representatives and/or invitees shall not use any parking spaces other than those parking spaces specifically designated by Landlord for Tenant’s use. Said parking spaces, if specifically designated by Landlord to Tenant, may be reasonably relocated by Landlord within the Parcel at any time, and from time to time if necessary. Landlord shall give Tenant at least ten (10) days prior written notice of any specific designation of Tenant’s parking spaces. Tenant shall not, at any time, park, or permit to be parked by Tenant Parties, any trucks or vehicles adjacent to the loading area so as to interfere in any way with the use of such areas, nor shall Tenant, at any time, park or permit the parking of Tenant’s trucks and other vehicles or the trucks and vehicles of Tenant’s suppliers or others, in any portion of the common areas not designated by Landlord for

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such use by Tenant. Tenant shall not park nor permit to be parked, any inoperative vehicles or equipment on any portion of the common parking area or other common areas of the Parcel.Tenant agrees to assume responsibility for compliance by its employees with the parking provision contained herein. If Tenant or its employees park in other than designated parking areas, then Landlord may charge Tenant, as an additional charge, and Tenant agrees to pay Ten Dollars ($10.00) per day for each day or partial day each such vehicle is parking in any area other than that designated. Tenant hereby authorizes Landlord, at Tenant’s sole expense, to tow away from the Building any vehicle belonging to Tenant or Tenant’s employees parked in violation of these provisions, or to attach violation stickers or notices to such vehicles; provided, however, that unless any such vehicle is parked in a dangerous and/or designated no parking zone, Landlord will attach a twenty-four (24) hour violation notice on said vehicle prior to having the vehicle towed from the Parcel. Tenant shall use the parking area for vehicle parking only and shall not use the parking areas for storage. Notwithstanding the foregoing, in the event Landlord offers any other tenant or occupant of the Parcel reserved parking spaces, Landlord shall offer Tenant an amount of reserved parking spaces in an amount proportionate to the amount of reserved parking spaces given to such other tenant or occupant of the Parcel (such proportionate amount to be determined in accordance with the size of the Premises and size of the other tenant’s or occupant’s premises and the total number of parking spaces of Tenant and the total number of parking spaces of such other tenant or occupant of the Parcel).

10. ACCEPTANCE AND SURRENDER OF PREMISES: Effective as of March 1, 2011 Lease Paragraph 5 (“Acceptance and Surrender of Premises”) shall be replaced with the following:

Subject to Landlord’s completion of its obligations under Amendment No. 1, Paragraph 7.A (“AS- IS Basis: Interior Improvements to be Constructed by Landlord”) above, by entry hereunder, Tenant accepts the Premises as being in good and sanitary order, condition and repair and accepts the Building and improvements included in the Premises in their present condition and without representation or warranty by Landlord as to the condition of such Building or as to the use or occupancy which may be made thereof. Any exceptions to the foregoing must be by written agreement executed by Landlord and Tenant. Tenant agrees on the last day of the Term, or on the sooner termination of this Lease, to surrender the Premises promptly and peaceably to Landlord in good condition and repair (damage by Acts of God, fire, normal wear and tear excepted), with all interior walls cleaned, and repaired or replaced, if damaged; all floors cleaned and waxed; all carpets cleaned and shampooed; all broken, marred or nonconforming acoustical ceiling tiles replaced; all windows washed; the air conditioning and heating systems exclusive to the Premises, if any, serviced by a reputable and licensed service firm and in good operating condition (provided the maintenance of such equipment has been the Tenant’s responsibility during the Term of this Lease) and repair; the plumbing and electrical systems and lighting within the non-common areas of the Premises in good order and repair, including replacement of any burned out or broken light bulbs or ballasts (all lights and ballasts must be of the same type, color and wattage); together with all alterations, additions, and improvements (collectively “Alterations”) which may have been made, in, to, or on the Premises, except as referenced in Lease Paragraph 6 (“Alterations and Additions”), Tenant shall not be required to remove any Alterations that are not subject to restoration pursuant to Landlord’s written Consent to Alterations agreement executed by Tenant and Landlord. Tenant shall be responsible for repairing any damage caused by the installation and/or the removal of Tenant’s trade fixtures by Tenant or Tenant’s employees, agents or contractors. For purposes of clarification, Landlord agrees that Tenant shall not be required to remove any Alterations that existed in the Premises (including the Relinquished

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Premises) on March 1, 2010. For all other such Alterations, Tenant shall ascertain from Landlord within thirty (30) days before the end of the Term of this Lease whether Landlord desires to have the Premises or any part or parts thereof restored to their condition and configuration as when the Premises were delivered to Tenant and if Landlord shall so desire, then at Tenant’s option, Tenant shall either (i) pay to Landlord a fee in an amount equal to (a) Landlord’s estimated cost to the average of two (2) estimates received by Landlord to perform such removal work required to restore the Premises to the configuration as shown on Exhibit B attached hereto that existed on March 1, 2010 after bidding such work to at least two (2) contractors; however Landlord shall not obtain the estimates until Tenant has notified Landlord that it wants to pay the fee versus doing the work itself, or (ii) Tenant shall restore said Premises or such part or parts thereof before the end of this Lease at Tenant’s sole cost and expense. In the event Tenant elects to pay for the cost of the restoration, the fee shall be paid by Tenant to Landlord regardless of whether or not Landlord elects to restore all or part of said Premises. In the event Tenant is required to complete the restoration and said restoration is not completed prior to the Termination Date, Tenant acknowledges that Tenant shall enter into a Hold Over period pursuant to the terms of Lease Paragraph 25 (“Holding Over”) and Tenant shall automatically be liable to Landlord for the monthly Hold Over Basic Rent and all other Additional Rent until said restoration is completed by Tenant. Tenant, on or before the end of the Term or sooner termination of this Lease, shall remove all of Tenant’s personal property and trade fixtures from the Premises, and all property not so removed on or before the end of the Term or sooner termination of this Lease shall be deemed abandoned by Tenant and title to same shall thereupon pass to Landlord without compensation to Tenant. Landlord may, upon termination of this Lease, remove all moveable furniture and equipment so abandoned by Tenant, at Tenant’s sole cost, and repair any damage caused by such removal at Tenant’s sole cost. Upon surrender of the Premises to Landlord, Tenant shall provide Landlord with keys for all exterior and interior locking doors (including mechanical rooms). If the Premises is not surrendered at the end of the Term or sooner termination of this Lease, Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in so surrendering the Premises including, without limitation, any claims made by any succeeding Tenant founded on such delay. Nothing contained herein shall be construed as an extension of the Term hereof or as a consent of Landlord to any holding over by Tenant. The voluntary or other surrender of this Lease or the Premises by Tenant or a mutual cancellation of this Lease shall not work as a merger and, at the option of Landlord, shall either terminate all or any existing subleases or subtenancies or operate as an assignment to Landlord of all or any such subleases or subtenancies.

11. MAINTENANCE:

A. Tenant Maintenance of the Building. Effective March 1, 2011 Lease Paragraph 7 (“Maintenance”) shall be replaced by the following paragraph for the period commencing March 1, 2011 and thereafter.

“Tenant shall, at its sole cost and expense, keep and maintain the non-common areas of the Premises (including appurtenances) and every part thereof in a high standard of maintenance and repair, and in good and sanitary condition. Tenant’s maintenance, repair and replacement responsibilities herein referred to include, but are not limited to, janitorization, plumbing systems within the non-common areas of the Premises (such as water and drain lines, sinks), electrical systems within the non-common areas of the Premises (such as outlets, lighting fixtures, lamps,

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bulbs, tubes, ballasts), heating and air-conditioning controls within the non-common areas of the Premises (such as thermostats, time clocks, supply and return grills) and any HVAC systems/unit(s) that serve Tenant’s server room(s), and all interior improvements within the Premises including but not limited to: wall coverings, window coverings, acoustical ceilings, vinyl tile, carpeting, partitioning, doors (both interior and exterior, including closing mechanisms, latches and locks), fire extinguishers as required by code, and all other interior improvements of any nature whatsoever. Tenant agrees to provide carpet shields under all rolling chairs or to otherwise be responsible for wear and tear of the carpet caused by such rolling chairs if such wear and tear exceeds that caused by normal foot traffic in surrounding areas. Areas of excessive wear shall be replaced at Tenant’s sole expense upon Lease termination. Tenant hereby waives all rights hereunder, and benefits of, subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect.”

B. Landlord Maintenance of the Common Areas of the Building. Effective March 1, 2011 Landlord shall operate, manage and maintain the Common Areas of the Building. As Additional Rent and in accordance with Paragraph 4.D of this Lease (but subject to Section 50 of this Lease), Tenant shall pay its Proportionate Share of the cost of operation (including common utilities), management, maintenance, repair and replacement of the common areas of the Building including, but not limited to lobbies, restrooms, janitor’s closets, hallways, mechanical and telephone rooms, entrances, spaces above the ceilings and janitorization of said common areas). The maintenance items herein referred to include, but are not limited to, all common area windows, window frames, plate glass, glazing, truck doors, main plumbing systems of the Building (such as water drain lines, sinks, toilets, faucets, drains, showers and water fountains), main electrical systems (such as panels and conduits), all non-server room roof top heating and air-conditioning systems exclusively and/or non exclusively serving the Premises (such as compressors, fans, air handlers, ducts, boilers, heaters and any elements of the foregoing located above the ceiling grid in the Premises) excluding, however, any HVAC unit(s) that serve Tenant’s server room(s), structural elements and exterior surfaces of the Building; store fronts, roof, roof membrane, downspouts, Building common area interiors (such as wall coverings, window coverings, floor coverings, partitioning and ceilings in the Common Area), Building exterior Common Area doors, exterior lighting, skylights (if any), and automatic fire extinguishing systems (but not the fire extinguishers required by code in Tenant’s Premises); license, permit and inspection fees; security, supplies, materials, equipment and tools; and the cost of capital expenditures which have the effect of reducing operating expenses.  In the event Landlord makes capital improvements (such as a replacement of the entire roof membrane) not related to an insured peril, Landlord shall amortize the cost of capital improvements using an interest rate equal to the higher of (i) Landlord’s borrowing rate per annum or (ii) the prime rate of interest plus one per annum over the useful economic life of such capital improvements as determined by Landlord in its reasonable discretion in accordance with GAAP (“Amortized Cost”) and Tenant shall pay its Proportionate Share of said Amortized Cost monthly as Additional Rent over the term remaining in the Lease plus, if applicable, during the extended Term as provided for in Paragraph 19 (“Option to Extend Lease for Five (5) Years”), subject to the provisions of Section 50 of the Lease.

In the event an entire HVAC unit(s) (excluding any server room HVAC unit(s)), including condenser unit(s), but excluding components thereof (for example a condenser) to the Leased Premises has served its useful life and needs to be replaced during the period commencing March 1, 2011 and thereafter

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during the remaining term of the Lease, Landlord shall replace said unit(s) provided said replacement is not the result of (a) Tenant’s failure to have said unit(s) serviced on a quarterly basis, maintained, repaired and/or replaced if recommended by the third party licensed HVAC company retained by Tenant during the period Tenant leased one hundred percent (100%) of the Building and/or (b) damage caused by Tenant, its agents, employees, invitees, contractors, or its future subtenants and/or assignees (if any) at any time during the Term of the Lease. In the event Landlord replaces an HVAC unit, Landlord shall amortize the cost of the HVAC unit using an interest rate equal to the higher of (i) Landlord’s borrowing rate per annum or (ii) the prime rate of interest plus one per annum over the useful economic life of such capital improvements as determined by Landlord in its reasonable discretion in accordance with GAAP (“Amortized Cost”) and Tenant shall pay its Proportionate Share of said Amortized Cost monthly as Additional Rent over the term remaining in the Lease plus, if applicable, during the extended Term as provided for in Paragraph 19 (“Option to Extend Lease for Five (5) Years”), subject to the provisions of Section 50 of the Lease.

Tenant hereby waives all rights under, and benefits of subsection I of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect.

C. Landlord Maintenance of the Common Areas of the Parcel. Effective March 1, 2011, Lease Paragraph 49 (“Expenses of Operation, Management and Maintenance of the Driveway, Parking Lot and Landscaped Areas of the Parcel on Which the Premises are Located”) shall be replaced with the following for the period remaining in the Lease commencing March 1, 2011. Landlord shall operate, manage and maintain the Common Areas of the Parcel. As Additional Rent and in accordance with Paragraph 4.D of this Lease (but subject to Section 50 of the Lease), Tenant shall pay to Landlord Tenant’s Proportionate Share of all expenses of operation, management, maintenance, repair and replacement of the Common Areas of the Parcel including, but not limited to, license, permit, and inspection fees; security; utility charges associated with exterior landscaping and lighting (including water and sewer charges); all charges incurred in the maintenance and replacement of landscaped areas, ponds, fountains, lakes, if any, parking lots, parking lot lights and paved areas (including repairs, replacement, resealing and restriping), sidewalks, driveways, maintenance, repair and replacement of all fixtures and electrical, mechanical and plumbing systems; supplies, materials, equipment and tools and the cost of capital expenditures which have the effect of reducing operating expenses. In the event Landlord makes capital improvements, Landlord shall amortize the cost of capital improvements using an interest rate equal to the higher of (i) Landlord’s annual borrowing rate per annum or (ii) the prime rate of interest plus one per annum over the useful economic life of such capital improvements as determined by Landlord in its reasonable discretion in accordance with GAAP (“Amortized Cost”) and Tenant shall pay its Proportionate Share of said Amortized Cost monthly as Additional Rent over the term remaining in the Lease, plus, if applicable, during the extended Term as provided for in Paragraph 19 (“Option to Extend Lease for Five (5) Years”), subject to the provisions of Section 50 of the Lease.

Tenant hereby waives all rights hereunder, and benefits of, subsection 1 of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect.

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D. Structural Maintenance. Effective March 1, 2011 and notwithstanding anything to the contrary in Paragraph 11.A above, (i) Landlord shall repair, including replacement related to, damage to the structural shell, foundation, roof structure and roof membrane (provided Landlord replaces the entire roof membrane) (but not the interior improvements or glazing) of the Building leased hereunder at Landlord’s cost; however, Landlord shall amortize the cost of such repairs or replacements not covered by an insured peril using an interest rate equal to the higher of (i) Landlord’s annual borrowing rate per annum or (ii) the prime rate of interest plus one per annum over the useful economic life of such repairs or replacements as determined by Landlord in its reasonable discretion in accordance with GAAP (“Amortized Cost”) and Tenant shall pay its Proportionate Share of said Amortized Cost monthly as Additional Rent over the term remaining in the Lease subject to Paragraph 50 of the Lease, plus Tenant’s Proportionate Share of the insurance deductible (if such damage is the result of an insured peril); provided Tenant has not caused such damage, in which event Tenant shall be responsible for one hundred percent (100%) of the insurance deductible and any such costs and expense not reimbursed to Landlord by insurance proceeds for repair and/or replacement or damage so caused by the Tenant and shall pay such amount to Landlord within thirty (30) days of the invoice date. Tenant hereby waives all rights under, and benefits of subsection I of Section 1932 and Sections 1941 and 1942 of the California Civil Code and under any similar law, statute or ordinance now or hereafter in effect. Notwithstanding the foregoing, a crack in the foundation or exterior walls, or any other defect in the Building that does not endanger the structural integrity of the building for which Tenant is or is not responsible, or which is not life-threatening, shall not be considered material, and Landlord may elect, in its sole and absolute discretion, not to repair and/or replace the same; however, Landlord may require Tenant to repair and/or replace the same at Tenant’s sole cost and expense, within thirty days of written notice from Landlord, if Tenant is responsible for the repair and/or replacement.

In the event the Term of the Lease is extended for any reason whatsoever, Tenant’s Proportionate Share of the Amortized Cost of the earlier repair and/or replacement cost shall be increased to include the additional amount payable to Landlord due to the Extended Term of the Lease.

12. UTILITIES OF THE BUILDING IN WHICH THE PREMISES ARE LOCATED: As Additional Rent and in accordance with Paragraph 4.D of this Lease Tenant shall pay its Proportionate Share, (or if the Building in which the Premises is located is not one hundred percent (100%) leased, said Proportionate Share for utilities shall be calculated based on (i) Tenant’s Premises square footage as a percentage of the total square footage leased to Tenant and any other third party tenants in the Building or (ii) other equitable basis as calculated by Landlord of the cost of all utility charges such as water, gas, electricity, (and telephone, telex and other electronic communications service, if applicable), sewer service, waste pick-up and any other utilities, materials or services furnished directly to the Building in which the Premises is located, including, without limitation, any temporary or permanent utility surcharge or other exactions whether or not hereinafter imposed. Notwithstanding anything to the contrary herein, in the event any utility charges apply only to the Premises leased by Tenant, Tenant shall place such utilities in Tenant’s name and shall pay the related costs directly to the utility company(ies).

Landlord shall not be liable for and Tenant shall not be entitled to any abatement or reduction of rent by reason of any interruption or failure of utility services to the Premises when such interruption or failure is caused by accident, breakage, repair, strikes, lockouts, or other labor disturbances or labor disputes of any

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nature, or by any other cause, similar or dissimilar, beyond the reasonable control of Landlord.

Landlord shall furnish to the Premises between the hours of 8:00 am and 6:00 pm, Mondays through Fridays (holidays excepted) and subject to the Rules and Regulations of the Common Area hereinbefore referred to, reasonable quantities of water, gas and electricity suitable for the intended use of the Premises and heat and air-conditioning required in Landlord’s judgment for the comfortable use and occupation of the Premises for such purposes. Tenant may, from time to time, have its staff and equipment operate on a twenty-four (24) hour-a-day, seven (7) day-a-week schedule, and Tenant shall pay for extra consumption of such utilities attributable to such after-hours occupancy, if any, used by Tenant, but Tenant shall not be subject to any after-hours charge by Landlord other than the cost of the extra consumption of such utilities attributable to such after-hours use and after hours charge or premium as reflected on PG&E statements. Tenant agrees that at all times it will cooperate fully with Landlord and abide by all regulations and requirements that Landlord may prescribe for the proper functioning and protection of the Building heating, ventilating and air-conditioning systems. Whenever heat generating machines, equipment, or any other devices (including exhaust fans) are used in the Premises by Tenant which affect the temperature otherwise maintained by the air-conditioning system, Landlord shall have the right to install supplementary air-conditioning units in the Premises and the cost thereof, including the cost of installation and the cost of operation and maintenance thereof, shall be paid by Tenant to Landlord upon demand by Landlord. Tenant will not, without the written consent of Landlord, use any apparatus or device in the Premises (including, without limitation), electronic data processing machines or machines using voltage in excess of 120 Volts which will in any way increase the amount of electricity, gas, water or air-conditioning usually furnished or supplied to premises being used as general office space, or connect with electric current (except through existing electrical outlets in the Premises), or with gas or water pipes any apparatus or device for the purposes of using electric current, gas, or water. Landlord acknowledges that Tenant may use electrical current up to 220 Volts subject to the terms and conditions of this Paragraph. If (i) Tenant shall require water, gas, or electric current in excess of that usually furnished or supplied to Premises being used as general office space, Tenant shall first obtain the written consent of Landlord, which consent shall not be unreasonably withheld, or (ii) if Tenant is found to be using water, gas and/or electrical current in excess of its Proportionate Share (as such excess usage is confirmed by a study conducted by Landlord’s contractor(s) and/or licensed electrician(s), Landlord may (a) adjust the Proportionate Share allocated to Tenant based on Tenant’s actual or estimated use or (b) cause an electric current, gas or water meter to be installed in the Premises in order to measure the amount of electric current, gas or water consumed for any such excess use. In the event Landlord questions Tenant’s usage, Landlord shall employ the services of a licensed electrical or plumbing contractor to determine what Tenant’s actual use is and Tenant shall be responsible for paying the cost related to said investigation by the licensed contractor or any other qualified third party vendor that Landlord may employ to provide such service. The cost of any such meter and of the installation, maintenance and repair thereof, all charges for such excess water, gas and electric current consumed (as shown by such meters and at the rates then charged by the furnishing public utility); and any additional expense incurred by Landlord in keeping account of electric current, gas, or water so consumed shall be paid by Tenant, and Tenant agrees to pay Landlord therefor promptly following demand by Landlord.

13. COMPLIANCE. Lease Paragraph 14 (“Compliance”) shall be amended to include the

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following:

The provisions of this Paragraph 14 shall survive the expiration or termination of this Lease.

Any non-conformance of the Premises and/or the improvements installed and paid for by Landlord, required by the governing agency to be corrected, shall be corrected at the cost and expense of Landlord if such non-conformance exists as of the Commencement Date of the Lease and further provided that such governing agency’s requirement to correct the non-conformance is not initiated as a result of: (i) any improvements made by or for Tenant (excluding however the Interior Improvements completed by Landlord as referenced in Paragraph 7.A); or (ii) any permit request made to a governing agency by or for Tenant (excluding however the Interior Improvements completed by Landlord as referenced in Paragraph 7.A). Except as noted above, Landlord agrees that the Amortized Cost of capital improvements which are not necessitated by Tenant’s particular use, but are necessitated by any new laws, statutes, ordinances or governmental rules, regulations, or requirements that become effective after the Lease Commencement Date will be amortized over the useful life of such improvement, and Tenant shall be required to pay its Proportionate Share of the Amortized Cost over (a) the remaining term of the Lease and Tenant shall pay its Proportionate Share of said Amortized Cost monthly over the term then remaining in the Lease. Notwithstanding anything to the contrary above, Tenant will immediately pay one hundred percent (100%) of the cost of required capital improvements related to Tenant’s particular use of the Premises and resulting from (i) and/or (ii) above.

In the event the Term of the Lease is extended for any reason whatsoever, Tenant’s Proportionate Share of the earlier Amortized Cost shall be increased to include the additional amount payable to Landlord due to the Extended Term of the Lease.

14. ASSIGNMENT AND SUBLETTING: Effective March 1, 2010 Lease Paragraphs 16 and 42 (“Assignment and Subletting”) is hereby amended to reflect that Tenant shall pay to Landlord, as Additional Rent (i) from March 1, 2010 through April 30, 2011, one hundred percent (100%) of all Basic Rents and/or consideration due Tenant from its assignees, transferees, or subtenants in excess of the Basic Rent payable by Tenant to Landlord hereunder for the assigned, transferred and/or subleased space (“Excess Rent”) and (ii) fifty percent (50%) of the Excess Rent from May 1, 2011 through the remaining term of the Lease. Provided, however, that before payment to Landlord of such Excess Rent, Tenant shall first be entitled to recover from such Excess Rent the future subtenant amounts, the amount of the reasonable leasing commission related to said transaction paid by Tenant to a third party broker not affiliated with Tenant; third party attorneys’ fees Tenant incurs for said sublease, and leasehold improvement costs made specifically for the subtenant, if any.

15. NOTICES: Lease Paragraph 31 (“Notices”) is hereby amended to change the address for notices, demand, requests, advices or designations from Tenant to Landlord to: PEERY/ARRILLAGA, 2450 WATSON COURT, PALO ALTO, CA 94303.

16. HAZARDOUS MATERIALS: Effective March 1, 2010, the definition of Anniversary Date as used in Lease Paragraph 45 (“Hazardous Materials”) refers to the anniversary date of the Lease Commencement Date and is hereby amended to refer to April 1st of each year vs. the anniversary date of

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the Lease Commencement Date.

In the event Tenant’s Hazardous Materials Activities includes radioactive materials, Tenant acknowledges and agrees that all such radioactive materials use shall cease in sufficient time prior to the Lease Termination Date to enable Tenant to obtain complete closure and complete decommissioning of the Premises by all applicable governing agencies (local and State) by no later than the Lease Termination Date. Tenant shall provide Landlord with copies of the written confirmation by the governing agencies that closure and decommission have been completed.

17. BROKERS: Tenant and Landlord represent and warrant that neither has dealt with any real estate brokers, agents, or finders in connection with this Amendment No. 1, and neither knows of no real estate broker, agent or finder who is entitled to a commission in connection with this Lease Amendment (“Lease Commission”), except as follows: Jay Seiden and Nathan Zoucha of Cushman & Wakefield (collectively “Broker”), whose Lease Commission of $120,000.00 shall be paid by Landlord to Broker in accordance with Landlord’s standard commission policy and within fifteen (15) business days following Landlord’s receipt of the fully executed Lease Amendment and Broker’s statement. Each party agrees to defend, protect, indemnify and hold the other harmless from and against all claims for Lease Commissions, finder’s fees, and other compensation made by any other broker, agent, or finder as consequence of the respective party’s actions or dealings with such other broker, agent or finder.

18. TENANT’S OPTION TO TERMINATE LEASE: Provided that, as of the date Tenant exercises its Option to Terminate, Tenant is not in monetary default or non-monetary material default following the expiration of applicable notice and cure period of the terms, covenants and conditions of this Lease and any amendments thereto, Landlord hereby grants to Tenant an Option to Terminate the Lease anytime after March 1, 2016, subject to Tenant providing six (6) months pre notice to Landlord of its intent to terminate; the effective date of early termination shall be six (6) months following Landlord’s receipt of said notice, but in no event shall the Lease terminate prior to March 1, 2016.

A.       Amended Termination Date. In the event Tenant exercises Tenant’s Option to Terminate as set forth herein, this Lease shall be further amended (and said amendment executed by Landlord and Tenant) to reflect the amended Termination Date and, except for those provisions in this Lease which survive the Termination of this Lease, said Lease shall be of no further force and effect as of the expiration of the amended Termination Date with Tenant being responsible for the full performance of all terms, covenants, and conditions of this Lease through the effective date of termination as set forth above, subject to the payment of the Termination Fee as set forth in Paragraph 18.B. below.

B.       Termination Fee. As consideration to be paid Landlord for the privilege of the early termination of this Lease, Tenant shall pay to Landlord a “Termination Fee” equal to the total of the unamortized (i) $120,000.00 brokerage fee payable to Cushman & Wakefield as set forth in Paragraph 17 in this Amendment No. 1, (ii) the $217,500.00 Interior Improvement Allowance (which Interior Improvement Allowance amount shall be reduced in the event Tenant does not request full distribution of the $217,500.00 as provided for in Paragraph 7.C) and (iii) the $2,414,470.70 Deferred Basic Rent as set forth in this Amendment No. 1. The amortization period shall be ten (10) years and commences on March 1, 2010. Following Landlord’s receipt of Tenant’s election to terminate the Lease as provided in

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Paragraph 18, Tenant agrees to pay the Termination Fee to Landlord within ten (10) days following Tenant’s receipt of an invoice from Landlord reflecting the amount due. For example: if Tenant elects to terminate the Lease on February 28, 2017 and if Tenant uses one hundred percent (100%) of the Interior Improvement Allowance of $217,500.00, Tenant would be responsible for paying a Termination Fee equal to $825,591.24 which includes the following unamortized then remaining balances: (i) $36,000.00 brokerage fee ($120,000.00 / 10 years / 12 months = $1,000.00 x 36 months), (ii) $65,250.000 Interior Improvement Allowance ($217,500.00 / 10 years / 12 months = $1,812.50 x 36 months) and (iii) $724,341.24 Deferred Basic Rent ($2,414,470.70 / 10 years / 12 months = $20,120.59 x 36 months).

C.       Personal Nature of Option to Terminate. The Option rights of Tenant under this Paragraph 18 are granted for Tenant’s personal benefit and may not be assigned or transferred by Tenant, either voluntarily or by operation of law, in any manner whatsoever, other than in connection with a Permitted Transfer. In the event that the Lease is assigned (other than in connection with a Permitted Transfer), the Option granted herein shall be void and of no force and effect.

19. OPTION TO EXTEND LEASE FOR FIVE (5) YEARS: Provided said Lease is not terminated prior to the scheduled Termination Date and provided Tenant has not assigned the Lease or subleased more than fifty percent (50%) of the Premises (other than in connection with a Permitted Transfer) at the time said “Option to Extend” (as herein called) is exercised, Landlord hereby grants to Tenant an Option to Extend this Lease Agreement for an additional five (5) year period (“Extended Term”) upon the following terms and conditions:

A.    Notice; Deadline. Tenant shall give Landlord written notice of Tenant’s exercise of this Option to Extend not earlier than nine (9) months prior to the scheduled Lease Termination Date, in which event the Lease shall be considered extended for an additional five (5) years with: (i) the Basic Rent to be determined pursuant to Paragraph 19.B below; and (ii) this Paragraph 19 deleted. In the event that Tenant fails to timely exercise Tenant’s Option to Extend as set forth herein in writing, Tenant shall have no further Option to Extend this Lease, and this Lease shall continue in full force and effect for the full remaining Term hereof, absent this Paragraph 19.

B.    Notice and Acceptance of Terms. In the event Tenant timely exercises Tenant’s Option to Extend as set forth herein, Landlord shall, within ten (10) business days after receipt of Tenant’s exercise of its Option to Extend, advise Tenant of the Basic Rent required for the Extended Term of the Lease. Said Basic Rent shall be equal to the then current market per square foot rate for similar quality buildings in the vicinity of the Premises of equivalent quality, size, utility and location (the “Market Basic Rent Rate”). Tenant shall have ten (10) business days after receipt from Landlord of the proposed Basic Rent in which to reject said proposed Basic Rent. Tenant’s failure to timely reject the proposed Basic Rent shall be deemed as Tenant’s acceptance of such proposed Basic Rent and Tenant shall enter into written documentation confirming same. If Tenant timely rejects the proposed Basic Rent, then Landlord and Tenant shall then negotiate in good faith to agree to the Basic Rent for a period of five (5) business days following such rejection notice from Tenant. In the event Landlord and Tenant fail to agree to the Basic Rent within such five (5) business day period (the “Outside Agreement Date”), then Landlord and Tenant shall each make a separate determination of the Market Basic Rent Rate which shall be submitted to each other and to arbitration in accordance with the following items (i) through (vii):

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(i)               Landlord and Tenant shall each appoint, within ten (10) days of the Outside Agreement Date, one arbitrator who shall by profession be a certified MAI designated appraiser licensed to practice in California with at least five (5) years experience in the appraisal of properties in the vicinity of the Premises. The determination of the arbitrators shall be limited solely to the issue of whether Landlord’s or Tenant’s submitted Market Basic Rent Rate is the closest to the actual Market Basic Rent Rate as determined by the arbitrators; provided, however, the arbitrators may only select Landlord’s or Tenant’s determination of Market Basic Rent Rate and shall not be entitled to make a compromise determination.

(ii)              The two arbitrators so appointed shall within five (5) business days of the date of the appointment of the last appointed arbitrator agree upon and appoint a third arbitrator who shall be qualified under the same criteria set forth hereinabove for qualification of the initial two arbitrators.

(iii)             The three arbitrators shall within fifteen (15) days of the appointment of the third arbitrator reach a decision as to whether the parties shall use Landlord’s or Tenant’s submitted Market Basic Rent Rate, and shall notify Landlord and Tenant thereof.

(iv)             The decision of the majority of the three arbitrators shall be binding upon Landlord and Tenant.

(v)              If either Landlord or Tenant fails to appoint an arbitrator within ten (10) days after the applicable Outside Agreement Date, the arbitrator appointed by one of them shall reach a decision, notify Landlord and Tenant thereof, and such arbitrator’s decision shall be binding upon Landlord and Tenant.

(vi)            If the two arbitrators fail to agree upon and appoint a third arbitrator, or both
parties fail to appoint an arbitrator, then the appointment of the third arbitrator or any arbitrator shall be dismissed and the matter to be decided shall be forthwith submitted to arbitration under the provisions of the American Arbitration Association.

(vii)           The cost of arbitration shall be paid by Landlord and Tenant equally.

C.      Personal Nature of Option to Extend. The option rights of Tenant under this Paragraph 19, and the Extended Term thereunder, are granted for Tenant’s personal benefit and may not be assigned or transferred by Tenant, either voluntarily or by operation of law, in any manner whatsoever except in connection with a Permitted Transfer. In the event that Landlord consents to a sublease of more than fifty percent (50%) of the Premises or assignment under Lease Paragraphs 16 and 42 (other than a Permitted Transfer), the option granted herein and any Extended Term thereunder shall at Landlord’s option be void and of no force and effect (without notice from Landlord), whether or not Tenant shall have purported to exercise such option prior to such assignment or sublease, and this Lease will continue in full force and effect for the full remaining Term hereof, absent of this Paragraph 19.

D.      Loss of Option to Extend Right. It is agreed that if Tenant is at the time it exercises its

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Option to Extend in monetary default of this Lease or in a material non-monetary default as provided for in Lease Paragraphs 19 and 43 (“Bankruptcy and Default”) and has failed to cure the default in the cure period provided for under this Lease following Tenant’s receipt of notice from Landlord, this Option to Extend is automatically forfeited by Tenant (without notice from Landlord). In the event said Option to Extend is forfeited as stated herein, Tenant shall have no further Option to Extend this Lease. It is further agreed that if Tenant has exercised its Option to Extend and is subsequently in default prior to, or at any time prior to the commencement of the Extended Term and has failed to cure the (a) monetary default within five (5) days from the date of written notice from Landlord, or (b) material non-monetary default within the cure period provided for under this Lease, Landlord may at its sole and absolute discretion, cancel and rescind Tenant’s Option to Extend, and, unless said Lease is also terminated due to said uncured default, this Lease will continue in full force and effect for the full remaining Term hereof, absent of this Paragraph 19.

20. REPLACEMENT OF LEASE PARAGRAPH 12 (“PROPERTY INSURANCE”): Said Lease Paragraph 12 (“Property Insurance”) is hereby deleted in its entirety and replaced with the following:

“12. PROPERTY INSURANCE. Throughout the Lease Term, Landlord shall purchase and keep in force, and Tenant shall pay to Landlord (or Landlord’s agent if so directed by Landlord), as Additional Rent and in accordance with Paragraph 4.D of this Lease, Tenant’s Proportionate Share of the deductibles on insurance claims and the cost of, policy or policies of insurance covering loss or damage to and/or destruction of the Building (excluding routine maintenance and repairs and incidental damage or destruction intentionally caused by Tenant, its officers, employees, agents, contractors and/or representatives) in the amount of the full replacement value thereof, providing protection against those perils included within the classification of “all risks” “special form” insurance and flood and/or earthquake insurance, if available, plus a policy of rental income insurance in the amount of one hundred (100%) percent of twelve (12) months Basic Rent, plussums paid as Additional Rent. If such insurance cost is increased due to Tenant’s use of the Premises, Tenant agrees to pay to Landlord, in addition to its Proportionate Share of the deductibles, the full cost of such increase within five (5) business days of receipt of the related invoice. Tenant shall have no interest in or any right to the proceeds of any insurance procured by Landlord for the Premises.

In addition and notwithstanding anything to the contrary in this Paragraph 12, each party to this Lease hereby waives all rights of recovery against the other party or its officers, employees, agents and representatives for loss or damage to its property or the property of others under its control, arising from any cause insured against under the fire and extended “special form” property coverage (excluding, however, any loss resulting from Hazardous Material contamination of the Property) required to be maintained by the terms of this Lease to the extent full reimbursement of the loss/claim is received by the insured party. Each party required to carry property insurance hereunder shall cause the policy evidencing such insurance to include a provision permitting such release of liability (“waiver of subrogation endorsement”). If such waiver is so prohibited, the insured party affected shall promptly notify the other party thereof.  Notwithstanding anything to the contrary herein, the foregoing waiver of subrogation shall not include any loss resulting from Hazardous Material contamination of the Property or any insurance coverage relating thereto.”

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21. DESTRUCTION: Lease Paragraph 21 (“Destruction”) is hereby deleted in its entirety and replaced with the following:

“In the event the Premises are destroyed in whole or in part from any cause, Landlord may, at its option:

(a)           Rebuild or restore the Premises to their condition prior to the damage or destruction, or

(b)           Terminate this Lease (providing that the Premises is damaged to the extent of thirty-three and one third percent (33 1/3%) or more of the replacement cost, exclusive of footings, foundations and floor slabs).

If Landlord does not give Tenant notice in writing within thirty (30) days from the destruction of the Premises of its election to either rebuild and restore the Premises, or to terminate this Lease, Landlord shall be deemed to have elected to rebuild or restore the Premises, in which event Landlord agrees, at its expense except for any deductible, which is the responsibility of the Tenant, promptly to rebuild or restore the Premises to the condition existing prior to the damage or destruction. Tenant shall be entitled to a reduction in Rent from the date of such damage or destruction, provided Tenant is not using any portion of such damaged area, while such repair is being made in the proportion that the area of the Premises rendered untenantable by such damage bears to the total area of the Leased Premises. If Landlord initially estimates that the rebuilding or restoration will exceed one hundred eighty (180) days or if Landlord does not complete the rebuilding or restoration within one hundred eighty (180) days following the commencement date of construction (such period of time to be extended for delays caused by the fault or neglect of Tenant or because of Acts of God, acts of public agencies, labor disputes, strikes, fires, freight embargos, rainy or stormy weather, inability to obtain materials, supplies or fuels, acts of contractors or subcontractors, or delay of the contractors or subcontractors due to such causes or other contingencies beyond the control of Landlord) (the “Allowed Restoration Period”), and provided the damage or destruction does not result from intentional damage or destruction caused by Tenant, its officers, employees, agents, contractors and/or representatives, then Tenant shall have the right to terminate this Lease by giving written notice to Landlord within five (5) business days following the date Tenant receives Landlord’s written notice stating that the restoration will exceed the Allowed Restoration Period. During the period the Landlord named in this Amendment No. 1 or any of its affiliates owns the Building and Tenant elects to terminate this Lease early pursuant to the terms of this Paragraph 21.(b), Tenant shall remain liable for its Proportionate Share of the insurance deductible as it relates to the Premises. Subject to the terms of this Paragraph 21, Tenant shall not be liable for its Proportionate Share of the insurance deductible if Landlord terminates the Lease pursuant to this Paragraph 21 or Tenant terminates the Lease pursuant to this Paragraph 21 provided neither the Landlord named in Amendment No. 1 nor any of its affiliates owns the Building at the time the damage to the Building occurs that results in the right of either party to terminate the Lease. Notwithstanding anything herein to the contrary, Landlord’s obligation to rebuild or restore shall be limited to the Building and interior

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improvements constructed by Landlord as they existed on the later of (a) the Commencement Date of the Lease or (b) March 1, 2011 and shall not include restoration of Tenant’s trade fixtures, equipment, merchandise, or any improvements, alterations or additions made by Tenant to the Premises, which Tenant shall forthwith replace or fully repair at Tenant’s sole cost and expense provided this Lease is not terminated according to the provisions above.

Unless this Lease is terminated pursuant to the foregoing provisions, this Lease shall remain in full force and effect. Tenant hereby expressly waives the provision of Section 1932, Subdivision 2, in Section 1933, Subdivision 4 of the California Civil Code.

In any event that the Building in which the Premises are situated is damaged or destroyed to the extent of not less than thirty-three and one third percent (33 1/3%) of the replacement cost thereof, Landlord may elect to terminate this Lease, whether the Premises be injured or not. Notwithstanding anything to the contrary herein, Landlord may terminate this Lease in the event of an uninsured event or if insurance proceeds are insufficient to cover one hundred percent of the rebuilding costs net of the deductible.”

22. CHOICE OF LAW/VENUE; SEVERABILITY: This Amendment shall in all respects be governed by and construed in accordance with the laws of the County of Alameda in the State of California and each party specifically stipulates to venue in Alameda County. If any provisions of this Amendment shall be invalid, unenforceable, or ineffective for any reason whatsoever, all other provisions hereof shall be and remain in full force and effect.

23. AUTHORITY TO EXECUTE: The parties executing this Amendment hereby warrant and represent that they are properly authorized to execute this Amendment and that the individuals executing this Lease are authorized to bind the parties on behalf of whom they execute this Amendment and to all of the terms, covenants and conditions of this Amendment as they relate to the respective parties hereto.

24. EXAMINATION OF AMENDMENT: This Amendment No. 1 shall not be effective until its execution by both Landlord and Tenant.

EXCEPT AS MODIFIED HEREIN, all other terms, covenants, and conditions of the Lease shall remain in full force and effect.

[SIGNATURES ON FOLLOWING PAGE]

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IN WITNESS WHEREOF, Landlord and Tenant have executed this Amendment No. 1 to Lease as of the day and year last written below.

LANDLORD:			TENANT:
JOHN ARRILLAGA SURVIVOR’S TRUST			ACTIVIDENTITY, INC.
			a California corporation
By	/s/ John Arrillaga		By	/s/ Jacques Kerrest
John Arrillaga, Trustee
			Jacques Kerrest
Date:		3/24/10	Printer or Type Name
RICHARD T. PEERY SEPARTE			Title:		CFO
PROPERTY TRUST
By	/s/ Richard T. Peery		Date:		3/23/2010
Richard T. Peery, Trustee
Date:		3/24/10

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EXHIBIT ATO AMENDMENT NO. 1 DATED FEBRUARY 9, 2010 BETWEEN THE JOHN ARRILLAGA SURVIVOR’S TRUST AND THE RICHARD T. PEERY SEPARATE PROPERTY TRUST, AS LANDLORD, AND ACTIVIDENTITY INC., AS TENANT

ARDEN WOOD III-G

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EXHIBIT B TO AMENDMENT NO. 1 DATED FEBRUARY 9, 2010 BETWEEN THE JOHN ARRILLAGA SURVIVOR’S TRUST AND THE RICHARD T. PEERY SEPARATE PROPERTY TRUST, AS LANDLORD, AND ACTIVIDENTITY INC., AS TENANT

ARDEN WOOD III-G

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EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Grant Evans, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ActivIdentity Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ GRANT EVANS

Grant Evans

Chief Executive Officer

May 10, 2010

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Jacques Kerrest, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ActivIdentity Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial to be designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

/s/ JACQUES KERREST

Jacques Kerrest

Chief Financial Officer

May 10, 2010

EX-32.1

EXHIBIT 32.1(1)

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO (18 U.S.C. SECTION 1350)

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The certification set forth below is being submitted in connection with the Quarterly Report of ActivIdentity Corporation on Form 10-Q for quarterly period ended March 31, 2010 as filed with the Securities and Exchange Commission (Report), for the purpose of complying with Rule 13a—14(b) or Rule 15d—14(b) of the Securities Exchange Act of 1934 (Exchange Act) and section 1350 of chapter 63 of Title 18 of the United States Code.

Grant Evans, Chief Executive Officer, and Jacques Kerrest, Chief Financial Officer of the Company, each certifies pursuant to §906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Exchange Act; and

2. The information contained in the Report fairly presents in all material respects, the financial condition and results of operations of ActivIdentity Corporation.

/s/ GRANT EVANS

Grant Evans

Chief Executive Officer

May 10, 2010

/s/ JACQUES KERREST

Jacques Kerrest

Chief Financial Officer

May 10, 2010

A signed original of this written statement as required by Section 906 has been provided to ActivIdentity Corporation and will be retained by ActivIdentity Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

(1) The material contained in this Exhibit 32.1 is not deemed “filed” with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing.