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, 2005

[_]   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)

                                 25 Forbes Blvd.
                         Foxborough, Massachusetts 02035
                           ---------------------------
                    (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 X No

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

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

On November 18, 2005, 32,920,984 shares of the registrant's Common Stock, $0.001
par value, were outstanding.


<PAGE>

                               AXEDA SYSTEMS INC.
                                    FORM 10-Q
                        Quarter Ended September 30, 2005

                                Table of Contents
<TABLE>

                                                                                                             Page
                                                                                                             ----
<S>             <C>                                                                                          <C>
                 PART I - FINANCIAL INFORMATION

Item 1           Financial Statements (unaudited)

                 Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004                    2

                 Consolidated Statements of Operations for the three months ended September 30, 2005 and 2004  3

                 Consolidated Statements of Operations for the nine months ended September 30, 2005 and 2004   4

                 Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004   5

                 Notes to the Consolidated Financial Statements                                                6

Item 2           Management's Discussion and Analysis of Financial Condition and Results of Operations         17


Item 3           Quantitative and Qualitative Disclosures About Market Risk                                    36

Item 4           Controls and Procedures                                                                       36

                 PART II - OTHER INFORMATION

Item 1           Legal Proceedings                                                                             37

Item 2           Unregistered Sales of Equity Securities  and Use of Proceeds                                  39

Item 3           Defaults Upon Senior Securities                                                               39

Item 4           Submission of Matters to a Vote of Security Holders                                           39

Item 5           Other Information                                                                             39

Item 6           Exhibits                                                                                      39

                 Signatures                                                                                    40

                 Exhibit Index                                                                                 41

                 Exhibit 31.1
                 Exhibit 31.2
                 Exhibit 32.1

</TABLE>

<PAGE>

PART 1 FINANCIAL INFORMATION
Item 1: Financial Statements (unaudited)
                               AXEDA SYSTEMS INC.
                           CONSOLIDATED BALANCE SHEETS
                 (in thousands, except share and per share data)

<TABLE>

                                                                                    September 30,    December 31,
                                                                                        2005             2004
                                                                                        ----             ----
ASSETS
Current assets:

<S>                                                                                     <C>           <C>
   Cash and cash equivalents                                                            $1,484        $   2,429
   Accounts receivable, net of allowance for bad debts of $79 at September 30,
    2005, and $88 at December 31, 2004                                                   3,727            4,108
   Prepaid expenses and other current assets                                             1,166              714
                                                                                         -----              ---
     Total current assets                                                                6,377            7,251

   Furniture and equipment, net of accumulated allowances for depreciation of
    $1,327 at September 30, 2005, and $1,524 at December 31, 2004                          584            1,308
   Goodwill                                                                              3,640            3,640
   Identified intangible assets, net                                                       593              949
   Other assets                                                                            313              946
                                                                                           ---              ---
     Total assets                                                                     $ 11,507        $  14,094
                                                                                      ========        =========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:

   Bridge loans                                                                         $1,500                -
   Note payable, net of debt discounts of $1,385 at September 30, 2005 and $907
     at December 31, 2004                                                                3,090              293
   Accounts payable                                                                      1,412            1,436
   Accrued expenses                                                                      3,170            3,923
   Income taxes payable                                                                    938              780
   Deferred revenue                                                                      1,708            1,521
                                                                                         -----            -----
     Total current liabilities                                                          11,818            7,953

Non-current liabilities:
   Note payable, net of current portion and debt discount of $- at
     September 30, 2005 and  $1,248 at December 31, 2004                                     -            2,052
   Other non-current liabilities                                                            47              103
   Financing-related liabilities                                                             -            3,243
                                                                                             -            -----
     Total liabilities                                                                  11,865           13,351
                                                                                        ------           ------

Commitments and contingencies (Note 7)

Stockholders' equity (deficit):
   Preferred stock, $0.001 par value; 5,000,000 shares authorized in 2005 and
     2004, none issued or outstanding                                                        -                -
   Common stock, $0.001 par value; 100,000,000 shares authorized in 2005 and
    50,000,000 shares authorized in 2004; 33,512,938 shares issued in 2005 and
    33,173,288 shares  issued in 2004                                                       33               33
   Additional paid-in capital                                                          150,301          148,027
   Deferred stock compensation                                                            (90)             (90)
   Accumulated deficit                                                               (149,471)        (146,179)
   Accumulated other comprehensive income                                                  249              332
   Treasury stock at cost, 603,800 shares in 2005 and 2004                             (1,380)          (1,380)
                                                                                       -------          -------
     Total stockholders' equity (deficit)                                                (358)              743
                                                                                          ---               ---

     Total liabilities and stockholders' equity (deficit)                             $ 11,507         $ 14,094
                                                                                      ========         ========
</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>

                                                         Three Months Ended September 30,
                                                         --------------------------------
                                                                      2005            2004
                                                              ------------    ------------
Revenues:
<S>                                                           <C>             <C>
  License .................................................   $      1,860    $      1,700
  Services and maintenance ................................          1,514           1,021
  Hardware ................................................              1              17
                                                              ------------    ------------

    Total revenues ........................................          3,375           2,738
                                                              ------------    ------------

Cost of revenues:
  License .................................................             99             104
  Services and maintenance ................................            598             730
  Software amortization ...................................            112             112
                                                              ------------    ------------

    Total cost of revenues ................................            809             946
                                                              ------------    ------------

    Gross profit ..........................................          2,566           1,792
                                                              ------------    ------------

Research and development (R&D) ............................            678             944
Sales and marketing (S&M) .................................          1,112           1,760
General and administrative (G&A) ..........................          1,371           1,338
Depreciation and amortization .............................            425             322
                                                              ------------    ------------

    Total operating costs .................................          3,586           4,364
                                                              ------------    ------------

    Operating loss ........................................         (1,020)         (2,572)

Interest income (expense), net ............................           (493)             (5)
Other income (expense), net ...............................             55           1,241
                                                              ------------    ------------

Loss before income taxes ..................................         (1,458)         (1,336)
     Provision for income taxes ...........................             50              16
                                                              ------------    ------------
Net loss ..................................................   $     (1,508)   $     (1,352)
                                                              ============    ============

Basic and diluted net loss per weighted average
 common share outstanding .................................   $      (0.05)   $      (0.04)
                                                              ============    ============
Weighted average number of common shares outstanding
 used in calculation of basic and diluted net loss
 per common share .........................................     32,912,288      32,511,455
                                                              ============    ============
</TABLE>

        See accompanying notes to the consolidated financial statements.


                                       3
<PAGE>
                               AXEDA SYSTEMS INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)

<TABLE>
                                                             Nine Months Ended September 30,
                                                             -------------------------------
                                                                      2005            2004
                                                              ------------    ------------
Revenues:
<S>                                                           <C>             <C>
  License .................................................   $      6,136    $      5,611
  Services and maintenance ................................          4,528           3,454
  Hardware ................................................              9             103
                                                              ------------    ------------

    Total revenues ........................................         10,673           9,168
                                                              ------------    ------------

Cost of revenues:
  License .................................................            297             534
  Services and maintenance ................................          2,080           2,703
  Software amortization ...................................            336             336
                                                              ------------    ------------

    Total cost of revenues ................................          2,713           3,573
                                                              ------------    ------------

    Gross profit ..........................................          7,960           5,595
                                                              ------------    ------------

Research and development (R&D) ............................          2,364           3,068
Sales and marketing (S&M) .................................          4,104           5,775
General and administrative (G&A) ..........................          3,906           4,382
Depreciation and amortization .............................            807             840
                                                              ------------    ------------

    Total operating costs .................................         11,181          14,065
                                                              ------------    ------------

    Operating loss ........................................         (3,221)         (8,470)

Interest income (expense), net ............................         (1,286)            (35)
Other income (expense), net ...............................          1,373           2,136
                                                              ------------    ------------

Loss before income taxes ..................................         (3,134)         (6,369)
     Provision for income taxes ...........................            158              46
                                                              ------------    ------------
Net loss ..................................................   $     (3,292)   $     (6,415)
                                                              ============    ============

Basic and diluted net loss per weighted average
  common share outstanding ................................   $      (0.10)   $      (0.20)
                                                              ============    ============
Weighted average number of common shares outstanding
  used in calculation of basic and diluted net loss
  per common share ........................................     32,862,995      32,465,580
                                                                ============    ============
</TABLE>

        See accompanying notes to the consolidated financial statements.


                                       4
<PAGE>



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

                                                                              Nine Months Ended September 30,
                                                                              -------------------------------
                                                                                     2005       2004
                                                                                  -------    -------

Cash flows from operating activities:
<S>                                                                               <C>        <C>
  Net loss ....................................................................   $(3,292)   $(6,415)
  Adjustments to reconcile net loss to net cash used in
   operating activities:
  Depreciation and amortization ...............................................     1,143      1,176
  Unrealized gains on financing-related liabilities ...........................    (1,310)    (2,024)
  Gain on disposal of assets ..................................................      --         (110)
  Non-cash interest expense ...................................................       822       --
  Non-cash settlement .........................................................      --         (720)

  Non-cash compensation .......................................................      --          113
  Provision for doubtful accounts (net of recoveries) .........................        (9)         4
Changes in items affecting operations:
  Accounts receivable .........................................................       390        540
  Prepaid expenses and other current assets ...................................        82       (296)
  Other assets ................................................................       310         61
  Accounts payable ............................................................       (24)       226
  Accrued expenses and non-current liabilities ................................      (772)      (303)
  Income taxes payable ........................................................       158        (92)
  Deferred revenue ............................................................       187         (8)
                                                                                  -------    -------

    Net cash used in operating activities .....................................    (2,315)    (7,848)
                                                                                  -------    -------

Cash flows from investing activities:
  Capital expenditures ........................................................       (79)      (148)
                                                                                  -------    -------
    Net cash used in investing activities .....................................       (79)      (148)
                                                                                  -------    -------

Cash flows from financing activities:
   Proceeds from issuance of bridge loans .....................................     1,500       --
   Net proceeds from exercise of stock options ................................        14         52
  Net repayments under bank line of credit ....................................      --         (287)
  Net repayments of other non-current liabilities .............................      --          (27)
                                                                                  -------    -------
    Net cash provided by (used in) financing activities .......................     1,514       (262)
                                                                                  -------    -------

Effect of exchange rate changes on cash and cash equivalents ..................       (65)        10
                                                                                  -------    -------

      Net decrease in cash and cash equivalents ...............................      (945)    (8,248)

Cash and cash equivalents:
  Beginning of period .........................................................     2,429      9,617
                                                                                  -------    -------
  End of period ...............................................................   $ 1,484    $ 1,369
                                                                                  =======    =======
</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 - Overview

          Axeda  Systems  Inc.  is a software  and  services  company  providing
          solutions in an emerging  market known as Machine To Machine,  or M2M.
          Solutions  in the M2M market  enable  communications  between  people,
          devices,  and systems  and turn the  resulting  data into  information
          companies can act upon. We develop,  market and sell software products
          and services used by multiple  industries and customers  worldwide for
          device relationship  management,  or DRM, a segment of the M2M market,
          to access and exploit  information  located  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  2003,  our  revenues  have been  substantially  generated  from
          selling DRM products and services, or DRM business.

          The DRM  business,  with  revenues  primarily  in the  United  States,
          Germany  and Japan is our  flagship  product.  We  complement  our DRM
          products with professional services,  training, and support offerings.
          We leverage  our mix of  experience  in embedded  systems,  enterprise
          software,  and the Internet to solve difficult problems with practical
          solutions.

          We also separately sell,  mainly in Europe,  various software products
          that support our Industrial  Technology  for Automation  business (ITA
          business) comprised of Axeda ITA, Axeda@aGlance/IT,  Axeda Web@aGlance
          and Axeda FactorySoft OPC.

     b)  Going-Concern  Exception  in the Report of our  Independent  Registered
     Public  Accounting  Firm  Contained in our Annual Report for the Year Ended
     December 31, 2004

          We have sustained significant losses from operations and negative cash
          flows from  operations  since  inception.  For the nine  months  ended
          September 30, 2005 and for the years ended December 31, 2004 and 2003,
          the  operating  losses  sustained  were  $3,221,  $9,590 and  $14,978,
          respectively.

          The report of our independent registered public accounting firm on our
          audited consolidated  financial statements for the year ended December
          31, 2004 included an explanatory  paragraph  indicating  that there is
          substantial doubt about our ability to continue as a going concern.

          Since July 1, 2005, we have been in default  under the Laurus  Secured
          Convertible Term Note, or Note,  issued to Laurus Master Fund, Ltd, or
          Laurus,  for failing to pay when due interest under the Note for June,
          July,  August  and  September  2005,  as well as the July,  August and
          September  2005  principal  payments.  Article IV of the Note  defines
          "Events of Default" as the failure to pay any installment of principal
          or  interest  within  three  days of the due  date,  and that upon the
          occurrence and continuance of an Event of Default, Laurus may make all
          sums of  principal,  interest  and other  fees then  remaining  unpaid
          immediately due and payable. In the event of such an acceleration, the
          amount due and owing to Laurus  shall be one  hundred  twenty  percent
          (120%) of the outstanding  principal  amount,  plus accrued and unpaid
          interest and fees.  In addition,  the  registration  rights  agreement
          entered into in connection with the Note states that if our shares are
          not traded on a "Trading  Market",  which does not  include  the "Pink
          Sheets",  where our shares of common stock currently trade, then Axeda
          is obligated to issue certain  warrants to Laurus,  and our failure to
          do so also constitutes a default under the Note.

          In a Letter  Agreement  dated July 8, 2005 between  Axeda Systems Inc.
          and  Laurus,  Laurus  agreed to accept  payment in full in cash of the
          outstanding  principal and accrued and unpaid interest  simultaneously
          with the closing of the JMI Asset Sale,  in full  satisfaction  of our
          obligations  (see  discussion  included  herein  at  Part  I,  Item 2-
          Management's  Discussion  and  Analysis  of  Financial  Condition  and
          Results of Operations).  However, in the event bankruptcy  proceedings
          are  initiated  by or against us prior to the closing of the JMI Asset
          Sale, the default penalties described above would resume.
                                       6
<PAGE>
          Management has developed and begun to implement a plan to address this
          issue,  which  includes the sale of our DRM  business.  That plan also
          includes efforts, which thus far have been been unsuccesful, to find a
          buyer for, or to engage in strategic  partnerships  involving  the ITA
          business.  There  can  be  no  assurance  that  we  will  successfully
          implement  our plan,  or that we will be able to  continue  as a going
          concern.  If we continue to own the DRM  businessand/or if we continue
          to be  unsuccessful  in ofur  efforts  to find a  buyer  or  strategic
          partner  for our ITA  business,  we will  need to  receive  additional
          financing  from  new or  current  investors  and  potential  strategic
          partners.  Such financing may not be available on favorable  terms, if
          it is  available  at all.  In the absence of finding  such  additional
          financing and/or strategic partners, it is likely that we will have to
          commence  proceedings  under the  Bankruptcy  Code.  The  accompanying
          unaudited   consolidated  financial  statements  do  not  include  any
          adjustments that might result from the outcome of these uncertainties.


     c) Sale of DRM Business and Assets Sale to ASOC Acquisition Corp.

          Effective  September  1,  2005  we  entered  into a  definitive  asset
          purchase agreement to sell, subject to Shareholder  approval,  our DRM
          business  and  related  assets  to  ASOC  Acquisition   Corp.,  a  new
          corporation formed and owned by JMI Equity Fund V, L.P. and JMI Equity
          Fund V (AI),  L.P., or JMI, for $7,000 plus the  assumption of certain
          liabilities related to the DRM business.

          The DRM business to be sold  includes  our Axeda DRM software  systems
          designed to remotely monitor,  manage and service  intelligent devices
          deployed at end-user  sites.  The DRM  business  includes  Axeda Agent
          software,  an Axeda  Enterprise  server  and  Axeda  Applications  and
          related products and services. The assets include customer and partner
          agreements, intellectual property, and certain furniture and equipment
          used in the DRM business.  The DRM business revenues have been derived
          principally  from sales to  customers  located  in the United  States,
          Japan and Europe.

          The DRM  business  to be sold does not  include  the  assets  that are
          employed in connection with the production,  distribution  and sale of
          the Industrial  Technology for Automation  products,  or ITA business,
          that are marketed,  primarily in Europe, as the "Axeda  Supervisor" or
          "Wizcon" product family.

          The DRM business does not constitute a separate legal entity.  The DRM
          business  is   conducted   primarily  by  our   operating   subsidiary
          corporation in the United  States,  Axeda Systems  Operating  Company,
          Inc.,  but  also  includes  most  of the  business  activities  of our
          subsidiaries  in  Japan  and  Germany,  and  also a small  part of the
          activity  of our  subsidiary  in  France.  Since  the  Sale of the DRM
          business has not been approved by the stockholders,  and their vote on
          the DRM Asset Sale is not scheduled  until  December 2, 2005,  the DRM
          business is not shown as discontinued  operations because Statement of
          Financial  Accounting Standards No. 144 "Accounting for the Impairment
          or Disposal of Long-Lived  Assets,"  requires  approval by the highest
          level of  management  required for approval of the sale,  which is the
          stockholders,  in order to utilize discontinued operations accounting.
          However, the Definitive Proxy Statement-Amendment 1 filed with the SEC
          on October 31, 2005, which is incorporated  herein by reference in its
          entirety,  includes pro forma  financial  information  indicating  the
          impact of the DRM Asset sale on our financial  position and operations
          (Annex  C  to  the  Definitive  Proxy  Statement),  and  DRM  business
          historical balance sheets and statements of operations (Annex D to the
          Definitive Proxy Statement).

          In connection with the transaction,  JMI has provided $1,500 of bridge
          loans,  $600  of  which  was  advanced  to us in  July  2005,  and the
          remaining $900 was advanced to us in September 2005 following  signing
          of the  definitive  documents.  The bridge loans bear  interest at the
          rate of 7% per annum and are  secured  by  security  interests  in the
          assets of our DRM business.

          We anticipate that the $7,000 of proceeds we will receive upon closing
          of the  Asset  Purchase  Agreement  will  be  reduced  by  the  $1,530
          principal and accrued  interest on our  borrowings  from JMI (See Note
          6). In  addition,  we expect to use a  portion  of the  remaining  net
          proceeds to pay:

               o    the combined balance of $4,725,  as of November 30, 2005, of
                    principal and accrued interest that we owe to Laurus, and
               o    anticipated transaction costs of $550, and
               o    working capital requirements of $195..
                                       7
<PAGE>
     d) Use of Estimates

          The  preparation  of the  accompanying  Balance Sheet and Statement of
          Operations requires us to make estimates and judgments that affect the
          reported amounts of assets,  liabilities,  revenues and expenses,  and
          related  disclosure  of  contingent  assets  and  liabilities.  On  an
          on-going  basis,  we evaluate  the  reasonableness  of our  estimates,
          including those related to bad debts, intangible assets, income taxes,
          warranty  obligations,  purchase commitments and contingencies.  These
          estimates are based upon  historical  experience  and on various other
          assumptions that are believed to be reasonable under the circumstances
          at the time of the  estimate,  the results of which form the basis for
          making  judgments  about the carrying values of assets and liabilities
          that are not readily  apparent from other sources.  Actual results may
          differ from these estimates under different assumptions or conditions.

     e) Basis of Presentation

          The interim consolidated financial statements of Axeda 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 our financial
          position, results of operations and cash flows for the interim periods
          presented. 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,  2004 filed with the SEC,
          which is  incorporated  herein  by  reference  in its'  entirety.  The
          interim results  presented are not  necessarily  indicative of results
          for any subsequent quarter or for the year ending December 31, 2005.

          If our  stockholders  approve  the  sale  of the DRM  business  at our
          December 2, 2005  special  meeting of  stockholders,  the DRM business
          revenue,  costs and expenses will be eliminated from our  consolidated
          statement of operations,  as will the DRM assets that will be sold and
          liabilities that will be assumed. The Definitive Proxy Statement filed
          with the SEC on October  31,  2005,  which is  incorporated  herein by
          reference in its' entirety,  includes  Pro-forma  Financial  Statement
          indicating  the  impact  of  the  DRM  Asset  sale  on  our  financial
          statements (Annex C), and DRM business  historical  Balance Sheets and
          Income Statements (Annex D).

     f) Revenue Recognition

          We  recognize  software  revenues  in  accordance  with  Statement  of
          Position,  or SOP, 97-2, "Software Revenue  Recognition," or SOP 97-2,
          as amended by SOP 98-9,  "Modification  of SOP 97-2,  Software Revenue
          Recognition,  With  Respect  to  Certain  Transactions,"  or SOP 98-9.
          License  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.

     g) Financial Instruments

          Our  financial  instruments  principally  consist  of  cash  and  cash
          equivalents, accounts receivable, accounts payable, and notes payable.
          Cash and cash equivalents,  accounts receivable, accounts payable, and
          the  bridge  loans  and  note  payable  are  carried  at  cost,  which
          approximates fair value.
                                       8
<PAGE>
     h) Computation of Earnings Per Share

          We compute  earnings per share,  or EPS, in  accordance  with 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 (using
          the treasury stock method), and the incremental common shares issuable
          upon the conversion of the  convertible  debt (using the  if-converted
          method). Common equivalent shares are excluded from the calculation if
          their effect is anti-dilutive.

          (i) September 30, 2005

               Options  to  purchase  6,224,848  shares of common  stock  with a
               weighted-average   exercise   price  of  $1.13  per  share   were
               outstanding  as of September  30, 2005,  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  3,693,413 options that were vested,
               with a weighted  average  exercise  price of $1.39 per share,  of
               which  1,016,000  were  vested and in the money,  with a weighted
               average  exercise  price of $0.01 per  share.  The  options  have
               various expiration dates during the next ten years.

               Warrants  to  purchase  6,570,344  shares of common  stock with a
               weighted-average  exercise  price of $1.01 per share were  vested
               and  outstanding  as of September 30, 2005, but were not included
               in the  calculation of diluted EPS because the effects of assumed
               exercise   would  have  an   anti-dilutive   effect  on  EPS.  No
               outstanding warrants were vested and in the money as of September
               30, 2005. The outstanding  warrants have various expiration dates
               during the next five years.

               In addition, 9,323,752 shares issuable upon conversion of debt to
               common stock were  excluded from the  computation  of diluted EPS
               because  the  effects  of  assumed   conversion   would  have  an
               anti-dilutive effect on EPS.

          (ii) 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 as of 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  1,392,461  were  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  2,696,219  shares of common  stock with a
               weighted-average  exercise  price of $1.96 per share were  vested
               and  outstanding  as of 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 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 Laurus
               financing  in October  2004.  In addition,  in December  2004 the
               exercise price of these warrants was reduced from $1.69 per share
               to $1.35 per share in  accordance  with the terms of the warrants
               and with shareholder approval.

                                       9
<PAGE>
     k) Stock-based Compensation

          SFAS No. 123, "Accounting for Stock-based  Compensation," or SFAS 123,
          and SFAS 148 "Accounting for Stock Based Compensation - Transition and
          Disclosure  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.

          We account for our stock-based  employee  compensation  plan 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>

                                                              Three Months Ended     Nine Months Ended
                                                              ------------------     -----------------
                                                                 September 30,          September 30,
                                                                 -------------          -------------
                                                                2005       2004       2005       2004
                                                          ----------    -------    -------    -------
<S>                                                       <C>           <C>        <C>        <C>
Net loss, as reported .................................   $   (1,508)   $(1,352)   $(3,292)   $(6,415)
Add:  Stock-based employee compensation
 included in reported net loss ........................         --            9       --          113
Deduct: Stock-based employee compensation
 expense determined under fair value based
 method for all awards ................................         (221)      (277)      (652)      (986)
                                                          ----------    -------    -------    -------
Pro forma net loss ....................................   $   (1,729)   $(1,620)   $(3,944)   $(7,288)
                                                          ==========    =======    =======    =======
Net  loss  per  common  share  -  basic  and
 diluted:
     As reported ......................................   $    (0.05)   $ (0.04)   $ (0.10)   $ (0.20)
                                                          ==========    =======    =======    =======
     Pro forma ........................................   $    (0.05)   $ (0.05)   $ (0.12)   $ (0.22)
                                                          ==========    =======    =======    =======
</TABLE>
          We used the following assumptions to determine the fair value of stock
          options granted using the  Black-Scholes  option pricing model for the
          three and nine months ended September 30, 2005 and 2004:

                                                 2005             2004
                                                 ----             ----
        Dividend yield                             0%               0%
        Expected volatility                      122%           86% - 112%
        Average expected option life          4 years            4 years
        Risk-free interest rate                 3.92%         1.17% - 2.16%

     l) Recent Accounting Pronouncements

          On April 21, 2005,  the SEC  approved a new rule for public  companies
          that delays the effective date of SFAS No. 123R "Share-Based Payment,"
          or SFAS  123R,  to  annual  periods  beginning  after  June 15,  2005.
          Therefore,  we will postpone the adoption of SFAS 123R until the first
          quarter of 2006.

          SFAS 123R will 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 instead requires that such awards be
          accounted for using a fair value based  method,  which will require us
          to measure the  compensation  expense for all such  awards,  including
          stock options, at fair value at the grant date.  Compensation  expense
          will then be recognized over the service or vesting period.

          We are  evaluating the  requirements  of SFAS 123R and expect that the
          adoption of SFAS 123R will have a material impact on our  consolidated
          results  of  operations.  We have not yet  determined  the  effect  of
          adopting SFAS 123R, nor have we determined the method that we will use
          to adopt it.  However,  had we adopted SFAS 123R in the current  year,
          the impact of that standard would have been similar to the current pro
          forma disclosures under SFAS 123.

                                       10
<PAGE>
     m) Reclassifications

          Certain  prior year amounts have been  reclassified  to conform to the
          current year presentation.

2) Acquired Intangible Assets

Acquired  intangible  assets  that are  subject to  amortization  consist of the
following:

                       Gross Carrying Amount
                       ---------------------       Accumulated Amortization
                       September 30 2005 and      -----------------------
                         December 31,            September 30,   December 31,
                               2004                   2005             2004
                         -----------------       -------------     ------------
Developed technology         $  210               $  210              $  210
Core technology               1,840                1,281                 944
Customer base                   110                   76                  57
                                ---                   --                  --
     Total                  $ 2,160              $ 1,567            $  1,211
                            =======              ========           ========

     Aggregate  amortization expense was $119 for each of the three months ended
     September  30, 2005 and 2004,  and $356 and $356 for the nine months  ended
     September 30, 2005 and 2004, respectively.

3) Accrued Expenses

     Accrued expenses consist of the following:

                                                   September 30,   December 31,
                                                            2005           2004
                                                            ----           ----
      Legal and professional fees                          $ 381          $ 319
      Payroll and related costs                              899          1,065
      Royalties to Israeli government agencies               586            734
      Sales, excise and other taxes                          534            480
      Severance                                              127            520
      Unutilized leased facilities                            11            302
      Other                                                  632            503
                                                             ---            ---
                    Total accrued expenses                $3,170         $3,923
                                                          ======         ======

4) Income Tax Expense

     Income tax expense  consists of current  provisions  for estimated  foreign
     income taxes of $50 and $158 for the three and nine months ended  September
     30, 2005, respectively, and $16 and $46 for the three and nine months ended
     September 30, 2004, respectively.

5) Financing-related Liabilities

     The Financial  Accounting  Standards  Board, or FASB,  Emerging Issues Task
     Force, or EITF,  issued EITF 00-19,  "Accounting  for Derivative  Financial
     Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,"
     or EITF 00-19, which 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.

     Equity derivative  contracts accounted for as permanent equity are recorded
     at their  initial fair value and  subsequent  changes in fair value are not
     recognized unless a change in the contracts'  classification occurs. Equity
     derivative  contracts not  qualifying for permanent  equity  accounting are
     recorded at fair value as an asset or liability with subsequent  changes in
     fair value recognized through the statement of operations.

                                       11
<PAGE>
     EITF 00-19 considers that the ability to keep SEC filings current is beyond
     the control of a  registrant,  and  therefore do not qualify for  permanent
     equity accounting. The potential liquidated damages we were required to pay
     pursuant to the  registration  rights  agreements  if we failed to keep our
     registration  statements effective were considered to be potential net cash
     settlements  pursuant to EITF 00-19.  Therefore,  in  accordance  with EITF
     00-19,  through  February 16, 2005 we recorded the estimated  fair value of
     the warrants issued to Laurus and Special  Situations  Private Equity Fund,
     L.P. and its affiliates, collectively SSF, as a financing-related liability
     in  the   consolidated   balance   sheets,   and  the  fair  value  of  the
     financing-related  liability was 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.

     a)  February  16,  2005  Amendments  of  Agreements  with Laurus and SSF On
     February 16, 2005, we amended a series of agreements relating to Laurus and
     SSF. Specifically, we:

          o    amended the registration  rights agreement with SSF such that any
               liquidated  damages  that may arise for failure to: a) file a new
               registration  statement  for any shares that may be issued to SSF
               in the future,  to cause such  registration  statement  to become
               effective,  or to maintain the effectiveness of such registration
               statement would be payable in unregistered shares of common stock
               rather  than  cash  and we  would  be  obligated  to use our best
               efforts to subsequently register the shares;

          o    amended the securities  purchase  agreement with Laurus such that
               any  liquidated  damages  that may arise for  failure  to deliver
               shares of common  stock  upon  conversion  of  Laurus'  Note in a
               timely   manner  would  be  payable  in  a  warrant  to  purchase
               unregistered shares of common stock rather than cash and we would
               be obligated to use our best efforts to subsequently register the
               underlying shares; and

          o    amended the  registration  rights agreement with Laurus such that
               any  liquidated  damages  that may  arise for  failure  to file a
               registration  statement  for any  shares  that may be  issued  to
               Laurus in the future,  to cause such  registration  statement  to
               become   effective,   to  maintain  the   effectiveness  of  such
               registration  statement  or to keep our  common  stock  listed or
               quoted  would be payable in a warrant  to  purchase  unregistered
               shares of common stock rather than cash and we would be obligated
               to use our best efforts to  subsequently  register the underlying
               shares.

          Effective  in  February  2005,  as a result of these  amendments,  the
          accounting  and  reporting  requirements  for  our  financing  related
          liabilities  now qualify for permanent  equity  accounting  under EITF
          00-19,  and  therefore,  the  estimated  fair  value of the  financing
          related  liabilities of $1,934 was reclassified as additional  paid-in
          capital.  The estimated  fair values of the warrants  issued to Laurus
          and to SSF were  calculated  using the  Black-Scholes  model using the
          following assumptions:

<TABLE>

                                               February 16, 2005         February 16, 2005          September 30, 2004
                                               -----------------         -----------------          ------------------
                                                    Laurus                      SSF                        SSF
                                                    ------                      ---                        ---
        <S>                                        <C>                       <C>                        <C>
          Current market price/share                 $0.53                     $0.53                      $0.45
          Exercise price/share                       $0.53                     $1.35                      $1.71
          Dividend yield                              0%                        0%                          0%
          Expected volatility                        107%                      107%                        108%
          Expected life                           4.62 years                 3.6 years                  3.98 years
          Risk-free interest rate                    3.77%                     3.69%                      3.17%
</TABLE>

     b) May 4, 2005 Amendment of Agreements with Laurus

          On May 4,  2005,  we  amended  the Note  and  several  of the  related
          agreements  for  the  primary  purpose  of  postponing  the  principal
          payments due in May and June 2005, of $150 each,  until  September and
          October  2007,  respectively.  In exchange  for these  amendments,  we
          issued to Laurus a warrant to  purchase  750,000  shares of our common
          stock  at an  exercise  price of  $0.37  per  share.  The  warrant  is
          exercisable  for a term of five years and has an estimated  fair value
          of  approximately  $211,  which is being  amortized over the remaining
          term of the loan as additional non-cash interest expense.
                                       12
<PAGE>

     c) Default Under Laurus Note and July 8, 2005 Letter Agreement with Laurus

          To induce Laurus to subordinate  its security  interest and to provide
          all other consents  necessary for the  transactions  with JMI, in July
          2005 we entered into a letter agreement with Laurus in which we agreed
          that we would pay to Laurus in full in cash all outstanding  principal
          and accrued and unpaid interest owed to Laurus simultaneously with the
          closing of the JMI  transaction.  This payment will be deemed to be in
          full satisfaction of all of our obligations to Laurus, and we will not
          be required to pay to Laurus the  prepayment  penalty  that would have
          required payment of 120% of the outstanding  principal and accrued and
          unpaid  interest  owed  to  Laurus.  If  bankruptcy   proceedings  are
          initiated   by  or  against  us  prior  to  the  closing  of  the  JMI
          transaction, then we will again become obligated to pay the prepayment
          penalty and any other obligations that may arise.

          Because failure to pay principal when due is an event of default under
          the  terms  of the Note  payable  to  Laurus  and we have not paid the
          principal  payments for July through  October  2005, we are in default
          under the Laurus Note. As a result,  the unpaid loan principal balance
          of $4,475 is now  reflected  in our  consolidated  balance  sheet as a
          current  liability as of September 30, 2005,  net of debt discounts of
          $1,385.

6) Bridge Loans

     In July and  September  2005 we received an  aggregate  of $1,500 of bridge
     loans from JMI. The bridge loans bear  interest at the rate of 7% per annum
     and are secured by security interests in the assets of our DRM business. As
     of September  30, 2005  interest due and accrued  under the bridge loans is
     $13.  Pursuant to the terms of a  subordination  agreement which Laurus has
     entered into with JMI and us, Laurus has agreed to subordinate its right to
     payment of the note we issued to it,  and its  security  interest  in those
     assets,  so that JMI holds a senior  secured  lien therein to the extent of
     the first $600 of bridge loans that JMI provides to us. With respect to the
     $900 balance of the bridge loans,  JMI's security interest in the assets of
     our DRM  business  will be pari passu with the  security  interest  held by
     Laurus in the same  assets.  The bridge loans are expected be repaid at the
     closing  of the  sale of our DRM  business  to ASOC  Acquisition  Corp.  in
     December 2005 (See Note 1c).

7) Commitments and Contingencies

     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.  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.

     Questra Patent Infringement Litigation

     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  method of  communication  over the Internet.  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 10, 2004, Questra filed a patent  infringement  lawsuit against
     us in the  United  States  District  Court  for the  Northern  District  of
     California  charging us with  infringement of U.S. Patent No. 6,377,162 and
     seeking injunctive relief and unspecified monetary damages.

     On September  14, 2005 we reached an  agreement  with Questra to settle all
     pending patent litigation between Axeda and Questra. Under the terms of the
     confidential  settlement,  the parties have agreed,  among other things, to
     cross-license  the  patents  that were  involved in the  litigation  and to
     dismiss the pending claims with prejudice.  The parties have also agreed to
     a two-year  covenant  prohibiting  the companies  from filing  against each
     other any additional patent  infringement suits. The parties have agreed to
     keep  the  terms  of the  settlement  confidential  except  to  the  extent
     disclosure is required by the  securities  laws of the United States or any
     other applicable jurisdiction.

                                       13
<PAGE>
     SECURITIES ALLOCATION CLASS ACTION

     On November 27, 2001, a putative shareholder class action was filed against
     us, certain of our officers and  directors,  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 our
     officers  and  directors.  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.

     Our  board  of  directors  approved  a  settlement  agreement  and  related
     agreements which set forth the terms of a settlement among us, our officers
     and  directors,  the  plaintiff  class,  the  vast  majority  of the  other
     approximately 300 issuer defendants and the individual defendants currently
     or formerly  associated with these companies.  Among other provisions,  the
     settlement  agreement  provides  for a release of us and our  officers  and
     directors  for the conduct  alleged in the action to be wrongful.  We would
     agree to undertake certain  responsibilities,  including agreeing to assign
     away, not assert,  or release certain  potential claims we may have against
     the  underwriters.  The  settlement  agreement  also  provides a guaranteed
     recovery of $1 billion to plaintiffs  for the cases  relating to all of the
     approximately  300 issuers.  To the extent that the underwriter  defendants
     settle  all of the  cases  for at  least $1  billion,  no  payment  will be
     required under the issuers'  settlement  agreement.  To the extent that the
     underwriter  defendants  settle for less than $1  billion,  the issuers are
     required to make up the  difference.  It is anticipated  that any potential
     financial  obligation  we have to  plaintiffs  pursuant to the terms of the
     settlement  agreement  and related  agreements  will be covered by existing
     insurance.  We currently are not aware of any material  limitations  on the
     expected recovery of any potential financial  obligation to plaintiffs from
     our insurance carriers.  Our carriers appear solvent,  and we are not aware
     of any uncertainties as to the legal sufficiency of an insurance claim with
     respect to any recovery by plaintiffs. Therefore, we do not expect that the
     settlement  will involve any payment by us. If material  limitations on the
     expected recovery of any potential  financial  obligation to the plaintiffs
     from our insurance carriers should arise, our maximum financial  obligation
     to the plaintiffs  pursuant to the settlement  agreement would be less than
     $3,400.

     On  February  15,  2005,  the Court  granted  preliminary  approval  of the
     settlement agreement,  subject to certain modifications consistent with its
     opinion.  Those  modifications  have  been  made  and the  issuers  and the
     plaintiffs have submitted to the Court a revised  settlement  agreement for
     approval. There is no assurance that the Court will grant final approval to
     the settlement.

     If the  settlement  agreement  currently  before the  Court,  as revised in
     accordance with the  preliminary  approval order, is accepted by the Court,
     then we anticipate that any potential  financial  obligation we may have to
     the  plaintiffs  pursuant  to the  terms of the  settlement  agreement  and
     related agreements will be covered by existing insurance. If the settlement
     agreement  is not  approved  and we are  found  liable,  we are  unable  to
     estimate or predict the  potential  damages that might be awarded,  whether
     such damages would be greater than the Company's  insurance  coverage,  and
     whether  such  damages  would  have a  material  impact on our  results  of
     operations or financial  condition in any future period.  If the settlement
     does not occur,  and  litigation  against us continues,  we believe we have
     meritorious defenses and intend to defend the case vigorously.

                                       14
<PAGE>
8) Segment and Major Customer Information

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

                              Three Months Ended     Nine Months Ended
                              ------------------     -----------------
                                  September 30,        September 30,
                                  -------------        -------------
                                  2005      2004      2005      2004
                               -------   -------   -------   -------
   Revenues:
      DRM ..................   $ 3,374   $ 2,721   $10,664   $ 9,065
      Other ................         1        17         9       103
                               -------   -------   -------   -------
        Total ..............   $ 3,375   $ 2,738   $10,673   $ 9,168
                               =======   =======   =======   =======
   Gross profit:
      DRM ..................   $ 2,565   $ 1,775   $ 7,951   $ 5,492
      Other ................         1        17         9       103
                               -------   -------   -------   -------
        Total ..............   $ 2,566   $ 1,792   $ 7,960   $ 5,595
                               =======   =======   =======   =======

     Customer Concentration

     Three  customers  accounted  for 30%,  or $1,022,  and 36%,  or $1,036,  of
     revenues for the quarters ended September 30, 2005 and 2004,  respectively.
     Three  customers  accounted  for 19%,  or $2,059,  and 20%,  or $1,821,  of
     revenues  for  the  nine  months  ended   September   30,  2005  and  2004,
     respectively.

     Geographic Sources of Revenue

     We sell and license our technology to customers primarily in North America,
     Europe and Asia. Our North American operations generated 57% and 38% of our
     revenues  in  the  three  months  ended   September   30,  2005  and  2004,
     respectively,  and 55% and 38% of our  revenues  for the nine months  ended
     September 30, 2005 and 2004, respectively. Our total revenues for the three
     and nine months  ended  September  30, 2005 and 2004 were  derived from the
     following geographic regions (based on where the customer is located):

                                    Three Months Ended September 30,
                                   ----------------------------------
                                        2005              2004
                                  ----------------    ----------------
                                             % of                % of
Country/ Geographic Region        Amount     Total    Amount     Total
--------------------------        ------     -----    ------     -----
North America:
     United States ............   $1,942       57%    $1,045      38%
     Canada ...................     --       --         --
                                  ------   ------     ------   ------

          Total - North America    1,942       57      1,045       38
                                  ------   ------     ------   ------
Europe:
     Germany ..................      129        4        110        4
     France ...................      343       10        160        6
     Netherlands ..............      113        3        159        6
     Switzerland ..............       91        3        617       23
     United Kingdom ...........       51        2        115        4
     Other ....................      270        8        228        8
                                  ------   ------     ------   ------
          Total - Europe ......      997       30      1,389       51
                                  ------   ------     ------   ------
Other:
     Israel ...................      108        3         78        3
     Japan ....................      189        6        148        5
     Other ....................      139        4         78        3
                                   ------   ------     ------   ------

          Total - Other .......      436       13        304       11
                                  ------   ------     ------   ------

         Total ................   $3,375      100%    $2,738      100%
                                  ======      ===     ======      ===
                                       15
<PAGE>
                                    Nine Months Ended September 30,
                                   ----------------------------------
                                        2005              2004
                                  ----------------    ----------------
                                             % of                % of
Country/ Geographic Region        Amount     Total    Amount     Total
--------------------------        ------     -----    ------     -----
North America:
     United States ............   $ 5,862        55%   $ 3,448        38%
     Canada ...................         3      --            9      --
                                  -------   -------    -------   -------
          Total - North America     5,865        55      3,457        38
                                  -------   -------    -------   -------
Europe:
     Germany ..................       438         4        406         4
     France ...................     1,316        12        904        10
     Netherlands ..............       414         4        515         6
     Switzerland ..............       487         5      1,233        13
     United Kingdom ...........       318         3        324         4
     Other ....................       731         7        976        11
                                  -------   -------    -------   -------
          Total - Europe ......     3,704        35      4,358        48
                                  -------   -------    -------   -------
Other:
     Israel ...................       386         4        227         2
     Japan ....................       435         4        942        10
     Other ....................       283       184          2
                                            -------    -------   -------
                                                                       2
          Total - Other .......     1,104        10      1,353        14
                                  -------   -------    -------   -------

         Total ................   $10,673       100%   $ 9,168       100%
                                  =======       ===    =======       ===

9) Consolidated Statements of Cash Flows

     Supplemental disclosure of cash flow information:
<TABLE>

                                                            Nine Months Ended September 30,
                                                            -------------------------------
                                                                     2005       2004
                                                                  -------    -------
Cash paid during the period for:
<S>                                                               <C>        <C>
  Interest ....................................................   $    60    $     3
                                                                  =======    =======
  Income taxes (refund) .......................................   $   (21)   $    99
                                                                  =======    =======

Non-cash financing activities:
  Reclassification of financing-related liabilities
    to permanent equity .......................................   $ 1,934         $-
                                                                  =======    =======
  Issuance of warrant .........................................   $   211         $-
                                                                  =======    =======
</TABLE>


10) Comprehensive Loss

     The components of comprehensive loss are as follows:
<TABLE>

                                                          Three Months Ended       Nine Months Ended
                                                               September 30,         September 30,
                                                               2005       2004       2005       2004
                                                       ------------    -------    -------    -------
<S>                                                    <C>             <C>        <C>        <C>
Net loss ...........................................   $     (1,508)   $(1,352)   $(3,292)   $(6,415)
Foreign currency translation adjustment ............              2          2        (83)       (18)
                                                       ------------    -------    -------    -------
Comprehensive loss .................................   $     (1,506)   $(1,350)   $(3,395)   $(6,433)
                                                       ============    =======    =======    =======
</TABLE>
                                       16
<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 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," "could,"  "will,"  "should,"
"seeks,"  "pro  forma,"   "potential,"   "anticipates,"   "predicts,"   "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,  readers are cautioned not to place undue reliance on
such forward-looking statements. Forward-looking statements should be considered
in light of various important factors,  including those set forth in this report
under the caption  "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 AND RECENT EVENTS

On June 29, 2005, we entered into a non-binding letter of intent to sell our DRM
business and related  assets to JMI Equity Fund V, L.P., or JMI, a Baltimore and
San Diego-based private equity firm. In the event this asset sale is consummated
as currently contemplated,  we expect the DRM business to continue to operate in
the ordinary course following the closing of the asset sale as a private company
funded by JMI, with JMI assuming  support and maintenance  services for existing
customers.  We expect  the key  operational  employees  of the DRM  business  to
continue with the new company in their current roles to prevent  interruption of
business operations.

In July 2005, to induce Laurus Master Fund, Ltd., or Laurus,  to subordinate its
security  interest  and  to  provide  all  other  consents   necessary  for  the
transactions  with JMI, we entered into a letter  agreement with Laurus in which
we agreed that we would pay to Laurus in full in cash all outstanding  principal
and accrued and unpaid interest owed to Laurus  simultaneously  with the closing
of the JMI transaction.  This payment will be deemed to be in full  satisfaction
of all of our obligations to Laurus

In July and  September  2005 we received an  aggregate of $1,500 of bridge loans
from JMI.

Effective on September 1, 2005, as described in detail in our  definitive  proxy
statement,  as amended,  filed on October 31,  2005,  which is  incorporated  by
reference  herein in its entirety,  we entered into a definitive  asset purchase
agreement to sell, subject to Shareholder approval, our DRM business and related
assets to ASOC  Acquisition  Corp.,  a new  corporation  formed and owned by JMI
Equity Fund V, L.P.  and JMI Equity Fund V (AI),  L.P.,  or JMI, for $7,000 plus
the assumption of certain liabilities related to the DRM business.

The DRM business to be sold includes our Axeda DRM software  systems designed to
remotely monitor,  manage and service  intelligent  devices deployed at end-user
sites.  The Axeda DRM software  systems include Axeda Agent  software,  an Axeda
Enterprise server and Axeda Applications and related products and services.  The
assets  include  customer and partner  agreements,  intellectual  property,  and
certain  furniture  and  equipment  used in the DRM  business.  The DRM business
revenues have been derived  principally  from sales to customers  located in the
United States, Japan and Europe.

The DRM  business to be sold does not  include  the assets that are  employed in
connection  with  the  production,  distribution  and  sale  of  the  industrial
automation  products  that are  marketed,  primarily  in  Europe,  as the "Axeda
Supervisor"  or  "Wizcon"  product  family,  which  is also  referred  to as the
Industrial Technology for Automation, or ITA business.

The DRM business does not constitute a separate  legal entity.  The DRM business
is conducted  primarily by our operating  subsidiary  corporation  in the United
States,  Axeda Systems  Operating  Company,  Inc., but also includes most of the
business  activities of our subsidiaries in Japan and Germany,  and also a small
part of the activity of our subsidiary in France.
                                       17
<PAGE>
In connection with the transaction, JMI has provided $1,500 of bridge loans. The
bridge  loans  bear  interest  at the rate of 7% per  annum and are  secured  by
security interests in the assets of our DRM business.

We  anticipate  that the $7,000 of proceeds we will  receive upon closing of the
Asset Purchase  Agreement  will be reduced by the $1,500  principal plus accrued
interest of approximately $30 on our borrowings from JMI. In addition, we expect
to use a portion of the remaining net proceeds to pay:

     o    the estimated  combined balance of $4,725, as of November 30, 2005, of
          principal and accrued interest that we owe to Laurus, and

     o    anticipated transaction costs of $550, and

     o    working capital requirements of $195.

We will  seek the  approval  of our  stockholders  to  consummate  the  proposed
transaction  at the  Special  Meeting  of  Stockholders'  Meeting  to be held on
December  2,  2005.  There  can  be no  assurance  that  we  will  receive  such
stockholder approval.

If the sale of our DRM business to JMI is consummated,  substantially all of our
revenue will be derived from our remaining assets,  the ITA business.  We do not
have experience operating our business with this single product family and we do
not expect  that the  revenues to be  generated  from the ITA  business  will be
sufficient  to allow us to  continue  to  operate  as a going  concern.  We have
recently received some inquiries from third parties who have indicated that they
may be interested in acquiring the ITA business.  We would consider  selling the
ITA  business  if we were  offered  favorable  terms.  However,  there can be no
assurances  that a  suitable  acquirer  will be  identified  and  that we  could
negotiate a favorable price and terms for such transaction.

If sales of both the DRM business and the ITA business are consummated, we would
expect to use the proceeds to pay our creditors, including Laurus. To the extent
that  not all of our  obligations  to  creditors  would  be  satisfied  with the
proceeds of such  sales,  we would most likely  commence  proceedings  under the
Bankruptcy Code.

If the sale of the DRM business is not consummated

     o    we do not believe we will be able to repay our secured indebtedness to
          JMI or to Laurus; and

     o    JMI will have the option of acquiring the secured indebtedness that we
          owe to Laurus.

If JMI does not  exercise  that  option,  then  Laurus  will have the  option of
acquiring  the  indebtedness  that we owe to JMI. If either of those two secured
creditors  exercises its option, the acquiring creditor will be in a position to
foreclose on the combined $6,000,000 security interest covering our DRM business
and assets,  and thereby  acquire  title to the DRM business and assets  without
consummating the proposed sale of the DRM business.  If that occurs, we will not
receive any part of the  $7,000,000  purchase  price that we would  receive upon
consummation of the sale.

If the sale of the DRM  business is not  consummated,  and even if it is, but we
are unable to sell or find a strategic  buyer for the ITA  business on favorable
terms,  it is very likely that we will have to  commence  proceedings  under the
Bankruptcy Code.

On July 7, 2005, our common stock was delisted from The Nasdaq  SmallCap  Market
because we did not achieve a $1.00  minimum bid price by June 30, 2005  required
under an exception to the minimum bid price  requirement  we had been granted to
permit our continued  inclusion in such market.  Since July 7, 2005,  quotations
for our common stock have appeared in the "Pink Sheets."

Our  operating  loss for the three and nine  months  ended  September  30,  2005
decreased by $1,552,  or 60%, to $1,020,  and  decreased  by $5,249,  or 62%, to
$3,221,  compared to the prior year  periods,  which  reflects  the  increase in
revenues and the reduction in our cost of revenues and operating costs.

For the three and nine months ended  September 30, 2005, our operating  expenses
decreased  by $778,  or 18%,  to $3,586,  and  decreased  by $2,884,  or 21%, to
$11,181,  respectively,  compared to the prior year  periods due mainly to prior
years' staffing reductions in research and development,  and sales and marketing
departments.
                                       18
<PAGE>
Interest  expense was $493 in the quarter  and $1,286 in the  nine-month  period
compared  to  minimal  expense  in the  prior  same  periods  due to the  Laurus
convertible  debt  financing.  Interest  expense  includes  the  nominal  stated
interest and amortization of the beneficial  conversion  feature of the note and
the  amortization  of the value of the warrants  issued to Laurus in  connection
with the Note financing as required by GAAP.

At September 30, 2005 our cash and cash equivalents balance was $1,484, compared
with  $2,429 as of  December  31, 2004 due mainly to the $2,315 net cash used in
operations, offset partially by the $1,500 Bridge Loan from JMI.

Going-Concern  Exception  in the  Report of our  Independent  Registered  Public
Accounting  Firm  Contained in our Annual Report for the Year Ended December 31,
2004

We have  sustained  significant  losses from  operations and negative cash flows
from operations  since  inception.  For the nine months ended September 30, 2005
and 2004 our operating losses were $3,221 and $8,470, respectively.

The report of our independent  registered public accounting firm on our December
31, 2004 consolidated  financial  statements  included an explanatory  paragraph
indicating  there is substantial  doubt about our ability to continue as a going
concern.

Since July 1, 2005, we have been in default under the Laurus Secured Convertible
Term Note, or Note, issued to Laurus Master Fund, Ltd, or Laurus, for failing to
pay when due interest under the Note for June, July,  August and September 2005,
as well as the July, August and September 2005 principal payments. Article IV of
the Note defines  "Events of Default" as the failure to pay any  installment  of
principal  or  interest  within  three  days of the due date,  and that upon the
occurrence and  continuance of an Event of Default,  Laurus may make all sums of
principal,  interest and other fees then remaining  unpaid  immediately  due and
payable.  In the  event of such an  acceleration,  the  amount  due and owing to
Laurus shall be one hundred twenty percent (120%) of the  outstanding  principal
amount, plus accrued and unpaid interest and fees. In addition, the registration
rights  agreement  entered into in  connection  with the Note states that if our
shares are not traded on a "Trading  Market",  which does not  include the "Pink
Sheets",  where our  shares of  common  stock  currently  trade,  then  Axeda is
obligated  to issue  certain  warrants to Laurus,  and our failure to do so also
constitutes a default under the Note.

In a Letter  Agreement dated July 8, 2005 between Axeda Systems Inc. and Laurus,
Laurus agreed to accept payment in full in cash of the outstanding principal and
accrued  and unpaid  interest  simultaneously  with the closing of the JMI Asset
Sale, in full satisfaction of our obligations.  However, in the event bankruptcy
proceedings are initiated by or against us prior to the closing of the JMI Asset
Sale, the default penalties described above would resume.

Management  has  developed  and begun to implement a plan to address this issue,
which  includes the sale of our DRM business and may include the sale of our ITA
business. However, there can be no assurance that we will successfully implement
our plan or that we will be able to continue as a going  concern.  Our plan also
requires us to receive additional  financing from new or current investors if we
do not sell our DRM business or find a buyer or partner for our ITA business. We
do not expect such financing to be available on favorable  terms, if at all. Our
unaudited  consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

FINANCING TRANSACTIONS

Bridge Loans from JMI

In connection  with the DRM Asset Sale, JMI has provided $1,500 of bridge loans,
$600 of which  was  advanced  to us in July  2005,  and the  remaining  $900 was
advanced  to us in  September  2005  following  the  signing  of the  definitive
documents.  The bridge  loans bear  interest at the rate of 7% per annum and are
secured  by  security  interests  in the  assets  of  our  DRM  business.  It is
anticipated  that the JMI Bridge Loans and accrued  interest will be paid to JMI
out of the DRM sales proceeds at the Closing.

Laurus Note Payable

On October 5, 2004, we issued to Laurus, a secured convertible term note, or the
Note, in the principal amount of $4,500 and received net proceeds of $3,910. The
Note is  convertible  into  shares  of our  common  stock  at an  initial  fixed
conversion  price of $0.48  per  share.  The Note has a term of three  years and
accrues  interest at the prime rate plus 2% per year (8.75% as of September  30,
2005).

On May 4, 2005, we amended our note with Laurus and several  related  agreements
for the primary  purpose of having  Laurus  postpone our  required  repayment of
principal in May and June 2005.  These principal  repayments will become payable
in  September  2007 and  October  2007,  respectively,  subject  to the  earlier
repayment as  contemplated  by the  transaction  with JMI  discussed  above.  In
exchange for these amendments, we issued to Laurus a warrant to purchase 750,000
shares of our common stock at an exercise price of $0.37 per share.  The warrant
is  exercisable  for a term of five  years and the  estimated  fair value of the
warrant of $211 is being amortized as additional  interest expense over the term
of the loan.
                                       19
<PAGE>
As of July 1, 2005, we are in default under the Note for failing to pay interest
due under the Note for June July,  August  and  September  2005,  as well as the
July,  August  and  September  2005  principal  payments  when due.  In a Letter
Agreement  dated July 8, 2005 between  Axeda  Systems  Inc.  and Laurus,  Laurus
agreed  to  accept  payment  in full in cash of the  outstanding  principal  and
accrued  and unpaid  interest  simultaneously  with the closing of the DRM Asset
Sale, in full satisfaction of our obligations.  However, in the event bankruptcy
proceedings are initiated by or against us prior to the closing of the DRM asset
sale with ASOC Acquisition Corp, the applicable default penalties would resume.

LEASES

On July 11, 2005 we entered  into a Letter of Intent to sublease  14,711  square
feet of space in Foxborough,  MA, which is in the same industrial/office complex
as our current  offices.  In October 2005 we finalized  the sublease  agreement,
which  proposes  annual rent of $125,  plus  operating  expenses,  utilities and
taxes, for the 18-month term of September 29, 2005 to March 31, 2007.

In July 2005, we entered into a Sublease  Termination  Agreement for our offices
in Mansfield, MA under which we were obligated to surrender these premises on or
before October 1, 2005 or the  Termination  Date,  rather than the current lease
termination date of July 2007. This termination agreement provided for no rental
liability from July 1, 2005 to the  Termination  Date.  The security  deposit of
$150 and related  letter of credit were  reduced by $100 upon the signing of the
Termination  Agreement,  and by another $25 upon the signed lease for  alternate
space,  and the final $25 will be returned after  surrendering  the premises and
the final inspection.

With the finalizing of the Sublease  Agreement for our office in Foxborough,  MA
on September 29, 2005,  our lease  commitments,  including  rent,  utilities and
taxes,  will be reduced by  approximately  $582 over the  remaining  lease term,
compared to the Mansfield, MA sublease.


                                       20
<PAGE>
RESULTS OF OPERATIONS

Three and Nine Months Ended  September 30, 2005 Results of Operations,  Compared
to Three and Nine Months Ended September 30, 2004.

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 (In thousands)
<TABLE>

                                                Three Months Ended September 30,                 Nine Months Ended September 30,
                                                --------------------------------                 -------------------------------
                                                 2005                    2004                 2005                  2004
                                        ----------------------   ---------------------   ------------------- ---------------------
                                                    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 ...........................   $  1,860       55.1%   $  1,700      62.1%     $ 6,136      57.5%  $  5,611      61.2%
   Services and maintenance ..........      1,514       44.9       1,021      37.3        4,528      42.4      3,454      37.7
   Hardware ..........................          1        0.0          17        .6            9       0.1        103       1.1
                                         --------    -----      --------    ----       --------    ----     --------    ----
     Total revenues ..................      3,375      100.0       2,738     100.0       10,673     100.0      9,168     100.0
                                         --------    -----      --------    ----       --------    ----     --------    ----

Cost of revenues:
   License ...........................         99        3.0         104       3.8          297       2.8        534       5.8
   Services and maintenance ..........        598       17.7         730      26.6        2,080      19.5      2,703      29.5
   Software amortization .............        112        3.3         112       4.1          336       3.1        336       3.7
                                              ---        ---         ---       ---          ---       ---        ---       ---
     Total cost of revenues                   809       24.0        946       34.5        2,713      25.4      3,573      39.0
                                              ---       ----        ---       ----        -----      ----      -----      ----


   Gross profit ......................      2,566       76.0      1,792       65.5        7,960      74.6      5,595      61.0
                                         --------    -----     --------     ----       --------    ----     --------    ----

Research and development (R&D) .......        678       20.1        944       34.5        2,364      22.2      3,068      33.4
Sales and marketing (S&M) ............      1,112       32.9      1,760       64.3        4,104      38.5      5,775      63.0
General and administrative (G&A) .....      1,371       40.6      1,338       48.8        3,906      36.6      4,382      47.8
Depreciation and amortization ........        425       12.6        322       11.8          807       7.5        840       9.2
                                         --------    -----     --------     ----       --------    ----     --------    ----
   Total operating costs .............      3,586      106.2      4,364      159.4       11,181     104.8     14,065     153.4
                                         --------    -----     --------     ----       --------    ----     --------    ----

   Operating loss ....................     (1,020)     (30.2)    (2,572)     (93.9)      (3,221)    (30.2)    (8,470)    (92.4)

Gain (loss) on disposal of assets ....         (3)    --           --        -               (2)   --            110       1.2

Interest income (expense), net .......       (493)     (14.7)        (5)     -           (1,286)    (12.0)       (35)      (.4)

Other income (expense), net ..........         58        1.7      1,241       45.1        1,375      12.9      2,026      22.1
                                         --------    -----     --------     ----       --------    ----     --------    ----

   Loss before income taxes ..........     (1,458)     (43.2)    (1,336)    (48.8)      (3,134)    (29.3)    (6,369)    (69.5)

Provision for income taxes ...........         50        1.5         16       0.6          158       1.5         46       0.5
                                         --------    -----     --------    ----       --------    ----     --------    ----
   Net loss ..........................   $ (1,508)   (44.7)    $ (1,352)   (49.4)     $ (3,292)    (30.8)   $ (6,415)   (70.0)
                                         ========    =====     ========    =====      ========     =====    ========    =====

</TABLE>


                                       21
<PAGE>
RESULTS OF OPERATIONS

REVENUES.  Overall  revenues  increased by $637,  or 23%, to $3,375 in the third
quarter of 2005 compared to the 2004 third quarter,  and increased by $1,505, or
16%, to $10,673  for the first nine months of 2005,  compared to the same period
in 2004. This revenue increase was driven by higher DRM revenues  resulting from
the continued  acquisition of new customer accounts,  additional spending by our
existing  customers  and the  increase in  maintenance  revenue due to continued
growth.

License  revenues  in the third  quarter of 2005  increased  by $160,  or 9%, to
$1,860  compared to the 2004 third  quarter,  and  increased by $525,  or 9%, to
$6,136 in the first nine months of 2005  compared to the same period in 2004 due
to sales  contracts  from both  existing  and new  customers in the current year
periods,  and  continued  customer  acceptance  of our  DRM  solutions  for  M2M
communication.

Services  and  maintenance  revenues in the third  quarter of 2005  increased by
$493,  or 48%, to $1,514  compared to the 2004 third  quarter,  and increased by
$1,074,  or 31%, to $4,528 in the first nine months of 2005 compared to the same
period in 2004 due to greater demand for our professional services in connection
with the expansion of existing DRM system installations,  additional maintenance
plans sold with new DRM systems  licenses and increasing sales of our hosted DRM
system solution, which was launched in the second quarter of 2004.

COST OF REVENUES. For the third quarter of 2005 total cost of revenues was $809,
which was  $137,  or 14%,  lower  than the 2004  third  quarter.  Total  cost of
revenues was $2,713 for the first nine months of 2005,  which was $860,  or 24%,
lower  compared to the same period in 2004,  due primarily to decreases in staff
and  staff-related   expenses,   resulting  from  our  ongoing  cost  monitoring
initiatives, and reductions in charges for bundled third-party software.

Cost of license  revenues in the third quarter of 2005 decreased by $5, or 4.8%,
to $99,  compared  to $104 in the third  quarter  of 2004,  and cost of  license
revenues in the first nine  months of 2005  decreased  by $237,  or 44%, to $297
compared  to $534 in the same  period in 2004.  These  decreases  are  primarily
because of reductions in charges for third-party  software  bundled with our DRM
system products,  reductions in hardware sold as components of bundled solutions
and reductions in royalties owed to the Office of the Chief  Scientist in Israel
in connection with sales of our ITA products, for which contractual  obligations
ended in the first quarter 2004.

Cost of services and maintenance decreased by $132, or 18%, to $598 in the third
quarter of 2005,  compared  to $730 in the third  quarter  of 2004,  and for the
first nine months of 2005 cost of  services  and  maintenance  revenue of $2,080
decreased  by $623,  or 23%,  compared to the same  period  last year.  The 2005
decreases in cost of services  and  maintenance  revenue was  achieved  although
services  and  maintenance  revenues  increased by 48% and 31% for the three and
nine months ended,  respectively,  due to higher employee productivity driven by
prior years' workforce reductions,  including the closing of our office in Japan
in September 2004, offset by increases in the costs of other internal  resources
and utilization of lower-cost, third party consultants to meet peak demand.

GROSS  PROFIT.  Gross profit  increased by $774,  or 43%, to $2,566 in the third
quarter of 2005,  compared to $1,792 in the third  quarter of 2004,  and, in the
first nine months of 2005,  increased by $2,365, or 42%, to $7,960 due primarily
to the increase in revenues, combined with the reductions in cost of revenues as
discussed above.

RESEARCH AND DEVELOPMENT  EXPENSE (R&D).  R&D consists of staff,  staff-related,
professional  and other  development-related  support costs  associated with the
development of new products,  quality assurance and product testing. R&D for the
quarter ended September 30, 2005 decreased $266, or 28%, to $678,  compared with
the  prior  year  quarter.   This  change   included   decreases  in  staff  and
staff-related  expenses of $160, and the reclassification of $90 to services and
maintenance  cost  of  revenues  for  the  cost of R&D  personnel  utilized  for
professional services engagements. For the nine months ended September 30, 2005,
R&D  decreased  $702,  or 23%, to $2,364 due primarily to decreases in staff and
staff-related  expenses of $465 and the reclassification of $205 to services and
maintenance  cost  of  revenues  for  the  cost of R&D  personnel  utilized  for
professional  services  engagements.  As a  percentage  of total  revenues,  R&D
decreased  from 35% to 20% for the third  quarter of 2005  compared  to the same
quarter  in  2004,  and  decreased  from 33% to 22% for the  nine  months  ended
September  30,  2005  compared  to the same  period  in 2004.  These  percentage
decreases  are due  primarily to the  reduction in R&D and the increase in total
revenues.

                                       22
<PAGE>
SALES AND MARKETING EXPENSE (S&M). S&M consists of salaries, travel expenses and
costs,  advertising and other sales and marketing  efforts.  S&M for the quarter
ended September 30, 2005 decreased $648, or 37%, to $1,112 compared to the prior
year quarter. For the nine months ended September 30, 2005 S&M decreased $1,628,
or 28%, to $4,104.  During the quarter ended  September 30, 2005,  reduced staff
and  staff-related  expense  contributed $400 to the decrease which included the
closing of the Japan office in August,  2004,  while  continued  cost  reduction
efforts led to a decline in various  other  departmental  support  costs,  which
combined  for a  decrease  of an  additional  $300 from the prior  year,  offset
partially by an increase of $80 in commissions paid due to increase DRM sales in
the US. For the nine months ended  September  30, 2005,  reduced  severance  and
staff  reductions   including  office  closings  effective  September  30,  2004
contributed $200 and $1,200, respectively.  Continued cost reduction efforts led
to a decline in various other  departmental  support costs, which combined for a
decrease of an additional  $500 from the prior year. The  nine-month  reductions
were partially  offset by an increase in commissions of $360 due to the increase
in revenues. As a percentage of revenues,  S&M decreased from 64% to 33% for the
third quarter of 2005 compared to the same quarter in 2004,  and decreased  from
63% to 39% for the nine months  ended  September  30, 2005  compared to the same
period in 2004. These  percentage  decreases were due to the reduced S&M and the
increase in total revenues.

GENERAL AND ADMINISTRATIVE  EXPENSE (G&A). G&A consists of staff,  staff-related
expenses,  office overhead costs, and outside  professional legal and accounting
fees, of our finance, human resources,  legal and other management  departments.
G&A for the quarter ended September 30, 2005 increased by $42, or 3%, to $1,371.
For the nine months ended  September 30, 2005,  G&A decreased by $408, or 9%, to
$3,906 due to reductions  in staff and  staff-related  expenses of $1,800,  as a
result of past staff reduction  measures  taken,  reductions in costs of certain
insurance  coverage of $100,  and $200 reduction in other  miscellaneous  costs.
These reductions were offset by the settlement of an assumed lease obligation of
an acquired  business of $600 in the third  quarter of 2004.  A similar  accrual
reversal was not recorded in the current  quarter  ended  September 30, 2005. In
addition,  increased  legal and  professional  fees  related to the patent legal
proceedings and proposed asset sale  transactions  added $1,100 to the increase.
As a percentage  of revenues,  G&A was 41% for the third quarter of 2005 and 49%
for the third quarter of 2004, and decreased from 47% to 37% for the nine months
ended September 30, 2005 compared to the same period in 2004 due to the increase
in total revenues and the reduced G&A.

INTEREST INCOME  (EXPENSE),  NET. Net interest  expense for the third quarter of
2005 was $493 and for the nine  months  ended  September  30,  2005 was  $1,286,
compared to nominal  amounts for the same periods in 2004. The increases for the
three and nine months ended September 30, 2005 are the result of the issuance of
the Note to Laurus in October 2004, the related  amortization  of original issue
discount and debt issuance costs,  and the monthly coupon interest due. The debt
discount and debt issuance costs are being amortized over the three-year term of
the Note.

OTHER  INCOME,  NET.  Net  other  income  of $1,375  for the nine  months  ended
September  30,  2005  consists   primarily  of  the  reversal  in  2005  of  the
financing-related  liabilities recorded in the fourth quarter 2004 in connection
with  the  Laurus  and  SSF  financings.   For  the  same  period  in  2004  the
mark-to-market  non-cash gains of $2,026 were primarily  attributable to a lower
stock price compared to the stock price as of the end of the preceding period.

Effective  in  February  2005,  as a result of certain  amendments  with SSF and
Laurus, the accounting and reporting requirements of EITF 00-19 no longer apply,
and the  estimated  fair value of the  financing-related  liabilities  after the
mark-to-market  valuation  adjustment  as of  February  16,  2005 of $1,934  was
reclassified to additional paid-in capital.

FOREIGN  CURRENCY EFFECTS ON RESULTS OF OPERATIONS.  Foreign currency  movements
for the three months ended September 30, 2005 had no effect on revenues from the
same period in the prior  year.  For the nine months  ended  September  30, 2005
currency  exchange  rate  movements  increased  revenues  by $130  from the same
periods in the prior year due primarily to a  strengthening  of the U.S.  dollar
against the Euro beginning in May 2005.

                                       23
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

Since March 2001, our operations have largely been financed through the sales of
the assets of our former consumer  electronics  business and our former Internet
appliance  business,  the  sale of  shares  of our  common  stock  in a  private
placement transaction with Special Situations Private Equity Fund, L.P., or SSF,
in September 2003 and the issuance of the convertible term note to Laurus Master
Fund,  Ltd., or Laurus in a private  placement  transaction  in October 2004. In
addition JMI, in connection  with the DRM Asset Sale,  provided us with a Bridge
Loan of $1,500.  At September 30, 2005 we had  approximately  $1,484 in cash and
cash equivalents.

Net cash used in operations  for the nine months  ending  September 30, 2005 was
$945,  compared  to  $8,248  for same  period in 2004.  Cash  used in  operating
activities for the first nine months of 2005 was primarily the result of our net
cash used in  operations  of $2,315,  partially  offset by the $1,500 JMI Bridge
Loan.

Net cash used in  operations  for the nine months ended  September  30, 2004 was
$7,848. Cash used in operating  activities for the first nine months of 2004 was
primarily the result of our net loss of $6,369 and unrealized  gains recorded of
$2,136.  In addition,  capital  expenditures were $148, and net repayments under
the bank line of credit were $287.


LACK OF LIQUIDITY AND AVAILABILITY OF FINANCIAL RESOURCES

We have  limited  financial  resources  currently  available  to  invest  in new
initiatives,  additional key personnel, new equipment and operating capital. The
report of our independent  registered public accounting firm on our December 31,
2004  consolidated   financial  statements  included  an  explanatory  paragraph
indicating  there is substantial  doubt about our ability to continue as a going
concern.  Management has developed and begun to implement a plan to address this
issue,  which  includes  the sale of our Axeda DRM system  business and may also
include the sale of our ITA product family  business.  However,  there can be no
assurance that we will  successfully  implement our plan or that we will be able
to  continue  as a going  concern.  If the DRM  business  sale does not  receive
stockholder  approval,  and/or  we are  unable  to  sell or  enter  a  strategic
partnership  regarding our ITA business,  it is unlikely that we will be able to
continue our business  operations in the absence of our plan also requires us to
receive  additional  financing from new or current  investors.  We do not expect
such financing to be available on favorable  terms, if at all. The  accompanying
unaudited  consolidated financial statements do not include any adjustments that
might result from the outcome of these uncertainties.

SALE OF DRM BUSINESS AND ASSETS AND BRIDGE LOAN

DRM Asset Sale to ASOC Acquisition Corp., a subsidiary of JMI.

We entered  into a  definitive  asset  purchase  agreement  to sell,  subject to
Shareholder  approval,  our DRM business and related assets to ASOC  Acquisition
Corp.,  a new  corporation  formed and owned by JMI Equity Fund V, L.P.  and JMI
Equity Fund V (AI),  L.P.,  or JMI,  for $7,000 plus the  assumption  of certain
liabilities related to the DRM business.

In connection  with the  transaction,  JMI has provided  $1,500 of bridge loans,
$600 of which  was  advanced  to us in July  2005,  and the  remaining  $900 was
advanced to us in September 2005 following signing of the definitive  documents.
The bridge  loans bear  interest  at the rate of 7% per annum and are secured by
security interests in the assets of our DRM business.

We  anticipate  that the $7,000 of proceeds we will  receive upon closing of the
Asset  Purchase  Agreement  will be reduced by the $1,530  principal and accrued
interest on our bridge loan from JMI. In addition, we expect to use
the remaining net proceeds as follows:

     o    the estimated  combined balance of $4,725, as of November 30, 2005, of
          principal and accrued interest that we owe to Laurus will be paid,
     o    anticipated transaction costs of $550 will be paid, and
     o    the $195 balance will be added to working capital.

                                       24
<PAGE>
Laurus has agreed to  subordinate  its right to payment of the note we issued to
it,  and its  security  interest  in those  assets,  so that JMI  holds a senior
secured  lien  therein to the extent of the first $600 of bridge  loans that JMI
provides to us. To induce  Laurus to  subordinate  its security  interest and to
provide all other consents  necessary for the  transactions  with JMI, we agreed
that we would pay to Laurus in full in cash all outstanding principal and unpaid
interest owed to Laurus  simultaneously with the closing of the JMI transaction.
This payment will be deemed to be in full satisfaction of all of our obligations
to Laurus,  and we will not be required to pay to Laurus the prepayment  penalty
that  would  have  required  payment of 120% of the  outstanding  principal  and
accrued  and unpaid  interest  owed to Laurus.  If  bankruptcy  proceedings  are
initiated by or against us prior to the closing of the JMI transaction,  then we
will  again  become  obligated  to pay the  prepayment  penalty  and  any  other
obligations that may arise.

We have recently  received some  inquiries from third parties who have indicated
that they may be  interested in acquiring the ITA product  family  business.  We
would  consider  selling the ITA  product  family  business  if we were  offered
favorable terms.  However,  there can be no assurances that a suitable  acquirer
will be identified and that we could  negotiate a favorable  price and terms for
such transaction.

If sales of both the  Axeda  DRM  system  business  and the ITA  product  family
business  are  consummated,  we  would  expect  to use the  proceeds  to pay our
creditors,  including  Laurus as described  above. To the extent that not all of
our  obligations  to creditors were  satisfied,  we will likely have to commence
proceedings under the Bankruptcy Code, or be forced to enter bankruptcy.

FINANCING EVENTS AND AMENDMENTS

Bridge Loan from JMI

In connection  with the DRM Asset Sale, JMI has provided $1,500 of bridge loans,
$600 of which  was  advanced  to us in July  2005,  and the  remaining  $900 was
advanced to us in September 2005 following signing of the definitive  documents.
The bridge  loans bear  interest  at the rate of 7% per annum and are secured by
security interests in the assets of our DRM business. It is anticipated that the
JMI Bridge Loans and accrued  interest  will be paid to JMI out of the DRM sales
proceeds at the Closing.

Laurus Note Payable

On October 5, 2004, we issued to Laurus, a secured convertible term note, or the
Note, in the principal amount of $4,500 and received net proceeds of $3,910. The
Note is  convertible  into  shares  of our  common  stock  at an  initial  fixed
conversion  price of $0.48  per  share.  The Note has a term of three  years and
accrues  interest at the prime rate plus 2% per year (8.75% as of September  30,
2005).

On February 16, 2005, we amended the securities  purchase  agreement with Laurus
such that any liquidated damages that may arise for failure to deliver shares of
common  stock upon  conversion  of  Laurus'  Note in a timely  manner,  would be
payable in a warrant to purchase unregistered shares of common stock rather than
cash and we would be obligated to use our best efforts to subsequently  register
the underlying  shares.  We also amended the registration  rights agreement with
Laurus  such that any  liquidated  damages  that may arise for failure to file a
registration  statement  for any  shares  that may be  issued  to  Laurus in the
future,  to cause such registration  statement to become effective,  to maintain
the  effectiveness  of such  registration  statement or to keep our common stock
listed or quoted would be payable in a warrant to purchase  unregistered  shares
of  common  stock  rather  than cash and we would be  obligated  to use our best
efforts to subsequently register the underlying shares.

On May 4,  2005,  we  amended  the Note  issued to Laurus  and  several  related
agreements  for the primary  purpose of  amending  some of the due dates for the
repayment of principal. Specifically, the principal payments due in May and June
2005,  of $150 each which had to be paid in cash  because our common stock price
was below the level in the Laurus  agreements that would have permitted  payment
of the Laurus Note  principal  and  interest in common  stock.  The May and June
payments were  postponed  until  September and October  2007,  respectively.  In
exchange for these amendments, we issued to Laurus a warrant to purchase 750,000
shares of our common  stock at an  exercise  price of $0.37 per share and with a
term of five years.

As of July 1, 2005, we are in default under the Note for failing to pay interest
due under the Note for June July,  August  and  September  2005,  as well as the
July,  August  and  September  2005  principal  payments  when due.  In a Letter
Agreement  dated July 8, 2005 between  Axeda  Systems  Inc.  and Laurus,  Laurus
agreed  to  accept  payment  in full in cash of the  outstanding  principal  and
accrued  and unpaid  interest  simultaneously  with the closing of the DRM Asset
Sale, in full satisfaction of our obligations.
                                       25
<PAGE>
However,  in the event  bankruptcy  proceedings  are  initiated by or against us
prior to the  closing  of the DRM asset  sale with ASOC  Acquisition  Corp,  the
applicable  default  penalties  would  resume.  Article  IV of the Note  defines
"Events of  Default"  as the  failure to pay any  installment  of  principal  or
interest  within three days of the due date,  and that upon the  occurrence  and
continuance  of an  Event of  Default,  Laurus  may make all sums of  principal,
interest and other fees then remaining  unpaid  immediately due and payable.  In
the event of such an  acceleration,  the amount due and owing to Laurus shall be
one hundred twenty  percent (120%) of the  outstanding  principal  amount,  plus
accrued and unpaid interest and fees.

In addition, the Laurus registration rights agreement entered into in connection
with the Note  states  that if our shares are not traded on a "Trading  Market",
which does not  include  the "Pink  Sheets",  where our  shares of common  stock
currently  trade,  then Axeda is obligated to issue certain  warrants to Laurus,
and our failure to do so also constitutes a default under the Note.

SSF

On September 23, 2003, we issued  4,918,100 shares of our common stock to SSF in
a private placement of our common stock. The shares were sold at $1.22 per share
with net proceeds of $5,597.

On February 16, 2005, we amended the registration rights agreement with SSF such
that any  liquidated  damages that may arise for failure to file a  registration
statement for any shares that may be issued to SSF in the future,  to cause such
registration  statement to become effective or to maintain the  effectiveness of
such  registration  statement would be payable in unregistered  shares of common
stock  rather  than cash and we would be  obligated  to use our best  efforts to
subsequently register the shares.


                                       26
<PAGE>
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS

Investing in our common stock involves a high degree of risk. In addition to the
other  information  in this  Quarterly  Report on Form 10-Q and the  information
incorporated  by  reference  herein,  you should  carefully  consider  the risks
described  below before  purchasing  our common  stock.  If any of the following
risks  occur,  our  business  could  be  materially  harmed,  and our  financial
condition and results of operations could be materially and adversely  affected.
As a result, the price of our common stock could decline, and you could lose all
or part of your investment.

DRM ASSET SALE RISK FACTORS

You should  carefully  consider the following  risk factors  relating to the DRM
Asset Sale  before  deciding to invest in our stock.  You should also  carefully
consider the additional  information in the Definitive  Proxy Statement filed on
October 31, 2005,  and the  additional  information in our other reports on file
with the  Securities  and Exchange  Commission  including  the December 31, 2004
Annual  Report  filed  on SEC Form  10-K  filed on April  12,  2005,  which  are
incorporated herein in their entirety.

WE MAY SELL SUBSTANTIALLY ALL OF THE ASSETS OF OUR BUSINESS.  IF WE DO SO, THERE
IS NO ASSURANCE  THAT  STOCKHOLDERS  WOULD  RECEIVE ANY OF THE PROCEEDS FROM THE
SALE OF OUR ASSETS.

The assets involved in the proposed sale of the DRM business to ASOC Acquisition
Corp. accounted for approximately 50% of our total revenues in 2003, 49% in 2004
and 59% in the first six months of 2005. Following completion of the sale of our
DRM business and assets, if it occurs, we will no longer have the revenue stream
generated by those assets.

We have recently  received some  inquiries from third parties who have indicated
that they may be  interested  in acquiring the  industrial  automation  products
manufacturing   and   distribution   business   through   which  we  market  our
"Wizcon/Supervisor"  product  family.  We may  consider  selling the  Supervisor
products  family  business if we are offered terms that we view to be favorable.
However,  there can be no assurances that a suitable acquirer will be identified
or that we could negotiate a favorable price and terms for such transaction.

Even if we succeed  in  selling  substantially  all of our  assets,  there is no
assurance  that  after the  necessary  payments  to  creditors,  there  would be
sufficient  funds remaining for  distribution to stockholders or that we may not
file for or be forced into bankruptcy.

THERE ARE NO  ASSURANCES  THAT THE SALE OF THE DRM  BUSINESS  AND ASSETS WILL BE
COMPLETED.

ASOC  Acquisition  Corp.  will not be  obligated to complete the sale of the DRM
business  and  assets  unless  all  conditions  to  ASOC   Acquisition   Corp.'s
obligations are satisfied or waived,  including our obligation to assign various
contracts and agreements to ASOC Acquisition  Corp. and the requirement that our
stockholders approve the transaction. There can be no assurance that all of such
conditions will be satisfied or waived and that we will receive such stockholder
approval.

IN THE EVENT THAT THE SALE OF THE DRM BUSINESS IS NOT CONSUMMATED,  IT IS LIKELY
THAT JMI AND/OR LAURUS WILL  FORECLOSE ON  SUBSTANTIALLY  ALL OF OUR ASSETS,  OR
THAT WE WILL COMMENCE PROCEEDINGS UNDER THE BANKRUPTCY CODE.

Laurus has made a $4,500,000  loan to us. JMI has provided  $1,500,000 of Bridge
Loans to us. To secure the payment of all obligations  owed by us to Laurus,  we
granted to Laurus a security  interest in, and lien upon,  all of our assets and
the assets of some of our U.S.  subsidiaries and we pledged the stock of some of
our U.S.  subsidiaries to Laurus.  To secure the payment of all obligations owed
by us to  JMI,  we  granted  to JMI a  security  interest  in,  and  lien  upon,
substantially  all of the assets  employed in the DRM  business.  The JMI Bridge
Loans will become due and payable at the time of closing of the asset sale, upon
the  occurrence  of an event of default  or  termination  of the Asset  Purchase
Agreement for any reason or on December 15, 2005, whichever occurs first. To the
extent we are unable to repay the Bridge  Loans at such time,  we may be subject
to foreclosure by JMI on substantially all of the assets of Axeda and certain of
its subsidiaries related to the DRM business.  In addition,  to induce Laurus to
subordinate  its security  interest and to provide all other consents  necessary
for the transactions  with JMI, we agreed that we would pay to Laurus in full in
cash all  outstanding  principal and accrued and unpaid  interest owed to Laurus
simultaneously  with the closing of the JMI  transaction.  This  payment will be
deemed to be in full  satisfaction of all of our  obligations to Laurus,  and we
will not be required  to pay to Laurus the  prepayment  penalty  that would have
required  payment of 120% of the  outstanding  principal  and accrued and unpaid
interest owed to Laurus.  If bankruptcy  proceedings are initiated by or against
us  prior to the  closing  of the JMI  transaction,  then we will  again  become
obligated  to pay the  prepayment  penalty in  accordance  with the terms of the
Laurus  debt and any other  obligations  that may  arise.  In the event that the
Asset Purchase  Agreement is terminated,  our  indebtedness to JMI and Laurus in
the aggregate  principal  amount of  approximately $6 million plus interest will
then become due and payable. If that occurs, it is unlikely that we will be able
                                       27
<PAGE>
to pay that  indebtedness.  If  either  or both of Laurus  and JMI  commence  to
foreclose on their  respective  liens,  such  actions  would  substantially  and
materially adversely affect our financial condition and our ability to remain in
business.

If the sale of the DRM  business is not  consummated,  and even if it is, but we
are unable to sell or find a strategic  buyer for the ITA  business on favorable
terms,  it is very likely that we will have to  commence  proceedings  under the
Bankruptcy Code.


FOLLOWING  THE SALE OF THE DRM  BUSINESS  AND  ASSETS,  WE MAY  NEED  ADDITIONAL
CAPITAL TO FUND OUR OPERATIONS AND TO REPAY CREDITORS.

If we  cannot  obtain  this  capital,  when  and if  needed,  we  will  have  to
significantly  curtail  our  operations  and our  ability to continue as a going
concern may be jeopardized.

The net proceeds  from the sale of the DRM business and assets will enable us to
pay all sums due and owing to Laurus,  but will not be sufficient to pay what we
owe to our  other  creditors.  Laurus  has  agreed to  subordinate  its right to
payment of the note we issued to it and its security  interest in  substantially
all of the assets of Axeda and  certain of its  subsidiaries  related to the DRM
business,  so that JMI holds a senior  secured lien on the assets related to the
DRM business to the extent of $600,000 of the JMI Bridge  Loans,  and it holds a
secured lien that is pari passu with Laurus' security  interest to the extent of
the $900,000  balance of the JMI Bridge Loans.  To induce Laurus to  subordinate
its  security  interest  and to provide  all other  consents  necessary  for the
consummation of the transactions  contemplated by the Asset Purchase  Agreement,
we agreed that we would pay to Laurus in full in cash all outstanding  principal
and accrued and unpaid interest owed to Laurus  simultaneously  with the closing
of the JMI transaction.  This payment will be deemed to be in full  satisfaction
of all of our  obligations  to  Laurus,  and we will not be  required  to pay to
Laurus the  prepayment  penalty that would have required  payment of 120% of the
outstanding   principal,   plus  accrued  and  unpaid  interest.  If  bankruptcy
proceedings  are  initiated  by or against us prior to the  closing of the Asset
Purchase  Agreement,  then we will again become  obligated to pay the prepayment
penalty and any other obligations that may arise.

Even if the sale of the DRM  business  and assets is  completed,  we may require
additional capital to fund our operations and repay unsecured  creditors.  If we
require  additional  capital,  we  will  need to seek  external  debt or  equity
financing  and/or sell the Supervisor  products family business assets following
the completion of the sale of the DRM business and assets.

In light of our financial condition, sources of funds or other financing may not
be available  for us in the future or may not be available in amounts we require
to operate our business.  Finally, we may be unable to obtain financing on terms
acceptable  to us, if at all.  Our  failure to obtain  capital  to  finance  our
working capital needs and pay our obligations to unsecured creditors in adequate
amounts and on acceptable terms will negatively  impact our business,  financial
condition  and liquidity and 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  FAILURE TO  COMPLETE  THE ASSET SALE MAY RESULT IN A DECREASE IN THE MARKET
VALUE OF OUR COMMON STOCK.

The asset sale is subject to a number of  contingencies,  including  approval by
our  stockholders  and other  customary  closing  conditions.  We cannot predict
whether we will succeed in  obtaining  the  approval of our  stockholders.  As a
result,  we cannot  assure  you that the asset  sale will be  completed.  If our
stockholders fail to approve the proposal at the special meeting or if the asset
sale is not completed for any other reason, the market price of our common stock
may decline.

If our  stockholders  do not  approve  and adopt the asset sale  pursuant to the
Asset  Purchase  Agreement,  there may not be any other  offers  from  potential
acquirers.

If our stockholders do not approve the asset sale, we may seek another strategic
transaction, including the sale of all or part of our business. Although we have
had such discussions with various parties in the past, none of these parties may
now have an  interest  in a  strategic  transaction  with Axeda or be willing to
offer a reasonable purchase price.

IF OUR  STOCKHOLDERS  DO NOT APPROVE THE DRM ASSET SALE OR IF WE DO NOT COMPLETE
THE ASSET SALE WE WILL  CONTINUE TO FACE  CHALLENGES  AND  UNCERTAINTIES  IN OUR
ABILITY TO ACHIEVE BUSINESS SUCCESS.
                                       28
<PAGE>
We  have  faced  challenges  and   uncertainties   surrounding  our  ability  to
successfully execute our business plan, such as our history of operating losses,
increasing  competition from custom software  development by in-house developers
and others,  the expense of research  and  development,  our reliance on a small
number of large customers,  a limited number of indirect  distribution  channels
and litigation and claims regarding our intellectual property rights.

IF OUR STOCKHOLDERS DO APPROVE AND ADOPT THE ASSET PURCHASE AGREEMENT WE WILL BE
UNABLE TO COMPETE WITH THE DRM BUSINESS.

We will be unable to compete  with the DRM business for five years from the date
of the  closing.  We have agreed for a period of five years from the date of the
closing of the asset sale (i) not to solicit or otherwise  communicate  with any
customer  of the DRM  business  for the  purpose of  inducing  such  customer to
refrain from or to discontinue its relationship with ASOC Acquisition Corp.; and
(ii) not to compete with the DRM business.

IF THE DRM ASSET  SALE IS NOT  COMPLETED,  WE MAY NOT HAVE  SUFFICIENT  FUNDS TO
REPAY OUR OBLIGATIONS TO LAURUS WHEN THEY BECOME DUE.

Because our common stock is currently  trading below $0.53 per share, we are not
able to use shares of our common  stock to repay the  principal  and interest on
the note held by Laurus.  In May 2005,  we amended the note and several  related
agreements  for the primary  purpose of having Laurus  postpone our repayment of
principal due in May 2005 and June 2005. These principal  repayments are payable
in September 2007 and October 2007, respectively.

If the JMI Asset Sale is not completed, we would be required to obtain the funds
necessary to repay our obligations to Laurus or JMI either through  refinancing,
the issuance of additional  equity or debt securities or the sale of assets.  We
do not  believe  we would be able to  obtain  the funds  needed  to repay  those
obligations from any one or more of these sources on favorable economic terms or
at all. If the DRM Asset Sale is not completed and 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.

IF THE DRM ASSET SALE IS NOT ENTERED  INTO OR  COMPLETED,  THE TERMS OF OUR DEBT
OBLIGATIONS  TO  LAURUS  AND TO JMI  SUBJECT  US TO THE RISK OF  FORECLOSURE  ON
SUBSTANTIALLY ALL OF OUR ASSETS.

To secure the  payment of all  obligations  owed to  Laurusand  to JMI,  we have
granted security  interests to each of them in substantially all of our property
and assets. Because we are in default under the Laurus obligations, which, under
the Note are heightened and accelerated,  and because we would be unable, in all
likelihood, to repay our indebtedness to JMI and to Laurus if the JMI Asset Sale
is  not   completed,   Laurus  and  JMI  could  subject  us  to  foreclosure  on
substantially  all of our assets to the extent  necessary  to repay any  amounts
due. Any  defaults  and  resulting  foreclosures  would have a material  adverse
effect on our financial condition.

As of July 1, 2005, we are in default under the Laurus Secured  Convertible Term
Note, or Note, issued to Laurus Master Fund, Ltd, or Laurus,  for failing to pay
interest due under the Note for June, July,  August, and September 2005, as well
as the July,  August and September 2005 principal  payments when due. Article IV
of the Note defines "Events of Default" as the failure to pay any installment of
principal  or  interest  within  three  days of the due date,  and that upon the
occurrence and  continuance of an Event of Default,  Laurus may make all sums of
principal,  interest and other fees then remaining  unpaid  immediately  due and
payable.  In the  event of such an  acceleration,  the  amount  due and owing to
Laurus shall be one hundred twenty percent (120%) of the  outstanding  principal
amount, plus accrued and unpaid interest and fees. In addition, the registration
rights  agreement  entered into in  connection  with the Note states that if our
shares are not traded on a "Trading  Market",  which does not  include the "Pink
Sheets",  where our  shares of  common  stock  currently  trade,  then  Axeda is
obligated  to issue  certain  warrants to Laurus,  and our failure to do so also
constitutes a default under the Note.

In a Letter  Agreement dated July 8, 2005 between Axeda Systems Inc. and Laurus,
Laurus agreed to accept payment in full in cash of the outstanding principal and
accrued  and unpaid  interest  simultaneously  with the closing of the JMI Asset
Sale, in full satisfaction of our obligations (see discussion included herein at
Part I, Item 2- Management's  Discussion and Analysis of Financial Condition and
Results of Operations).

However,  in the event  bankruptcy  proceedings  are  initiated by or against us
prior to the closing of the JMI Asset  Sale,  the  default  penalties  described
above would resume.
                                       29
<PAGE>
OUR COMMON  STOCK WAS  DELISTED  FROM THE NASDAQ  SMALLCAP  MARKET,  WHICH COULD
RESULT IN LOSS OF INVESTORS, LIMITED LIQUIDITY AND CONTRACTUAL PENALTIES.

On July 7, 2005, our common stock was delisted from The Nasdaq  SmallCap  Market
because  we failed  to  achieve a $1.00  minimum  bid price by June 30,  2005 as
required by the terms of an exception we had  previously  received  that allowed
our continuous  trading on The Nasdaq  SmallCap  Market.  The quotations for our
common stock now appear in the "Pink Sheets."

There is  currently a limited  trading  market for our common  stock on the Pink
Sheets.  The ability to trade our common stock on the Pink Sheets depends on the
presence and investment decisions of willing buyers and sellers.  Therefore, the
number of investors who are willing to purchase our common stock is limited, the
volume of our common stock traded on a daily basis is low, and the  liquidity of
our common  stock is limited.  There can be no  guarantee  that our common stock
will be  accepted  for  quotation  by any  other  quotation  system,  market  or
exchange.  Prices  for  securities  traded  solely  on the  Pink  Sheets  may be
difficult  to  obtain.  As such,  our  stock  has  very  limited  liquidity  and
marketability.  This very limited liquidity,  marketability,  the reduced public
access to quotations  for our common stock and lack of a regular  trading market
for our stock are factors that have  contributed to the depression of the market
price per share of our common  stock.  If our common  stock is not listed on any
quotation  system,  market or exchange,  we could incur  penalties under certain
agreements to which we are a party,  including under the terms of our agreements
relating to the convertible promissory notes and warrants we issued to Laurus on
October 5, 2004 which  provide for penalties if our stock is not listed for more
than three consecutive trading days.

WE HAVE NEVER BEEN PROFITABLE AND MAY NEVER ACHIEVE PROFITABILITY IN THE FUTURE.

We had a net loss of  approximately  $3,379 for the nine months ended  September
30, 2005. To date,  we have not achieved  operating  profitability  on an annual
basis and have an  accumulated  deficit of $149,471 as of September 30, 2005. We
have  invested  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.

AS OUR  BUSINESS IS  CURRENTLY  CONDUCTED  OR IF WE KEEP ANY OF OUR ASSETS,  OUR
FUTURE SUCCESS DEPENDS UPON THE ACCEPTANCE OF OUR SOLUTIONS.

Our future growth will be driven by sales of our products and related  services.
If the  market  for our  products  fails to grow or grows  more  slowly  than we
anticipate, our business will suffer.

AS OUR BUSINESS IS CURRENTLY  CONDUCTED OR IF WE KEEP ANY OF OUR ASSETS,  WE MAY
NOT BE ABLE TO COMPETE EFFECTIVELY.

Competition in the market for our solutions is emerging and expected to continue
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.

AS OUR BUSINESS IS CURRENTLY  CONDUCTED OR IF WE KEEP ANY OF OUR ASSETS,  WE MAY
NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL ADVANCES.

The process of remotely  obtaining  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. 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.
                                       30
<PAGE>
AS OUR  BUSINESS IS  CURRENTLY  CONDUCTED  OR IF WE KEEP ANY OF OUR ASSETS,  THE
SALES CYCLE FOR OUR PRODUCTS IS LONG AND MAY BE CYCLICAL  AND WE TYPICALLY  RELY
ON LARGE CONTRACTS FROM RELATIVELY FEW CUSTOMERS,  WHICH MAY CAUSE OUR OPERATING
RESULTS TO FLUCTUATE.

Our sales cycle is lengthy and may be subject to  business  cycles.  Our product
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 product 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.

AS OUR BUSINESS IS CURRENTLY  CONDUCTED OR IF WE KEEP ANY OF OUR ASSETS,  IT MAY
BE  DIFFICULT,  TIME-CONSUMING  AND EXPENSIVE FOR OUR CUSTOMERS TO INTEGRATE OUR
SOLUTIONS WITH THEIR  PRODUCTS,  AND THEY MAY BE UNABLE TO DEPLOY THEIR PRODUCTS
SUCCESSFULLY OR OTHERWISE ACHIEVE THE BENEFITS ATTRIBUTABLE TO OUR SOLUTIONS.

Our  customers  often  desire to integrate  our  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
solutions  may limit our  ability  to expand  our  revenues,  and may  result in
customer dissatisfaction, causing harm to our reputation.


AS OUR  BUSINESS IS  CURRENTLY  CONDUCTED  OR IF WE KEEP ANY OF OUR ASSETS,  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, to the extent that we retain assets,  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;
     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.

AS OUR  BUSINESS  IS  CURRENTLY  CONDUCTED  OR IF WE  KEEP  ANY  OF OUR  ASSETS,
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 may receive
when selling through indirect channels.

AS OUR BUSINESS IS CURRENTLY  CONDUCTED OR IF WE KEEP ANY OF OUR ASSETS,  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.
                                       31
<PAGE>
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.

AS OUR  BUSINESS IS  CURRENTLY  CONDUCTED  OR IF WE KEEP ANY OF OUR ASSETS,  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 being  important  to our  business.  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.

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,"  and the patent  infringement
lawsuit filed in November 2004 against us by one of our competitors  charging us
with  infringement of U.S. Patent No. 6,377,162.  See the Questra  paragraphs in
the  commitments  and  contingencies  section below as these  lawsuits have been
resolved and dropped by both parties.

AS OUR BUSINESS IS CURRENTLY  CONDUCTED OR IF WE KEEP ANY OF OUR ASSETS,  WE MAY
BE SUBJECT TO PRODUCT  LIABILITY  CLAIMS AND REDUCED SALES BECAUSE OF DEFECTS IN
OUR PRODUCTS.
                                       32
<PAGE>
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;
     o    increased 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.

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  more  than  50%,  reducing  staffing  levels  by 53% by  eliminating  or not
replacing 111 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  continue  to take  additional
measures  to reduce  expenses.  We recorded  charges of $1.4  million in 2004 to
reduce staffing levels and to continue to 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.

LITIGATION REGARDING INTELLECTUAL PROPERTY RIGHTS EXISTS IN OUR INDUSTRY

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. 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.

Questra Patent Infringement Litigation

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
method of  communication  over the  Internet.  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.
                                       33
<PAGE>
On November 10, 2004, Questra filed a patent infringement  lawsuit against us in
the  United  States  District  Court for the  Northern  District  of  California
charging  us  with  infringement  of  U.S.  Patent  No.  6,377,162  and  seeking
injunctive relief and unspecified monetary damages.

On September 14, 2005 we reached an agreement with Questra to settle all pending
patent litigation between Axeda and Questra. Under the terms of the confidential
settlement,  the parties have agreed,  among other things,  to cross-license the
patents that were involved in the  litigation  and to dismiss the pending claims
with prejudice.  The parties have also agreed to a two-year covenant prohibiting
the companies from filing against each other any additional patent  infringement
suits. The parties have agreed to keep the terms of the settlement  confidential
except to the extent disclosure is required by the securities laws of the United
States or any other applicable jurisdiction.

AS OUR  BUSINESS IS  CURRENTLY  CONDUCTED  OR IF WE KEEP ANY OF OUR ASSETS,  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 France,  Switzerland,
Japan,  Germany,  the Netherlands and other countries in Europe,  Asia and Latin
America.  Our operations outside the United States include facilities located in
France. For the quarter ended September 30, 2005 we derived approximately 42% 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.

Our geographic diversity requires significant management attention and financial
resources in order 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 products internationally.

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 $1,800 to fund the development of
our Axeda ITA product.  As of September  30, 2005 we have paid  royalties to the
OCS in the aggregate  amount of $1,800.  As of September 30, 2005, the remaining
$200 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 $1,200 and
royalties in the aggregate amount of $600 have been repaid.  As of September 30,
2005, $300 is accrued in other current liabilities.

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

Assuming the exercise of all stock options exercisable by them within 60 days of
September  30, 2005,  our officers and directors  would have, in the  aggregate,
beneficially  owned  approximately 5.7 million shares, or approximately  17%, 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.

CERTAIN  PROVISIONS IN 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.
                                       34
<PAGE>
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.

AS OUR BUSINESS IS CURRENTLY  CONDUCTED OR IF WE KEEP ANY OF OUR ASSETS,  WE MAY
NOT BE ABLE TO COMPETE EFFECTIVELY IN THE INTERNET-RELATED PRODUCTS AND SERVICES
MARKET.

Our products  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.

                                       35
<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. We
are exposed to certain  market risks  arising  from adverse  changes in interest
rates, primarily due to the potential effect of such changes on the Note held by
Laurus,  as described under  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity  and Capital  Resources."  We do
not use interest rate derivative instruments to manage exposure to interest rate
changes.  If the interest rate on the Note held by Laurus,  which accrues at the
prime rate plus 2% per year,  were to  increase  by 1% per year,  we would incur
additional interest expense of approximately $41,000 in 2005.

Item 4: Controls and Procedures

Under the supervision and with the  participation  of our management,  including
our principal executive officer and principal financial officer, we conducted an
evaluation of the  effectiveness  of the design and operation of our  disclosure
controls and  procedures,  as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities  Exchange  Act of 1934 as of the end of the  period  covered  by this
report,  or the  Evaluation  Date.  Based  upon the  evaluation,  our  principal
executive officer and principal  financial officer concluded that our disclosure
controls and procedures  were effective as of the  Evaluation  Date.  Disclosure
controls  are  controls  and  procedures  designed  to  reasonably  ensure  that
information  required to be  disclosed  in our reports  filed under the Exchange
Act, such as this report, is recorded, processed, summarized and reported within
the time  periods  specified in the SEC's rules and forms.  Disclosure  controls
include  controls  and  procedures  designed  to  reasonably  ensure  that  such
information is accumulated and  communicated  to our  management,  including our
chief  executive  officer and chief financial  officer,  as appropriate to allow
timely decisions regarding required disclosure.

In connection with this evaluation,  our management identified no changes in our
internal  control over financial  reporting that occurred during the most recent
fiscal quarter that materially affected,  or are reasonably likely to materially
affect, our internal control over financial reporting.


                                       36
<PAGE>
PART II: OTHER INFORMATION

Item 1:  Legal Proceedings

SECURITIES ALLOCATION CLASS ACTION

On November 27, 2001, a putative  shareholder class action was filed against us,
certain of our officers and directors,  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 our  officers  and
directors.  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.

Our board of directors  approved a settlement  agreement and related  agreements
which set forth the terms of a settlement  among us, our officers and directors,
the plaintiff  class,  the vast majority of the other  approximately  300 issuer
defendants and the individual  defendants  currently or formerly associated with
these companies. Among other provisions, the settlement agreement provides for a
release of us and our  officers  and  directors  for the conduct  alleged in the
action to be  wrongful.  We would agree to undertake  certain  responsibilities,
including  agreeing to assign away,  not assert,  or release  certain  potential
claims we may have  against the  underwriters.  The  settlement  agreement  also
provides  a  guaranteed  recovery  of $1  billion  to  plaintiffs  for the cases
relating  to all of the  approximately  300  issuers.  To the  extent  that  the
underwriter  defendants  settle  all of the  cases for at least $1  billion,  no
payment will be required under the issuers' settlement agreement.  To the extent
that the underwriter defendants settle for less than $1 billion, the issuers are
required  to  make up the  difference.  It is  anticipated  that  any  potential
financial  obligation  we  have  to  plaintiffs  pursuant  to the  terms  of the
settlement  agreement  and  related  agreements  will  be  covered  by  existing
insurance.  We  currently  are not  aware  of any  material  limitations  on the
expected recovery of any potential  financial  obligation to plaintiffs from our
insurance  carriers.  Our carriers appear  solvent,  and we are not aware of any
uncertainties as to the legal  sufficiency of an insurance claim with respect to
any recovery by plaintiffs. Therefore, we do not expect that the settlement will
involve any payment by us. If material  limitations on the expected  recovery of
any potential financial obligation to the plaintiffs from our insurance carriers
should arise, our maximum financial obligation to the plaintiffs pursuant to the
settlement agreement would be less than $3.4 million.

On February 15, 2005, the Court granted  preliminary  approval of the settlement
agreement,  subject to certain modifications  consistent with its opinion. Those
modifications  have been made and the issuers and the plaintiffs  have submitted
to the Court a revised settlement agreement for approval.  There is no assurance
that the Court will grant final approval to the settlement.

If the settlement agreement currently before the Court, as revised in accordance
with  the  preliminary  approval  order,  is  accepted  by the  Court,  then  we
anticipate that any potential financial obligation we may have to the plaintiffs
pursuant to the terms of the settlement agreement and related agreements will be
covered by existing insurance.  If the settlement  agreement is not approved and
we are found liable,  we are unable to estimate or predict the potential damages
that might be awarded,  whether such damages would be greater than the Company's
insurance coverage, and whether such damages would have a material impact on our
results of  operations  or  financial  condition  in any future  period.  If the
settlement does not occur,  and litigation  against us continues,  we believe we
have meritorious defenses and intend to defend the case vigorously.

                                       37
<PAGE>
Questra Patent Infringement Litigation

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
method of  communication  over the  Internet.  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 10, 2004, Questra filed a patent infringement  lawsuit against us in
the  United  States  District  Court for the  Northern  District  of  California
charging  us  with  infringement  of  U.S.  Patent  No.  6,377,162  and  seeking
injunctive relief and unspecified monetary damages.

On September 14, 2005 we reached an agreement with Questra to settle all pending
patent litigation between Axeda and Questra. Under the terms of the confidential
settlement,  the parties have agreed,  among other things,  to cross-license the
patents that were involved in the  litigation  and to dismiss the pending claims
with prejudice.  The parties have also agreed to a two-year covenant prohibiting
the companies from filing against each other any additional patent  infringement
suits. The parties have agreed to keep the terms of the settlement  confidential
except to the extent disclosure is required by the securities laws of the United
States or any other applicable jurisdiction.

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."



                                       38
<PAGE>

Item 2:  Unregistered Sales of Equity Securities  and Use of Proceeds

None.

Item 3: Defaults Upon Senior Securities

Since July 1, 2005, we have been in default under the Laurus Secured Convertible
Term Note, or Note, issued to Laurus Master Fund, Ltd, or Laurus, for failing to
pay when due interest under the Note for June, July,  August and September 2005,
as well as the July, August and September 2005 principal payments. Article IV of
the Note defines  "Events of Default" as the failure to pay any  installment  of
principal  or  interest  within  three  days of the due date,  and that upon the
occurrence and  continuance of an Event of Default,  Laurus may make all sums of
principal,  interest and other fees then remaining  unpaid  immediately  due and
payable.  In the  event of such an  acceleration,  the  amount  due and owing to
Laurus shall be one hundred twenty percent (120%) of the  outstanding  principal
amount, plus accrued and unpaid interest and fees. In addition, the registration
rights  agreement  entered into in  connection  with the Note states that if our
shares are not traded on a "Trading  Market",  which does not  include the "Pink
Sheets",  where our  shares of  common  stock  currently  trade,  then  Axeda is
obligated  to issue  certain  warrants to Laurus,  and our failure to do so also
constitutes a default under the Note.

In a Letter  Agreement dated July 8, 2005 between Axeda Systems Inc. and Laurus,
Laurus agreed to accept payment in full in cash of the outstanding principal and
accrued  and unpaid  interest  simultaneously  with the closing of the JMI Asset
Sale, in full satisfaction of our obligations (see discussion included herein at
Part I, Item 2- Management's  Discussion and Analysis of Financial Condition and
Results  of  Operations).  However,  in the  event  bankruptcy  proceedings  are
initiated  by or against  us prior to the  closing  of the JMI Asset  Sale,  the
default penalties described above would resume.

Item 4: Submission of Matters To a Vote of Security Holders

The DRM Asset Sale cannot be completed unless, among other things,  stockholders
holding a majority of the  outstanding  shares of our common  stock  approve and
adopt the transactions contemplated by the Asset Purchase Agreement.  Therefore,
a special  meeting of  stockholders  of Axeda  Systems Inc.  will be held at The
Holiday Inn, 31 Hampshire  Street,  Mansfield,  MA 02048, on December 2, 2005 at
11:00 a.m., local time. Stockholders will be asked to approve and adopt the sale
of  substantially  all of the assets,  including  technology,  patents and other
intellectual property,  relating to our device relationship management,  or DRM,
business to ASOC  Acquisition  Corp.  pursuant to the Asset  Purchase  Agreement
dated as of September 1, 2005 by and among Axeda  Systems  Inc.,  Axeda  Systems
Operating  Company,  Inc.,  Axeda  IP,  Inc.  and ASOC  Acquisition  Corp.  More
information  about the DRM  Asset  Sale is  contained  in the  Definitive  Proxy
Statement filed with the SEC on October 31, 2005, which we encourage you to read
in its entirety.  A copy of the Asset Purchase  Agreement is attached as Annex A
to the Definitive Proxy Statement.

In  addition,  stockholders  will  be  asked  to  approve  an  amendment  to our
certificate  of  incorporation  to change  the name of the  company  from  Axeda
Systems Inc. to ITA Holdings, Inc., which is also a requirement of the DRM Asset
Purchase Agreement.

Item 5: Other Information
Not applicable.

Item 6: Exhibits
The exhibits  listed on the Exhibit Index  (following the Signatures  section of
this  quarterly  report) are included,  or  incorporated  by reference,  in this
quarterly report.



                                       39
<PAGE>

SIGNATURES

Pursuant to the requirements of 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 21, 2005

Axeda Systems Inc.

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


       /s/ Karen F. Kupferberg
           -----------------
           Karen F. Kupferberg
           Executive Vice President, Chief Financial Officer and Treasurer





                                       40
<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):
<TABLE>


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

        <S>            <C>
          3.1           Amended and Restated Certificate of Incorporation, as amended.  (1)
          3.2           Bylaws of Axeda Systems Inc., as amended by the Board of Directors on February 22, 2002. (2)
          4.1           Agreement, dated as of May 4, 2005, by and between Axeda Systems Inc. and Laurus Master Fund, Ltd. (3)
          4.2           Common Stock Purchase Warrant, dated as of May 4, 2005, issued by Axeda Systems Inc. to Laurus Master Fund,
                          Ltd. (3)
          10.1          Letter of Intent dated June 29, 2005 between Axeda Systems, Inc. and JMI Equity Fund V, L.P. (4)
          10.2          Senior Secured Bridge Note Purchase Agreement dated as of July 8, 2005 by and among Axeda Systems Inc.,
                         Axeda Systems Operating Company, Inc., JMI Equity Fund V, L.P. and JMI Equity Fund V (AI), L.P. (4)
          10.3          Security Agreement dated as of July 8, 2005 by and among Axeda Systems Inc., Axeda Systems Operating
                         Company, Inc. JMI Equity Fund V, L.P., and JMI Equity Fund V (AI), L.P. (4)
          10.4          Subsidiary Guaranty dated July 8, 2005 granted by Axeda Systems Operating Company, Inc. in favor of JMI
                         Equity Fund V, L.P., and JMI Equity Fund V (AI), L.P. (4)
          10.5          Grant of Security Interest in Patents and Trademarks dated as of July 8, 2005 made by Axeda Systems Inc.,
                         Axeda Systems Operating Company, Inc. and Axeda IP, Inc. to JMI Equity Fund V, L.P. and JMI Equity Fund V
                         (AI), L.P. (4)
          10.6          Amendment No. 1 to Security Agreement entered into and effective as of July 13, 2005 by and among Axeda
                         Systems Inc., Axeda Systems Operating Company, Inc., Axeda IP, Inc., JMI Equity Fund V, L.P. and JMI Equity
                        Fund V (AI), L.P. (4)
         10.7          Amendment No. 1 to Subsidiary Guaranty entered into and effective as of July 13, 2005 by and among Axeda
                        Systems Operating Company, Inc., Axeda IP, Inc., JMI Equity Fund V, L.P. and JMI Equity Fund V (AI), L.P.(4)
          10.8          Subordination Agreement dated as of July 8, 2005 by and among Axeda Systems Inc., JMI Equity Fund V, L.P.,
                         and JMI Equity Fund V (AI), L.P. and Laurus Master Fund, Ltd. (4)
          10.9          Letter Agreement dated July 8, 2005 between Axeda Systems Inc. and Laurus Master Fund, Ltd. (5)
         10.10          Asset Purchase Agreement dated as of September 1, 2005 among Axeda Systems, Inc., Axeda Systems Operating
                         Company, Inc., Axeda IP, Inc. and ASOC Acquisition Corp. (7)
         10.11          Form of Voting Agreement dated September 1, 2005 and executed by ASOC Acquisition Corp. with each of the
                         following stockholders: David Bennett, Paul Vais, Karen Kupfererg, James Hansen, Robert M. Russell, Jr.,
                         Richard MacKeen and Dale Calder.  (7)
         10.12          Senior Subordinated Secured Bridge Note Purchase Agreement dated as of September 1, 2005 by and among Axeda
                         Systems Inc., Axeda Systems Operating Company, Inc., Axeda IP, Inc., JMI Equity Fund V, L.P. and JMI Equity
                         Fund V (AI), L.P.  (7)
         10.13          Amendment No. 1 to Senior Secured Bridge Note Purchase Agreement entered into effective as of September 1,
                         2005 by and among Axeda Systems Inc., Axeda Systems Operating Company, Inc., JMI Equity Fund V, L.P. and
                         JMI Equity Fund V (AI), L.P.  (7)
         10.14          Amended and Restated Security Agreement dated as of September 1, 2005 by and among Axeda Systems Inc.,
                         Axeda Systems Operating Company, Inc., Axeda IP, Inc., JMI Equity Fund V, L.P., and JMI Equity Fund V (AI),
                         L.P.  (7)
         10.15          Amended and Restated Subsidiary Guaranty dated as of September 1, 2005 granted by Axeda Systems Operating
                         Company, Inc. and Axeda IP, Inc. in favor of JMI Equity Fund V, L.P., and JMI Equity Fund V (AI), L.P. (7)
         10.16          Amended and Restated Subordination Agreement dated as of September 1, 2005 by and among Axeda Systems Inc.,
                         JMI Equity Fund V, L.P., JMI Equity Fund V (AI), L.P. and Laurus Master Fund, Ltd.  (7)
         10.17          Sublease dated as of September 9, 2005.  (8)
          16.1          Letter re Change in Certifying Accountant, dated September 7, 2005, from KPMG LLP to the Securities and
                         Exchange Commission.  (6)

         20.1          Definitive Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment 1).(9)

         31.1*            Certification of the Chief Executive Officer of Axeda Systems Inc. required pursuant to Section 302 of
                           the Sarbanes-Oxley Act of 2002.
         31.2*            Certification of the Chief Financial Officer of Axeda Systems Inc. required pursuant to Section 302 of
                           the Sarbanes-Oxley Act of 2002.
         32.1*            Certification of the Chief Executive Officer and Chief Financial Officer of Axeda Systems Inc. required
                           pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

</TABLE>

(1)  Incorporated by reference to the  registrant's  Annual Report on Form 10-K,
     as filed with the Securities and Exchange Commission on April 13, 2005.

(2)  Incorporated by reference to the  registrant's  Current Report on Form 8-K,
     dated  February  25,  2002,  as filed  with  the  Securities  and  Exchange
     Commission on February 27, 2002.

(3)  Incorporated  by reference to the  registrant's  Current Report on Form 8-K
     dated May 2, 2005, as filed with the Securities and Exchange  Commission on
     May 6, 2005.

(4)  Incorporated  by reference to the  registrant's  Current Report on Form 8-K
     dated July 8, 2005, as filed with the Securities and Exchange Commission on
     July 14, 2005.
                                       41
<PAGE>

(5)  Incorporated by reference to the registrant's  Current Report on Form 8-K/A
     dated July 8, 2005, as filed with the Securities and Exchange Commission on
     July 18, 2005.

(6)  Incorporated by reference to the registrant's Current Report on Form 8-K as
     filed with the Securities and Exchange Commission on September 7, 2005.

(7)  Incorporated by reference to the registrant's Current Report on Form 8-K as
     filed with the Securities and Exchange Commission on September 8, 2005.

(8)  Incorporated by reference to the registrant's Current Report on Form 8-K as
     filed with the Securities and Exchange Commission on October 5, 2005.

(9)  Incorporated by reference to the  registrant's  Definitive  Proxy Statement
     Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment
     1) as filed with the  Securities  and  Exchange  Commission  on October 31,
     2005.

---
*        Filed herewith


                                       42
<PAGE>