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

                                    FORM 10-Q

[X]  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
     Act of 1934 For the quarterly period ended September 30, 2004

                                       OR

[_]  Transition  Report  Pursuant  to  Section  13 or  15(d)  of the  Securities
     Exchange  Act of 1934  For  the  transition  period  from  ____________  to
     ______________

                       Commission File number: 000-26287

                               Axeda Systems Inc.
             (Exact Name of Registrant as Specified in Its Charter)



                         Delaware                            23-2763854
             (State or other jurisdiction of              (I.R.S. Employer
              incorporation or organization)            Identification Number)


                                 21 Oxford Road
                         Mansfield, Massachusetts 02048
                           ---------------------------

                    (Address of Principal Executive Offices)
       Registrant's Telephone Number, Including Area Code: (508) 337-9200

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 o No

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).
                                    Yes No o

                           ---------------------------

On November 12, 2004, 32,541,060 shares of the Registrant's Common Stock, $0.001
par value, were outstanding.
<PAGE>

                               AXEDA SYSTEMS INC.
                                    FORM 10-Q


                                      INDEX

<TABLE>
<CAPTION>
                                                                                                               Page
<S>            <C>                                                                                           <C>
Part I           Financial Information

Item 1           Financial Statements

                 Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003        2

                 Consolidated Statements of Operations for the three months ended September 30, 2004 and       3
                 2003  (unaudited)

                 Consolidated Statements of Operations for the nine months ended September 30, 2004 and        4
                 2003  (unaudited)

                 Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and        5
                 2003  (unaudited)

                 Notes to the Consolidated Financial Statements                                                6


Item 2           Management's Discussion and Analysis of Financial Condition and Results of Operations         13

Item 3           Quantitative and Qualitative Disclosures About Market Risk                                    32

Item 4           Controls and Procedures                                                                       32

Part II          Other Information

Item 1            Legal Proceedings                                                                            33

Item 6            Exhibits                                                                                     35

                 Signatures                                                                                    36

                 Exhibit Index                                                                                 37

               Exhibit 4.1

               Exhibit 4.2

               Exhibit 4.3

               Exhibit 4.4

               Exhibit 10.1

               Exhibit 10.2

               Exhibit 10.3

               Exhibit 10.4

               Exhibit 31.1

               Exhibit 31.2

               Exhibit 32.1
</TABLE>

<PAGE>
PART I  FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS (unaudited)

                               AXEDA SYSTEMS INC.
                           CONSOLIDATED BALANCE SHEETS
                 (In thousands, except share and per share data)
<TABLE>
<CAPTION>


                                                                                          September 30,   December 31,
                                                                                               2004          2003
                                                                                            ---------      ---------
ASSETS
Current assets:
<S>                                                                                         <C>            <C>
   Cash and cash equivalents                                                                $   1,369      $   9,617
   Accounts receivable, net                                                                     2,656          3,200
   Prepaid expenses                                                                               489            307
   Other current assets                                                                           235            121
                                                                                            ---------      ---------
     Total current assets                                                                       4,749         13,245

   Furniture and equipment, net                                                                 1,530          2,229
   Goodwill                                                                                     3,640          3,640
   Identified intangible assets, net                                                            1,067          1,423
   Other assets                                                                                   288            349
                                                                                            ---------      ---------
     Total assets                                                                           $  11,274      $  20,886
                                                                                            =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Notes payable                                                                            $     130      $     417
   Accounts payable                                                                             1,479          1,253
   Accrued expenses                                                                             4,434          4,866
   Income taxes payable                                                                           641            733
   Deferred revenue                                                                             1,414          1,422
                                                                                            ---------      ---------
     Total current liabilities                                                                  8,098          8,691

Non-current liabilities:
   Other non-current liabilities                                                                  103            862
   Financing-related liability                                                                    584          2,608
                                                                                            ---------      ---------
     Total liabilities                                                                          8,785         12,161
                                                                                            ---------      ---------

Commitments and contingencies (note 7)

Stockholders' equity:
   Preferred stock, $0.001 par value; 5,000,000 shares authorized in
     2004 and 2003, none issued or outstanding                                                   --             --
   Common stock, $0.001 par value; 50,000,000 shares authorized; 33,134,860
     shares issued in 2004 and 32,913,211 shares issued in 2003                                    33             33
   Additional paid-in capital                                                                 146,682        146,644
   Deferred stock compensation                                                                   (151)          (310)
   Accumulated deficit                                                                       (142,903)      (136,488)
   Accumulated other comprehensive income                                                         208            226
   Treasury stock at cost, 603,800 shares in 2004 and 2003                                     (1,380)        (1,380)
                                                                                            ---------      ---------
     Total stockholders' equity                                                                 2,489          8,725
                                                                                            ---------      ---------
     Total liabilities and stockholders' equity                                             $  11,274      $  20,886
                                                                                            =========      =========
</TABLE>

See accompanying notes to the consolidated financial statements.


                                       2
<PAGE>
                               AXEDA SYSTEMS INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                      Three Months Ended September 30,
                                                                          2004                 2003
                                                                          ----                 ----
Revenues:
<S>                                                                              <C>                <C>
  License                                                                        $1,700             $ 2,575
  Services and maintenance                                                        1,021                 924
  Hardware                                                                           17                 104
                                                                                     --                 ---

    Total revenues                                                                2,738               3,603
                                                                                  -----               -----

Cost of revenues:
  License                                                                           104                 151
  Services and maintenance                                                          730                 757
  Software amortization                                                             112                 159
                                                                                    ---                 ---

    Total cost of revenues                                                          946               1,067
                                                                                    ---               -----

    Gross profit                                                                  1,792               2,536
                                                                                  -----               -----
Research and development (R&D)
  Non-cash compensation                                                               -                  28
  Other R&D expense                                                                 944                 969
Sales and marketing (S&M)
  Non-cash compensation                                                               -                  10
  Other S&M expense                                                               1,760               1,777
General and administrative (G&A)
  Non-cash compensation                                                               9                 108
  Other G&A expense                                                               1,329               1,747
  Depreciation and amortization                                                     322                 278
                                                                                    ---                 ---

    Total operating expenses                                                      4,364               4,917
                                                                                  -----               -----

    Operating loss                                                              (2,572)             (2,381)

Interest income (expense), net                                                      (5)                (24)
Other income (expense), net                                                       1,241                 639
                                                                                  -----                 ---

Loss before provision for income taxes                                          (1,336)             (1,766)

     Provision for income taxes                                                      16                  45
                                                                                     --                  --
Net loss                                                                      $ (1,352)           $ (1,811)
                                                                              =========           =========
Basic and diluted net loss per weighted average common share
  outstanding                                                                  $ (0.04)            $ (0.07)
                                                                               ========            ========
Weighted average number of common shares outstanding used in
  calculation of basic and diluted net loss per common share                 32,511,455          27,741,394
                                                                             ==========          ==========
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       3
<PAGE>

<TABLE>
<CAPTION>

                                                                      Nine Months Ended September 30,
                                                                          2004                 2003
                                                                          ----                 ----
Revenues:
<S>                                                                              <C>                <C>
  License                                                                        $5,611             $ 7,050
  Services and maintenance                                                        3,454               2,457
  Hardware                                                                          103                 287
                                                                                    ---                 ---

    Total revenues                                                                9,168               9,794
                                                                                  -----               -----

Cost of revenues:
  License                                                                           534                 976
  Services and maintenance                                                        2,703               2,794

  Hardware                                                                            -                   1
  Software amortization                                                             336                 475
                                                                                    ---                 ---

    Total cost of revenues                                                        3,573               4,246
                                                                                  -----               -----

    Gross profit                                                                  5,595               5,548
                                                                                  -----               -----
Research and development (R&D)
  Non-cash compensation                                                               2                  84
  Other R&D expense                                                               3,066               4,090
Sales and marketing (S&M)
  Non-cash compensation                                                              43                  27
  Other S&M expense                                                               5,732               6,558
General and administrative (G&A)
  Non-cash compensation                                                              68                 381
  Other G&A expense                                                               4,314               6,264
  Depreciation and amortization                                                     840                 848
                                                                                    ---                 ---

    Total operating expenses                                                     14,065              18,252
                                                                                 ------              ------

    Operating loss                                                              (8,470)            (12,704)

Gain on disposal of assets                                                          110                 743
Interest income (expense), net                                                     (35)                  29
Other income (expense), net                                                       2,026                 621
                                                                                  -----                 ---

Loss before provision for income taxes                                          (6,369)            (11,311)

     Provision for income taxes                                                      46                 140
                                                                                     --                 ---
Net loss                                                                      $ (6,415)          $ (11,451)
                                                                              =========          ==========
Basic and diluted net loss per weighted average common share
  outstanding                                                                  $ (0.20)            $ (0.42)
                                                                               ========            ========
Weighted average number of common shares outstanding used in
  calculation of basic and diluted net loss per common share                 32,465,580          27,390,836
                                                                             ==========          ==========
</TABLE>


See accompanying notes to the consolidated financial statements.

                                       4
<PAGE>

                               AXEDA SYSTEMS INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                   Nine Months Ended September 30,
                                                                                        2004             2003
                                                                                        ----             ----
Cash flows from operating activities:
<S>                                                                                       <C>             <C>
  Net loss                                                                                $ (6,415)       $ (11,451)
  Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization                                                               1,176            1,323
  Gain on disposals of assets                                                                 (110)            (729)
  Unrealized gain on financing-related liability                                            (2,024)            (645)
  Non-cash settlement                                                                         (720)                -
  Non-cash compensation and other expenses                                                      113              492
  Provision for doubtful accounts                                                                 4             (59)

Changes in items affecting operations:
  Accounts receivable                                                                           540            (111)
  Prepaid expenses and other current assets                                                   (296)              276
  Goodwill, intangible assets and other assets                                                   61               78
  Accounts payable                                                                              226          (1,264)
  Accrued expenses                                                                            (303)          (1,708)
  Income taxes payable                                                                         (92)              147
  Deferred revenue                                                                              (8)              166
                                                                                                ---              ---
    Net cash used in operating activities                                                   (7,848)         (13,485)
                                                                                            -------         --------

Cash flows from investing activities:
  Capital expenditures                                                                        (148)            (111)
                                                                                              -----            -----
    Net cash used in investing activities                                                     (148)            (111)
                                                                                              -----            -----

Cash flows from financing activities:
  Net repayment under bank line of credit                                                     (287)              448
  Net proceeds from issuance of common stock                                                      -            5,597
  Repayments of long-term debt and other non-current liabilities                               (27)            (226)
   Net proceeds from exercise of stock options                                                   52                8
                                                                                                 --                -
    Net cash provided by (used in) financing activities                                       (262)            5,827
                                                                                              -----            -----

Effect of exchange rate changes on cash and cash equivalents                                     10               59
                                                                                                 --               --

Net decrease in cash and cash equivalents                                                   (8,248)          (7,710)
Cash and cash equivalents:
  Beginning of period                                                                         9,617           19,065
                                                                                              -----           ------
  End of period, including restricted cash of $100 in 2003                                   $1,369          $11,355
                                                                                             ======          =======
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       5
<PAGE>

                               AXEDA SYSTEMS INC.
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

All amounts are in thousands,  except share and per share amounts,  unless noted
otherwise.

1)       Summary of Significant Accounting Policies

a)       Description of Business and Liquidity

Axeda  Systems  Inc.,  or we,  our,  us or Axeda,  develops,  markets  and sells
software  products  and  services  used by  multiple  industries  and  customers
worldwide  for Device  Relationship  Management,  or DRM,  to access and exploit
information hidden within remote machines, devices and facilities. We distribute
our DRM products through direct sales to original  equipment  manufacturers,  or
OEMs, and enterprise customers,  as well as through distributors and value-added
resellers.  We maintain  regional sales and support offices in the United States
and France.

In December 2001 we purchased all of the  outstanding  capital stock of eMation,
Ltd., or eMation,  a private  company  organized  under the laws of the State of
Israel and  headquartered  near Boston,  Massachusetts.  Since 2002 our revenues
have been substantially generated from selling DRM products.

We have sustained significant net losses and negative cash flows from operations
since our inception.  For the nine months ended September 30, 2004 and 2003, our
net losses were $6,415 and $11,451,  respectively,  and negative cash flows from
operating  activities  were $7,848 and  $13,485,  respectively.  There can be no
assurances that we will be able to generate sufficient revenues or positive cash
flows from operating activities necessary to achieve or sustain profitability in
the short or long term.

Based upon our current cash resources and revised financial  projections for the
remainder of the year, we currently anticipate that our available funds and cash
flows from  operations  should be sufficient to meet our cash needs through 2005
based on forecasted year over year growth in revenues. However, due to risks and
uncertainties,  we cannot assure  investors that our future operating cash flows
will be sufficient to meet our  requirements.  In such event, our operations and
liquidity would likely be materially  adversely  affected.  We cannot assure you
that if  additional  financing  is  needed,  the  additional  financing  will be
available to us on favorable terms when required, or at all.

On October 5, 2004,  we issued a  three-year  secured  convertible  term note to
Laurus  Master Fund,  Ltd., or Laurus,  in the principal  amount of $4,500 (note
12).


b)       Basis of Presentation

The interim consolidated  financial statements of Axeda as of September 30, 2004
and for the three and nine months  ended  September  30, 2004 and 2003  included
herein  have been  prepared  by us,  without  audit,  pursuant  to the rules and
regulations  of  the  Securities  and  Exchange  Commission,   or  SEC.  Certain
information and footnote  disclosures  normally included in financial statements
prepared in accordance  with  accounting  principles  generally  accepted in the
United States of America,  or GAAP,  have been condensed or omitted  pursuant to
such rules and  regulations  relating to interim  financial  statements.  In the
opinion of management, the accompanying unaudited interim consolidated financial
statements  reflect  all  adjustments,  consisting  of normal  recurring  items,
necessary to present  fairly the  financial  position of Axeda at September  30,
2004,  the  results  of our  operations  for the  three  and nine  months  ended
September  30,  2004  and  2003 and our cash  flows  for the nine  months  ended
September 30, 2004 and 2003.  The unaudited  consolidated  financial  statements
included  in this  Form  10-Q  should be read in  conjunction  with the  audited
consolidated  financial statements and notes thereto,  included in our Form 10-K
for the year ended  December 31, 2003.  The interim  results  presented  are not
necessarily  indicative  of results for any  subsequent  quarter or for the year
ending December 31, 2004.

c)       Principles of Consolidation

The consolidated  financial  statements include our financial statements and the
financial   statements  of  our  wholly-owned   subsidiaries.   All  significant
intercompany balances and transactions have been eliminated in consolidation.

                                       6
<PAGE>

d)       Cash and Cash Equivalents

For  purposes of the  statement  of cash flows,  we consider  all highly  liquid
instruments  purchased  with a  maturity  of  three  months  or  less to be cash
equivalents.

e)       Revenue Recognition

We recognize  software  revenues in  accordance  with the American  Institute of
Certified Public  Accountants'  Statement of Position,  or 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."  Software revenues
are  recognized  in the period in which  persuasive  evidence of an  arrangement
exists,  the fee is  fixed  or  determinable,  delivery  of the  technology  has
occurred requiring no significant production,  modification or customization and
collectibility is probable.

We  recognize  revenue  for  certain  arrangements  where  products  and certain
services are bundled in  accordance  with Emerging  Issues Task Force,  or EITF,
Issue No. 00-21,  "Revenue  Arrangements  with Multiple  Deliverables,"  or EITF
00-21.  In applying the concepts of EITF 00-21,  we must  determine  whether the
deliverables  are separable into multiple  units of accounting.  We allocate the
total fee on such  arrangements to the individual  deliverables  either based on
their  relative  fair  values or using the  residual  method,  as  circumstances
dictate.  We then recognize  revenue on each  deliverable in accordance with our
policies for product and services revenue  recognition.  The application of EITF
00-21  includes  judgments  as to whether  the  delivered  item has value to the
customer  on a  standalone  basis and  whether we have  objective  and  reliable
evidence  of fair value for the  undelivered  items.  Our  ability to  recognize
revenue in the future may be affected if actual selling prices are significantly
less than the fair values.

f)       Financial Instruments

Our  financial  instruments  principally  consist of cash and cash  equivalents,
accounts  receivable,  accounts  payable and notes  payable  that are carried at
cost, which approximates fair value. The  financing-related  liability financial
instrument is recorded at fair value (note 6).

g)       Computation of Earnings Per Share

We compute earnings per share, or EPS, in accordance with Statement of Financial
Accounting Standards,  or SFAS, No. 128, "Computation of Earnings Per Share," or
SFAS 128. In  accordance  with SFAS 128,  basic  earnings  per share is computed
using the  weighted  average  number of common  shares  outstanding  during  the
period. Diluted earnings per share is computed using the weighted average number
of common and dilutive common equivalent shares  outstanding  during the period.
Common equivalent shares consist of the incremental  common shares issuable upon
the exercise of stock options and warrants  (calculated using the treasury stock
method).  Common  equivalent  shares are excluded from the  calculation if their
effect is anti-dilutive.


The  following  potential  shares of common  stock have been  excluded  from the
computation of diluted net loss per share for all periods  presented because the
effect would have been anti-dilutive:

i) Three Months Ended September 30, 2004

Options to purchase  5,609,100  shares of common  stock with a  weighted-average
exercise price of $1.42 per share were outstanding during the three months ended
September  30,  2004 but were not  included  in the  computation  of diluted EPS
because the effects of assumed  exercise would have an  anti-dilutive  effect on
EPS. The outstanding  options include 3,601,937 options that are vested,  with a
weighted  average  exercise  price of $1.48 per share,  of which  1,413,294  are
vested and in the money,  with a weighted  average  exercise  price of $0.10 per
share. The options have various expiration dates during the next ten years.

Warrants to purchase  2,694,151  shares of common stock with a  weighted-average
exercise price of $1.96 per share were vested and  outstanding  during the three
months ended  September 30, 2004,  but were not included in the  calculation  of
diluted EPS because the effects of assumed  conversion or exercise would have an
anti-dilutive  effect on EPS.  No  outstanding  warrants  were vested and in the
money.  The warrants have various  expiration  dates during the next five years.
The  outstanding  warrants  include  2,459,050  warrants (note 6) whose exercise
price  was  lowered  from  $1.71 per share to $1.69 per share as a result of and
effective  upon the  closing  of our  financing  in October  2004 (note 12).  In
addition,  these  warrants  are subject to a further  reduction  of the exercise
price from $1.69 per share to $1.35 per share,  subject to stockholder  approval
at our next annual meeting of stockholders.

                                       7
<PAGE>
ii) Nine Months Ended September 30, 2004

Options to purchase  5,609,100  shares of common  stock with a  weighted-average
exercise price of $1.42 per share were outstanding  during the nine months ended
September  30,  2004 but were not  included  in the  computation  of diluted EPS
because the effects of assumed  exercise would have an  anti-dilutive  effect on
EPS. The outstanding  options include 3,601,937 options that are vested,  with a
weighted  average  exercise  price of $1.48 per share,  of which  1,568,528  are
vested and in the money,  with a weighted  average  exercise  price of $0.18 per
share. The options have various expiration dates during the next ten years.

Warrants to purchase  2,694,151  shares of common stock with a  weighted-average
exercise  price of $1.96 per share were vested and  outstanding  during the nine
months ended  September 30, 2004,  but were not included in the  calculation  of
diluted EPS because the effects of assumed  conversion or exercise would have an
anti-dilutive  effect on EPS.  No  outstanding  warrants  were vested and in the
money.  The warrants have various  expiration  dates during the next five years.
The  outstanding  warrants  include  2,459,050  warrants (note 6) whose exercise
price  was  lowered  from  $1.71 per share to $1.69 per share as a result of and
effective  upon the  closing  of our  financing  in October  2004 (note 12).  In
addition,  these  warrants  are subject to a further  reduction  of the exercise
price from $1.69 per share to $1.35 per share,  subject to stockholder  approval
at our next annual meeting of stockholders.


iii) Three Months Ended September 30, 2003

Options to purchase  5,728,911  shares of common  stock with a  weighted-average
exercise price of $1.76 per share were outstanding during the three months ended
September  30,  2003 but were not  included  in the  computation  of diluted EPS
because  the  effects  of  assumed   conversion   or  exercise   would  have  an
anti-dilutive  effect on EPS. The outstanding  options include 2,725,947 options
that are vested,  with a weighted  average exercise price of $2.21 per share, of
which 1,064,387 are vested and in the money,  with a weighted  average  exercise
price of $0.12 per share.  The options have various  expiration dates during the
next ten years.

Warrants  to purchase  439,475  shares of common  stock with a  weighted-average
exercise  price of $3.72 per share  were  vested and  outstanding  on a weighted
average  basis,  including  213,830  warrants  which were not  exercisable as of
September 30, 2003,  during the three months ended  September 30, 2003, but were
not  included in the  calculation  of diluted EPS because the effects of assumed
conversion  or  exercise  would  have  an  anti-dilutive   effect  on  EPS.  The
outstanding  warrants  include 43,042 warrants that are vested and in the money,
with a weighted  average  exercise  price of $1.39 per share.  The warrants have
various expiration dates during the next five years.

iv) Nine Months Ended September 30, 2003

Options to purchase  5,728,911  shares of common  stock with a  weighted-average
exercise price of $1.76 per share were outstanding  during the nine months ended
September  30,  2003 but were not  included  in the  computation  of diluted EPS
because  the  effects  of  assumed   conversion   or  exercise   would  have  an
anti-dilutive  effect on EPS. The outstanding  options include 2,725,947 options
that are vested,  with a weighted  average exercise price of $2.21 per share, of
which 1,041,859 are vested and in the money,  with a weighted  average  exercise
price of $0.09 per share.  The options have various  expiration dates during the
next ten years.

Warrants  to purchase  279,371  shares of common  stock with a  weighted-average
exercise  price of $4.89 per share were  vested and  outstanding,  on a weighted
average  basis,  including  72,060  warrants  which were not  exercisable  as of
September 30, 2003,  during the nine months ended  September 30, 2003,  but were
not  included in the  calculation  of diluted EPS because the effects of assumed
conversion or exercise would have an anti-dilutive effect on EPS. No outstanding
warrants  were vested and in the money.  The warrants  have  various  expiration
dates during the next five years.
                                       8
<PAGE>
h)       Stock-based Compensation

SFAS No. 123,  "Accounting for Stock-based  Compensation," or SFAS 123, provides
companies the alternative to adopt the fair value method for expense recognition
of employee stock options and  stock-based  awards or to continue to account for
such  items  using the  intrinsic  value  method as  outlined  under  Accounting
Principles Board Opinion No. 25,  "Accounting for Stock Issued to Employees," or
APB 25, with pro forma disclosures of results of operations as if the fair value
method had been applied.

At September 30, 2004 we have two stock-based  employee  compensation  plans. We
account for those plans under the recognition and measurement  principles of APB
25 and related  interpretations.  The following table  illustrates the effect on
net loss and net loss per share if we had  applied  the fair  value  recognition
provisions of SFAS 123 to stock-based compensation:

<TABLE>
<CAPTION>

                                                     Three Months Ended September 30,       Nine Months Ended September 30,
                                                     --------------------------------       -------------------------------
                                                          2004               2003               2004               2003
                                                          ----               ----               ----               ----
<S>                                                         <C>                <C>                 <C>              <C>
     Net loss, as reported                                  $ (1,352)          $(1,811)            $(6,415)         $ (11,451)
     Add:  Stock-based employee compensation
     included in reported net loss, net of
     related tax effects                                            9               146                 113                492
     Deduct: Total stock-based employee
     compensation expense determined under fair
     value based method for all awards                          (277)             (742)               (986)            (2,054)
                                                                -----             -----               -----            -------
     Pro forma net loss                                    $(1,620)           $ (2,407)           $ (7,288)         $ (13,013)
                                                           ==========         =========           =========         ==========
     Net  loss  per  common  share  -  basic  and
     diluted:
          As reported                                         $(0.04)           $(0.07)             $(0.20)            $(0.42)
                                                              =======           =======             =======            =======
          Pro forma                                           $(0.05)           $(0.09)             $(0.22)            $(0.48)
                                                              =======           =======             =======            =======
</TABLE>



We used the following  assumptions  to determine the fair value of stock options
granted using the Black-Scholes option-price model:
<TABLE>
<CAPTION>

                                                                           September 30,
                                                           ----------------------------------------
                                                                    2004                      2003
                                                                    ----                      ----
<S>                                                                      <C>                     <C>
       Dividend yield                                                    0%                      0%
       Expected volatility                                       86% - 192%               0% - 192%
       Average expected option life                                 4 years                 4 years
       Risk-free interest rate                                1.02% - 5.71%           1.02% - 5.73%
</TABLE>


For the nine months ended  September 30, 2004, we granted  843,000 stock options
to employees, including 120,000 to our chief financial officer, with an exercise
price per share equal to the fair market  value of our common  stock on the date
of grant and ranging from $0.87 to $1.28.

i)       Guarantees
Our  software  license  agreements  typically  provide  for  indemnification  of
customers for  intellectual  property  infringement  claims.  We also warrant to
customers,  when requested,  that our software products operate substantially in
accordance  with standard  specifications  for a limited period of time. We have
not incurred significant obligations under customer  indemnification or warranty
provisions  historically,  and do not expect to incur significant obligations in
the future.  Accordingly,  we do not maintain  accruals for  potential  customer
indemnification or warranty-related obligations.

We have agreements in place with our directors and officers whereby we indemnify
them for certain events or occurrences while the officer or director is, or was,
serving at our request in such capacity.  The maximum potential amount of future
payments we could be required to make under these indemnification  agreements is
unlimited;  however,  we have a director and officer  insurance  policy that may
enable us to recover a portion of any future amounts paid.
                                       9
<PAGE>
j)       Use of Estimates

The  preparation  of  financial  statements  in  conformity  with GAAP  requires
management 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 revenues and
expenses during the reporting period.  Significant items subject to estimates in
these financial statements include the recoverability of goodwill and intangible
assets and valuation allowances for accounts receivable and deferred tax assets.
Actual results could differ from those estimates.

k)       Recent Accounting Pronouncements

On March 31, 2004, the Financial  Accounting  Standards Board, or FASB, issued a
proposed  Statement,  "Share Based Payment,  an Amendment of FASB Statements No.
123 and 95," relating to the  accounting  for  equity-based  compensation.  This
statement  proposes  changes to GAAP that, if  implemented,  would require us to
record a charge to compensation expense for stock option grants to employees. We
currently  account for stock  options  under SFAS 123 (note 1h). As permitted by
SFAS 123, we have elected to use the intrinsic value method prescribed by APB 25
to measure  compensation  expense for  stock-based  awards granted to employees.
Under APB 25 the granting of stock options is not considered compensation if the
option exercise price is not less than the fair market value of the common stock
at the measurement  date, which is generally the grant date. The FASB's proposal
would eliminate our ability, starting in 2006, to account for stock-based awards
granted to employees using the intrinsic value method  prescribed by APB 25, and
would instead require that such awards be accounted for using a fair-value based
method,  which would require us to measure the compensation expense for all such
awards,  including stock options, at fair value at the grant date.  Compensation
expense would then be recognized  over the service or vesting  period.  The FASB
continued its  redeliberations  of this statement  through  October 2004,  which
began in July 2004, and set a goal of completing its redeliberations and issuing
a final  statement  in the second half of 2004.  We cannot  predict  whether the
proposed  statement  will be  adopted,  but if  adopted it would have an adverse
affect  on our  results  of  operations.  On July 20,  2004  the  U.S.  House of
Representatives approved a bill (H.R.3574) to replace the guidance that the FASB
set forth in this exposure draft. The bill stipulates that the fair value of all
options to purchase the stock of a company granted after December 31, 2004, to a
named  executive  officer  (defined  as the CEO and the four other  most  highly
compensated  executive  officers of the company)  must be expensed,  but only if
both the company's  annual revenue and market  capitalization  surpass  $25,000.
Voluntary  expensing is permitted under the bill,  which  additionally  requires
improved employee stock option transparency and reporting disclosures.

In May 2002 the FASB  added a  project  to its  technical  agenda  to  develop a
comprehensive  statement  on  revenue  recognition.  The FASB  plans to issue an
exposure  draft of an  amendment  to FASB  Concepts  Statement 5, and a separate
exposure  draft of a general  standard  on  revenue  recognition  in the  fourth
quarter of 2004.


2)       Supplemental Disclosure of Balance Sheet Information

      Provision for Doubtful Accounts

        Accounts  receivable are net of provisions for doubtful  accounts of $72
        and $68 as of September 30, 2004 and December 31, 2003, respectively.



3)       Acquired Intangible Assets

       Acquired  intangible assets that are subject to amortization at September
30, 2004 and December 31, 2003, consist of the following:

<TABLE>
<CAPTION>
                                Gross Carrying Amount                   Accumulated Amortization
                                ---------------------                   ------------------------
                                      2004             2003              2004              2003
                                      ----             ----              ----              ----
<S>                                 <C>              <C>                  <C>            <C>
Developed Technology                $  210           $  210               $210           $  21
Core Technology                      1,840            1,840                833             497
Customer Base                          110              110                 50              30
                                       ---              ---                 --              --
     Total                         $ 2,160          $ 2,160             $1,093          $  737
                                   =======          =======            =======          ======
</TABLE>
                                       10
<PAGE>
     Aggregate  amortization expense was $356 and $498 for the nine months ended
September 30, 2004 and 2003, respectively,  and $664 for the year ended December
31, 2003.  Estimated  aggregate expense for the quarter ending December 31, 2004
and for each of the next 2 years is as follows:

                                                    Charged to:
                                                    -----------
                                                 Cost of        Operating
                                  Total          revenues         expense
                                  -----          --------         -------
Year ending December 31,
 2004                              $ 119            $ 112            $  7
 2005                                474              447              27
 2006                                474              447              27
 Thereafter                            -                -               -

4)       Goodwill
       The changes in the gross carrying amount of goodwill, all attributable to
our DRM segment, for the nine months ended September 30, 2004 and the year ended
December 31, 2003are as follows:


  Balance as of December 31, 2002                $ 3,651
                                                 =======
  Other                                             (11)
                                                    ====
  Balance as of December 31, 2003                $ 3,640
                                                 =======
  Nine months ended September 30, 2004                 -
                                                    ----
  Balance as of September 30, 2004                $3,640
                                                  ======

     Goodwill is not deductible for income tax purposes.


5)       Accrued Expenses

Accrued expenses consist of the following:

                                              September 30,     December 31,
                                                  2004              2003
                                                  ----              ----
Legal and professional fees                    $  587             $ 558
Payroll and related costs                         958             1,477
Royalties to Israeli government agencies          904               759
Sales, excise and other taxes                      93               266
Severance                                         718                88
Unutilized leased facilities                      102               547
Other                                           1,072             1,171
                                                -----             -----
                                               $4,434            $4,866
                                               ======            ======

6)       Private Placement and Financing-related Liability

On September 23, 2003, we issued 4,918,100 shares of our common stock to certain
accredited  investors  in a  private  investment  in  public  equity,  or  PIPE,
financing.  The shares were sold at $1.22 per share with net proceeds of $5,597.
We also issued to the investors  warrants  exercisable for the purchase of up to
an  aggregate of  2,459,050  shares of our common  stock at an initial  exercise
price of $1.71 per share. The exercise price was lowered from $1.71 per share to
$1.69 per share as a result of and  effective  upon the closing of our financing
in October 2004 (note 12). In addition,  these warrants are subject to a further
reduction of the exercise price from $1.69 per share to $1.35 per share, subject
to stockholder approval at our next annual meeting of stockholders.

We also entered into a registration  rights  agreement with the investors in the
PIPE  financing  pursuant  to which  we were  obligated  to file a  registration
statement on Form S-3, for the resale of the shares sold in the  transaction and
the  shares  issuable  upon  exercise  of the  warrants,  with the SEC.  The SEC
declared the registration  statement effective on October 23, 2003. In the event
that sales cannot be made because we have not updated the registration statement
to keep it effective and to comply with securities law requirements,  we will be
required to pay  liquidated  damages to each PIPE investor  equal to 1.5% of the
purchase price paid by such investor for each thirty-day  period or pro rata for
any portion thereof after the deadline passes until the  registration  statement
is updated and declared effective by the SEC.

                                       11
<PAGE>
EITF Issue No. 00-19,  "Accounting for Derivative Financial  Instruments Indexed
to, and Potentially Settled in, a Company's Own Stock," or EITF 00-19, addresses
accounting for equity derivative  contracts indexed to, and potentially  settled
in, a company's  own stock,  or equity  derivatives,  by providing  guidance for
distinguishing  between  permanent  equity,  temporary  equity  and  assets  and
liabilities.  EITF 00-19  addresses  and  clarifies  whether  specific  contract
provisions  or other  circumstances  cause a net-share  or  physical  settlement
alternative  to be within or  outside  the  control  of the  issuer.  EITF 00-19
provides that the ability to keep SEC filings current is beyond the control of a
registrant.  Therefore,  the potential  liquidated damages we may be required to
pay  pursuant  to the  registration  rights  agreement  if we fail  to keep  our
registration  statement effective is a potential net cash settlement pursuant to
EITF  00-19.  While we view  this  liquidated  damages  contingency  as  neither
probable nor reasonably  estimable,  we recorded the estimated fair value of the
warrant as of September 23, 2003 of $3,410 as a  financing-related  liability in
the consolidated  balance sheet in accordance with EITF 00-19. The fair value of
the financing-related liability is adjusted at each balance sheet date, with the
non-cash  change  in  fair  value  reported  in the  consolidated  statement  of
operations  as other income or expense.  Upon the earlier of the exercise of the
warrants or the  expiration  of the period for which  liquidated  damages may be
assessed against us, the fair value of the  financing-related  liability will be
reclassified to additional paid-in capital.

The estimated fair value of the financing-related  liability as of September 30,
2004 was $583.  The change in fair value from December 31, 2003 to September 30,
2004 of $2,025 was recorded as other income in the  consolidated  statements  of
operations.

The estimated  fair value of the warrant,  used to determine the estimated  fair
value of the financing-related liability, was calculated using the Black-Scholes
model using the following assumptions:


                                               September 30,       December 31,
                                                     2004              2003
                                               --------------      ------------
             Current market price/share             $0.45             $1.36
             Exercise price/share                   $1.71             $1.71
             Dividend yield                            0%                0%
             Expected volatility                     108%              115%
             Expected life                     3.98 years          4.73 years
             Risk-free interest rate                3.17%             3.13%


7)       Commitments and Contingencies

SECURITIES CLASS ACTION
Between February and April 2000, eleven class action lawsuits were filed against
us and certain of our officers and directors in the United States District Court
for the  Eastern  District  of  Pennsylvania.  On May 25,  2000,  the cases were
consolidated  under Civil  Action No.  00-CV-1014,  and entitled "In re RAVISENT
Technologies, Inc. Securities Litigation." Pursuant to the court's consolidation
order, a consolidated  and amended class action  complaint was filed on June 14,
2000 with an alleged class period of July 15, 1999 through April 27, 2000.  This
complaint  alleges  violations  of the  federal  securities  laws,  specifically
Sections 11 and 15 of the  Securities  Act of 1933,  Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and Rule 10b-5 promulgated  thereunder.  On
July 3,  2000,  we and the  other  defendants  filed a  motion  to  dismiss  the
consolidated  and amended class action  complaint.  On July 13, 2004,  the Court
denied the motion,  and the discovery stay was lifted. On September 24, 2004 the
Defendants filed a stipulation with the court,  suspending  motion and discovery
deadlines pending negotiation of the settlement documents.  On October 23, 2004,
the  parties  through  their   respective   counsel  executed  a  memorandum  of
understanding  to settle the class  action for $7,000.  Although we believe that
such lawsuits or claims are without merit and that we have meritorious  defenses
to the  actions,  we plan to settle the  litigation  pursuant to the October 23,
2004  memorandum of  understanding.  We have been informed by our directors' and
officers'  liability  insurance  carriers  that  the  full  amount  of the  cash
settlement will be paid directly by them.
                                       12
<PAGE>
SECURITIES ALLOCATION CLASS ACTION
On November 27, 2001, a putative  shareholder class action was filed against us,
certain of our officers and directors, or the Individual Defendants, and several
investment banks, or the Underwriter  Defendants,  that were underwriters of our
initial  public  offering.  The action was filed in the United  States  District
Court for the Southern District of New York, or the Court, purportedly on behalf
of investors who purchased our stock between July 15, 1999 and December 6, 2000,
of the Plaintiffs. A Consolidated Amended Complaint,  which is now the operative
complaint, was filed on April 19, 2002.

The lawsuit  alleges  violations of Sections 11 and 15 of the  Securities Act of
1933 and Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5  promulgated  thereunder  against  one or both  of us and  the  Individual
Defendants.  The claims are based on allegations that the underwriter defendants
agreed to allocate stock in our July 15, 1999 initial public offering to certain
investors in exchange for excessive and  undisclosed  commissions and agreements
by  those  investors  to  make  additional   purchases  in  the  aftermarket  at
pre-determined prices. The Plaintiffs allege that the prospectus for our initial
public  offering was false and  misleading in violation of the  securities  laws
because it did not disclose these  arrangements.  The action seeks damages in an
unspecified amount.

Similar "IPO allocation"  actions have been filed against over 300 other issuers
that have had  initial  public  offerings  since 1998 and all are  included in a
single coordinated  proceeding in the Southern District of New York. On July 15,
2003,  the  Company's  board of  directors  approved  the terms of a  settlement
proposal as set forth in a Memorandum of  Understanding  (the "MOU"),  which has
now been memorialized in a settlement agreement,  an Insurer-Insured  Agreement,
an Agreement Among Insurers, and a Special Counsel Agreement.

The  settlement  agreement  and  related  agreements  set  forth  the terms of a
settlement  between us, the Individual  Defendants,  the Plaintiff class and the
vast  majority  of  the  other  approximately  300  Issuer  Defendants  and  the
Individual  Defendants  currently or formerly  associated with those  companies.
Among other provisions,  the settlement provides for our release and the release
of the  Individual  Defendants  for the  conduct  alleged  in the  action  to be
wrongful. We agree to undertake certain responsibilities,  including agreeing to
assign away, not assert,  or release certain  potential  claims that we may have
against  our  underwriters.  It is  anticipated  that  any  potential  financial
obligation  of ours to the  Plaintiffs  pursuant to the terms of the  settlement
agreement and related  agreements will be covered by existing  insurance.  . The
agreement is subject to approval by the court, which cannot be assured. A motion
for  preliminary  approval by the court of the proposed  settlement was filed on
June 25, 2004. On July 14, 2004, the underwriter  defendants  filed a memorandum
in Opposition to Plaintiffs' Motion for Preliminary  Approval of Settlement with
Defendant Issuers' and Individuals.  On August 4, 2004 the Plaintiffs and Issuer
Defendants filed replies to the Underwriter Defendants.  On October 13, 2004 the
Court determined the criteria for Section 11 class certifications, and certified
the  Section  11 class in four of the six cases  that were the  subject of class
certification  motions,  noting that the Court's intention was to provide strong
guidance to all parties  regarding  class  certification  in the  remaining  two
cases. The Plaintiffs have not yet moved to certify a class in our case.

If the  settlement  does not occur,  and  litigation  against us  continues,  we
believe we have  meritorious  defenses and intend to defend the case vigorously.
We cannot  predict  whether or when a settlement  will occur or be finalized and
are unable at this time to determine  whether the outcome of the litigation will
have a material  impact on its results of operations  or financial  condition in
any future period.  However,  failure to  successfully  defend this action could
harm our results of operations, liquidity and financial condition.

IPM
On March 20, 2003,  Industria  Politecnica  Meridionale Spa., or IPM, an Italian
corporation,  filed a complaint  against us in the United States  District Court
for the  Northern  District  of  California.  The lawsuit  alleges  breach of an
agreement  between IPM and our  wholly-owned  subsidiary  Ravisent  Technologies
Internet  Appliance  Group,  Inc., or RTIAG,  and fraud in  connection  with the
delivery  of  circuit  boards  to IPM  that  were  not in  compliance  with  the
agreement,  and claims damages of $15,000 for breach of contract and fraud,  and
unspecified  punitive  damages and attorney's  fees. On May 2, 2003, we moved to
dismiss  all  claims  against  RTIAG.  On or about June 23,  2003,  IPM filed an
amended  complaint  adding RTIAG as a party in the action and providing  further
specificity on the fraud  allegation.  We withdrew our motion to dismiss shortly
thereafter.  We filed an answer to the amended complaint on July 3, 2003 denying
the breach of contract and fraud claims.  RTIAG filed a counterclaim  on July 3,
2003 for breach of  contract  against  IPM,  seeking  damages  of  $2,732,  plus
interest,  fees and costs. IPM filed an answer to the amended  complaint on July
22,  2003  denying the breach of  contract  claims.  IPM filed a motion to amend
their  complaint  on February 19, 2004,  which was granted,  and which  withdrew
their fraud  complaint  and modified  their breach of contract  claim to specify
that the defendants  breached the contract by providing  circuit  boards,  which
were  underpowered,  and to an  unacceptable  extent,  incapable of operating in
IPM's products.  We filed a motion seeking summary judgment on March 9, 2004. On
March 30, 2004, IPM's motion to amend their complaint was granted.  On April 13,
2004, Axeda filed a supplement to its motion for summary judgment.  On April 27,
2004, IPM filed a supplemental  opposition to our summary  judgment  motion.  We
filed a response on May 4, 2004 and our motion for summary judgment was heard on
May 18, 2004.

                                       13
<PAGE>
On June 22,  2004,  the court  issued an order  granting  our motion for summary
judgment and  dismissing  IPM's claims  against us. IPM filed a Motion for Entry
and  Certification of Final Judgment on August 2, 2004 so as to permit an appeal
of the summary judgment ruling before trial on Axeda's counterclaim.  The motion
is scheduled to be was heard on September 7, 2004 and was denied by the court. A
case settlement  hearing on our  counterclaim  was is also scheduled  forheld in
September  2004,  which was also  denied  by the  Court.  We filed a motion  for
summary  judgment on our counterclaim on October 26, 2004, which is scheduled to
be heard on November 30, 2004. On approximately  November 9, 2004, IPM filed its
opposition  to our October 26, 2004 motion for summary  judgment.  We have until
November 16, 2004 to file a reply to IPM's opposition.

QUESTRA
On June 30,  2004,  we  announced  that we were  awarded a patent by the  United
States   Patent   and   Trademark    Office   for   a   key   element   of   our
Firewall-Friendly(TM) method of communication over the Internet. Our U.S. patent
No.  6,757,714  is  titled  "Reporting  The  State Of An  Apparatus  To A Remote
Computer." The patent protects one of our inventions relating to enabling remote
"devices" -- machines,  appliances,  instruments,  and  computers -- to securely
communicate their health and status to enterprise  computer systems. On June 30,
2004, we filed a complaint in the United States  District Court for the District
of  Massachusetts  against  Questra  Corporation , one of our  competitors,  for
infringement of this patent.  On November 9, 2004 Questra filed an answer to our
complaint, without filing a substantive counterclaim.

On November 10, 2004 Questra filed a lawsuit in the United States District Court
for the Northern district of California against us alleging infringement of U.S.
patent No.  6,377,162,  titled  "Medical  Diagnostic  Field  Service  Method and
Apparatus." , The suit seeks injunctive relief and unspecified monetary damages.
As the complaint was only served  November 12, 2004, we are currently  reviewing
the  matter,  including  the  limits of any  potential  exposure,  with  outside
counsel. We plan to vigorously assert all applicable defenses to the litigation,
and in  particular  will  be  investigating  not  only  the  patent's  potential
infringement  limitations,  but also its core  validity  and  enforceability  by
Questra.  We are unable to predict  the  outcome  of this  matter or  reasonably
estimate an amount of loss given its current status.

LEASE
In connection  with our  acquisition of eMation.  Ltd., or eMation,  in December
2001, we recorded an unutilized lease obligation of $1,200.  Until February 2003
we made payments under the lease totaling $180, resulting in a balance of $1,020
as of September 30, 2004. In May 2003 the lessor  provided us with formal notice
of  termination  of the lease and from June 2003 until May 2004,  filed  various
complaints  against us alleging payment due for rent and other charges under the
lease.  On October 18, 2004 we entered into a settlement  and release  agreement
with the lessor to settle all  charges,  suits and claims  against us. Under the
terms of the settlement and release  agreement,  we will pay $300 payable in two
installments  of $150 each. The first  installment was paid on October 20, 2004,
and  the  second  installment  is due on  October  1,  2005As  a  result  of the
settlement we reversed $720 of the  liability,  which is included as a reduction
of other general and  administrative  expense in the  accompanying  consolidated
statements of operations for the three and nne months ended September 30, 2004.

OTHER

In March 2003 we entered into a confidential  settlement  agreement with Phoenix
Technologies  in connection  with the sale of the assets of our former  Internet
appliance,  or IA, business.  In connection with this settlement  agreement,  we
reversed  accruals of $743 initially  recorded in March 2001 as part of the sale
of the assets of our former IA business.

From  time  to time we are  involved  in  lawsuits,  claims,  investigations  or
proceedings  consisting of  intellectual  property,  commercial,  employment and
other  matters,  which arise in the ordinary  course of business.  In accordance
with  SFAS No.  5,  Accounting  for  Contingencies,  we make a  provision  for a
liability when it is both probable that a liability has been  incurred,  and the
amount of the loss can be reasonably estimated. These provisions are reviewed at
least   quarterly   and  adjusted  to  reflect  the  impacts  of   negotiations,
settlements,  rulings,  advice of legal counsel and other information and events
pertaining  to a particular  case. It is possible that our cash flows or results
of operations  could be affected in any  particular  period by the resolution of
one or more of these contingencies.

                                       14
<PAGE>

8)       Segment and Major Customer Information

We operate in a single industry segment,  which is the development and licensing
of our technology.

Three  customers  accounted  for 30%,  or $815,  and 20%,  or  $1,821,  of total
revenues for the three and nine months ended  September 30, 2004,  respectively.
Three  customers  accounted  for 35%, or $1,275,  and 18%,  or $1,728,  of total
revenues for the three and nine months ended September 30, 2003, respectively.



                                       15
<PAGE>

We sell and license our  technology  to customers  primarily  in North  America,
Europe and Asia. Our total  revenues were derived from the following  geographic
regions (based on where the customer is located):

<TABLE>
<CAPTION>

                                                        Three Months Ended September 30,
Country/ Geographic Region                            2004                            2003
--------------------------                            ----                            ----
                                             Amount        % of Total        Amount        % of Total
North America:
<S>                                               <C>                <C>         <C>                 <C>
     United States                                $ 1,045            38%         $ 1,700             48%
     Canada                                             -              -               -               -
                                                        -              -               -               -
          Total - North America                     1,045             38           1,700              48
                                                    -----             --           -----              --

Europe:
     Germany                                          110              4             141               4
     France                                           160              6             275               8
     Netherlands                                      159              6             111               3
     Switzerland                                      617             23             492              14
     United Kingdom                                   115              4             268               7
     Other                                            228              8             412              11
                                                      ---              -             ---              --
          Total - Europe                            1,389             51           1,699              47
                                                    -----             --           -----              --

Asia-Pacific:
     Israel                                            78              3              49               1
     Japan                                            148              5             110               3
     Other                                             24              1              11               -
                                                       --              -              --               -
          Total - Asia-Pacific                        250              9             170               4
                                                      ---              -             ---               -

Other                                                  54              2              34               1
                                                       --              -              --               -

         Total                                    $ 2,738           100%         $ 3,603            100%
                                                  =======          ====         ========           ====
</TABLE>

<TABLE>
<CAPTION>

                                                        Nine Months Ended September 30,
                                                        -------------------------------
Country/ Geographic Region                            2004                            2003
--------------------------                            ----                            ----
                                             Amount        % of Total        Amount        % of Total
                                             ------        ----------        ------        ----------
North America:
<S>                                           <C>               <C>         <C>                 <C>
     United States                            $3,448            38%         $ 3,882             39%
     Canada                                        9              -             260               3
                                                   -              -             ---               -
          Total - North America                3,457             38           4,142              42
                                               -----             --           -----              --
Europe:
     Germany                                     406              4             413               4
     France                                      904             10           1,073              11
     Netherlands                                 515              6             341               3
     Switzerland                               1,233             13             908               9
     United Kingdom                              324              4             365               4
     Other                                       976             11             904              10
                                                 ---             --             ---              --
          Total - Europe                       4,358             48           4,004              41
                                               -----             --           -----              --
Asia-Pacific:
     Israel                                      227              2             214               2
     Japan                                       942             10           1,237              13
     Other                                        71              1              95               1
                                                  --              -              --               -
          Total - Asia-Pacific                 1,240             13           1,546              16
                                               -----             --           -----              --

Other                                            113              1             102               1
                                                 ---              -             ---               -

         Total                               $ 9,168           100%         $ 9,794            100%
                                             =======          ====         ========           ====
</TABLE>



9)       Segment Reporting

Segment  information is presented in accordance with SFAS No. 131,  "Disclosures
About Segments Of An Enterprise And Related Information." This standard requires
segmentation based upon our internal  organization and disclosure of revenue and
operating income based upon internal accounting  methods.  DRM is our reportable
segment.

For 2004,  Other is comprised of our IA business,  the assets of which were sold
in March of 2001. For 2003, Other is comprised of our former personal  computer,
or PC,  business,  which we exited in May 2002,  our former IA business  and our
former consumer electronics,  or CE, business,  the assets of which were sold in
March of 2001.
                                       16
<PAGE>
We evaluate operating segment  performance based on revenue and gross profit. We
have not historically evaluated segment performance based on operating income or
allocated assets to our individual operating segments.
<TABLE>
<CAPTION>

                                               Three Months Ended                        Nine Months Ended
                                                  September 30,                             September 30,
                                            2004                2003                 2004                 2003
                                            ----                ----                 ----                 ----
             Revenues:
             <S>                             <C>                  <C>                   <C>                  <C>
               DRM                              $ 2,721              $ 3,499               $9,065               $9,258
               Other                                 17                  104                  103                  536
                                                     --                  ---                  ---                  ---
                       Total                   $ 2,738               $ 3,603               $9,168               $9,794
                                               ========              =======               ======               ======

             Gross profit:
                    DRM                         $ 1,775             $  2,432               $5,492               $5,262
                    Other                            17                  104                  103                  286
                                                     --                  ---                  ---                  ---
                       Total                    $ 1,792             $  2,536               $5,595               $5,548
                                                =======             ========               ======               ======

</TABLE>

10)      Consolidated Statements of Cash Flows

         Supplemental disclosure of cash flow information:
                                                Nine Months Ended
                                                  September 30,
                                            -------------------------
                                            2004           2003
                                            ----           ----
Cash paid during the period for:
  Interest                                  $  5          $  32
                                            ====          =====
  Income taxes                                99             33
                                              ==             ==



11)      Comprehensive Income (Loss)

     The components of comprehensive loss are as follows:

<TABLE>
<CAPTION>
                                               Three Months Ended September 30,               Nine Months Ended
                                                                                                 September 30,
                                                   2004               2003                 2004                 2003
                                                   ----               ----                 ----                 ----
<S>                                                  <C>                  <C>                  <C>                <C>
     Net loss                                        $(1,352)             $(1,811)             $(6,415)           $(11,451)
     Foreign currency translation
     adjustment                                             2                   53                   10                  59
                                                            -                   --                 ----                  --
     Comprehensive loss                              $(1,350)             $(1,758)             $(6,405)           $(11,392)
                                                     ========             ========             ========           =========
</TABLE>

                                       17
<PAGE>
12)      Subsequent Events - Private Placement
On October 5, 2004, we we issued a secured  convertible  term note, or the Note,
in the principal  amount of $4,500 to Laurus Master Fund,  Ltd., or Laurus.  The
Note is  convertible  into shares of our common  stock at an initial  conversion
price of $0.48 per share. Pursuant to these agreements, we also issued to Laurus
a warrant,  or the  Warrant,  to purchase up to  2,500,000  shares of our common
stock at an exercise price of $0.53 per share with a term of five years.

The Note has a term of three years and  accrues  interest at the prime rate plus
2% per year (6.75% as of October 5, 2004).  Interest on the principal  amount is
payable  monthly,  in  arrears,  beginning  on November 1, 2004 and on the first
business day of each  consecutive  calendar month  thereafter until the maturity
date.  Under the terms of the Note, the monthly interest payment and the monthly
principal  payment are payable either in cash at 102% of the respective  monthly
amortization  amounts or, if certain  criteria  are met, in shares of our common
stock. The minimum monthly principal repayment of $150 commences on May 1, 2005,
and continues through the October 5, 2007 maturity date. The principal  criteria
for the monthly payments to be made in shares of our common stock include:

     o    the  effectiveness of a current  registration  statement  covering the
          shares of our common stock into which the principal and interest under
          the Note are convertible;

     o    an average  closing  price of our common stock for the  previous  five
          trading  days  greater  than or equal to 110% of the fixed  conversion
          price; and

     o    the  amount of such  conversion  not  exceeding  25% of the  aggregate
          dollar  trading volume of our common stock for the previous 10 trading
          days.

We may prepay the Note at any time by paying 120% of the  principal  amount then
outstanding,  together with accrued but unpaid  interest  thereon,  on or before
October 5, 2006,  or by paying 115% of the  principal  amount then  outstanding,
together with accrued but unpaid interest  thereon,  after October 5, 2006. Upon
an event of default  under the Note,  Laurus may demand  repayment  at a rate of
120% of the  outstanding  principal and interest amount of the Note if it occurs
on or before October 5, 2006 and at a rate of 115% of the outstanding  principal
and interest  amount of the Note if it occurs after October 5, 2006. If the Note
remains  outstanding  after an event of default that is not cured,  the interest
rate increases to 1.5% per month. Events of default include:

     o    a failure to make payments under the Note when due;

     o    a material breach of the transaction documents by us;

     o    bankruptcy related events;

     o    a change of control transaction without prior approval; and

     o    events of default under other agreements to which we are a party.

On a  month-by-month  basis,  if we register the shares of common stock issuable
upon  conversion of the Note and upon exercise of the Warrant on a  registration
statement  declared  effective by the  Securities and Exchange  Commission,  the
interest  rate on the Note is subject to  reduction by 1% for every 25% increase
in the market price of our common stock above the conversion  price of the Note,
but in no event shall the interest rate be less than zero percent.

Laurus  also has the option to convert  all or a portion of the Note into shares
of our common stock at any time,  subject to limitations  described  below, at a
conversion  price of $0.48 per share,  subject to adjustment as described below.
The Note is currently  convertible  into  9,375,000  shares of our common stock,
excluding  the  conversion  of any accrued  interest.  The  conversion  price is
adjustable  on  a  weighted  average  basis  upon  certain  future  issuance  of
securities by us at a price less than the conversion price then in effect. There
are a number of limitations on Laurus'  ability to convert the Note and exercise
the Warrant. These limitations include:

     o    Laurus may not convert  the Note or exercise  the Warrant for a number
          of shares  that would  cause all shares  then held by Laurus to exceed
          4.99% of our outstanding  shares of common stock unless there has been
          an event of default or Laurus provides us with 75 days prior notice.

     o    Laurus has also  agreed  that it will not convert the Note or exercise
          the  Warrant  for more than  6,491,440  shares  of  common  stock at a
          weighted  average exercise price of below $0.47 unless the issuance of
          the shares has been approved by our stockholders.

                                       18
<PAGE>
     o    Finally, Laurus agreed that it would not convert the Note and exercise
          the Warrant for more than  8,202,012  shares of common stock until our
          stockholders  approved an increase in our authorized  number of shares
          of common stock.

We  covenanted  that we would  promptly call a  stockholders  meeting to solicit
approval of an increase in the number of shares of our common  stock  authorized
for  issuance  and  approval of the  issuance of more than  6,491,440  shares of
common  stock at a price of less than $0.47 per share.  The Note is secured by a
blanket first priority lien on substantially all of our assets and the assets of
some of our U.S. subsidiaries,  and by a pledge of the stock of some of our U.S.
subsidiaries.

We were obligated to file a  registration  statement on Form S-3 (or if Form S-3
is not available  another  appropriate form) registering the resale of shares of
our common  stock  issuable  upon  conversion  of the Note and  exercise  of the
Warrant by November 4, 2004 and to have such Statement declared effective by the
Securities and Exchange  Commission,  or SEC, by no later than January 13, 2005.
We timely filed a registration  statement on Form S-3 on October 26, 2004, which
has not yet  been  declared  effective.  If the  registration  statement  is not
declared effective within the timeframe described, if the registration statement
is suspended other than as permitted in the Registration Rights Agreement, or if
our common  stock is not  listed  for three  consecutive  trading  days,  we are
obligated  to pay Laurus  additional  cash  fees.  The cash fees are 1.5% of the
original principal amount of the Note for each 30 day period in which we fail to
take these actions.

In May 2004 we renewed our loan and security  agreement with Silicon Valley Bank
through June 2005,  that provides us with a line of credit,  or the Line, in the
amount of the lesser of $2,000 or the borrowing  base, as defined  (limited to a
percentage of eligible  accounts  receivable).  On September 30, 2004,  $493 was
available,  with $130  outstanding,  which was repaid on  October  1,  2004.  At
September  30,  2004 there were no letters of credit or other  amounts  for bank
services  outstanding  under the Line.  On October 5, 2004, in order to complete
the financing with Laurus,  we cancelled the Line and paid Silicon Valley Bank a
termination fee of $20.

                                       19
<PAGE>
ITEM 2: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

This  Quarterly  Report  on Form  10-Q,  including  the  following  Management's
Discussion  And  Analysis Of  Financial  Condition  And  Results Of  Operations,
contains  forward-looking  statements  within the  meaning of Section 27A of the
Securities Act of 1933, as amended,  Section 21E of the Securities  Exchange Act
of 1934, as amended,  and the Private Securities  Litigation Reform Act of 1995,
that involve a number of risks and  uncertainties.  Such statements are based on
current  expectations  of  future  events  that  involve  a number  of risks and
uncertainties  that may  cause  the  actual  events  to  differ  materially  and
adversely  from  those  discussed  herein.  In  addition,  such  forward-looking
statements are necessarily dependent upon assumptions,  estimates and dates that
may be  incorrect  or imprecise  and involve  known and unknown  risks and other
factors.  Accordingly,  any  forward-looking  statements  included herein do not
purport  to be  predictions  of future  events or  circumstances  and may not be
realized.  Forward-looking  statements can be identified by, among other things,
the use of  forward-looking  terminology such as "believes,"  "expects,"  "may,"
"will," "should," "seeks," "pro forma," "anticipates,"  "plans," "estimates," or
"intends,"  or the  negative  of any  thereof,  or other  variations  thereon or
comparable terminology, or by discussions of strategy or intentions. Given these
uncertainties,  prospective  investors are cautioned not to place undue reliance
on  such  forward-looking   statements.   Readers  are  referred  to  risks  and
uncertainties  identified  in this  "Management's  Discussion  And  Analysis  Of
Financial  Condition  And  Results Of  Operations,"  under  "Risk  Factors"  and
elsewhere herein. All  forward-looking  statements,  and reasons why results may
differ, that are included in this report are made as of the date of this report,
and except as required by law, we disclaim  any  obligations  to update any such
factors or to  publicly  announce  the  results of any  revisions  to any of the
forward-looking  statements contained herein or reasons why results might differ
to reflect future events or  developments.  References  herein to "Axeda," "we,"
"our,"  and  "us"   collectively   refer  to  Axeda  Systems  Inc.,  a  Delaware
corporation,  and  all of its  direct  and  indirect  U.S.,  Israeli,  Japanese,
European and Canadian subsidiaries.


OVERVIEW

Axeda is a software  and  services  company  providing  an emerging  category of
business software known as Device Relationship Management,  or DRM. Our flagship
product,  the Axeda DRM system,  is a distributed  software solution designed to
enable businesses to remotely monitor,  manage and service intelligent  devices.
The Axeda DRM system  enables  manufacturers  and service  providers  to use the
Internet to establish and manage continuous connections with devices deployed at
their customers' facilities,  allowing them to stay in touch with their products
throughout their lifecycle,  tapping the value of remote device information with
new, automated e-service, operations monitoring, and e-commerce offerings.

In  recent  years we have  undertaken  several  major  steps to  reposition  our
business and capitalize on the emerging growth opportunities  represented by the
DRM market. This market is also known as M2M, or  machine-to-machine,  autonomic
computing,  remote  monitoring and  management and several other  descriptors in
different  vertical  markets.  On  December  7,  2001,  we  acquired  all of the
outstanding  shares of eMation,  Ltd. The acquisition  gave us an entry into the
DRM market.  During 2002 our revenues were  increasingly  generated from selling
DRM  products,  and since  2002,  substantially  all of our  revenues  have been
generated from selling DRM products.

Through  September  30,  2004 we have  recorded  approximately  $1.3  million in
restructuring  charges to reduce staffing levels,  terminate  certain leases and
consolidate our operations.  Combined with our expected continued year over year
growth in DRM systems revenues, we believe that our future operating losses will
continue  to be  lower  than  what we  have  historically  experienced.  We will
continue to evaluate our cost structure and may undertake additional measures to
reduce expenses in the future.

On October 5, 2004,  we entered into  definitive  agreements  with Laurus Master
Fund,  Ltd.,  or  Laurus,  pursuant  to  which we  issued  to  Laurus a  secured
convertible  term note,  or the Note,  in the  principal  amount of $4.5 million
convertible  into shares of our common stock at a conversion  price of $0.48 per
share. Pursuant to these agreements,  we also issued to Laurus a warrant, or the
Warrant,  to purchase up to 2,500,000  shares of our common stock at an exercise
price of $0.53 per share with a term of five years. Under the terms of the Note,
the  monthly  interest  payment and the  monthly  principal  payment are payable
either in cash at 102% of the  respective  monthly  amortization  amounts or, if
certain  criteria are met, in shares of our common  stock.  The minimum  monthly
principal  repayment of $150,000 commences on May 1, 2005, and continues through
the October 5, 2007 maturity date.
                                       20
<PAGE>
On September 23, 2003, we issued 4,918,100 shares of our common stock to certain
accredited  investors  in a  private  investment  in  public  equity,  or  PIPE,
financing.  The shares were sold at a price of $1.22 per share with net proceeds
of $5.6 million.  We also issued to the investors  warrants  exercisable for the
purchase of up to an  aggregate  of  2,459,050  shares of our common stock at an
initial exercise price of $1.71 per share. The exercise price will be reduced to
$1.35 per share subject to our stockholder  approval at our annual  stockholders
meeting.  Operating  results and our liquidity  position are discussed  further,
below.

We currently operate in two principal regions:  the United States and Europe. As
a result of the difficult capital spending climate,  our DRM revenues  decreased
by $0.4  million  through  September  2004  compared to the same period in 2003,
primarily  due to  decreases  in our  licensing  revenues.  Although our license
revenues  alone  declined  by $1.4  million,  due  in-part to  downward  pricing
pressure, our service revenues increased $1.0 million due to a greater number of
new service  customer  accounts and additional  spending by our existing base of
customers.  While recurring sales from existing customers and the timing of more
widespread  adoption of our product remains difficult to predict, we believe our
DRM revenues will increase in 2004,  from the prior year,  due to further orders
from our current  customer  base,  our sales  pipeline and  improvements  in the
marketplace.

For the nine months ended  September  30,  2004,  our  revenues  were  adversely
affected by delays in the purchasing decision of certain prospects and customers
near the end of the quarter and  competition in the DRM space.  This slowdown in
corporate spending has been observed  industry-wide among customer  relationship
management ("CRM") and enterprise  resource planning ("ERP") companies,  and has
been  attributed to concerns about job growth in the future,  uncertainty in the
current  geopolitical  climate,  and  uncertainty  about the outcome of the U.S.
presidential  election. We also formally launched our hosted DRM offering during
the second  quarter of 2004,  and this  resulted in our  deferral  of  licensing
revenue for certain customers into future periods.

For the nine months ended September 30, 2004, our operating  expenses  decreased
by $4.2  million,  or 23%,  compared to the same  period for the prior year.  We
believe the cost  reductions  combined  with an  increase  in  revenues  and our
October 2004 private  placement  will be sufficient to allow us to meet our cash
needs through December 31, 2005.

At September  30, 2004,  our cash  balance was $1.4 million  compared  with $9.6
million at year-end  2003.  Operating  results and our  liquidity  position  are
discussed further below.
                                       21
<PAGE>
Results of Operations

Three and Nine Months Ended September 30, 2004 Compared to Three and Nine Months
Ended September 30, 2003.

The  following  table sets  forth,  for the  periods  indicated,  the amount and
percentage  of total  revenues  represented  by certain  items  reflected in our
consolidated statements of operations:

                               Axeda Systems Inc.
              Unaudited Consolidated Statements of Operations Data
                                 (In thousands)
<TABLE>
<CAPTION>

                                           Three Months Ended September 30,                     Nine Months Ended September 30,
                                    ---------------------------------------------       -------------------------------------------
                                                 2004               2003                       2004                   2003
                                                 ----               ----                       ----                   ----
                                               Percent of               Percent of                Percent of              Percent of
                                     Amount     Revenues      Amount      Revenues       Amount     Revenues      Amount    Revenues
                                     ------     --------      ------      --------       ------     --------      ------    --------
Revenues:
<S>                                   <C>            <C>       <C>          <C>          <C>          <C>        <C>           <C>
   License                            $1,700         62.1%    $ 2,575      71.5%        $5,611       61.2%      $ 7,050       72.0%
   Services and maintenance            1,021         37.3         924       25.6         3,454        37.7        2,457        25.1
   Hardware                               17          0.6         104        2.9           103         1.1          287         2.9
                                          --          ---         ---        ---           ---         ---          ---         ---
     Total revenues                    2,738        100.0       3,603      100.0         9,168       100.0        9,794       100.0
                                       -----        -----       -----      -----         -----       -----        -----       -----

Cost of revenues:
   License                               104          3.8         151        4.2           534         5.8          976        10.0
   Services and maintenance              730        26.66         757       21.0         2,703        29.5        2,794        28.5
   Hardware                                -            -           -          -             -           -            1           -
   Software amortization                 112          4.1         159        4.4           336         3.7          475         4.8
                                         ---          ---         ---        ---           ---         ---          ---         ---
     Total cost of revenues              946         34.5       1,067       29.6         3,573        39.0        4,246        43.3
                                         ---         ----       -----       ----         -----        ----        -----        ----

   Gross profit                        1,792         65.5       2,536       70.4         5,595        61.0        5,548        56.7
                                       -----         ----       -----       ----         -----        ----        -----        ----

Research and development(R&D)
    Non-cash compensation                  -            -          28        0.8             2           -           84         0.9
    Other R&D expense                    944         34.5         969       26.9         3,066        33.4        4,090        41.8
Sales and marketing (S&M)
    Non-cash compensation                  -            -          10        0.3            43         0.5           27         0.3
    Other S&M expense                  1,760         64.3       1,777       49.3         5,732        62.5        6,558        66.9
General and administrative (G&A)
    Non-cash compensation                  9          0.3         108        3.0            68         0.7          381         3.9
    Other G&A expense                  1,329         48.5       1,747       48.5         4,314        47.1        6,264        64.0
    Depreciation and amortization        322         11.8         278        7.7           840         9.2          848         8.6
                                         ---         ----         ---        ---           ---         ---          ---         ---
   Total operating expenses            4,364        159.4       4,917      136.5        14,065       153.4       18,252       186.4
                                       -----        -----       -----      -----        ------       -----       ------       -----

   Operating loss                    (2,572)       (93.9)     (2,381)     (66.1)       (8,470)      (92.4)     (12,704)     (129.7)

Gain on disposal of assets                 -            -           -          -           110         1.2          743         7.6
Interest income (expense), net and
 other income (expense), net           1,236         45.1         615       17.1         1,991        21.7          650         6.9
                                       -----         ----         ---       ----         -----        ----          ---         ---
   Loss before income tax            (1,336)       (48.8)     (1,766)     (49.0)       (6,369)      (69.5)     (11,311)     (115.2)
Provision for income taxes                16          0.6          45        1.2            46         0.5          140         1.4
                                          --          ---          --        ---            --         ---          ---         ---
   Net loss                         $(1,352)     (49.4) %   $ (1,811)    (50.2)%      $(6,415)    (70.0) %   $ (11,451)   (116.6) %
                                    ========     ========   =========    =======      ========    ========   ==========   =========
</TABLE>

                                       22
<PAGE>
                               AXEDA SYSTEMS INC.

Results of Operations

REVENUES. Overall, revenues decreased by $0.9 million or 24% and $0.6 million or
6%, to $2.7  million and $9.2  million,  during the three and nine months  ended
September 30, 2004, respectively, compared to the same periods in 2003. Sales of
our DRM  solutions  decreased  $0.8 million or 22% and $0.4 million or 5%, while
hardware sales decreased $0.1 million and $0.2 million during the three and nine
months ended September 30, 2004, respectively.

License  revenues  for the  three  and nine  months  ended  September  30,  2004
decreased by $0.9 million and $1.4  million  respectively,  compared to the same
periods in 2003.  The decrease in license  revenues  was due to reduced  license
sales from new accounts for the three and nine months ended  September  30, 2004
compared to the prior periods.  We believe the decrease in new orders was due in
part to new customers  questions  concerning  our financial  viability.  For the
fourth quarter of 2004, we expect DRM license  revenues to increase  compared to
2003 as we attract  additional  new orders  after  having  closed on our Private
Placement in October 2004.

Decreased sales of  fully-reserved,  outdated  components of our former Internet
appliance,  or IA, business  resulted in a decline in hardware  revenues of $0.2
million to $0.1 million for the nine months ended  September 30, 2004, from $0.3
million for the nine months ended  September 30, 2003. In the future,  we expect
hardware  revenues and related gross profit to be minimal due to the  decreasing
quantities available and the uncertainty of any future sales.

Services and maintenance  revenues  increased $0.1 million and $1.0 million,  or
10%  and  41%,  for  the  three  and  nine  months  ended  September  30,  2004,
respectively, compared to the same periods in 2003. The increases over the three
and nine month  periods,  in comparison to the same periods in 2003,  are due to
increased   demand  for   professional   services  from  existing  DRM  customer
installations,  as  well as  additional  maintenance  plans  sold  with  new DRM
systems. We anticipate  services and maintenance  revenues will vary, as work in
this area is subject to our customers' requirements and approval processes.

Historically, the majority of our revenues have been derived from a small number
of customers.  However,  since  entering the  enterprise  software  market,  our
revenues are becoming  less  concentrated.  For the three and nine month periods
ended September 30, 2004, our top three customers accounted for $0.8 million, or
30%, and $1.8 million or 20% of our total revenues,  respectively. For the three
and nine  month  periods  ended  September  30,  2003,  our top three  customers
accounted  for $1.2  million,  or 35%,  and $1.7  million,  or 18%, of our total
revenues,  respectively.  In the  future,  we  expect  our  revenues  to be less
concentrated  as sales of our software and services span a wider  customer base.
There has also been a shift in  industry-wide  buying  patterns  for  enterprise
software, from large up-front purchases to smaller, more frequent purchases over
time.  Finally,  the  introduction  of our hosted  offering is also  expected to
reduce revenue concentration in the future.

We sell our DRM system  solutions  primarily to companies in the  industrial and
building  automation,  high technology  devices,  medical  instrumentation,  and
office automation industries. In the quarter ended September 30, 2004, customers
based in North America  accounted for 38% of our  revenues.  We anticipate  that
revenues from international  operations will continue to represent a significant
portion of our revenues.

COST OF REVENUES.  Cost of revenues  decreased by $0.1 million and $0.7 million,
or 11% and 16%, respectively, to $0.9 million and $3.6 million for the three and
nine months ended September 30, 2004, respectively, compared to the same periods
in 2003.

Cost of revenues for license fees for the nine months ended  September  30, 2004
decreased by approximately $0.4 million compared to the same period in 2003. The
$0.4 million  decrease for the nine months  ended  September  30, 2004 is due to
decreased license fees associated with our discontinued personal computer ("PC")
products of $0.2 million, and a decrease in DRM costs of $0.2 million, resulting
from the closure of our Israeli  operations during the first quarter of 2003 and
decreased  product  and  packaging  costs,  as a  result  of  our  ongoing  cost
management  initiatives.  We expect our cost of license fees as a percentage  of
license revenues to decline,  as our license revenues are now comprised entirely
of our DRM products.

Cost of revenues for services and maintenance  decreased by $0.1 million for the
nine months ending  September 30, 2004 compared to the same period in 2003.  The
$0.1 million  decrease in cost of services and  maintenance  for the nine months
ended  September 30, 2004 is due to a $0.1 million  decrease in travel  expense.
Additionally,  the company  recorded  $0.1 million in  severance  expense in the
current and prior  year.  We expect our cost of services  and  maintenance  as a
percentage  of services  and  maintenance  revenues  to decline,  as a result of
savings from our restructuring activities, but may vary as our services revenues
change.
                                       23
<PAGE>
Software amortization of our developed and core technologies for the nine months
ending September 30, 2004 decreased $0.1 million, compared to the same period in
2003, due to the full amortization of certain identified  intangibles.  Non-cash
amortization of acquired technology will represent approximately $0.5 million of
our cost of revenues for the year ending December 31, 2004.

GROSS PROFIT.  Gross profit decreased $0.7 million,  or 29%, to $1.8 million for
the three months ended  September  30, 2004 compared to the same period in 2003.
Gross profit remained relatively  consistent for the nine months ended September
30, 2004  compared to the same period in 2003.  The  decrease in gross profit in
the third quarter is attributable to a decrease in license revenues.

For the  three  and nine  month  periods  ended  September  30,  2004 and  2003,
substantially  all of our revenues  were derived from  licenses and services and
maintenance.  As a percentage of total revenues,  gross profit margin  decreased
from 70% to 65% for the quarters  ended  September  30, 2003 and  September  30,
2004,  respectively  and  increased  from 57% to 61% for the nine  months  ended
September 30, 2003 and September 30, 2004,  respectively.  The decrease in gross
margin for the three months ended  September 30, 2004 was directly  attributable
to lower license  revenues  compared to the same period in 2003. The increase in
gross margin for the nine months ended September 30, 2004 was due to an increase
in services and maintenance revenues due to increased capacity utilization,  the
closure of our Israeli  operations  and reduced  software  amortization  expense
compared to the same period in 2003.


OTHER RESEARCH AND DEVELOPMENT  ("R&D")  EXPENSE.  Other R&D expense consists of
staff,  staff-related,  professional and other development related support costs
associated with the development of new products,  quality assurance and testing.
R&D expenses  decreased  $1.0 million or 25% to $3.1 million for the nine months
ended September 30, 2004 compared to the same period in 2003.

The decrease in other R&D expense for the nine months ended  September  30, 2004
was due to decreases in staff and staff related  expense of $0.5 million,  lower
expenses  associated  with the closure of our Israeli  operations  and severance
totaling  $0.3 million and $0.2  million of other  expense.  As a percentage  of
revenues, other R&D expenses decreased from 42% to 33% for the nine months ended
September  30,  2004,  compared to the same period in 2003.  We expect other R&D
expense to  decrease in 2004 as we optimize  our  development  teams to meet our
current  business  requirements.  Additionally,  we expect  other R&D expense to
decrease as a percentage of revenues if and as our future revenues increase.

OTHER  SALES AND  MARKETING  ("S&M")  EXPENSE.  Other S&M  expense  consists  of
salaries, travel expenses and costs associated with trade shows, advertising and
other sales and marketing efforts, as well as technical support costs. Other S&M
expense decreased  approximately  $0.8 million,  or 13%, to $5.7 million for the
nine months ended September 30, 2004, compared to the same period in 2003.

Reduced staff and staff related  expense,  bonus and travel expense  contributed
$0.5 million, $0.2 million and $0.1 million to the decrease in other S&M expense
for the nine  months  ended  September  30,  2004  compared  to the prior  year.
Severance  expense of $0.4 million for the nine months ended  September 30, 2004
was approximately the same as severance expense for the prior period in 2003. As
a percentage of revenues,  other S&M expense  decreased from 67% to 63%, for the
nine months ended  September  30, 2004,  compared to the same period in 2003. We
expect  other S&M expense to decrease in 2004 as we optimize  our S&M  marketing
teams to meet our current business requirements.  Additionally,  we expect other
S&M  expense  as a  percentage  of  revenues  to  decrease  if and as our future
revenues increase.


OTHER GENERAL AND ADMINISTRATIVE  ("G&A") EXPENSE. Other G&A expense consists of
staff, staff related, and support costs for our finance, human resources,  legal
and other management departments.  Other G&A expenses decreased $0.4 million and
$2.0 million, or 24% and 31%, to $1.3 million and $4.3 million for the three and
nine months ended September 30, 2004, respectively, compared to the same periods
in 2003. As a percentage  of total  revenues,  other general and  administrative
expenses remained relatively consistent at 49%, and decreased from 64% to 47% of
total  revenues  for the  three  and  nine  months  ended  September  30,  2004,
respectively.
                                       24
<PAGE>
The $0.4 million  decrease in other G&A expense for the quarter ended  September
30, 2004 relates to the favorable settlement of outstanding lease litigation for
$0.6  million,  reduced  bonus and salary  expense of $0.3  million  and reduced
professional  fees and  insurance  expense of $0.1  million  offset by increased
severance  expense of $0.6  million  versus  the prior  year.  The $2.0  million
decrease  in other G&A  expense for the nine  months  ended  September  30, 2004
relates to the favorable  settlement  of  outstanding  lease  litigation of $0.6
million,  a $0.2 million  decrease related to our Mansfield lease obligation and
the  reversal of estimated  patent and  intellectual  property  accruals of $0.4
million no longer  considered  necessary.  In  addition,  we  reduced  staff and
related compensation expense by $0.4 million,  insurance expense by $0.3 million
and  professional  fees by $0.2 million as part of our ongoing  cost  management
initiatives.  These decreases were partially  offset by an increase in severance
expense of $0.2 million for the nine months ended  September 30, 2004. We expect
other  G&A  expense  to  decrease  in  2004  as  we  optimize  our  general  and
administrative teams to meet our current business requirements. Additionally, we
expect other G&A expense to decrease as a  percentage  of revenues if and as our
future revenues increase.


NON-CASH COMPENSATION G&A EXPENSE. Non-cash G&A expense consists of amortization
of compensation  related to stock options.  Non-cash G&A expense  decreased $0.1
million and $0.3  million for the quarter and nine months  ended  September  30,
2004, respectively,  from $0.1 million and $0.4 million for the quarter and nine
months ended September 30, 2003,  respectively.  The decrease is attributable to
certain deferred  compensation  being fully amortized as a result of the related
stock option awards becoming fully vested in the prior years.

DEPRECIATION AND AMORTIZATION. We recorded depreciation and amortization of $0.3
million for the three months ended  September  30, 2004 and  September 30, 2003,
respectively,  and  depreciation  and  amortization of $0.8 million for the nine
months ended September 30, 2004 and September 30, 2003, respectively.

GAIN ON DISPOSAL OF ASSETS.  There were no gains or losses on disposal of assets
in the quarters  ending  September 30, 2004 or September 30, 2003.  For the nine
months ended  September  30, 2004, we recorded a gain of  $0.1million.  from the
reversal of a $0.1 million  accrual  recorded in connection with the sale of the
assets of our former  consumer  electronics  business  in March 2001 that was no
longer considered  necessary.  This compares with a gain of $0.7 million for the
nine months ended  September  30, 2003,  resulting  from a favorable  settlement
agreement in March 2003 for the escrow relating to the sale of the assets of our
former IA business in March 2001. In connection with this settlement  agreement,
we reversed  accruals of  approximately  $0.7 million  recorded in March 2001 as
part of the sale.

OTHER INCOME  (EXPENSE),  NET. We entered into a registration  rights  agreement
with the  investors in our  September  2003 private  investment in public entity
("PIPE")  financing  pursuant to which we were  obligated to file a registration
statement with the SEC for the resale of the shares sold in the  transaction and
the  shares  issuable  upon  exercise  of the  warrants.  The SEC  declared  the
registration  statement  effective on October 23, 2003.  In the event that sales
cannot be made because we have not updated the registration statement to keep it
effective,  we will be required to pay liquidated  damages to each PIPE investor
equal to 1.5% of the purchase  price paid by such  investor for each  thirty-day
period or pro rata for any portion thereof after the deadline that passes before
the registration  statement is updated and declared  effective by the SEC. While
we view the  liquidated  damages  contingency  related to the  financing-related
liability  as  neither  probable  nor  reasonably  estimable,  we  recorded  the
estimated   fair  value  of  the  warrant  as  of   September   23,  2003  as  a
financing-related liability in the consolidated balance sheet in accordance with
EITF Issue No.  00-19.  The fair  value of the  financing-related  liability  is
adjusted at each  balance  sheet date,  with the  non-cash  change in fair value
reported in the consolidated statement of operations as other income or expense.
The related  mark-to-market  non-cash  gain for the three and nine month periods
ended September 30, 2004 was $1.2 million and $2.0 million, respectively. Due to
the uncertainty  surrounding  the variables  required by the valuation model for
the  financing-related  liability and corresponding gain or loss adjustment,  we
cannot  estimate  the  future  income or  expense  resulting  from the  periodic
valuations of the liability.

FOREIGN  CURRENCY EFFECTS ON RESULTS OF OPERATIONS.  Foreign currency  movements
for the three and nine months ended  September 30, 2004  increased  revenues and
expenses by $0.5 million and $0.5  million,  respectively,  from the prior year.
Increases in revenues and expenses from foreign currency fluctuations are due to
the  weakness  versus the prior year of the U.S.  dollar  against the Euro,  the
British  pound and the  Japanese  yen.  Although  we cannot  predict  the future
changes in foreign currency rates, any  strengthening of the U.S. dollar against
the foreign  currencies will have an unfavorable impact on our revenues in 2004,
and an equal but opposite  favorable  impact on our expenses in 2004.  We expect
that changes in foreign  currencies  will not have a material  effect on our net
loss for 2004.

                                       25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

Since March 2001, our operations have largely been financed through the sales of
the assets of our Consumer Electronics and Internet Appliance businesses and the
September 2003 PIPE financing.  As of September 30, 2004, we had $1.4 million in
cash and cash equivalents.

Net cash used in operating  activities  for the nine months ended  September 30,
2004 was $7.8  million,  compared to $13.5  million  for the nine  months  ended
September 30, 2003. Cash used in operating  activities for the first nine months
of 2004 was primarily the result of our net loss of $6.4 million and  unrealized
gains of $2.1  million  offset by non-cash  expenses  of $0.6  million and other
changes in working capital of approximately  $0.1 million.  The reduction in net
cash used in operations is primarily the result of the lower net loss.

Beginning in the second quarter of 2002, we initiated a series of steps designed
to consolidate  and streamline our operations and decrease our operating  losses
and  corresponding  use of cash.  We have  halved the number of global  offices,
reduced  staffing  levels by 46% by  eliminating  or not replacing 96 employees,
engaged partners to provide us with variable staffing  capabilities to meet peak
demand periods and have closely monitored our  infrastructure  costs. In 2002 we
exited the PC  business  and  focused our efforts on several key markets for DRM
Systems products. In 2002 and 2003, we recorded $1.9 million and $1.4 million in
restructuring  charges,  respectively,  to  reduce  staffing  levels,  terminate
certain leases and consolidate our operations.  We continue to evaluate our cost
structure  and in the  third  quarter  of  2004  we  recorded  $1.1  million  in
restructuring  charges to reduce  staffing  levels and further  consolidate  our
operations.

Net cash used in investing  activities  for the nine months ended  September 30,
2004 and 2003 was $0.1  million,  and  consisted of  purchases of furniture  and
equipment  in  both  periods.  We  have  no  material  commitments  for  capital
expenditures,  and we anticipate minimal spending on capital expenditures as our
needs in operations, infrastructure and personnel arise.

Net cash used in financing activities was $0.3 million for the nine months ended
September 30, 2004 and consisted of principal  payments  reducing  indebtedness.
Net cash provided by financing  activities  was $5.8 million for the nine months
ended September 30, 2003, and primarily  consisted of proceeds from the issuance
of common stock of $5.6 million and borrowings under a bank line of credit.

In June 2004, we amended a Software License Agreement, or the Agreement,  with a
vendor who  provides  server and client  software  that is bundled  with our DRM
enterprise server products. License fees are due and payable at the rate of 2.5%
of each billable  sale,  as defined.  Under the  Agreement,  we agreed to pay an
additional minimum, non-refundable prepaid license fee of $0.2 million, which is
payable in  installments.  We paid $0.1 million in July 2004 and are required to
pay the remaining $0.1 million on December 20, 2004.

As of September  30,  2004,  we have $0.5  million of accrued  costs  related to
leases for facilities that we no longer occupy.  In accordance with a settlement
and release  agreement  relating to $0.4  million of these  costs,  $0.2 million
waspaid in October 2004, and $0.2 million is due in October 2005.

We maintain an irrevocable,  cash-secured, standby letter of credit (the "letter
of  credit")  from a bank  for  $0.15  million  as  security  for our  corporate
headquarters lease. The letter of credit expires in August 2005 and provides for
automatic one-year renewals, but not beyond August 2007. The letter of credit is
secured by a certificate  of deposit for $0.15  million from the same bank,  and
also expires in August 2005.  This amount is restricted  for  withdrawal  and is
included in other assets (non-current) in our consolidated balance sheets.


On October 5, 2004, we issued a secured  convertible  term note, or the Note, in
the principal amount of $4.5 million to Laurus Master Fund, Ltd., or Laurus. The
Note is  convertible  into shares of our common  stock at an initial  conversion
price of $0.48 per share. Pursuant to the agreements, we also issued to Laurus a
warrant,  or the Warrant, to purchase up to 2,500,000 shares of our common stock
at an exercise price of $0.53 per share with a term of five years.
                                       26
<PAGE>
The Note has a term of three years and  accrues  interest at the prime rate plus
2% per year (6.75% as of October 5, 2004).  Interest on the principal  amount is
payable  monthly,  in  arrears,  beginning  on November 1, 2004 and on the first
business day of each  consecutive  calendar month  thereafter until the maturity
date.  Under the terms of the Note, the monthly interest payment and the monthly
principal  payment are payable either in cash at 102% of the respective  monthly
amortization  amounts or, if certain  criteria  are met, in shares of our common
stock. The minimum monthly principal repayment of $0.15 million commences on May
1, 2005,  and continues  through the October 5, 2007 maturity  date.  Please see
note 12 to the consolidated financial statements for an additional discussion of
the terms of financing with Laurus.

In May 2004 we renewed our loan and security  agreement with Silicon Valley Bank
through June 2005,  that provided us with a line of credit,  or the Line, in the
amount of the lesser of $2,000 or the borrowing  base, as defined  (limited to a
percentage of eligible accounts receivable). On September 30, 2004, $0.5 million
was  available,  with $0.1 million  outstanding,  which was repaid on October 1,
2004. At September 30, 2004 there were no letters of credit or other amounts for
bank  services  outstanding  under the Line.  On October  5,  2004,  in order to
complete  the  financing  with Laurus,  we  cancelled  the Line and paid Silicon
Valley Bank a termination fee of $20,000.


Based upon our current cash  resources  and revised  financial  projections,  we
currently  anticipate  that our available  funds and cash flows from  operations
should be  sufficient  to meet our cash needs  through 2005 based on  forecasted
year over year growth in revenues.  However, due to risks and uncertainties,  we
cannot assure  investors that our future operating cash flows will be sufficient
to meet our  requirements.  In such event,  our operations and liquidity will be
materially adversely affected. We cannot assure you that if additional financing
is needed,  the additional  financing will be available to us on favorable terms
when  required,  or at all. See also "Factors  That May Affect Future  Results,"
below.

                                       27
<PAGE>
Employee and Director Stock Options


Option Program Description

         Our stock option program is a broad-based,  long-term retention program
that is intended  to attract,  retain and  provide  performance  incentives  for
talented  employees,  officers  and  directors,  and to  align  stockholder  and
employee  interests.  Currently,  we grant options from the 1999 Stock Incentive
Plan, as amended,  or the 1999 Plan. The 1999 Plan has three  separate  programs
which include: the discretionary option grant program, under which employees may
be granted  options  to  purchase  shares of common  stock;  the stock  issuance
program,  under which eligible  employees may be granted shares of common stock;
and the automatic grant program, whereby eligible non-employee board members are
granted  options to purchase shares of common stock. To date, we have not issued
any shares  under the stock  issuance  program.  In  addition,  our stock option
program  included the 1995 Stock Option Plan, or the 1995 Plan, from which we no
longer  grant  options.  During  the  quarter  ended June 30,  2004,  all of the
remaining  outstanding  options under the 1995 Plan expired and were canceled in
accordance  with the design and procedures of the 1995 Plan. In connection  with
the eMation  acquisition,  we assumed options issued under eMation,  Ltd.'s 2001
Stock  Option Plan that became  exercisable  for up to  1,428,710  shares of our
common  stock,  530,000  of which  are  exercisable  for $0.01 per share and the
remaining  898,710  exercisable at $2.14 per share. No options have been or will
be granted  under the eMation,  Ltd.  2001 Stock Option Plan  subsequent  to our
acquisition of eMation, Ltd. The plans listed above are collectively referred to
in the  following  discussion  as the "Plans." We consider  our option  programs
critical to our operation  and  productivity;  essentially  all of our employees
participate.  Option vesting  periods are generally one to four years and expire
ten years from the grant date for the 1999 Plan.

         All stock option  grants to executive  officers are made after a review
by and  with  the  approval  of the  Compensation  Committee  of  the  Board  of
Directors.  All members of the Compensation Committee are independent directors,
as defined in the current and proposed rules applicable to issuers traded on the
NASDAQ  Stock  Market.  See the  "Compensation  Committee  Report  in  Executive
Compensation"  appearing  in our 2003 Proxy  Statement  for further  information
concerning  our policies and  procedures,  including  those of the  Compensation
Committee, regarding the use of stock options.

Distribution and Dilutive Effect of Options

         The table below provides  information  about stock options  granted for
the nine months ended September 30, 2004 and the year ended December 31, 2003 to
our  Chief  Executive  Officer,  Robert M.  Russell  Jr.,  and our  three  other
executive officers,  Dale E. Calder, Thomas J. Fogarty and John C. Roberts. This
group is referred to as the "Named Executive  Officers." Mr. Roberts was a Named
Executive Officer during 2003, but his employment terminated effective March 31,
2004. He has since served as a consultant  to the company  under an  independent
contractor  agreement  with us,  under  which his  options  continue to vest and
remain  exercisable  during the term of such  agreement,  pursuant to the normal
operation of our 1999 Stock Incentive Plan.

<TABLE>
<CAPTION>

                                                                     Nine Months Ended         Year Ended
                                                                     September 30, 2004      December 31, 2003
                                                                     ------------------     -----------------
<S>                                                                           <C>                     <C>
Net grants during the period as % of outstanding shares                       2.59%                   4.11%

Grants to Named Executive Officers during the period as % of
 total options granted                                                       14.23%                  11.66%

Grants to Named Executive Officers during the period as % of
 outstanding shares granted                                                   0.37%                   0.48%
Cumulative options held by Named Executive Officers as % of total
 options outstanding                                                         37.81%                  34.98%

</TABLE>


                                       28
<PAGE>
General Option Information

         The following  table sets forth the summary of activity under the Plans
for the nine months  ended  September  30, 2004 and the year ended  December 31,
2003:
<TABLE>
<CAPTION>


                                                                  Number of Options Outstanding
                                                                  -----------------------------
                                           Number of Shares     Number of Shares    Weighted Average
                                            Available for     Issuable on Exercise   Exercise Price
                                               Options             of Options          (per share)
                                               -------             ----------          -----------
<S>                                       <C>                     <C>                   <C>
December 31, 2002                            263,424              5,078,819            $1.95
                                             =======              =========

Grants                                    (1,329,000)             1,329,000             1.47
Exercises                                          -               (85,645)             0.17
Cancellations*                               486,902              (601,533)             2.88
Additional shares reserved                 1,100,000                    N/A              N/A
                                           ---------                    ---
December 31, 2003                            521,326              5,720,641            $1.76
                                             =======              =========
Grants                                     (843,000)                843,000             1.18
Exercises                                          -              (118,419)             0.28
Cancellations*                               792,787              (836,122)             3.66
Additional shares reserved                   969,282                    N/A              N/A
                                             -------                    ---
September 30, 2004                         1,440,395              5,609,100            $1.42
                                           =========              =========
</TABLE>


* The "Number of Shares  Available for Options"  does not include  options under
assumed  plans  exercisable  for  114,631  shares  and 43,335  shares  that were
cancelled  during  2003 and the first nine months of 2004,  respectively,  as no
options will be granted in the future pursuant to these assumed plans.

The following  table sets forth a  comparison,  as of September 30, 2004, of the
number of shares subject to our options whose  exercise  prices were at or below
the closing  price of our common  stock on  September  30, 2004  ("In-the-money"
options) to the number of shares subject to options whose  exercise  prices were
greater   than  the   closing   price  of  our   common   stock  on  such   date
("Out-of-the-money" options):
<TABLE>
<CAPTION>
                                            Exercisable                        Unexercisable                    Total
                                  ------------------------------     ---------------------------   ------------------------------

                                   Number of    Weighted Average     Number of  Weighted Average    Number of     Weighted Average
                                     Shares      Exercise Price       Shares    Exercise Price        Shares       Exercise Price
                                  ----------   ---------------      ----------  ----------------   -----------     --------------
<S>                               <C>             <C>                  <C>        <C>                <C>                <C>
In-the-money                      1,392,461       $ 0.10               338,277    $ 0.42             1,730,738          $ 0.16
Out-of-the-money (1)              2,209,476       $ 2.35             1,668,886    $ 1.50             3,878,362          $ 1.99
                                  ---------                          ---------                       ---------
Total options
 outstanding                      3,601,937       $ 1.48             2,007,163    $ 1.32             5,609,100          $ 1.42
                                  =========                                                          =========
</TABLE>


(1)  Out-of-the-money  options are those options with an exercise price equal to
or above the closing price of $0.45 as of September 30, 2004, as reported by the
Nasdaq National Market.
                                       29
<PAGE>
Executive Options

     The following table sets forth information  regarding stock options granted
     in 2004 to our Named Executive  Officers under our 1999 Plan.  Options were
     granted  with an exercise  price  equal to the closing  price of our common
     stock on the date of grant. Potential realizable values are net of exercise
     price, but before taxes associated with exercise.  These amounts  represent
     hypothetical  gains that could be achieved  for the options if exercised at
     the end of the option  term of ten years.  The  assumed 5% and 10% rates of
     stock price appreciation are provided for purposes of illustration only and
     do not  represent  our  estimate or  projection  of the future price of our
     common stock.
<TABLE>
<CAPTION>

                                                   Individual Grants
                         ---------------------------------------------------------------------
                              Number of                                                          Potential Realizable Value
                              Securities     Percentage of Total   Exercise                      at Assumed Annual Rates of
                          Underlying Option  Options Granted to   Price (Per      Expiration     Stock Price Appreciation for
Name                          Per Grant          Employees *        Share)           Date                Option Terms
----                          ---------          -----------        ------           ----         ---------------------------
                                                                                                     5%            10%
                                                                                                  --------      ---------
<S>                         <C>               <C>                   <C>            <C>           <C>             <C>
Robert M. Russell Jr.               -                  -             N/A              N/A              N/A          N/A
Dale E. Calder                      -                  -             N/A              N/A              N/A          N/A
Thomas J. Fogarty                 120,000             14.23%        $ 1.17        3/23/2014         $99,732     $260,178
</TABLE>

*Based on a total of 843,000  shares  subject to  options  granted to  employees
under our option plans during 2004.

Stock Option Exercises and Option Holdings

The  following  table  shows  stock  options  exercised  by the Named  Executive
Officers for the nine months ended  September  30, 2004,  if any,  including the
total value of gains on the date of  exercise  based on actual sale prices or on
the  closing  price that day if the shares  were not sold that day, in each case
less the exercise price of the stock options. In addition,  the number of shares
covered by both exercisable and  non-exercisable  stock options, as of September
30, 2004, is shown. Also reported are the values for "In-the-Money" options. The
dollar amounts shown in the "In-the-Money"  column represent the positive spread
between the exercise  price of any such  existing  stock options and the closing
price as of September 30, 2004 of our common stock.

<TABLE>
<CAPTION>
                            Number of
                             Shares
Named Executive            Acquired on      Value        Number of Securities Underlying               Values of Unexercised
 Officer                    Exercise      Realized            Unexercised Options                       In-the-Money Options*
-------------------         --------      --------       -----------------------------------        -------------------------------
                                                             Exercisable       Unexercisable        Exercisable        Unexercisable
                                                             -----------       -------------        -----------        -------------

<S>                        <C>               <C>                <C>                <C>                 <C>                <C>
 Robert M. Russell              -            $ -                712,245            168,755             $146,598              $ -
 Dale E. Calder                 -             -                 535,937             39,063              132,719                -
 Thomas J. Fogarty              -             -                 375,311            174,689               99,719                -
</TABLE>

* Option values based on stock price of $0.45 on September 30, 2004.


                                       30
<PAGE>
                      EQUITY COMPENSATION PLAN INFORMATION

The following table gives  information about our common stock that may be issued
upon the exercise of options under all of our Plans as of September 30, 2004:
<TABLE>
<CAPTION>

                                                (1)                    (2)                       (3)
                                                                                         Number of Securities
                                       Number of Securities     Weighted-Average       Remaining Available for
                                         to be Issued upon      Exercise Price of    Future Issuance Under Equity
                                            Exercise of       Outstanding Options,   ompensation Plans (Excluding
                                       Outstanding Options,   Warrants, and Rights  C  Securities Reflected in
Plan Category                          Warrants, and Rights        (per share)               Column (1) )
-------------                                    ----------             ------               ------------
<S>                                                 <C>                       <C>                        <C>
Equity Compensation Plan Approved by
Shareholders (A) (B)                                5,609,100                 $ 1.42                     1,440,395
                                                    ---------                 ======                     =========
</TABLE>

(A)  On December 7, 2001, we acquired all of the outstanding  shares of eMation,
     Ltd., a private  company  organized  under the laws of the State of Israel,
     pursuant to a share purchase  agreement  amended and restated as of October
     5, 2001. In connection  with such  acquisition,  we assumed  options issued
     under eMation, Ltd.'s 2001 Stock Option Plan that became exercisable for up
     to 1,428,710  shares of our common stock,  530,000 of which are exercisable
     for $0.01 per share and the remaining  898,710 are exercisable at $2.14 per
     share. No options have been or will be granted under the eMation, Ltd. 2001
     Stock Option Plan subsequent to our acquisition of eMation, Ltd.

(B)  The number of shares  reserved for issuance under our 1999 Stock  Incentive
     Plan is  automatically  increased  on  January  1 of each year by an amount
     equal to 3% of the  shares  of our  common  stock  outstanding  on the last
     trading day of the  immediately  preceding  calendar  year, but in no event
     shall such annual increase  exceed  1,000,000  shares.  On January 1, 2004,
     969,282 additional shares were reserved for issuance.


Recent Accounting Pronouncements

Information regarding recent accounting pronouncements is provided in note 1k to
the consolidated financial statements included at Part I, Item 1 herein.


                                       31
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS

RISK FACTORS

Our business and industry are subject to a number of risks. You should carefully
consider  the risks  described  below,  in  addition  to the  other  information
contained  in this Report and in our other  filings  with the SEC. 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 immaterial
may also affect our business  operations.  If any of these risks actually occur,
our business,  financial  condition or results of operations  could be seriously
harmed.  In that event,  the market price for our common stock could decline and
you may lose part or all of your investment.

WE MAY NOT HAVE SUFFICIENT FUNDS TO REPAY OUR OBLIGATIONS TO LAURUS MASTER FUND,
LTD. WHEN THEY BECOME DUE

If we are not able to repay the principal and interest on the note, or the Note,
that we issued to Laurus Master Fund, Ltd., or Laurus, in October 2004 in shares
of our common stock, we may not have  sufficient  funds to repay Laurus when our
debt  obligations  to Laurus become due. The principal  criteria for the monthly
payments to be made in shares of our common stock include:

     o    the  effectiveness of a current  registration  statement  covering the
          shares of our common stock into which the principal and interest under
          the Note are convertible;

     o    a market  price of our common  stock  greater than or equal to 110% of
          the conversion price of the Note; and


     o    the  amount of such  conversion  not  exceeding  25% of the  aggregate
          dollar trading volume of our common stock for the previous ten trading
          days.


In addition:

     o    We will not be able to  issue  more  than an  aggregate  of  8,202,012
          shares of our common stock upon conversion of the Note and exercise of
          the  Warrant  unless  our  stockholders  approve  an  increase  in our
          authorized shares of common stock and

     o    We will not be able to issue  more  than  6,491,440  shares  of common
          stock at a weighted average exercise price of below $0.47 unless these
          issuances are approved by our stockholders.

Accordingly,  we may be  required to obtain the funds  necessary  to repay these
obligations  either through  refinancing,  the issuance of additional  equity or
debt  securities  or the sale of  assets.  We may be unable to obtain  the funds
needed,  if any, to repay the obligations  from any one or more of these sources
on  favorable  economic  terms or at all. We currently  have only  approximately
100,000  authorized  shares of common  stock  that  have not been  reserved  for
issuance. We are seeking stockholder approval to increased our authorized shares
of common stock at our annual stockholders meeting to give us the flexibility to
sell shares of common stock,  if necessary.  We have also granted Laurus a right
of first  refusal  on any debt or  equity  financings  that we  complete  before
October 3,  2005.  This may impede  our  ability  to secure  additional  funding
because it may  discourage  third  parties  from making an offer that Laurus may
match.  If we are unable to obtain funds to repay this  indebtedness,  we may be
forced to  dispose of assets or take other  actions  on  disadvantageous  terms,
which  could  result in losses and could have a material  adverse  effect on our
financial condition and results of operations.

THE  TERMS  OF  OUR  DEBT  OBLIGATIONS  TO  LAURUS  SUBJECT  US TO THE  RISK  OF
FORECLOSURE ON SUBSTANTIALLY ALL OF OUR ASSETS

To secure the  payment of all  obligations  owed to Laurus,  we have  granted to
Laurus a security interest in, and lien upon,  substantially all of our property
and assets.  The occurrence of an event of default under any of our  obligations
could subject us to foreclosure by Laurus on substantially  all of our assets to
the extent  necessary  to repay any amounts  due.  Any  defaults  and  resulting
foreclosure would have a material adverse effect on our financial condition.

                                       32
<PAGE>
WE HAVE NEVER BEEN PROFITABLE AND MAY NEVER ACHIEVE PROFITABILITY IN THE FUTURE

We had a net  loss of  approximately  $6.4  million  for the nine  months  ended
September 30, 2004. To date, we have not achieved operating  profitability on an
annual basis. We have invested and continue to invest  significant  resources in
product   development,   selling  and   marketing,   services  and  support  and
administrative  expenses.  To achieve  profitability,  we will need to  increase
revenues  and/or reduce  expenses  significantly.  We cannot assure you that our
revenues  will grow or that we will  achieve or  maintain  profitability  in the
future.

OUR COMMON  STOCK IS TRADING ON THE NASDAQ  SMALLCAP  MARKET AND WE MUST  COMPLY
WITH CERTAIN  LISTING  STANDARDS TO MAINTAIN OUR LISTING ON THE NASDAQ  SMALLCAP
MARKET

On August 5, 2004 our common stock began trading on The NASDAQ SmallCap  Market.
On August 26, 2004, we received a letter from The NASDAQ Stock Market indicating
that our common  stock  failed to maintain a minimum  closing bid price of $1.00
over the previous 30 consecutive  trading days as required by  Marketplace  Rule
4310(c)(4)  and that we have 180 calendar  days, or until  February 22, 2005, to
regain  compliance.  If, at any time before  February 22, 2005, the bid price of
our  common  stock  closes  at  $1.00  per  share or more  for a  minimum  of 10
consecutive  business  days.  The NASDAQ Stock Market will notify us that we are
back in compliance.  If we do not regain compliance by February 22, 2005, we may
be granted an additional  180-day period to regain compliance if the minimum bid
price requirement is the only NASDAQ SmallCap Market initial listing requirement
that we do not then satisfy.  If we do not regain compliance within the allotted
compliance  period  (including any extensions  that may be granted),  The NASDAQ
Stock  Market  will notify us that our common  stock will be  delisted  from The
Nasdaq  SmallCap  Market.  At such  time,  we would be  entitled  to appeal  the
determination  to a  NASDAQ  Listing  Qualifications  Panel.  We  are  currently
reviewing  what actions we should take to regain  compliance.  In addition,  the
transfer of our common stock to The NASDAQ SmallCap Market could have a negative
effect on the trading price or the liquidity of our common stock. If we were not
able to maintain  our listing on The NASDAQ  SmallCap  Market,  we would  likely
apply for  listing  on the OTC  Bulletin  Board or another  quotation  system or
exchange for which we could qualify.  We cannot guarantee,  however,  that if we
were unable to maintain our listing on The Nasdaq SmallCap Market, that we would
be eligible for listing on the OTC Bulletin Board or another quotation system or
exchange,  or, that if we do become listed,  that there would be no interruption
in the  trading  of our  common  stock  or that  we  would  be able to  maintain
eligibility.


OUR FUTURE SUCCESS DEPENDS UPON THE ACCEPTANCE OF OUR DRM SYSTEM SOLUTIONS

Our  future  growth  will be driven by sales of Axeda DRM  systems  and  related
services.  We acquired eMation,  Ltd., or eMation, a private Israeli company, in
December  2001.  eMation was founded in 1988 and  historically  derived its main
source of revenues from its industrial  automation products.  We offer the Axeda
DRM system and also  continue to  separately  sell the Axeda  Supervisor,  Axeda
@aGlance/IT,  Axeda  Web  @aGlance  and Axeda  FactorySoft  OPC to  support  our
industrial automation business.


WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY

Competition  in the market for DRM  solutions  is emerging  and expected to grow
stronger. We expect that competition will increase in the near term and that our
primary  long-term  competitors may not yet have entered the market.  Our future
competitors  may  have   significantly  more  personnel  or  greater  financial,
technical,  marketing and other resources than either our current competitors or
we do. Also, due to our present financial  condition,  customers and current and
potential  partners may decide not to conduct  business with us or may reduce or
terminate the business they conduct with us. Furthermore, our future competitors
may be able to respond more quickly to new or emerging  technologies and changes
in customer  requirements than we can. Also, future competitors may have greater
name  recognition  and more  extensive  customer  bases that they can  leverage.
Increased  competition could result in price reductions,  fewer customer orders,
reduced gross profit margins and loss of market share, any of which could have a
material adverse effect on our business.
                                       33
<PAGE>
WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL ADVANCES

The process of remotely  extracting and managing  information  from  intelligent
devices will likely be characterized by rapid technological change, frequent new
product  introductions and emerging industry standards.  We also expect that the
rapid evolution of Internet-based applications and standards, as well as general
technology  trends such as changes in or introductions of operating systems will
require us to adapt our  products  to remain  competitive.  Our  products  could
become  obsolete  and  unmarketable  if we are  unable to  quickly  adapt to new
technologies  or  standards.  To be  successful,  we will  need to  develop  and
introduce new products and product  enhancements  that respond to  technological
changes,  evolving industry  standards and other market changes and developments
in a timely manner and on a cost-effective  basis.  Although we plan to continue
to spend  substantial  amounts on research  and  development  in the future,  we
cannot  assure you that we will develop new  products  and product  enhancements
successfully  or that our products  will achieve  broad market  acceptance.  Our
failure to respond in a timely  and  cost-effective  manner to new and  evolving
technologies  and other market  changes and  developments  could have a material
adverse effect on our business.

OUR SALES  CYCLE FOR DRM SYSTEMS IS LONG AND MAY BE  CYCLICAL  AND WE  TYPICALLY
RELY ON LARGE CONTRACTS FROM  RELATIVELY FEW DRM CUSTOMERS,  WHICH MAY CAUSE OUR
OPERATING RESULTS TO FLUCTUATE

Our sales  cycle is  lengthy  and may be  subject to  business  cycles.  Our DRM
systems sales typically  involve  significant  capital  investment  decisions by
prospective  customers,  as well as a significant amount of time to educate them
as to the benefits of our products.  As a result,  companies spend a substantial
amount of time performing  internal  reviews and obtaining  capital  expenditure
approvals,  before  purchasing  our  products.  It may take up to nine to twelve
months or more  from the time we first  contact a  prospective  customer  before
receiving an initial  order.  The length of our DRM systems sales cycle may also
depend on a number of  additional  factors,  including  but not  limited  to the
following:

     o    the complexities of the problems our solutions address;

     o    the breadth of the solution  required by the  customer,  including the
          technical, organizational and geographic scope of the license;

     o    the sales channel through which the solution is sold;

     o    the economic conditions in the United States and abroad; and

     o    any other delays arising from factors beyond our control.

Furthermore,  our software  license  revenues may result from a relatively small
number of sales, some of which may generate disproportionately large revenues.

VARIATIONS  IN THE LENGTH OF OUR SALES CYCLES COULD CAUSE  REVENUES TO FLUCTUATE
GREATLY FROM PERIOD TO PERIOD

Because we have  typically  recognized  a  substantial  portion of our  software
revenue  in the last  month of a  quarter,  any  delay in the  licensing  of our
products  could cause  significant  variations  in our revenue  from  quarter to
quarter.  These fluctuations could cause our operating results to suffer in some
future  periods  because our operating  expenses are  relatively  fixed over the
short term and we devote significant time and resources on prospective clients.

A VARIATION  IN THE  CONVERSION  OF OUR  REVENUE  PIPELINE  TO  CONTRACTS  COULD
ADVERSELY AFFECT OUR REVENUES AND ABILITY TO FORECAST OPERATIONS

Our revenue pipeline estimates may not consistently correlate to actual revenues
in a particular  quarter or over a longer period of time. There has been a shift
in industry-wide  buying patterns for enterprise  software,  from large up-front
purchases  to smaller,  more  frequent  purchases  over time. A variation in the
revenue  pipeline or in the  conversion of the revenue  pipeline into  contracts
could cause us to plan or budget inaccurately and thereby could adversely affect
our business, financial condition or results of operations.

                                       34
<PAGE>
IT MAY BE DIFFICULT, TIME-CONSUMING AND EXPENSIVE FOR OUR CUSTOMERS TO INTEGRATE
OUR DRM  SOLUTIONS  WITH THEIR  PRODUCTS  AND THEY MAY BE UNABLE TO DEPLOY THEIR
PRODUCTS  SUCCESSFULLY OR OTHERWISE ACHIEVE THE BENEFITS ATTRIBUTABLE TO OUR DRM
SOLUTIONS

Our customers  often desire to integrate our DRM solutions  with their  existing
products,   computer  systems  and  software  programs.  This  can  be  complex,
time-consuming  and  expensive,  and may cause delays in the  deployment  of our
customers'  products.  As a result,  some  customers  may have  difficulty or be
unable to integrate our products  successfully or otherwise achieve the benefits
attributable  to our products.  Delayed or  ineffective  integration  of our DRM
solutions  may limit our  ability  to expand  our  revenues,  and may  result in
customer dissatisfaction, causing harm to our reputation.

WE HAVE  UNDERTAKEN  A NUMBER OF MEASURES TO REDUCE OUR  OPERATING  EXPENSES AND
THESE AND OTHER EXPENSE REDUCTION MEASURES MAY HAVE NEGATIVE CONSEQUENCES

Beginning in the second quarter of 2002, we initiated a series of steps designed
to consolidate and streamline our operations,  and decrease our operating losses
and corresponding use of cash,  including  reducing our number of global offices
by 50%,  reduced  staffing  levels by 46% by  eliminating  or not  replacing  96
employees,  engaging partners to provide us with variable staffing  capabilities
to meet peak demand periods and by closely monitoring our infrastructure  costs.
Although  it  is  not  possible  to  anticipate   all   potential   effects  the
implementation  of  these  expense  control  measures  will  have  on us or  our
development,  these activities have and could continue to have a negative effect
on our business and operations.  The extent and  ramifications of these measures
will be dependent upon our ability to raise additional financing,  the timing of
the receipt of financing and the amount of such  financing,  if any. We continue
to  evaluate  our cost  structure,  and in the third  quarter of 2004 have taken
additional measures to reduce expenses. We recorded an aggregate of $1.1 million
in restructuring charges . to reduce staffing levels,  terminate some leases and
further consolidate our operations.

WE ARE DEPENDENT UPON OUR KEY MANAGEMENT FOR OUR FUTURE SUCCESS,  AND FEW OF OUR
KEY PERSONNEL ARE OBLIGATED TO STAY WITH US

Our success  depends on the efforts and abilities of our senior  management  and
certain other key personnel. Many of our key employees are employed at will. Our
business  could be  harmed if any of these or other  key  employees  left or was
seriously  injured  and  unable to work and we were  unable to find a  qualified
replacement.

OUR GROWTH WILL BE LIMITED IF WE ARE UNABLE TO EXPAND OUR INDIRECT  DISTRIBUTION
SALES CHANNELS

We  currently  have  relationships  with  only  a  limited  number  of  indirect
distribution  channels,  consisting of relationships  with independent  software
vendors,  software  distributors and system integrators.  Nevertheless,  we have
derived,  and we  anticipate  that we will  continue  to derive,  a  significant
portion of our revenues from these relationships.

Our future growth will be limited if:

     o    we fail to work effectively with indirect distribution channels;

     o    we fail to increase the number of indirect  distribution channels with
          which we have relationships;

     o    the  business  of one or more of our  indirect  distribution  channels
          fails; or

     o    there is a decrease in the  willingness  and  ability of our  indirect
          distribution  channels to devote  sufficient  resources and efforts to
          marketing and supporting our products.

If any of these circumstances  occurs, we will have to devote substantially more
resources to the sales, marketing,  distribution,  implementation and support of
our  products  than  we  otherwise  would,  and our  own  efforts  may not be as
effective as those of our indirect distribution channels.

                                       35
<PAGE>
INCREASED  SALES THROUGH  INDIRECT  CHANNELS MAY ADVERSELY  AFFECT OUR OPERATING
PERFORMANCE

Even if our marketing  efforts  through  indirect  channels are  successful  and
result in increased  sales,  our average  selling  prices and operating  margins
could be  adversely  affected  because of the lower unit  prices that we receive
when selling through indirect channels.

WE MAY DEPEND ON OUR  STRATEGIC  PARTNERS AND OTHER THIRD  PARTIES FOR SALES AND
IMPLEMENTATION OF OUR PRODUCTS.  IF WE FAIL TO DERIVE BENEFITS FROM OUR EXISTING
AND FUTURE STRATEGIC RELATIONSHIPS, OUR BUSINESS WILL SUFFER

From time to time, we have  collaborated  with other  companies in areas such as
marketing,   distribution  or   implementation.   Maintaining  these  and  other
relationships is a meaningful part of our business  strategy.  However,  some of
our current and  potential  strategic  partners  are either  actual or potential
competitors, which may impair the viability of these relationships. In addition,
some of our relationships  have failed to meet expectations and may fail to meet
expectations  in the  future.  A failure by us to  maintain  existing  strategic
relationships or enter into successful new strategic relationships in the future
could seriously harm our business, operating results and financial condition.

OUR BUSINESS MODEL DEPENDS UPON LICENSING OUR INTELLECTUAL  PROPERTY,  AND IF WE
FAIL OR ARE UNABLE TO PROTECT OUR  PROPRIETARY  RIGHTS,  OUR  BUSINESS  COULD BE
HARMED

Our  ability to compete  depends  substantially  upon our  internally  developed
technology.  We have a program for securing and protecting  rights in patentable
inventions,  trademarks,  trade secrets and  copyrightable  materials.  However,
there can be no assurance that we have taken or will take all necessary steps to
protect our intellectual  property rights.  Our present financial  condition may
make it more difficult for us to fully enforce our intellectual property rights.
If we are not successful in protecting our intellectual  property,  our business
could be substantially harmed. We regard the protection of patentable inventions
as important to our  business.  We currently  have one United  States patent and
eleven United States patent  applications  pending  relating to our DRM business
and ten patent  applications  pending  internationally.  It is possible that our
pending  patent  applications  may not result in the issuance of patents or that
our patents may not be broad enough to protect our proprietary rights.

We rely on a combination of laws, such as patent, copyright, trademark and trade
secret laws, and contractual  restrictions,  such as confidentiality  agreements
and  licenses,  to establish  and protect our  proprietary  rights.  Despite any
precautions which we have taken:

o       laws and  contractual  restrictions  may not be  sufficient  to  prevent
        misappropriation  of our  technology  or deter  others  from  developing
        similar technologies;

o       other  companies  may claim common law or other  trademark  rights based
        upon state or foreign law which precede our  registration or use of such
        marks;

o       current federal laws that prohibit software copying provide only limited
        protection from software pirates, and effective trademark, copyright and
        trade secret protection may be unavailable or limited in certain foreign
        countries;

o       policing  unauthorized  use of our products and trademarks is difficult,
        expensive and  time-consuming  and we are unable to determine the extent
        to which piracy of our products and trademarks  may occur,  particularly
        overseas;

     o    certain  of  our  products  are  licensed  under  shrink-wrap  license
          agreements  that are not signed by licensees  and therefore may not be
          binding under the laws of certain jurisdictions; and

     o    tamper-resistant copy protection codes and security buttons may not be
          successful in preventing unauthorized use of our software.

The laws of other  countries in which we market our products  might offer little
or no effective protection of our proprietary  technology.  Reverse engineering,
unauthorized  copying or other  misappropriation  of our proprietary  technology
could enable third parties to benefit from our technology  without paying us for
it, which could significantly harm our business.
                                       36
<PAGE>
Any failure to  adequately  protect our  proprietary  rights could result in our
competitors offering similar products, potentially resulting in the loss of some
of our competitive advantage and a decrease in our revenues. Infringement claims
and lawsuits, such as the complaint we filed on June 30, 2004 against one of our
competitors for  infringement of our recently issued patent entitled  "Reporting
the State of an Apparatus to a Remote  Computer,"  are likely to be expensive to
resolve  and may not be  successful,  and  will  require  management's  time and
resources and, therefore, could harm our business.

WE MAY BE SUBJECT TO PRODUCT  LIABILITY  CLAIMS  AND  REDUCED  SALES  BECAUSE OF
DEFECTS IN OUR PRODUCTS

Our products are very complex and may contain  undetected errors that could harm
our reputation, result in product liability or decrease market acceptance of our
products. The likelihood of errors is higher when a new product is introduced or
when new versions or enhancements are released. Our products are integrated with
our customers'  networks and software  applications.  Errors may also arise as a
result of defects in the  products  and  systems  into  which our  products  are
incorporated.  We are unable to test our products in each of the applications in
which they are designed to work.  It is possible  that  defects  could cause our
customers to experience  device or  application  failures.  We have an extensive
quality assurance process in place and procedures to handle customer  complaints
and deliver bug fixes.  Despite  our quality  assurance  process and that of our
customers, defects and errors may be found in new products or in new versions or
enhancements of existing products after commercial shipment has begun. We may be
required to devote significant  financial resources and personnel to correct any
defects.  Known or unknown  errors or defects  that affect the  operation of our
products could result in the following, any of which could harm our business:

     o    delay or loss of revenues;

     o    customers could cancel a contract due to defects;

     o    diversion of development resources;

     o    increased product development costs;

     o    damage to our reputation;

     o    delay or diminished market acceptance of our products;

     o    increased service and warranty costs; and

     o    litigation costs.

Although  some of our licenses with  customers  contain  provisions  designed to
limit our  exposure to potential  product  liability  claims  these  contractual
limitations  on  liability  may not be  enforceable.  In  addition,  our product
liability  insurance  may not be  adequate to cover our losses in the event of a
product  liability  claim  resulting from defects in our products and may not be
available to us in the future.

SUBSTANTIAL  LITIGATION  REGARDING  INTELLECTUAL  PROPERTY  RIGHTS EXISTS IN OUR
INDUSTRY

There is a risk that third-parties,  including current and potential competitors
and  current  developers  of our  intellectual  property,  will  claim  that our
products,  or our customers' products,  infringe on their intellectual  property
rights or that we have misappropriated  their intellectual  property.  Software,
business   processes  and  other  property  rights  in  our  industry  might  be
increasingly  subject  to  third-party  infringement  claims  as the  number  of
competitors  grows and the  functionality  of  products  in  different  industry
segments  overlaps.  Other parties might currently have, or might  eventually be
issued,  patents that  infringe on the  proprietary  rights we use. Any of these
third parties might make a claim of infringement against us.

We  may be  required  to pay  substantial  damages  and  may  be  restricted  or
prohibited  from selling our products if it is proven that we have  violated the
intellectual  property rights of others. The defense of infringement  claims and
lawsuits,  regardless of their outcome, would likely be expensive to resolve and
could require a significant  portion of management's time. We cannot assume that
we will  prevail  in  intellectual  property  disputes  regarding  infringement,
misappropriation  or other  disputes.  Litigation  in which  we are  accused  of
infringement or misappropriation  might cause a delay in the introduction of new
products, require us to develop non-infringing  technology,  require us to enter
into royalty or license  agreements,  which might not be available on acceptable
terms, or at all, or require us to pay  substantial  damages,  including  triple
damages if we are held to have willfully infringed a third party's  intellectual
property. If a successful claim of infringement was made against us and we could
not  develop  non-infringing  technology  or license  the  infringed  or similar
technology  on  a  timely  and  cost-effective  basis,  our  business  could  be
significantly harmed.
                                       37
<PAGE>
In addition,  rather than  litigating an infringement  matter,  we may determine
that it is in our best interests to settle the matter. The terms of a settlement
may include the payment of damages and our  agreement to license  technology  in
exchange for a license fee and ongoing royalties. These fees may be substantial.
If we are forced to take any of the actions described above,  defend against any
claims from third parties or pay any license fees or damages, our business could
be harmed.

WE HAVE RECEIVED NOTICES OF CLAIMS RELATED TO OUR FORMER PC PRODUCTS (OR DIGITAL
MEDIA   PRODUCTS)   REGARDING  THE  ALLEGED   INFRINGEMENT   OF  THIRD  PARTIES'
INTELLECTUAL PROPERTY RIGHTS THAT MAY CAUSE US TO PAY DAMAGES

Some third parties  claim to hold patents  covering  various  aspects of digital
television,  or DTV, high-definition  television, or HDTV, and digital versatile
disk,  or DVD  technology  incorporated  into  our  former  and  our  former  PC
customers'  digital media products and have claimed that various aspects of DTV,
HDTV and DVD technology  incorporated into our and our customers'  digital media
products infringe upon patents held by them, including the following:

A group of  companies  formed a  consortium  known as  MPEG-LA  to  enforce  the
proprietary  rights of other holders of patents  covering  essential  aspects of
MPEG-2 technology that were incorporated into our former PC products.

Another  group of companies  formed a consortium  known as DVD6C  (formerly  DVD
Patent License  Program) to enforce the  proprietary  rights of other holders of
patents covering essential aspects of DVD technology that were incorporated into
our former PC products.

Another consortium of companies,  commonly known as 3C, notified a number of DVD
product  manufacturers  that the members of the consortium hold patents that are
essential to DVD technology,  and have requested that such companies pay license
royalties for the use of the technology covered by the 3C patents.

If MPEG LA, DVD6C,  3C, or any other third party proves that our former  digital
media products  infringe  their  proprietary  rights,  we may be required to pay
substantial damages for such past infringement.

We may also be liable to some of our  former  customers  for  damages  that they
incur in  connection  with  intellectual  property  claims.  Some of our license
agreements with former customers contain warranties of  non-infringement  and/or
commitments to indemnify our former  customers  against  liability  arising from
infringement of third-party intellectual property, which may include third-party
intellectual  property such as the patents held by members of MPEG LA, DVD6C, 3C
and others.  These commitments may require us to indemnify or pay damages to our
former  customers  for all or a portion of any  license  fees or other  damages,
including  attorneys'  fees,  that they are  required  to pay or agree to pay to
these or other third parties.  We have received notices of up to an aggregate of
$6.5 million asserting rights under the indemnification  provisions and warranty
provisions of our license  agreements  from several of our former  digital media
products  customers.  We may be required to pay substantial damages with respect
to such indemnification  assertions,  which could have a material adverse effect
on our business, financial condition or results of operations.

OUR  BUSINESS IS SUBJECT TO RISKS FROM  INTERNATIONAL  OPERATIONS  SUCH AS LEGAL
UNCERTAINTY, TARIFFS AND TRADE BARRIERS AND POLITICAL AND ECONOMIC INSTABILITY

We conduct  business in a number of  different  countries.  We sell  products in
numerous  countries  outside  of the United  States,  including  Japan,  France,
Switzerland,  the Netherlands,  Germany and other countries in Europe,  Asia and
Latin  America.  Our  operations  outside the United States  include  facilities
located in France.  For both the three and nine months ended September 30, 2004,
we derived approximately 62% of our revenues from sales to foreign companies. We
anticipate  that  revenues  from  international   operations  will  continue  to
represent a significant portion of our revenues.  As a result, we are subject to
risks associated with selling and operating in foreign  countries.  For example,
some  of our  contracts  with  foreign  customers  are  denominated  in  foreign
currencies.  We do not currently hedge against the risk of such transactions and
as a result, we face a risk of loss related to possible fluctuations in currency
exchange rates.
                                       38
<PAGE>
Our geographic diversity requires significant management attention and financial
resources to develop our international sales, support and distribution channels.
We may not be able to maintain international market demand for our products. Our
business could be adversely impacted if we are unable to successfully launch our
DRM products into our international operations.

Additional risks related to selling and operating in foreign countries  include,
among others:

     o    legal uncertainty regarding liability;

     o    language barriers in business discussions;

     o    cultural  differences  in the  negotiation  of contracts  and conflict
          resolution;

     o    time zone differences;

     o    reduced protection for intellectual property rights in some countries;

     o    differing labor regulations;

     o    tariffs, trade barriers and other regulatory barriers;

     o    problems in collecting accounts receivable;

     o    political and economic instability;

     o    changes in diplomatic and trade relationships;

     o    seasonal reductions in business activity;

     o    potentially adverse tax consequences;

     o    complexity and unexpected changes in local laws and regulations;

     o    greater difficulty in staffing and managing foreign operations; and

     o    increased financial accounting and reporting burdens and complexities.

WE ARE  SUBJECT TO  CONDITIONS  ATTACHED TO  GOVERNMENTAL  GRANTS WE RECEIVED IN
ISRAEL

Prior to being  acquired  by us in December  2001,  eMation  received  grants in
Israel from the Office of the Chief  Scientist of Israel's  Ministry of Industry
and  Trade,  or OCS,  in the  aggregate  amount  of  $1.8  million  to fund  the
development of our Axeda Supervisor  product.  We have paid royalties to the OCS
in the aggregate amount of $1.4 million. As of September 30, 2004, the remaining
$0.4  million of  principal  liability  is accrued in accrued  expenses.  We are
obligated  to pay  royalties  of 3.0% to 3.5% of revenues  derived from sales of
products  funded  through  grants  received from the OCS, up to a maximum of the
total amount of the grants received. The terms of the OCS grants require that we
manufacture  our  products  that are  developed  with such grants in Israel.  In
addition,  we may not transfer the technology developed pursuant to the terms of
these  grants to third  parties  without the prior  approval  of a  governmental
committee.

Additionally,  prior to being acquired by us in December 2001,  eMation received
grants from the Israeli  Government  through the Fund for the  Encouragement  of
Marketing Activities, or Marketing Fund, in the aggregate amount of $1.2 million
and  royalties in the aggregate  amount of $0.6 million have been repaid.  As of
September  30, 2004,  $0.4 million of the  remaining  potential  $0.6 million of
principal liability is accrued in other current liabilities. We are obligated to
pay  royalties of 4.0% of revenues  derived  from sales of products  that result
from grants  received  through the Marketing  Fund, up to a maximum of the total
amount of the grants received.

BECAUSE OF THEIR  SIGNIFICANT  STOCK  OWNERSHIP,  OUR OFFICERS AND DIRECTORS CAN
EXERT SIGNIFICANT INFLUENCE OVER OUR FUTURE DIRECTION

As of  September  30,  2004,  our  executive  officers,  directors  and entities
affiliated with them, in the aggregate,  beneficially  owned  approximately  4.1
million  shares,  or  approximately  13%, of our outstanding  common stock,  and
assuming the exercise of all stock options exercisable by them within 60 days of
September  30,  2004,  they would have,  in the  aggregate,  beneficially  owned
approximately  6.0 million  shares,  or  approximately  18%, of our  outstanding
common  stock.  These  stockholders,  if  acting  together,  would  be  able  to
significantly  influence  all matters  requiring  approval by our  stockholders,
including the election of directors,  the approval of mergers or other  business
combination transactions or a sale of all or substantially all of our assets.
                                       39
<PAGE>
CERTAIN  PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAKE CHANGES
OF CONTROL DIFFICULT EVEN IF THEY WOULD BE BENEFICIAL TO OUR STOCKHOLDERS

Our board of directors has the  authority  without any further vote or action on
the part of our  stockholders to issue up to 5 million shares of preferred stock
and to determine the price, rights, preferences,  privileges and restrictions of
the  preferred  stock.  This  preferred  stock,  if it is ever issued,  may have
preference over and harm the rights of the holders of our common stock. Although
the  issuance  of this  preferred  stock  will  provide us with  flexibility  in
connection  with  possible  acquisitions  and  other  corporate  purposes,  this
issuance may make it more  difficult  for a third party to acquire a majority of
our  outstanding  voting stock.  We currently  have no plans to issue  preferred
stock.

Our certificate of  incorporation  and by-laws include  provisions that may have
the effect of  deterring  an  unsolicited  offer to  purchase  our stock.  These
provisions, coupled with the provisions of the Delaware General Corporation Law,
may  delay or impede a  merger,  tender  offer or proxy  contest  involving  us.
Furthermore,  our board of directors is divided into three classes,  only one of
which is elected each year.  Directors  are only capable of being removed by the
affirmative  vote of 66 2/3% or greater of all  classes of voting  stock.  These
factors may further delay or prevent a change of control.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN THE  INTERNET-RELATED  PRODUCTS AND
SERVICES MARKET

Our DRM  solutions  communicate  through  public and private  networks  over the
Internet.  The success of our  products may depend,  in part,  on our ability to
continue developing products that are compatible with the Internet.

Critical  issues  concerning  the  commercial  use  of the  Internet,  including
security,  privacy,  demand,  reliability,  cost,  ease of  use,  accessibility,
quality of service and  potential  tax or other  government  regulation,  remain
unresolved  and may affect the use of the  Internet  as a medium to support  the
functionality  of our  products.  If these  critical  issues  are not  favorably
resolved,  our business,  financial  condition or results of operations could be
adversely affected.

OUR BUSINESS IS SUBJECT TO CHANGES IN FINANCIAL ACCOUNTING STANDARDS,  WHICH MAY
AFFECT OUR REPORTED REVENUE, OR THE WAY WE CONDUCT BUSINESS

We prepare our financial  statements in conformity  with  accounting  principles
generally accepted in the United States of America, or GAAP. GAAP are subject to
interpretation  by  the  Financial  Accounting  Standards  Board,  the  American
Institute of Certified Public Accountants the Securities and Exchange Commission
and various bodies appointed by these  organizations to interpret existing rules
and create new accounting policies.

                                       40
<PAGE>

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We  develop  products  in the  United  States  and sell such  products  in North
America,  Asia and  various  countries  in  Europe.  We collect a portion of our
revenues and pay a portion of our operating expenses in foreign currencies. As a
result,  our  financial  results could be affected by factors such as changes in
foreign currency exchange rates or weak economic  conditions in foreign markets.
Currently,  we do not use derivative  instruments to hedge our foreign  exchange
risk,  although we may do so in the future.  Our interest income is sensitive to
changes in the general  level of U.S.  interest  rates,  particularly  since the
majority of our investments are in short-term instruments.  Due to the nature of
our short-term  investments,  we have concluded that there is no material market
risk exposure. Therefore, no quantitative tabular disclosures are required.

ITEM 4: CONTROLS AND PROCEDURES

As of the end of the quarter ended September 30, 2004, under the supervision and
with the participation of our management,  including our chief executive officer
and chief financial officer,  we conducted an evaluation of the effectiveness of
the design and operation of our disclosure controls and procedures, as such term
is defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended. Based on that evaluation,  our chief executive
officer and chief financial officer  concluded that our disclosure  controls and
procedures were effective as of September 30, 2004 to ensure that information we
are required to disclose in reports that we file or submit under the  Securities
Exchange Act of 1934 is (i) recorded, processed,  summarized and reported within
the time periods  specified in  Securities  and  Exchange  Commission  rules and
forms, and (ii)  accumulated and  communicated to our management,  including our
chief  executive  officer and chief financial  officer,  as appropriate to allow
timely decisions regarding required disclosure.


                                       41
<PAGE>
PART II: OTHER INFORMATION

ITEM 1:  LEGAL PROCEEDINGS

SECURITIES CLASS ACTION
Between February and April 2000, eleven class action lawsuits were filed against
us and certain of our officers and directors in the United States District Court
for the  Eastern  District  of  Pennsylvania.  On May 25,  2000,  the cases were
consolidated  under Civil  Action No.  00-CV-1014,  and entitled "In re RAVISENT
Technologies, Inc. Securities Litigation." Pursuant to the court's consolidation
order, a consolidated  and amended class action  complaint was filed on June 14,
2000 with an alleged class period of July 15, 1999 through April 27, 2000.  This
complaint  alleges  violations  of the  federal  securities  laws,  specifically
Sections 11 and 15 of the  Securities  Act of 1933,  Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and Rule 10b-5 promulgated  thereunder.  On
July 3,  2000,  we and the  other  defendants  filed a  motion  to  dismiss  the
consolidated  and amended class action  complaint.  On July 13, 2004,  the Court
denied the motion  and the  discovery  stay has been  lifted.  On  approximately
September  23,  2004,  the parties to the class  action  reached an agreement in
principle  to settle the class  action for  $7,000.  On  September  24, 2004 the
Defendants filed a stipulation with the court,  suspending  motion and discovery
deadlines pending negotiation of the settlement documents.  On October 23, 2004,
the parties to the class action,  through their respective  counsel,  executed a
memorandum  of  understanding  regarding  the proposed  settlement.  Although we
believe  that  such  lawsuits  or  claims  are  without  merit  and that we have
meritorious  defenses to the actions,  we plan to settle the litigation pursuant
to the October 23, 2004  memorandum of  understanding.  We have been informed by
our directors' and officers'  liability  insurance carriers that the full amount
of the cash settlement will be paid by them.

SECURITIES ALLOCATION CLASS ACTION
On November 27, 2001, a putative  shareholder class action was filed against us,
certain of our officers and directors (the "Individual Defendants"), and several
investment  banks that were  underwriters  of our initial public  offering.  The
action was filed in the United States  District Court for the Southern  District
of New York,  purportedly on behalf of investors who purchased our stock between
July 15, 1999 and December 6, 2000. A Consolidated  Amended Complaint,  which is
now the operative complaint, was filed on April 19, 2002.

The lawsuit  alleges  violations of Sections 11 and 15 of the  Securities Act of
1933 and Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule
10b-5  promulgated  thereunder  against  one or both  of us and  the  Individual
Defendants.  The claims are based on allegations that the underwriter defendants
agreed to allocate stock in our July 15, 1999 initial public offering to certain
investors in exchange for excessive and  undisclosed  commissions and agreements
by  those  investors  to  make  additional   purchases  in  the  aftermarket  at
pre-determined  prices.  Plaintiffs  allege that the  prospectus for our initial
public  offering was false and  misleading in violation of the  securities  laws
because it did not disclose these  arrangements.  The action seeks damages in an
unspecified amount.

Similar "IPO allocation"  actions have been filed against over 300 other issuers
that have had  initial  public  offerings  since 1998 and all are  included in a
single coordinated  proceeding in the Southern District of New York. On July 15,
2003,  the  Company's  board of  directors  approved  the terms of a  settlement
proposal as set forth in a Memorandum of  Understanding  (the "MOU"),  which has
now been memorialized in an executed  settlement  agreement,  an Insurer-Insured
Agreement,  an Agreement Among Insurers,  and a Special Counsel  Agreement.  The
settlement  agreement and related agreements set forth the terms of a settlement
between the Company, the Individual Defendants, the plaintiff class and the vast
majority of the other  approximately  300 issuer  defendants  and the individual
defendants  currently or formerly  associated with those companies.  Among other
provisions,  the  settlement  provides  for a  release  of the  Company  and the
individual defendants for the conduct alleged in the action to be wrongful.  The
Company  agrees to undertake  certain  responsibilities,  including  agreeing to
assign away, not assert,  or release  certain  potential  claims the Company may
have against its  underwriters.  It is anticipated that any potential  financial
obligation of the Company to plaintiffs  pursuant to the terms of the settlement
agreement and related  agreements will be covered by existing  insurance.  . The
agreement is subject to approval by the court, which cannot be assured. A motion
for  preliminary  approval by the court of the proposed  settlement was filed on
June 25, 2004. On July 14, 2004, the underwriter  defendants  filed a memorandum
in Opposition to Plaintiffs' Motion for Preliminary  Approval of Settlement with
Defendant Issuers' and Individuals.  On August 4, 2004 the Plaintiffs and Issuer
Defendants filed replies to the Underwriter Defendants.  On October 13, 2004 the
Court determined the criteria for Section 11 class certifications, and certified
the  Section  11 class in four of the six cases  that were the  subject of class
certification  motions,  noting that the Court's intention was to provide strong
guidance to all parties  regarding  class  certification  in the  remaining  two
cases. The Plaintiffs have not yet moved to certify a class in our case.

                                       42
<PAGE>

If the  settlement  does not occur,  and  litigation  against us  continues,  we
believe we have  meritorious  defenses and intend to defend the case vigorously.
The  Company  cannot  predict  whether  or when a  settlement  will  occur or be
finalized  and are unable at this time to  determine  whether the outcome of the
litigation will have a material impact on its results of operations or financial
condition in any future period.  However,  failure to  successfully  defend this
action could harm our results of operations, liquidity and financial condition.


IPM
On March 20, 2003,  Industria  Politecnica  Meridionale Spa., or IPM, an Italian
corporation,  filed a complaint  against us in the United States  District Court
for the  Northern  District  of  California.  The lawsuit  alleges  breach of an
agreement  between IPM and our  wholly-owned  subsidiary  Ravisent  Technologies
Internet  Appliance  Group,  Inc., or RTIAG,  and fraud in  connection  with the
delivery  of  circuit  boards  to IPM  that  were  not in  compliance  with  the
agreement,  and claims  damages of $15 million for breach of contract and fraud,
and unspecified  punitive  damages and attorney's fees. On May 2, 2003, we moved
to dismiss all claims  against  RTIAG.  On or about June 23, 2003,  IPM filed an
amended  complaint  adding RTIAG as a party in the action and providing  further
specificity on the fraud  allegation.  We withdrew our motion to dismiss shortly
thereafter.  We filed an answer to the amended complaint on July 3, 2003 denying
the breach of contract and fraud claims.  RTIAG filed a counterclaim  on July 3,
2003 for breach of contract against IPM,  seeking damages of $2.7 million,  plus
interest,  fees and costs. IPM filed an answer to the amended  complaint on July
22,  2003  denying the breach of  contract  claims.  IPM filed a motion to amend
their  complaint  on February 19, 2004,  which was granted,  and which  withdrew
their fraud  complaint  and modified  their breach of contract  claim to specify
that the defendants  breached the contract by providing  circuit  boards,  which
were  underpowered,  and to an  unacceptable  extent,  incapable of operating in
IPM's products.  We filed a motion seeking summary judgment on March 9, 2004. On
March 30, 2004, IPM's motion to amend their complaint was granted.  On April 13,
2004, Axeda filed a supplement to its motion for summary judgment.  On April 27,
2004, IPM filed a supplemental  opposition to our summary  judgment  motion.  We
filed a response on May 4, 2004 and our motion for summary judgment was heard on
May 18, 2004.

On June 22,  2004,  the court  issued an order  granting  our motion for summary
judgment and  dismissing  IPM's claims  against us. IPM filed a Motion for Entry
and  Certification of Final Judgment on August 2, 2004 so as to permit an appeal
of the summary judgment ruling before trial on Axeda's counterclaim.  The motion
was heard on  September 7, 2004 and was denied by the court.  A case  settlement
hearing on our counterclaim was held in September 2004, which was also denied by
the Court. We filed a motion for summary judgment on our counterclaim on October
26, 2004,  which is scheduled to be heard on November 30, 2004. On approximately
November 9, 2004,  IPM filed its  opposition  to our October 26, 2004 motion for
summary  judgment.  We have  until  November  16,  2004 to file a reply to IPM's
opposition.


QUESTRA
On June 30,  2004,  we  announced  that we were  awarded a patent by the  United
States   Patent   and   Trademark    Office   for   a   key   element   of   our
Firewall-Friendly(TM) method of communication over the Internet. Our U.S. patent
No.  6,757,714  is  titled  "Reporting  The  State Of An  Apparatus  To A Remote
Computer." The patent protects one of our inventions relating to enabling remote
"devices" -- machines,  appliances,  instruments,  and  computers -- to securely
communicate their health and status to enterprise  computer systems. On June 30,
2004, we filed a complaint in the United States  District Court for the District
of  Massachusetts  against  Questra  Corporation , one of our  competitors,  for
infringement of this patent.  On November 9, 2004 Questra filed an answer to our
complaint, without filing a substantive counterclaim.

                                       43
<PAGE>
On November 10, 2004 Questra filed a lawsuit in the United States District Court
for the Northern district of California against us alleging infringement of U.S.
patent No.  6,377,162,  titled  "Medical  Diagnostic  Field  Service  Method and
Apparatus." , The suit seeks injunctive relief and unspecified monetary damages.
As the complaint was only served  November 12, 2004, we are currently  reviewing
the  matter,  including  the  limits of any  potential  exposure,  with  outside
counsel. We plan to vigorously assert all applicable defenses to the litigation,
and in  particular  will  be  investigating  not  only  the  patent's  potential
infringement  limitations,  but also its core  validity  and  enforceability  by
Questra.  We are unable to predict  the  outcome  of this  matter or  reasonably
estimate an amount of loss given its current status.

LEASE
In connection  with our  acquisition of eMation.  Ltd., or eMation,  in December
2001, we recorded an unutilized lease obligation of $1,200.  Until February 2003
we made payments under the lease totaling $180, resulting in a balance of $1,020
as of September 30, 2004. In May 2003 the lessor  provided us with formal notice
of  termination  of the lease and from June 2003 until May 2004,  filed  various
complaints  against us alleging payment due for rent and other charges under the
lease.  On October 18, 2004 we entered into a settlement  and release  agreement
with the lessor to settle all  charges,  suits and claims  against us. Under the
terms of the settlement and release  agreement,  we will pay $300,000 payable in
two installments of $150,000 each. The first installment was paid on October 20,
2004,  and the second  installment  is due on October 1, 2005 As a result of the
settlement  we  reversed  $720,000  of the  liability,  which is  included  as a
non-cash  reduction  of  other  general  and   administrative   expense  in  the
accompanying  consolidated statements of operations for the three and nne months
ended September 30, 2004.

OTHER

From time to time, we have received  notices of claims of  infringement of other
parties'  proprietary  rights  and other  claims in the  ordinary  course of our
business.  See "Factors That May Affect Future  Results - Risk Factors - We have
received  notices  of  claims  related  to our PC  products  (or  digital  media
products)  regarding the alleged  infringement  of third  parties'  intellectual
property rights that may cause us to pay damages." We have accrued for estimated
losses in the accompanying  consolidated  financial statements for those matters
where we believe the likelihood of an adverse outcome is probable and the amount
of the loss is reasonably  estimable.  The adverse resolution of any one or more
of these matters could have a material adverse effect on our business, financial
condition or results of operations.



ITEM 6: EXHIBITS
   (a) Exhibits

The exhibits  listed on the Exhibit Index  (following the Signatures  section of
this report) are  included,  or  incorporated  by reference,  in this  quarterly
report.


                                       44
<PAGE>


         SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) the Securities  Exchange Act
of 1934, as amended,  the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

November 15, 2004
Axeda Systems Inc.


By:    /s/ Robert M. Russell Jr.
        ----------------------------
        Robert M. Russell Jr.
        Chairman of the Board and Chief Executive Officer



By:      /s/ Thomas J. Fogarty
           -----------------
           Thomas J. Fogarty
           Executive Vice President and Chief Financial Officer





                                       45
<PAGE>



EXHIBIT INDEX Pursuant to Item  601(a)(2) of Regulation  S-K, this Exhibit Index
immediately precedes the exhibits.

The  following  exhibits are included,  or  incorporated  by reference,  in this
Quarterly  Report on Form 10-Q (and are numbered in accordance  with Item 601 of
Regulation S-K):

                                    EXHIBITS

<TABLE>
<CAPTION>

     Exhibit Number       Exhibit Title
     --------------       -------------

        <S>             <C>
          4.1             Securities Purchase Agreement, dated as of October 5, 2004, by and between Axeda Systems Inc. and Laurus
                           Master Fund, Ltd. (1)
          4.2             Secured Convertible Term Note, dated as of October 5, 2004, issued by Axeda Systems Inc. to Laurus Master
                           Fund, Ltd. (1)
          4.3             Common Stock Purchase Warrant, dated as of October 5, 2004, issued by Axeda Systems Inc. to Laurus Master
                           Fund, Ltd. (1)
          4.4             Registration Rights Agreement, dated as of October 5, 2004, by and between Axeda Systems Inc. and Laurus
                           Master Fund, Ltd. (1)
          10.1            Master Security Agreement, dated as of October 5, 2004, by and among Axeda Systems Inc., Axeda Systems
                           Operating Company, Inc., Liuco, Inc., Ravisent       Operating Company Inc., Axeda IP, Inc. and Laurus
                           Master Fund, Ltd. (1)
          10.2            Stock Pledge Agreement, dated as of October 5, 2004, by and between Axeda Systems Inc. and Laurus Master
                           Fund, Ltd. (1)
          10.3            Subsidiary Guaranty, dated as of October 5, 2004, by and among Axeda Systems Operating Company, Inc.,
                           Liuco, Inc., Ravisent Operating Company Inc. and Laurus Master Fund, Ltd. (1)
          10.4            Grant of Security Interest in Patents and Trademarks, dated as of October 5, 2004, by and among Axeda
                           Systems Inc., Axeda IP, Inc., Axeda Systems Operating Company, Inc. and Laurus Master Fund, Ltd. (1)
          31.1            Certification of the Chief Executive Officer of Axeda Systems Inc. required pursuant to Rule
                           13a-14(a)/15d-14(a)
          31.2            Certification of the Chief Financial Officer of Axeda Systems Inc. required pursuant to Rule
                           13a-14(a)/15d-14(a)
          32.1            Certification of the Chief Executive Officer and Chief Financial Officer of Axeda Systems Inc. required
                          pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</TABLE>

(1) Incorporated by reference the Registrant's  Current Report on Form 8-K dated
October 5, 2004, as filed with the Securities and Exchange Commission on October
12, 2004.