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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

ý Annual Report Pursuant To Section 13 or 15(d)
of The Securities Exchange Act of 1934

For the fiscal year ended September 30, 2010

OR

o Transition Report Pursuant To Section 13 or 15(d)
of The Securities Exchange Act of 1934

ACTIVIDENTITY CORPORATION

(Exact name of Registrant as specified in its charter)

(510) 574-0100
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No ý

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o    No ý

          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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý    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. Yes o    No o

          Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    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):

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

          The aggregate market value of Registrant's common stock, $0.001 par value per share, held by non-affiliates of the Registrant on March 31, 2010, the last business day of the Registrant's most recently completed second fiscal quarter, was approximately $135 million based upon the closing sales price of the common stock as reported on the NASDAQ Global Market on such date. Shares of the Registrant's common stock held by officers subject to section 16(b) filing requirements, directors and holders of five percent or more of the outstanding common stock have been excluded from this calculation because such persons may be deemed to be affiliates. The determination of affiliate status is not necessarily a conclusive determination for other purposes. As of November 11, 2010, the Registrant had outstanding 47,199,642 shares of common stock.

Documents Incorporated by Reference

          Certain information required by Part III of this Form 10-K, to the extent not set forth herein, is incorporated by reference from the issuer's definitive proxy statement to be filed in connection with its 2011 Annual Meeting of Stockholders.

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ACTIVIDENTITY CORPORATION
INDEX TO ANNUAL REPORT ON FORM 10-K
FOR FISCAL YEAR ENDED SEPTEMBER 30, 2010

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        The statements contained in this Annual Report on Form 10-K that are not historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, intentions, strategies, expected operating results, and financial condition. Forward-looking statements also include statements regarding events, conditions and financial trends that may affect our future plans of operations, business strategy, results of operations, and financial position. All forward-looking statements included in this document are based on information available to us on the date hereof, and we disclaim any intent to update any such forward-looking statements. Investors are cautioned that any forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the forward- looking statements as a result of various factors. Factors that could cause or contribute to such differences include, but are not limited to, those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the heading "Risk Factors," and elsewhere in this Annual Report.

PART I

ITEM 1:    BUSINESS

Overview

        ActivIdentity™ Corporation (the "Company" or "ActivIdentity" and also referred to as "we" or "our") is a global leader in strong authentication and credential management, providing solutions to confidently establish a person's identity when interacting digitally. For more than two decades, the Company's experience has been leveraged by security minded organizations in large scale deployments such as the United States Department of Defense, Nissan, and Saudi Aramco. The Company's customers have issued more than 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. In general, ActivIdentity solutions deliver multiple benefits, including increased digital and physical security, protection against online fraud, enhanced business process efficiencies, secure access to digital assets and a pathway to regulatory compliance.

        ActivIdentity, formerly known as ActivCard Corp., was incorporated in the State of Delaware in August 2002 for the purpose of changing the domicile of the publicly listed company in the ActivIdentity group of companies, previously ActivCard S.A., from the Republic of France to the United States. ActivIdentity's Common Stock is publicly traded on The NASDAQ Global Market under the symbol "ACTI."

        ActivIdentity delivers solutions today in three primary markets: Enterprise, Government and Commerce.

        Enterprise Market Solutions:    As a leader in establishing trusted online identities, ActivIdentity's Identity Assurance enterprise access solution (a) gives users universal access with one card or credential; (b) authenticates to a PC, network, application, facility door or copier; (c) digitally signs emails or encrypts data and (d) leverages the same strong credential to access logical and physical systems. The ActivIdentity Strong Authentication enterprise solution for remote access provides security and compliance assurance in an open, standards-based solution. ActivIdentity's solutions make it easy to deploy and support the broadest range of authentication methods such as hardware tokens and software tokens deployed on a variety of devices, including smartphones.

        Government Market Solutions:    ActivIdentity works with over 200 government agencies in the U.S., Europe, Asia, Australia, and beyond to develop and deploy the most trusted identity assurance solutions in the world. These solutions provide governments the ability to trust the identity of the users accessing their agency resources. For example, Personal Identity Verification ("PIV") compliant

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credentials, created and managed by ActivIdentity technology, support secure access to multiple physical and logical assets across agencies and for non-government employees accessing government resources.

        Commerce Market Solutions:    ActivIdentity has substantial experience helping regional and global banks around the world in offering their customers secure and convenient online banking. ActivIdentity provides a solution that is easy to deploy and supports the broadest range of authentication methods, including one-time password tokens, mobile authentication, EMV cards and certificate-based authentication, as well as strong passwords and DeviceID. Our 4TRESS Authentication Server, available as an appliance or as a local installation, is complemented by a proven portfolio of one-time password tokens, smartcards and USB keys, enabling us to offer our customers a complete solution based on open standards that is scalable, secure and simple to implement.

        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.

        We operate on a fiscal year ending September 30. For convenience in this Annual Report, we refer to the fiscal year ended September 30, 2008 as fiscal 2008, the fiscal year ended September 30, 2009 as fiscal 2009 and the fiscal year ended September 30, 2010 as fiscal 2010.

Recent Developments

        On October 11, 2010, the Company, ASSA ABLOY Inc. ("ASSA ABLOY") and FitAcquisition, Inc., a wholly owned subsidiary of ASSA ABLOY ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into the Company. As a result of the merger, Merger Sub will cease to exist, and the Company will survive as a wholly owned subsidiary of ASSA ABLOY. ASSA ABLOY has indicated its intent after the merger to make the Company part of ASSA ABLOY's HID Global business.

        Upon consummation of the merger, each share of Company Common Stock issued and outstanding immediately prior to the merger (other than (i) shares owned by ASSA ABLOY or Merger Sub, or by any direct or indirect wholly owned subsidiary of ASSA ABLOY or Merger Sub and (ii) shares to which appraisal rights are properly sought) and each share of Company common stock subject to restricted stock unit awards, whether vested or unvested, will be converted into the right to receive $3.25 in cash, without interest. Options to acquire shares of Company common stock outstanding immediately prior to the consummation of the merger, whether vested or unvested, will be converted into the right to receive an amount in cash, without interest, equal to the product of (A) the excess, if any, of $3.25 over the exercise price per share attributable to such option and (B) the total number of shares of Company common stock issuable upon exercise in full of such option.

        The completion of the merger is subject to customary conditions, including without limitation, (i) the approval of the merger by the Company's stockholders, (ii) the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which on November 2, 2010, ActivIdentity was notified that early termination of the applicable waiting periods has been granted, and (iii) receipt of other required foreign antitrust approvals. In addition, ASSA ABLOY's obligation to consummate the merger is subject to the Company having at least $68 million in "Company Available Net Cash" (as defined in the Merger Agreement). The Company distributed a definitive proxy statement related to approval of the Merger Agreement and related matters on November 12, 2010 and has scheduled a Special Meeting of Stockholders to be held December 16, 2010. Pending receipt of stockholder approval, we expect the merger to be completed promptly thereafter.

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        Beginning on October 12, 2010, several putative class action lawsuits were filed purportedly on behalf of ActivIdentity's stockholders in the Superior Court of Alameda County, California, the Delaware Chancery Court, the United States District Court for Northern California and the United States District Court in Delaware. The complaints name ActivIdentity and each member of the ActivIdentity Board as defendants. The lawsuits allege a variety of claims, including that our board members breached fiduciary duties owed to ActivIdentity stockholders by failing to engage in a fair process and failing to maximize stockholder value in approving the Merger. Several of the complaints also allege that ActivIdentity aided and abetted the members of the ActivIdentity Board in the alleged breach of their fiduciary duties. The Plaintiffs seek relief that includes, among other things, an injunction prohibiting the consummation of the Merger, rescission—to the extent the Merger terms have already been implemented, and the payment of plaintiffs' attorneys' fees and costs. On December 9, 2010, ActivIdentity and the defendants in a number of the actions entered into a memorandum of understanding which provides for the settlement and dismissal with prejudice of such actions, subject to customary conditions, including completion of appropriate settlement documentation, consummation of the merger and all necessary court approvals.

Market Trends

        There are a variety of market trends that stimulate demand for strong authentication and credential management solutions:

Compliance

        Compliance can be seen as a new driver for deployment of strong authentication as it enables a pathway to tamper-proof auditing trails to track who did what and when. Regulatory requirements and economic realities are pressuring organizations to secure access to applications and networks. Many industry standards and government regulations now deem static passwords as inadequate and establish guidance that multi-factor authentication should replace single factor authentication. The Sarbanes-Oxley Act ("SOX"), recommendations from the Federal Financial Institutions Examination Council, and the Health Insurance Portability and Accountability Act have led organizations to use stronger forms of authentication to mitigate fraud and protect customer information and patient privacy.

Internal Threat Risk

        While static passwords continue to dominate as the primary mechanism for identity verification, they create numerous issues for users and organizations alike. Static passwords are often created by users to be easily remembered, making them vulnerable to guessing, social engineering, and brute force dictionary attacks. Even static passwords created under a stringent policy are vulnerable because users write them down and display them in open areas. A key security concern with static passwords is the fact that a compromise (via keystroke logger or network sniffer) often goes undetected, introducing unknown risks to the organization. Since the economic downturn, the internal risk for many organizations has increased dramatically:

•

According to the 2010 Verizon Data Breach Investigation Report, stolen credentials were the most common way of gaining unauthorized access into organizations in 2009. 38% of network breaches involved stolen passwords and 86% of the records compromised were from attacks involving stolen credentials.



•

According to the PriceWaterhouseCoopers 2011 Global State of Information Security Survey, the business impacts from security breaches, from financial loss to compromises to brands and reputations, have increased as much as 233% over the last four years.

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New Supply Chain Paradigm

        The collaboration between companies, other organizations and government agencies is driving requirements to share data across networks and provide access to applications and data behind the firewall. To mitigate risk, many large organizations and government agencies are replacing traditional user names and passwords with digital certificates that enable strong authentication, encryption, and electronic signatures. However, to fully trust the access control and identity assurance services that digital certificates enable, organizations must securely store these digital identities / certificates on authentication devices such as smart cards or smart USB tokens.

Initiatives to Drive Customer Confidence and Loyalty

        As a result of the most recent financial crisis, strong authentication is being leveraged as a tool to enhance customer loyalty, especially in the banking and financial services industry.

Product Lines and Services

        ActivIdentity provides key building blocks for securing IT infrastructures and digital transactions to defend against security threats and identity fraud and at the same time increase an organization's resource utilization, improve productivity, and maximize return on investment.

        ActivIdentity offers five product lines that are the foundation for its solutions:

Strong Authentication

        ActivIdentity Strong Authentication suite of products enables organizations to securely address a variety of end-user access control scenarios, ranging from remote access via virtual private networks ("VPN") and secure access to Web-based applications, to secure access to data and applications on a local network.

        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 ("OTP"), and PKI certificates) and diverse audiences across a variety of service channels, making it the preferred versatile authentication platform for customer facing transactions and enterprise authentication needs.

Credential Management

        ActivIdentity Credential Management products enable organizations to securely deploy and manage smart cards and USB tokens containing a variety of credentials, including PKI certificates, OTPs, static passwords, biometrics, demographic data, and virtually any other application.

        The ActivIdentity ActivID™ Card Management System is a highly scalable, reliable, proven, and extensible solution that enables organizations to securely issue and manage the complete life cycle of digital credentials on devices, as well as securely update applications and credentials on devices after they have been issued to end users.

        Together with its Security Client software, Strong Authentication platform, and Authentication Device offering, ActivIdentity can provide organizations with a complete "Smart Employee ID Solution" that can be leveraged for both physical and logical access control.

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Security Clients

        ActivIdentity Security Clients software integrates and works seamlessly with ActivIdentity Strong Authentication and Credential Management offerings to deliver a comprehensive solution for security and network access.

        The ActivIdentity ActivClient™ secures desktops and networks with strong authentication based on smart cards and PKI. ActivIdentity ActivClient™ supports the U.S. government's most stringent security requirements and standards. Organizations have issued millions of cards to secure network access, encrypt data, sign emails, and log in to Web applications.

        ActivIdentity SecureLogin™ Single Sign-On software provides a simple and secure approach, enabling consistent password management and allowing organizations to provide a single secure sign-on for both local and remote users.

        The ActivIdentity™ Authentication Client provides end users with self services to temporarily enable access to workstations and reset Windows passwords. In addition, it allows management with auditing, diagnostic, and policy configuration support and enables smart card password authentication.

Authentication Devices

        Organizations' strong authentication needs vary widely based on transaction risks, deployment scenarios, and user communities. ActivIdentity offers a broad range of authentication devices that interoperate with its Strong Authentication and Credential Management products. These devices include the ActivIdentity line of OTP Tokens and other third party devices such as Smart Cards, Smart Card Readers, Smart USB Tokens, Display Card Tokens, Soft Tokens and Hardware Security Modules.

Physical Access Products

        The Company provides technology for the convergence of information technology ("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.

Services

        ActivIdentity offers training, implementation, onsite support and ongoing architecture assessment services to guide and support organizations. Professional services are offered to ensure that the deployments of ActivIdentity solutions meet an organization's security, compliance, and vulnerability management needs. Training programs help an organization learn quickly how to configure, administer, and optimize ActivIdentity strong authentication and credential management solutions in its network environment.

Customers

        Our customers include primarily large scale organizations in the technology, government, manufacturing, banking and financial services industries.

        For fiscal 2010, 2009 and 2008, we had one customer that accounted for more than 10% of our total revenue.

        At September 30, 2010, we had one customer's receivable balance that accounted for an aggregate of 12% of total accounts receivable. At September 30, 2009, our two largest customers' receivable

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balances accounted for an aggregate of 30% of total accounts receivable. We extend credit to these customers, and management believes that the receivable balances from these large customers are collectible based on our 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.

Sales, Services, and Marketing

        Our sales and marketing efforts are aimed at building long-term relationships with our customers. We market and sell our products and technologies through our worldwide direct sales force and through a network of partners including SIs, Original Equipment Manufacturers ("OEMs"), Value Added Distributors ("VADs"), and Value Added Resellers ("VARs"). Our direct sales force focuses on the top 2,000 companies worldwide and government agencies, working in concert with our channel sales and business development teams supporting initiatives with our SI, OEM, VAD and VAR partners.

        In addition to sales and service offices in the United States, we conduct sales, marketing, and services out of wholly owned subsidiaries or branches in other countries, including the United Kingdom, France, Germany, Singapore, and Australia. International revenue accounted for approximately 46%, 53%, and 58% of our total revenue in fiscal 2010, 2009, and 2008, respectively. We maintain an export compliance program that is designed to meet the requirements of U.S. export laws and regulations.

        ActivIdentity provides technical support from offices located in the U.S., France, and the United Kingdom. These offices provide third level technical support to end users, integrators, and distribution partners, who, in turn, provide first level and second level support to their end users and customers. We offer certification training programs and have established a worldwide "ActivIdentity Channel Partner Program." The third level support we provide includes email, telephone, and online support services to answer inquiries related to implementation, integration, and operation of our products and technologies. Our standard practice is to provide a one-year warranty on hardware and ninety days on software products.

        We have organized our marketing efforts into three functional groups to support our business strategies as follows:

Solutions Marketing

        The solutions markets team is responsible for synthesizing data from key customers, partners, and industry analysts to assist us in defining next generation solutions/products. Furthermore, the solutions markets team develops all sales and market messaging, positioning, collateral, and selling tools to enable our sales force and channel partners to capitalize on market opportunities and effectively position and sell our products.

Channel Marketing

        Our channel marketing organization defines and implements integrated marketing programs to increase brand and product awareness, as well as capture mindshare and enthusiasm for ActivIdentity solutions with our channel partner sales forces.

Corporate Marketing

        Corporate marketing efforts include public relations, Internet, telemarketing, trade shows, online advertising, email campaigns, channel promotions, associations marketing, and seminars. Our marketing programs target global 2000 companies and government decision makers, information technology managers and service providers using a high value approach addressing business problem solving and return on investment.

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Competition

        We compete in the strong authentication, credential management, security clients and authentication devices markets. We compete with numerous companies in each of these technology categories. The overall number of our competitors may increase and the identity and composition of competitors may change over time.

        The worldwide market for identity management is highly competitive. In each of our product categories, we face competition from established and potential competitors, some of which may have greater financial, research, engineering, manufacturing and marketing resources than we have, such as RSA Security (the Security Division of EMC), VeriSign, SafeNet, IBM, Passlogix, Thales Group, Intercede Group, and Vasco Data Security International. We may also face future competition from new market entrants from other overseas and domestic sources. We expect our competitors to continue to improve the design and performance of their current products and processes and to introduce new products and processes with improved price and performance characteristics. We believe that to remain competitive, we will require significant financial resources to offer a broad range of products, to maintain customer service and support centers worldwide, and to invest in product and process research and development.

        We believe that we compete favorably with respect to the principal factors affecting competition in our product segments, which include system performance, ease of use, reliability, installed base, technical service and support, product functionality, scalability, flexibility, use of open standards, return on investment, and total cost of ownership. We believe that, while price and delivery are important competitive factors, the customers' overriding requirement is for systems that are easily and effectively incorporated into their existing ecosystem and enhance productivity.

Industry Associations

        As a leading innovator in strong authentication and credential management, ActivIdentity is dedicated to driving industry standards. ActivIdentity belongs to a range of trade groups, industry associations and standards organizations to advance interoperability, ensure the highest technical standards, and promote innovative strong authentication and credential management technologies now and in the future.

        As of September 30, 2010, ActivIdentity participated in the following industry associations:

•

GlobalPlatform (GP)



•

The Smart Card Alliance



•

Initiative for Open AuTHentication (OATH)



•

Kantara Initiative



•

American National Standards Institute (ANSI)



•

Transglobal Secure Collaboration Program (TSCP)



•

Intellect

Intellectual Property

        Our success is heavily dependent on our ability to create proprietary technology and to protect and enforce our intellectual property rights, as well as our ability to defend against adverse claims of third parties with respect to our technology and intellectual property.

        We rely primarily on a combination of copyrights, trademarks, service marks, trade secrets, patents, restrictions on disclosure, and other methods to protect our intellectual property. We also enter into

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confidentiality and/or invention assignment agreements with our employees, consultants, and current and potential affiliates, customers, and business partners. We also generally control access to and distribution of our software, documentation and other confidential and proprietary information.

        As of September 30, 2010, we had 120 patents issued and applications for 110 pending in the U.S. and abroad, covering a wide range of our technology. From time to time, we acquire license rights under U.S. and foreign patents and other proprietary rights of third parties.

        Patents may not be awarded with respect to these applications and even if such patents are awarded, such patents may not provide us with sufficient protection of our intellectual property.

Research and Development

        We have research and development teams in Fremont, California (United States) and Suresnes (France) that are responsible for the design, development, and release of our products. The research and development function is organized into product management, product architecture, development, quality assurance, and documentation disciplines. When appropriate, we also integrate into our products third party technology that we purchase or license to shorten our time-to-market.

        The focus of our research and development efforts is to bring to market enhanced versions of our existing products, as well as new products, in order to address customer needs while maintaining compliance with government and industry standards. Our research and development expenses were $15.9 million, $15.1 million, and $18.9 million in fiscal 2010, 2009, and 2008, respectively.

Operations

        We have established relationships with hardware manufacturers and assemblers and software reproducers. Additionally, we have outsourcing arrangements for product warehousing and fulfillment services. Our global production and distribution capacity supports our current requirements and can readily be increased by augmenting existing production lines with current suppliers. We maintain ownership of all manufacturing tools, molds and software, supply all critical components, and define all manufacturing processes and quality control processes, thereby granting us the ability to relocate the manufacturing process or sub-license the manufacturing rights to a third party supplier should any unforeseen interruption occur.

        Our hardware products are manufactured by third party vendors based in China and Singapore. Our hardware products are shipped directly to our distribution partners and customers or to company warehouses in Fremont, California (United States), Hong Kong, Singapore, and Suresnes (France) for subsequent distribution. Software products are produced and packaged in Fremont, California (United States) and Suresnes (France).

Segment Information

        We operate in one reportable segment in which we provide management of identity solutions, and accordingly disclose segment information by geographic area only. Information regarding our revenue and property and equipment in the United States and in countries outside the United States is contained in Note—18 Segment Information to our consolidated financial statements included in this report and is incorporated in this section by this reference.

Backlog

        Our backlog for products at any point in time is not significant because products are generally delivered upon receipt of order. We do not believe that our backlog at any particular point in time is indicative of future sales levels. The timing and volume of customer orders are difficult to forecast because our customers typically require prompt delivery of products and a majority of our sales are

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booked and delivered in the same quarter. In addition, sales are generally made pursuant to standard purchase orders that can be rescheduled, reduced or canceled prior to delivery with little or no penalty.

Employees

        As of September 30, 2010 we employed approximately 218 people on a full-time basis, 111 in the United States and 107 elsewhere. Of the total, 15 were in operations and customer support, 96 were in research and development, 70 were in sales and marketing, and 37 were in general and administration.

        Our success is highly dependent on our ability to attract and retain qualified employees. None of our employees are subject to collective bargaining agreements.

Executive Officers

        Our executive officers as of September 30, 2010 and their ages and titles as of that date were as follows:

        Grant Evans has served as our Chief Executive Officer since April 2008 and was elected to the Board in March 2008. Mr. Evans served from January 2003 to March 2007 as the Chief Executive Officer and as a Director of A4Vision, Inc., a developer and manufacturer of machine vision technology for identity security. Prior to this, he served from March 1999 to March 2002 as the Executive Vice President at Identix, a publicly traded developer and manufacturer of identification technology solutions. Mr. Evans was also previously Vice President and General Manager of Identicator Technology and was responsible for leading that company's strategic direction and launching the commercial biometric market. Mr. Evans has served as a member of the board of directors of Bioscrypt and 3VR, a security access and video surveillance control company.

        Jacques Kerrest joined the Company in August 2008 as our Chief Financial Officer and Chief Operating Officer. Prior to joining the Company, from September 2004 until March 2008, Mr. Kerrest served as the Chief Financial Officer of Virgin Media, Inc., a communications company. From June 2003 to August 2004, Mr. Kerrest was the Managing Director and Chief Financial Officer of Equant, N.V., a global enterprise communications infrastructure company. From August 1997 to May 2003, Mr. Kerrest was the Senior Vice President and Chief Financial Officer of Harte-Hanks, Inc., a worldwide direct and targeted marketing company. From August 1995 to July 1997, Mr. Kerrest served as the Chief Financial Officer of Chancellor Broadcasting Company, a radio broadcasting company. From 1993 to July 1995, Mr. Kerrest was the Chief Financial Officer of Positive Communications, Inc., a private telecommunications company. Mr. Kerrest is a member of the board of directors of CKX, Inc., a company engaged in entertainment content management.

        John Boyer joined the Company in October 2001 and has served as our Senior Vice President, Worldwide Engineering since November 2008. Mr. Boyer served from October 2004 to October 2008 as our Director of Architecture and Chief Architect, from January 2003 to September 2004 as our Manager of Product Architecture, and from November 2001 to December 2002 in various engineering management positions. From March 1999 to October 2001, Mr. Boyer held various engineering roles at American Biometric Company, Ltd., a subsidiary of DEW Engineering and Development, Ltd.

Available Information

        Additional information about ActivIdentity is available on our website at www.actividentity.com. We make available free of charge on our website our Annual Report on Form 10-K, our Quarterly

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Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file them with or furnish them to the Securities and Exchange Commission ("SEC"). Information contained on our website is not part of this Annual Report on Form 10-K or our other filings with the SEC. Additionally, these filings may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549, by mailing a request to the United States Securities and Exchange Commission, Office of Investor Education and Advocacy, 100 F Street, NE, Washington, DC 20549-0213, by sending an electronic message to the SEC at publicinfo@sec.gov or by sending a fax to the SEC at 1-202-772-9295. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically.

ITEM 1A.    RISK FACTORS

Risk Factors That May Affect Results of Operations and Financial Condition

        Set forth below are certain risks and uncertainties that could affect our business, financial condition, operating results, and/or stock price. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem less significant also may impair our business operations.

Risks Relating to the Pending Merger

         Our business and stock price may be materially and adversely affected if the merger with ASSA ABLOY is not completed.

        On October 11, 2010, we entered into a merger an agreement of merger with ASSA ABLOY and Merger Sub, which provides for the merger of Merger Sub with and into ActivIdentity, with pursuant to which ActivIdentity surviving would survive the merger as a wholly owned subsidiary of ASSA ABLOY. The announcement of the planned merger could have an adverse effect on our revenues in the near term if customers delay, defer, or cancel purchases in response to the announcement. To the extent that the announcement of the merger creates uncertainty among our current or potential customers contemplating purchases of our products or services such that several large customers, or a significant group of small customers, delay purchase decisions pending completion of the planned merger, our results of operations could be materially adversely affected, our quarterly revenues could be substantially below the expectations of market analysts and the market price for our shares of common stock could decline. Furthermore, activities relating to the proposed merger and related uncertainties could cause employees to seek alternative employment and weaken our ability to recruit qualified personnel which could detract from our ability to generate revenue and control costs.

        In addition, completion of the pending merger is subject to certain conditions, including approval by the holders of our common stock of ActivIdentity stockholders. We cannot be certain that these conditions will be met or waived, that the necessary stockholder approval will be obtained or that we will be able to successfully consummate the merger as currently contemplated under the merger agreement or at all. If the merger is not completed, we could be subject to a number of risks that may materially and adversely affect our business and stock price, including:

•

the diversion of our management's attention from our day to day business and the unavoidable disruption to our employees and our relationships with customers which, in turn, may detract from our ability to grow revenues and minimize costs and lead to a loss of market position that we might be unable to regain;



•

the market price of our shares of common stock may decline to the extent the current market price of those shares reflects a market assumption that the merger will be completed;

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under certain circumstances we could be required to pay ASSA ABLOY a termination fee of approximately $5.0 million;



•

we may experience a negative reaction to any termination of the merger from our customers, employees or affiliates which may adversely impact our future results of operations as a stand-alone entity; and



•

the amount of the costs, fees and expenses and charges related to the merger.

         Restrictions on the conduct of our business prior to the completion of the pending merger with ASSA ABLOY may have a negative impact on our operating results.

        We have agreed to certain restrictions on the conduct of our business in connection with the proposed merger with ASSA ABLOY that require us to conduct our business in the ordinary course consistent with past practices, subject to specific limitations. These restrictions may delay or prevent us from undertaking business opportunities that may arise pending completion of the merger.

Risks Relating to Our Business

         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 2010, 2009 and 2008, we incurred losses of approximately $5.7 million, $5.5 million, and $76.5 million, respectively. As of September 30, 2010, our accumulated deficit was $334.3 million, which represents our net losses since inception. Although we had approximately $78.2 million in cash and cash equivalents, and investments as of September 30, 2010, 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.

        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.

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         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' abilities 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; or



•

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. We have reduced our product offerings as part of our prior restructuring initiatives to focus on our core products and do not expect to diversify our product offerings in the foreseeable future.

         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.

        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 2010, 2009 and 2008, one customer 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 2010, 2009, and 2008, worldwide government business accounted for approximately 10%, 19%, and 20%, respectively, of total product revenue. Although government spending is currently higher 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 significant customers;



•

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

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•

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 related 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 mix of products licensed and types of license agreements;



•

The effect of 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.

         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.

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        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 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 different from our platform, 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.

        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.

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         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 or their technology into our 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 incorporate their technology into our products, to jointly engage in research and development efforts, and to jointly engage in marketing efforts and reseller arrangements. To date, none of these relationships are 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 that 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 2010, 2009, and 2008, markets outside of North America accounted for 46%, 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.

        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

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currencies as well. Significant fluctuations in exchange rates between the U.S. dollars and foreign currencies may adversely affect our future operating results. Due to fluctuations in foreign currencies we recorded losses of $0.7 million, $0.8 million and $2.0 million in fiscal 2010, 2009 and 2008, respectively on our consolidated statements of operations.

         We rely on certain key employees. 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.

        We rely on the services of Grant Evans, our Chief Executive Officer, Jacques Kerrest, our Chief Operating Officer and Chief Financial Officer, and John Boyer, our Senior Vice President Worldwide Engineering. Michael Sotnick, our Executive Vice President Worldwide Sales and Field Operations, left the company in July 2010. 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 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.

        During fiscal 2010, in connection with the CoreStreet acquisition, we recorded $9.4 million of goodwill on our balance sheet representing approximately 8% of our total assets. At September 30, 2009, we had no goodwill on our balance sheet. As of September 30, 2010, we had $9.1 million of other intangible assets on our balance sheet representing approximately 8% of our total assets.

        If the Company's 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 asset impairment charges 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 other intangible assets drop below the carrying value of such assets, an additional impairment charge may be required.

        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.

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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 control 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. While we believe that we have effective internal control over financial reporting, if we fail to maintain the effectiveness of our internal control 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 rule making bodies 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.

         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

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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 have been 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. 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;



•

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;



•

We may not integrate acquired businesses, technologies, products, personnel and operations effectively;



•

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



•

We may not adopt an appropriate business model for integrated businesses, particularly with respect to our "go to market" strategy;



•

Customer demand for the acquired company's products may not meet our expectations;



•

We may incur higher than anticipated costs for the support and development of acquired products;



•

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;



•

We may have insufficient revenue to offset the increased expenses associated with acquisitions;



•

We may not retain key employees, customers, distributors and vendors of the companies we acquire;



•

Ineffective internal controls of the acquired company may require remediation as part of the integration process;



•

We may be required to assume pre-existing contractual relationships, which may be costly for us to terminate and disruptive for our customers;



•

The acquisitions may result in infringement, trade secret, product liability or other litigation: and



•

If we are unable to acquire companies that facilitate our strategic objectives, we may not have sufficient time to develop our own products and may not remain competitive.

        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.

         Changes in, or interpretations of, tax rules and regulations may adversely affect our effect tax rates.

        We are a U.S. based multinational organization subject to income taxes in both the United States and various foreign jurisdictions. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorable affected by changes in, or interpretation of, tax rules and regulations in the jurisdictions in which we do business, by lapses of the availability of the U.S. research and development tax credits, or by the valuation of our deferred tax assets and liabilities.

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         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, intercompany transactions and calculations result in a variety of uncertain tax positions. Our intercompany 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.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        We have no unresolved staff comments as of the date of this filing.

ITEM 2.    PROPERTIES

        Our properties consist primarily of leased office facilities for sales, marketing, research and development, and support and administrative personnel. Our corporate headquarters are located in Fremont, California. The table below shows the lease expiration dates (or the applicable cancellation period) and approximate square footage of the facilities that we lease as of September 30, 2010.

        We also lease various other smaller properties primarily for our sales and marketing personnel under leases, which are generally for a period of one year or less. We believe that our properties are in good condition, adequately maintained and suitable for the conduct of our business. Certain of our lease agreements provide options to extend the lease for additional specified periods. For additional information regarding our obligations under leases, see Note 15—Commitments and Contingencies to consolidated financial statements.

ITEM 3.    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.

        Beginning on October 12, 2010, several putative class action lawsuits were filed purportedly on behalf of ActivIdentity's stockholders in the Superior Court of Alameda County, California, the Delaware Chancery Court, the United States District Court for Northern California and the United

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States District Court in Delaware. The complaints name ActivIdentity and each member of the ActivIdentity Board as defendants. The lawsuits allege a variety of claims, including that our board members breached fiduciary duties owed to ActivIdentity stockholders by failing to engage in a fair process and failing to maximize stockholder value in approving the Merger. Several of the complaints also allege that ActivIdentity aided and abetted the members of the ActivIdentity Board in the alleged breach of their fiduciary duties. The Plaintiffs seek relief that includes, among other things, an injunction prohibiting the consummation of the Merger, rescission—to the extent the Merger terms have already been implemented, and the payment of plaintiffs' attorneys' fees and costs.

        On December 9, 2010, ActivIdentity and the individual defendants in the following actions entered into a memorandum of understanding: (i) in the Superior Court of Alameda County, California (the "Court"), captioned Vladimir Gusinsky Revocable Trust v. ActivIdentity Corp., et al., RG10541071, Lin v. ActivIdentity Corp., et al., RG10541379, Weisleder v. ActivIdentity Corp., et al., RG10541759, and Gallagher v. Evans, et al., RG10542346 (the "California State Actions"), (ii) in the United States District Court for the Northern District of California captioned Beverley & Lionel Sacks v. ActivIdentity, et al., 10-4705-JCS, and (the "California Federal Action"), and (iii) in Delaware Chancery Court captioned Tomaselli v. ActivIdentity, et al., 5928 (the "Delaware State Action")—collectively referred to herein as "the Actions." The memorandum of understanding provides for the settlement and dismissal with prejudice of the Actions, subject to customary conditions, including completion of appropriate settlement documentation, consummation of the Merger and all necessary court approvals. Although we believe that the Actions are without merit, we have entered into the memorandum of understanding to avoid any risk of materially delaying the Merger and to minimize the expense of defending the actions. The settlement and dismissal with prejudice—if completed and approved by the court—will resolve all of the claims that were or could have been brought by the plaintiffs in the Actions. In connection with the settlement and dismissal with prejudice, defendants agreed to cause to be paid to plaintiffs' counsel an amount up to $475,000 for its fees and expenses in the action, provided plaintiffs obtain court approval for any such amount. As part of the memorandum of understanding, we also agreed to file supplemental disclosures on (i) the background information leading up to the Merger, and (ii) the opinion of our financial advisor. We expect to file these supplemental disclosures on December 10, 2010.

        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 December 22, 2009, Intercede filed a claim in the U.K. High Court of Justice for revocation of Patent EP [UK] 0 981 803 and a declaration of non-infringement. 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 dismissed, bringing an end to all patent infringement litigation between the two companies.

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        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 September 30, 2010 or September 30, 2009.

        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 September 30, 2010 or September 30, 2009.

ITEM 4.    REMOVED AND RESERVED

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

        ActivIdentity's common stock trades on the NASDAQ Global Market under the symbol "ACTI".

        The table below sets forth for the periods indicated the high and low closing sale prices of our common stock on the NASDAQ Global Market.

        As of November 8, 2010, ActivIdentity had 47,183,720 shares of its common stock outstanding, held on record by 170 stockholders. ActivIdentity believes there were 23,573 beneficial owners of its common stock on November 8, 2010.

        We have never declared or paid any cash dividends on shares of our common stock and do not expect to do so in the foreseeable future. Any future decision to pay cash dividends will depend on our growth, profitability, financial condition, and other factors our Board of Directors may deem relevant.

        Information regarding equity compensation plans set forth in Note 2—Stock-Based Compensation to consolidated financial statements, is hereby incorporated by reference into this part II, item 5.

Stock Performance Graph

        We list our common stock on the NASDAQ Global Market. The following graph compares the cumulative total stockholder return on our common stock from September 30, 2005 through September 30, 2010, with the cumulative total return of (i) the NASDAQ Global Market System Composite Index (NASDAQ Composite), (ii) the NASDAQ Computer Index (NASDAQ Computer), and (iii) the NYSE Arca Computer Technology Index (NYSE Arca Technology) over the same periods. This graph assumes an initial investment of $100 and the reinvestment of any dividends. The comparisons in the graph below are based upon historical data and may not be indicative of future performance of our common stock.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among ActivIdentity, the NASDAQ Composite, the NASDAQ Computer, and the NYSE Arca Technology Index

*

$100 invested on September 30, 2005 in stock & index including reinvestment of dividends.
Fiscal Years Ended September 30.

Acquisition of CoreStreet

        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. For a

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discussion of CoreStreet's acquisition, see Note—3 Business Combinations to consolidated financial statements.

Stock Repurchase Program

        On February 18, 2010, the Board of Directors authorized a stock repurchase program to purchase up to $10 million or approximately 8% of its outstanding shares of common stock in the open market. On October 11, 2010 the Board of Directors terminated the stock repurchase program. For further information regarding the stock repurchase program, see Note 16—Stock Repurchase Program to consolidated financial statements.

        The following table provides the specified information about the repurchase of shares during fiscal 2010 under the Company's shares repurchase program:

ITEM 6.    SELECTED FINANCIAL DATA

        The following selected financial data should be read in conjunction with the Consolidated Financial Statements and related Notes thereto appearing elsewhere in this Form 10-K. We have derived the statement of income data for fiscal 2010, 2009 and 2008 and the balance sheet data as of September 30, 2010 and 2009 from the audited consolidated financial statements included elsewhere in this Form 10-K. The statement of operations data for fiscal 2007 and 2006 and the balance sheet data as of September 30, 2008, 2007 and 2006 were derived from the audited consolidated financial statements that are not included in this Form 10-K. The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes to Consolidated Financial Statements.

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