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 March 31, 2004

[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

          For the transition period from ____________ to ______________
                        Commission File number 000-26287

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



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



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

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

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                    Yes 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

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

On May 12, 2004, 32,469,862 shares of the Registrant's Common Stock, $0.001 par
value, were outstanding.

<PAGE>

                               AXEDA SYSTEMS INC.
                                    FORM 10-Q

<TABLE>
<CAPTION>

                                      INDEX

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

ITEM 1           Financial Statements

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

                 Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003      3
                 (unaudited)

                 Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003      4
                 (unaudited)

                 Notes to the Consolidated Financial Statements                                                5

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

ITEM 3           Quantitative and Qualitative Disclosures About Market Risk                                    32

ITEM 4           Controls and Procedures                                                                       32

PART II          OTHER INFORMATION

ITEM 1            Legal Proceedings                                                                            33

ITEM 2            Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities             34

ITEM 3            Defaults Upon Senior Securities                                                              34

ITEM 4            Submission of Matters to a Vote of Security Holders                                          34

ITEM 5            Other Information                                                                            34

ITEM 6            Exhibits and Reports on Form 8-K                                                             34

                 Signatures                                                                                    35

                 Exhibit Index                                                                                 36

                 Exhibit 31.1
                 Exhibit 31.2
                 Exhibit 32.1
</TABLE>
<PAGE>
PART I  FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                             March 31,   December 31,
                                                                               2004          2003
                                                                               ----          ----
                                                                           (unaudited)
ASSETS
Current assets:
<S>                                                                          <C>          <C>
   Cash and cash equivalents .............................................   $   6,281    $   9,617
   Accounts receivable, net ..............................................       3,156        3,200
   Prepaid expenses ......................................................         290          307
   Other current assets ..................................................         175          121
                                                                             ---------    ---------
     Total current assets ................................................       9,902       13,245

   Furniture and equipment, net ..........................................       1,982        2,229
   Goodwill ..............................................................       3,640        3,640
   Identified intangible assets, net .....................................       1,304        1,423
   Other assets ..........................................................         339          349
                                                                             ---------    ---------
     Total assets ........................................................   $  17,167    $  20,886
                                                                             =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of notes payable ......................................   $     109    $     417
   Accounts payable ......................................................       1,356        1,253
   Accrued expenses ......................................................       4,995        4,866
   Income taxes payable ..................................................         694          733
   Deferred revenue ......................................................       1,128        1,422
                                                                             ---------    ---------
     Total current liabilities ...........................................       8,282        8,691

Non-current liabilities:
   Other non-current liabilities .........................................         816          862
   Financing-related liability ...........................................       1,869        2,608
                                                                             ---------    ---------
     Total liabilities ...................................................      10,967       12,161
                                                                             ---------    ---------
Commitments and contingencies (note 6)

Stockholders' equity:
   Preferred stock, $0.001 par value; 5,000,000 shares authorized
     in 2004 and 2003, none issued or outstanding ........................        --           --
   Common stock, $.001 par value; 50,000,000 shares authorized; 33,073,662
     shares issued in 2004 and 32,913,211 shares issued in 2003 ..........          33           33
   Additional paid-in capital ............................................     146,688      146,644
   Deferred stock compensation ...........................................        (235)        (310)
   Accumulated deficit ...................................................    (139,127)    (136,488)
   Accumulated other comprehensive income ................................         221          226
   Treasury stock at cost, 603,800 shares in 2004 and 2003 ...............      (1,380)      (1,380)
                                                                             ---------    ---------
     Total stockholders' equity ..........................................       6,200        8,725
                                                                             ---------    ---------
     Total liabilities and stockholders' equity ..........................   $  17,167    $  20,886
                                                                             =========    =========
</TABLE>
See accompanying notes to the consolidated financial statements.

                                       2
<PAGE>

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

                                                                               Three Months Ended March 31,
                                                                               ----------------------------
                                                                                    2004           2003
                                                                              ------------    ------------
Revenues:
<S>                                                                           <C>             <C>
  License .................................................................   $      2,334    $      2,317
  Services and maintenance ................................................          1,181             963
  Hardware ................................................................             20             137
                                                                              ------------    ------------

    Total revenues ........................................................          3,535           3,417
                                                                              ------------    ------------

Cost of revenues:
  License .................................................................            194             511
  Services and maintenance ................................................          1,123           1,012
  Software amortization ...................................................            112             157
                                                                              ------------    ------------

    Total cost of revenues ................................................          1,429           1,680
                                                                              ------------    ------------

    Gross profit ..........................................................          2,106           1,737
                                                                              ------------    ------------

Research and development (R&D)
  Non-cash compensation ...................................................           --                28
  Other R&D expense .......................................................          1,091           1,714
Sales and marketing
  Non-cash compensation ...................................................             45              11
  Other selling and marketing expense .....................................          2,126           2,505
General and administrative
  Non-cash compensation ...................................................             30             103
  Other general and administrative expense ................................          1,898           2,561
  Depreciation and amortization ...........................................            263             308
                                                                              ------------    ------------

    Total operating expenses ..............................................          5,453           7,230
                                                                              ------------    ------------

    Operating loss ........................................................         (3,347)         (5,493)

Gain on disposal of assets ................................................           --               729
Interest income (expense), net ............................................            (12)             31
Other income (expense), net ...............................................            740              (4)
                                                                              ------------    ------------

Loss before provision for income taxes ....................................         (2,619)         (4,737)

     Provision for income taxes ...........................................             20              50
                                                                              ------------    ------------
Net loss ..................................................................   $     (2,639)   $     (4,787)
                                                                              ============    ============
Basic and diluted net loss per weighted average common share
  outstanding .............................................................   $      (0.08)   $      (0.18)
                                                                              ============    ============
Weighted average number of common shares outstanding used in
  calculation of basic and diluted net loss per common share ..............     32,413,006      27,179,237
                                                                                ============    ============
</TABLE>

See accompanying notes to the consolidated financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                       Three Months Ended March 31,
                                                                                       ----------------------------
                                                                                            2004        2003
                                                                                          --------    --------

Cash flows from operating activities:
<S>                                                                                        <C>         <C>
  Net loss .............................................................................   $ (2,639)   $ (4,787)
  Adjustments to reconcile net loss to net cash used in operating activities:
  Depreciation and amortization ........................................................        375         465
  Gain on disposals of assets ..........................................................       --          (729)
  Unrealized gain on financing-related liability .......................................       (739)       --
  Non-cash compensation and other expenses .............................................         75         142
  Provision for doubtful accounts ......................................................          7        --

Changes in items affecting operations:
  Accounts receivable ..................................................................         36         443
  Prepaid expenses and other current assets ............................................        (37)        (93)
  Goodwill, intangible assets and other assets .........................................         10          (4)
  Accounts payable .....................................................................        103        (273)
  Accrued expenses .....................................................................        104      (1,674)
  Income taxes payable .................................................................        (39)         57
  Deferred revenue .....................................................................       (294)       (377)
                                                                                           --------    --------
    Net cash used in operating activities ..............................................     (3,038)     (6,830)
                                                                                           --------    --------

Cash flows from investing activities:
  Capital expenditures .................................................................        (40)       (105)
                                                                                           --------    --------
    Net cash used in investing activities ..............................................        (40)       (105)
                                                                                           --------    --------

Cash flows from financing activities:
  Net repayment under bank line of credit ..............................................       (308)       --
  Repayments of long-term debt and other non-current liabilities .......................       --          (121)
   Net proceeds from exercise of stock options .........................................         23        --
                                                                                           --------    --------
    Net cash used in financing activities ..............................................       (285)       (121)
                                                                                           --------    --------

Effect of exchange rate changes on cash and cash equivalents ...........................         27          48
                                                                                           --------    --------

Net decrease in cash and cash equivalents ..............................................     (3,336)     (7,008)
Cash and cash equivalents:
  Beginning of period ..................................................................      9,617      19,065
                                                                                           --------    --------
  End of period, including restricted cash of $100 in 2003 .............................   $  6,281    $ 12,057
                                                                                           ========    ========
</TABLE>
See accompanying notes to the consolidated financial statements.


                                       4
<PAGE>
                               AXEDA SYSTEMS INC.
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Information with respect to March 31, 2004 and 2003 is unaudited)

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

1)   Summary of Significant Accounting Policies

     a) Description of Business and Liquidity

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

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

          We have sustained  significant net losses and negative cash flows from
          operations since our inception.  For the quarters ended March 31, 2004
          and 2003,  our net losses were $2,639 and  $4,787,  respectively,  and
          negative   cash  flows  from   operations   were  $3,038  and  $6,830,
          respectively.  There  can be no  assurances  that  we  will be able to
          generate   sufficient   revenues   necessary  to  achieve  or  sustain
          profitability  in the short or long term,  or positive cash flows from
          operations.  Management believes that the cash and cash equivalents as
          of March 31, 2004 will be sufficient to sustain our operations through
          at least  the  first  quarter  of  2005.  However,  due to  risks  and
          uncertainties,  there can be no assurances  that our future  operating
          cash flows will be sufficient to meet our requirements. In such event,
          our operations and liquidity  will be materially  adversely  affected.
          Additional  financing  may not be  available  when needed and, if such
          financing is available,  it may not be available on terms favorable to
          us.

          In 2003 we recorded  approximately $1,400 in restructuring  charges to
          reduce staffing levels,  terminate  certain leases and consolidate our
          operations. Combined with our expected continued year over year growth
          in DRM Systems  revenues,  we believe that our future operating losses
          will continue to be lower than in previous  years. We will continue to
          evaluate our cost structure and may undertake  additional  measures to
          reduce expenses in the future.

     b) Basis of Presentation

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

     c) Principles of Consolidation

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

                                       5
<PAGE>
     d) Cash and Cash Equivalents

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

     e) Revenue Recognition

          We  recognize  software  revenues  in  accordance  with  the  American
          Institute of Certified Public Accountants'  Statement of Position,  or
          SOP,  97-2,  "Software  Revenue  Recognition"  as amended by SOP 98-9,
          "Modification of SOP 97-2, Software Revenue Recognition,  With Respect
          to Certain  Transactions."  Software  revenues are  recognized  in the
          period in which persuasive  evidence of an arrangement exists, the fee
          is fixed or  determinable,  delivery of the  technology  has  occurred
          requiring no significant production, modification or customization and
          collectibility is probable.

     f) Financial Instruments

          Our  financial  instruments  principally  consist  of  cash  and  cash
          equivalents,  accounts receivable,  accounts payable and notes payable
          that  are  carried  at  cost,  which   approximates  fair  value.  The
          financing-related  liability financial  instrument is recorded at fair
          value (note 5).

     g) Computation of Earnings Per Share

          We compute earnings per share, or EPS, in accordance with Statement of
          Financial Accounting  Standards 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). Common equivalent shares are excluded from the calculation if
          their effect is anti-dilutive.


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

          i) Three Months Ended March 31, 2004

               Options  to  purchase  6,364,989  shares of common  stock  with a
               weighted-average  exercise price of $1.71 were outstanding during
               the three  months  ended March 31, 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  3,303,064  options that are vested,
               with a  weighted  average  exercise  price  of  $2.02,  of  which
               1,438,226  are vested and in the money,  with a weighted  average
               exercise  price of $0.19.  The options  have  various  expiration
               dates during the next ten years.

               Warrants  to  purchase  2,689,377  shares of common  stock with a
               weighted-average   exercise   price  of  $1.99  were  vested  and
               outstanding  during the three months  ended March 31,  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.

          ii) Three Months Ended March 31, 2003

               Options  to  purchase  4,986,272  shares of common  stock  with a
               weighted-average  exercise price of $1.95 were outstanding during
               the three months  ended March 31, 2003,  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  2,405,989  options that are vested,
               with a weighted average exercise price of $2.62, of which 798,637
               were vested and in the money,  with a weighted  average  exercise
               price of $0.01. The options have various  expiration dates during
               the next ten years.

                                       6
<PAGE>

               Warrants  to  purchase  564,191  shares  of common  stock  with a
               weighted-average   exercise   price  of  $2.80  were  vested  and
               outstanding  during the three months  ended March 31,  2003,  but
               were not included in the  calculation  of diluted EPS because the
               effects  of  assumed   conversion  or  exercise   would  have  an
               anti-dilutive  effect on EPS. The  outstanding  warrants  include
               187,967  warrants  that  are  vested  and  in the  money,  with a
               weighted  average  exercise  price of $0.06.  The  warrants  have
               various expiration dates during the next five years.

     h) Stock-based Compensation

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

          At March 31, 2004 we have two stock-based employee compensation plans.
          We account  for those  plans  under the  recognition  and  measurement
          principles of APB 25 and related interpretations.  The following table
          illustrates  the  effect  on net loss and net loss per share if we had
          applied  the  fair  value  recognition   provisions  of  SFAS  123  to
          stock-based compensation:

<TABLE>
<CAPTION>
                                                               Three Months Ended March 31,
                                                               ----------------------------
                                                                      2004       2003
                                                                    -------    -------
<S>                                                                 <C>        <C>
Net loss, as reported ...........................................   $(2,639)   $(4,787)
Add:  Stock-based employee compensation
included in reported net loss, net of related
tax effects .....................................................        75        142
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards ...............................      (454)      (504)
                                                                    -------    -------
Pro forma net loss ..............................................   $(3,018)   $(5,149)
                                                                    =======    =======
Net loss per common share - basic and diluted:
     As reported ................................................   $ (0.08)   $ (0.18)
                                                                    =======    =======
     Pro forma ..................................................   $ (0.09)   $ (0.19)
                                                                    =======    =======
</TABLE>

          We used the  following  ranges of  assumptions  to determine  the fair
          value of stock options  granted using the  Black-Scholes  option-price
          model for the quarters ended March 31, 2004 and 2003:

            Dividend yield .............        0%
            Expected volatility ........   119% - 192%
            Average expected option life   4 years
            Risk-free interest rate ....   1.02% - 5.71%

          In  February  and March  2004 we  granted  824,000  stock  options  to
          employees,  including 120,000 to our chief financial officer,  with an
          exercise  price per share equal to the fair market value of our common
          stock on the date of grant and ranging from $1.17 to $1.28.

                                       7
<PAGE>
     i) Guarantees

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

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

     j) Use of Estimates

          The  preparation  of  financial  statements  in  conformity  with GAAP
          requires  management to make estimates and assumptions that affect the
          reported   amounts  of  assets  and   liabilities  and  disclosure  of
          contingent  assets  and  liabilities  at the  date  of  the  financial
          statements  and the reported  amounts of revenues and expenses  during
          the reporting period.  Significant items subject to estimates in these
          financial statements include goodwill and intangible assets, valuation
          allowances for accounts  receivable,  deferred tax assets and deferred
          tax liabilities and foreign income taxes.  Actual results could differ
          from those estimates.

     k) Recent Accounting Pronouncements

          On March 31, 2004, the Financial  Accounting Standards Board, or FASB,
          consistent  with  recent  actions  of other  accounting  agencies  and
          entities,  issued a  proposed  statement,  "Share  Based  Payment,  an
          Amendment  of  FASB  Statements  No.  123  and  95,"  relating  to the
          accounting for  equity-based  compensation.  This  statement  proposes
          changes to GAAP that,  if  implemented,  would  require us to record a
          charge to  compensation  expense for stock option grants to employees.
          We currently  account for stock  options  under SFAS 123 (note 1h). As
          permitted  by SFAS 123,  we have  elected to use the  intrinsic  value
          method  prescribed  by  APB 25 to  measure  compensation  expense  for
          stock-based  awards granted to employees,  under which the granting of
          stock options is not considered  compensation  if the option  exercise
          price is not less than the fair  market  value of the common  stock at
          the grant date.  The FASB's  proposal  would  eliminate  our  ability,
          starting  in 2005,  to  account  for  stock-based  awards  granted  to
          employees using the intrinsic  value method  prescribed by APB 25, and
          would  instead  require  that  such  awards be  accounted  for using a
          fair-value  based  method,  which  would  require  us to  measure  the
          compensation expense for all such awards,  including stock options, at
          fair  value at the grant  date.  Compensation  expense  would  then be
          recognized  over the  service or  vesting  period.  We cannot  predict
          whether the  proposed  statement  will be  adopted,  but if adopted it
          would have an adverse affect on our results of operations.  On May 12,
          2004 the U.S. House of Representatives'  Capital Markets  Subcommittee
          approved a bill to bypass the guidance that the FASB set forth in this
          Exposure  Draft.  If the bill  passes,  it would  block the  mandatory
          expensing  of stock  options  until  regulators  complete a three-year
          study on the economic impact of the FASB's  proposal.  The bill would
          allow the SEC to recognize as "generally  accepted"  those  accounting
          principles  under which  companies need only expense the stock options
          they grant to their top five highest-paid executives.

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

                                       8
<PAGE>
     l) Reclassifications

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

2)       Supplemental Disclosure of Balance Sheet Information

      Provision for Doubtful Accounts

          Accounts receivable are net of provisions for doubtful accounts of $76
          and $68 as of March 31, 2004 and December 31, 2003, respectively.

      Acquired Identified Intangible Assets

          Accumulated  amortization  at March 31, 2004 and December 31, 2003 was
          $856 and $737, respectively.

3) Line of Credit

     In June 2003 we executed a loan and security  agreement with Silicon Valley
     Bank, or the Bank, that provides us with a line of credit,  or the Line, in
     the  amount  of the  lesser of $2,000 or the  borrowing  base,  as  defined
     (limited to a percentage of eligible  accounts  receivable).  The Line also
     provides  for a maximum of $1,000 in the form of letters of credit or other
     services  from the Bank that  reduces  the amount of  available  borrowings
     under the Line. The Line matures in June 2004,  bears interest at the prime
     rate plus 1% (5.00% at March 31, 2004),  with a minimum rate of 5.25%,  and
     is  collateralized  by substantially  all of our assets. We are required to
     comply  with a  tangible  net worth  covenant,  as  defined in the loan and
     security  agreement,  and  a  minimum  available  cash  (including  amounts
     available but undrawn under the Line) covenant.  At March 31, 2004, we were
     in  compliance  with  our  covenants  and  $248 was  available,  with  $109
     outstanding under the terms of the Line.

     In connection  with  obtaining the Line, we issued a warrant to the Bank to
     acquire 43,042 shares of our common stock at an exercise price of $1.39 per
     share and which  expires  in June  2008.  The  estimated  fair value of the
     warrant  issued was $44 and was recorded as debt  issuance  costs.  We also
     incurred legal and professional  fees of approximately $38 in obtaining the
     Line.  These amounts,  totaling $82, are being  amortized over the one-year
     term of the Line and included in interest expense.

     At March 31, 2004 there were no letters of credit or other amounts for bank
     services outstanding under the Line.

     In May 2004 we renewed the Line under  substantially  the same terms as the
     current Line.

4)       Accrued Expenses

Accrued expenses consist of the following:
<TABLE>
<CAPTION>

                                                                  March 31,  December 31,
                                                                    2004       2003
                                                                    ----       ----
<S>                                                                 <C>      <C>
Legal and professional fees .....................................   $  505   $  558
Payroll and related costs .......................................    1,484    1,477
Royalties to Israeli government agencies ........................      826      759
Sales, excise and other taxes ...................................      316      266
Severance .......................................................      277       88
Unutilized leased facilities ....................................      567      547
Other ...........................................................    1,020    1,171
                                                                    ------   ------
                                                                    $4,995   $4,866
                                                                    ======   ======
</TABLE>

                                       9
<PAGE>
5) Private Placement and Financing-related Liability

     On September  23, 2003, we issued  4,918,100  shares of our common stock to
     certain  accredited  investors in a private investment in public equity, or
     PIPE, financing.  The shares were sold at $1.22 per share with net proceeds
     of $5,597.  We also issued to the investors  warrants  exercisable  for the
     purchase of up to an aggregate  of 2,459,050  shares of our common stock at
     an initial exercise price of $1.71 per share.

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

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

     The estimated fair value of the financing-related liability as of March 31,
     2004 was $1,869.  The $739 net change in the fair value from  December  31,
     2003  was  recorded  as  other  income  in the  consolidated  statement  of
     operations.

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

<TABLE>
<CAPTION>
                                              March 31,      December 31,
                                                2004             2003
                                              ----------      -----------
<S>                                           <C>             <C>
Current market price/share .................. $     1.06      $     1.36
Exercise price/share ........................ $     1.71      $     1.71
Dividend yield ..............................       0%              0%
Expected volatility .........................     111%            115%
Expected life ............................... 4.48 years      4.73 years
Risk-free interest rate .....................       2.96%           3.13%
</TABLE>

                                       10
<PAGE>
6) Commitments and Contingencies

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

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

7) Segment and Major Customer Information

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

     Three customers  accounted for 37%, or $1,323,  of revenues for the quarter
     ended March 31,  2004.  Three  customers  accounted  for 28%,  or $960,  of
     revenues for the quarter ended March 31, 2003.

     We sell and license our technology to customers primarily in North America,
     Europe  and Asia.  Our North  American  operations  generated  37% and 43%,
     respectively, of our revenues in 2004 and 2003, and our total revenues were
     derived from the following  geographic regions (based on where the customer
     is located):

<TABLE>
<CAPTION>

                                                             Three Months Ended March 31,
                                                      -----------------------------------------
                                                             2004                  2003
                                                      -------------------    -------------------
Country/ Geographic Region                            Amount   % of Total    Amount   % of Total
--------------------------                            ------   ----------    ------   ----------
<S>                                                  <C>        <C>         <C>        <C>
North America:
     United States ..............................     $1,297         37%     $1,235         36%
     Canada .....................................          9       --           250          7
                                                      ------     ------      ------     ------
          Total - North America .................      1,306         37       1,485         43
                                                      ------     ------      ------     ------
Europe:
     Germany ....................................        121          3         150          4
     France .....................................        389         11         393         12
     Netherlands ................................        222          6         113          3
     Switzerland ................................        305          9         220          7
     United Kingdom .............................        146          4          42          1
     Other ......................................        341         10         285          8
                                                      ------     ------      ------     ------
          Total - Europe ........................      1,524         43       1,203         35
                                                      ------     ------      ------     ------
Asia-Pacific:
     Israel .....................................         18       --           125          4
     Japan ......................................        627         18         540         16
     Other ......................................         34          1          11       --
                                                      ------     ------      ------     ------
          Total - Asia-Pacific ..................        679         19         676         20
                                                      ------     ------      ------     ------

Other ...........................................         26          1          53          2
                                                      ------     ------      ------     ------

         Total ..................................     $3,535        100%     $3,417        100%
                                                      ======        ===      ======        ===
</TABLE>
                                       11
<PAGE>
8)       Segment Reporting

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

For 2004, Other is comprised of our IA business, the assets of which were sold
in March of 2001. For 2003, Other is comprised of our former personal computer,
or PC, business, which we exited in May 2002, our former IA business and our
former consumer electronics, or CE, business, the assets of which were sold in
March of 2001.

We evaluate operating segment performance based on revenue and gross profit. We
have not historically evaluated segment performance based on operating income or
allocated assets to our individual operating segments.
<TABLE>
<CAPTION>

                                                           Three Months Ended March 31,
                                                           ----------------------------
                                                                  2004          2003
                                                                 ------        ------
Revenues:
<S>                                                              <C>           <C>
  DRM ...................................................        $3,515        $3,031
  Other .................................................            20           386
                                                                 ------        ------
          Total .........................................        $3,535        $3,417
                                                                 ======        ======

Gross profit:
       DRM ..............................................        $2,086        $1,600
       Other ............................................            20           137
                                                                 ------        ------
          Total .........................................        $2,106        $1,737
                                                                 ======        ======
</TABLE>

9) Consolidated Statements of Cash Flows

     Supplemental disclosure of cash flow information:

                                             Three Months Ended March 31,
                                             ----------------------------
                                                    2004       2003
                                                     ---        ---
   Cash paid during the period for:
     Interest ...............................        $ 2        $22
                                                     ===        ===
     Income taxes ...........................         59         --
                                                     ===        ===

10) Comprehensive Income (Loss)

     The components of comprehensive loss are as follows:

                                                   Three Months Ended March 31,
                                                   ----------------------------
                                                          2004            2003
                                                       -------         -------
   Net loss .....................................      $(2,639)        $(4,787)
   Foreign currency translation adjustment ......           27              48
                                                       -------         -------
   Comprehensive loss ...........................      $(2,612)        $(4,739)
                                                       =======         =======

                                       12
<PAGE>
ITEM 2: MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

          The  following  Management's  Discussion  And  Analysis  Of  Financial
          Condition  And  Results  Of  Operations,  as well  as the  information
          contained elsewhere in this report, contain 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
          from those discussed herein. Such factors include, but are not limited
          to: our ability to become profitable;  future expenses; future results
          of operations;  uncertainties  in the market for DRM solutions and the
          potential for growth in the DRM market;  our ability to raise capital;
          the potential for the NASDAQ National Market to delist out stock;  our
          dependence  on the  cyclical  software  industry;  present  and future
          competition; our ability to manage technological change and respond to
          evolving industry  standards;  our ability to manage growth;  the long
          sales cycle for DRM solutions;  our customers' ability to implement or
          integrate  our DRM  solutions  successfully  and in a timely  fashion;
          limited distribution  channels;  dependence on strategic partners; the
          difficulty of protecting proprietary rights; the potential for defects
          in  products;  claims for  damages  asserted  against  us;  risks from
          international  operations;  and others  discussed under "Risk Factors"
          and "Management's  Discussion and Analysis of Financial  Condition and
          Results of Operations." In addition,  such forward-looking  statements
          are necessarily  dependent upon assumptions,  estimates and dates that
          may be incorrect or imprecise  and involve known and unknown risks and
          other factors.  Accordingly,  any forward-looking  statements included
          herein  do  not  purport  to  be   predictions  of  future  events  or
          circumstances and may not be realized.  Forward-looking statements can
          be  identified  by,  among other  things,  the use of  forward-looking
          terminology such as "believes,"  "expects,"  "may," "will,"  "should,"
          "seeks,"  "pro  forma,"   "anticipates,"   "plans,"   "estimates,"  or
          "intends," or the negative of any thereof, or other variations thereon
          or  comparable   terminology,   or  by   discussions  of  strategy  or
          intentions.  Given  these  uncertainties,  prospective  investors  are
          cautioned  not  to  place  undue  reliance  on  such   forward-looking
          statements.  All forward-looking  statements,  and reasons why results
          may differ,  that are  included in this report are made as of the date
          of this  report,  and  except as  required  by law,  we  disclaim  any
          obligations  to update any such  factors or to publicly  announce  the
          results  of any  revisions  to any of the  forward-looking  statements
          contained herein or reasons why results might differ to reflect future
          events or developments. References herein to "Axeda," "we," "our," and
          "us" collectively refer to Axeda Systems Inc., a Delaware corporation,
          and all of its direct and indirect U.S., Israeli,  Japanese,  European
          and Canadian subsidiaries.

OVERVIEW

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

In  recent  years we have  undertaken  several  major  steps to  reposition  our
business and capitalize on the emerging growth opportunities  represented by the
DRM market. This market is also known as M2M, or  machine-to-machine,  autonomic
computing,  remote  monitoring and  management and several other  descriptors in
different vertical markets.

On December 7, 2001, we acquired all of the outstanding shares of eMation,  Ltd.
The acquisition  gave us an entry into the DRM market.  During 2002 our revenues
were  increasingly   generated  from  selling  DRM  products,  and  since  2002,
substantially all of our revenues were generated from selling DRM products.

In 2003,  we recorded  approximately  $1.4 million in  restructuring  charges to
reduce staffing levels, terminate certain leases and consolidate our operations.
Combined  with our  expected  continued  year  over year  growth in DRM  Systems
revenues,  we believe that our future operating losses will continue to be lower
than what we have  historically  experienced.  We will  continue to evaluate our
cost structure and may undertake  additional  measures to reduce expenses in the
future.

On September 23, 2003, we issued 4,918,100 shares of our common stock to certain
accredited  investors  in a  private  investment  in  public  equity,  or  PIPE,
financing.  The shares were sold at a price of $1.22 per share with net proceeds
of $5.6 million.  We also issued to the investors  warrants  exercisable for the
purchase of up to an  aggregate  of  2,459,050  shares of our common stock at an
initial exercise price of $1.71 per share.  Operating  results and our liquidity
position are discussed in further detail, below.

                                       13
<PAGE>

We currently operate in three principal regions:  the United States,  Europe and
Japan.  Total  revenues  increased by $0.1 million in the first  quarter of 2004
compared to the first quarter of 2003.  Despite the continued  difficult capital
spending  climate,  our DRM  revenues  increased  by $0.5  million  in the first
quarter of 2004  compared to the same period in 2003,  due to  increases  in all
three  principal  regions.  These net  increases  were driven by an  accelerated
acquisition  of new customer  accounts,  as well as  additional  spending by our
existing customers. While recurring sales from existing customers and the timing
of more  widespread  adoption of our product  remains  difficult to predict,  we
believe  overall  revenues will increase in 2004 due to further  orders from our
current customer base, our sales pipeline and improvements in the marketplace.

For the first quarter of 2004 our operating  expenses decreased by $1.8 million,
or 25%,  compared  to the same  period for the prior  year.  We believe the cost
reductions  combined with an increase in revenues will be sufficient to allow us
to meet our cash needs through the first quarter of 2005.

At March 31, 2004, our cash balance was $6.3 million  compared with $9.6 million
at year-end  2003.  Operating  results and our liquidity  position are discussed
further below.

                                       14
<PAGE>

Results of Operations

Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 2003.

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

                               Axeda Systems Inc.
              Unaudited Consolidated Statements of Operations Data
                                 (In thousands)
                                                                  Three Months Ended March 31,
                                                            -------------------------------------------
                                                                   2004                   2003
                                                             ------------------    --------------------
                                                                     Percent of              Percent of
                                                             Amount    Revenues      Amount   Revenues
                                                             ------    --------      ------   --------
Revenues:
<S>                                                          <C>         <C>        <C>           <C>
   License ................................................  $ 2,334     66.0%      $ 2,317       67.8%
   Services and maintenance ...............................    1,181     33.4           963       28.2
   Hardware ...............................................       20      0.6           137        4.0
                                                             -------   ------         -------   ------
     Total revenues .......................................    3,535    100.0         3,417      100.0
                                                             -------   ------       -------   ------
Cost of revenues:
   License ................................................      194      5.5           511       15.0
   Services and maintenance ...............................    1,123     31.8         1,012       29.6
   Software amortization ..................................      112      3.1           157        4.6
                                                             -------   ------       -------   ------
     Total cost of revenues ...............................    1,429     40.4         1,680       49.2
                                                             -------   ------       -------   ------

Gross profit ..............................................    2,106     59.6         1,737       50.8
                                                             -------   ------       -------   ------
Research and development (R&D)
    Non-cash compensation .................................     --       --              28        0.8
    Other R&D expense .....................................    1,091     30.9         1,714       50.2
Sales and marketing (S&M)
    Non-cash compensation .................................       45      1.3            11        0.3
    Other S&M expense .....................................    2,119     59.9         2,505       73.3
General and administrative (G&A)
    Non-cash compensation .................................       30      0.9           103        3.0
    Other G&A expense .....................................    1,898     53.7         2,570       75.2
    Provision for doubtful accounts
    (recoveries) ..........................................        7      0.2            (9)      (0.3)
Depreciation and amortization .............................      263      7.4           308        9.0
                                                             -------   ------       -------     ------
         Total operating costs ............................    5,453    154.3         7,230      211.6
                                                             -------   ------       -------     ------

Operating loss ............................................   (3,347)   (94.7)       (5,493)    (160.7)

Gain on disposals of assets ...............................     --       --             729       21.7
Interest income (expense), net and other
    income (expense), net .................................      728     20.6            27        0.4
                                                             -------   ------         -------     ------
Loss before provision for income taxes ....................   (2,619)   (74.1)       (4,737)    (138.6)
Provision for income taxes ................................       20      0.6            50        1.5
                                                             -------   ------       -------     ------
Net loss ..................................................  $(2,639)   (74.7)%     $(4,787)    (140.1)%
                                                             =======   ======       =======     ======
</TABLE>

                                       15
<PAGE>
                               AXEDA SYSTEMS INC.
Results of Operations

REVENUES.  Overall revenues increased by 3%, or $0.1 million,  from $3.4 million
in the quarter  ended March 31, 2003 to $3.5 million for the quarter ended March
31, 2004. By segment,  sales of our DRM systems products increased $0.5 million,
or 16%, driven by an accelerated  acquisition of new customer accounts,  as well
as additional  spending,  including foreign currency movements,  by our existing
customers.  PC and hardware  revenues  decreased $0.4 million,  or 95%, over the
same  period of the prior  year.  By type,  services  and  maintenance  revenues
increased $0.2 million, or 23%, from the prior year, while license revenues were
flat and hardware  revenues  decreased $0.1 million.  See also "Foreign Currency
Effects on Results of Operations" below

Although our overall  license  revenues were  approximately  the same during the
quarter ended March 31, 2004 versus the prior year, DRM licensing fees increased
$0.3  million,  or 13%.  The  increase in DRM license  revenues  was offset by a
corresponding  decrease in license revenues of $0.2 million due to our exit from
our former PC  business.  In 2004 we expect DRM  license  revenues  to  increase
compared to 2003 as our DRM software solutions are more widely adopted.

Decreased sales of  fully-reserved,  outdated  components of our former Internet
appliance,  or IA, business  resulted in a decline in hardware  revenues of $0.1
million for the quarter  ended March 31, 2004 from $0.1  million for the quarter
ended March 31, 2003.  In 2004,  we expect  hardware  revenues and related gross
profit  to be  minimal  due to  the  decreasing  quantities  available  and  the
uncertainty of any future sales.

Services  and  maintenance  revenues  increased  23% from $1.0  million  for the
quarter  ended  March 31, 2003 to $1.2  million for the quarter  ended March 31,
2004.  The  increase  was  attributable  to a greater  demand  for  professional
services in connection  with existing DRM  installations,  as well as additional
maintenance plans sold with our DRM Systems.

Since our shift to the  enterprise  software  market our revenues have been less
concentrated,  however  variations  may  occur  as  sales  volume  to our  large
customers  fluctuate.  For the  quarter  ended  March  31,  2004,  our top three
customers  accounted for $1.3 million,  or 37%, of our total  revenues.  For the
quarter  ended  March 31,  2003,  our top  three  customers  accounted  for $1.0
million, or 28%, of our total revenues. In the future, we expect our revenues to
be less  concentrated  as sales of our  enterprise  software and services span a
wider customer base, our maintenance revenues increase and existing customers of
our DRM solutions purchase additional licenses and services.

We sell our DRM  system  solutions  to  Global  2000  companies  in the  medical
instrument,  enterprise  technology,  office and print  production  systems  and
industrial and building automation  industries.  For the quarter ended March 31,
2004  companies  based in North America  accounted  for 37% of our revenues.  We
anticipate  that  revenues  from  international   operations  will  continue  to
represent a significant portion of our revenues.

COST OF REVENUES. Cost of revenues decreased approximately $0.3 million, or 15%,
from $1.7  million  during the quarter  ended March 31, 2003 to $1.4 million for
the quarter  ended March 31, 2004.  Cost of revenues for license fees  decreased
approximately  $0.3  million  from  the  prior  year,  while  cost  of  revenues
associated with services and maintenance  increased  approximately  $0.1 million
from the prior year.

The $0.3 million decrease in cost of license revenues from the prior year is due
to a  decrease  in  licensing  costs,  caused by our exit from the PC  business,
associated  with our former PC products of $0.2  million,  and a decrease in DRM
costs of $0.1 million,  resulting from the closure of our Israeli operations and
decreased  product  and  packaging  costs,  as a  result  of  our  ongoing  cost
management  initiatives.  The $0.1  million  increase  in cost of  services  and
maintenance is primarily  attributable  to severance  expense  incurred in 2004,
which was not incurred in 2003, and unfavorable  currency exchange rates in 2004
compared to 2003.  We expect our cost of license fees as a percentage of license
revenues to remain  about the same  through  2004,  as our license  revenues are
comprised  entirely  of our DRM  products.  Non-cash  amortization  of  acquired
technology will represent approximately $0.4 million of our cost of revenues for
the year ending December 31, 2004.

GROSS PROFIT.  Gross profit increased by $0.4 million, or 21%, from $1.7 million
for the quarter ended March 31, 2003 to $2.1 million for the quarter ended March
31,  2004.  The  increase  in gross  profit is  attributable  to an  increase in
revenues  from DRM license fees which has a higher profit margin than the former
PC business, which sustained decreased revenues,  services and maintenance,  the
closure of our Israeli operations and reduced software amortization expense.

                                       16
<PAGE>
For the  quarters  ended  March  31,  2004 and  2003,  substantially  all of our
revenues  were  derived  from  licenses  and  services  and  maintenance.  As  a
percentage of total  revenues,  gross profit margin  increased  from 51% for the
quarter  ended March 31, 2003 to 60% for the quarter ended March 31, 2004 due to
lower staff  compensation  costs,  as a result of reduced  staff,  lower product
packaging costs, and the closure of our Israeli  operations.  The improvement in
gross profit margin from our services and maintenance  operations was the result
of an increase in the number of billable consulting engagements.

OTHER RESEARCH AND DEVELOPMENT  ("R&D")  EXPENSE.  Other R&D expense consists of
staff,  staff-related,  professional and other development-related support costs
associated  with the  development  of new  products,  customization  of existing
products  for  customers,  quality  assurance  and  testing.  Other R&D  expense
decreased  36%,  from $1.7 million for the quarter  ended March 31, 2003 to $1.1
million for the quarter ended March 31, 2004.

The decrease in other R&D expense  during the quarter  ended March 31, 2004 from
the prior year was due to decreases in staff and staff  related  expense of $0.3
million,  transition  expenses  associated  with  the  closure  of  our  Israeli
operations  and  severance  totaling  $0.2  million  and $0.1  million  of other
expense. As a percentage of total revenues, other R&D expense decreased from 50%
to 31% due to lower R&D  expenses.  We  expect  other R&D  expense  to  decrease
slightly  in 2004 as we  optimize  our  development  teams to meet  our  current
business requirements.  Additionally, we expect other R&D expense to decrease as
a percentage of revenues as our future revenues increase.

OTHER  SALES AND  MARKETING  ("S&M")  EXPENSE.  Other S&M  expense  consists  of
salaries and benefits,  travel  expenses and costs  associated with trade shows,
advertising  and other  marketing  efforts.  Other S&M  expense  decreased  $0.4
million,  or 15%, from $2.5 million for the quarter ended March 31, 2003 to $2.1
million for the quarter ended March 31, 2004.

Reduced  staff and staff related  expense and travel  expense  contributed  $0.3
million and $0.1 million, respectively, to the decrease during the quarter ended
March 31, 2004 from the prior year. Additionally, increased severance expense of
$0.1 million was offset by decreased  other  expense for the quarter ended March
31, 2004. As a percentage of total  revenues,  other S&M expense  decreased from
73% to 60% due to lower S&M  expenses.  We expect  other S&M expense to decrease
slightly  in 2004 as we  optimize  our S&M  marketing  teams to meet our current
business requirements. Additionally, we expect other S&M expense as a percentage
of revenues to decrease as our future revenues increase.

OTHER GENERAL AND ADMINISTRATIVE  ("G&A") EXPENSE. Other G&A expense consists of
staff, staff-related and support costs for our executive,  finance, legal, human
resources and information systems departments.  Other G&A expense decreased $0.7
million,  or 26%, from $2.6 million for the quarter ended March 31, 2003 to $1.9
million for the quarter ended March 31, 2004. As a percentage of total revenues,
other G&A expense  decreased  from 75% to 54% due to decreased G&A expenses,  as
described below.

The $0.7 million  decrease in other G&A expense  consists of $0.2 million due to
decreased staff and related compensation  expense, and $0.2 million of decreased
severance  expense  from the prior  year.  In  addition,  we reduced  insurance,
professional fees and other expense each by $0.1 million, as part of our ongoing
cost management initiatives.  We expect other G&A expense to decrease in 2004 as
we optimize our general and  administrative  teams to meet our current  business
requirements.  Additionally,  we  expect  other G&A  expense  to  decrease  as a
percentage of revenues as our future revenues increase.

NON-CASH COMPENSATION G&A EXPENSE. Non-cash G&A expense consists of amortization
of  compensation  related to stock options.  Non-cash  compensation  G&A expense
decreased  $0.1  million for the quarter  ended March 31, 2004 from $0.1 million
for the quarter ended March 31, 2003.  The decrease is  attributable  to certain
deferred  compensation  having become fully amortized as a result of the related
stock option awards having fully vested.

GAIN ON DISPOSALS OF ASSETS.  We signed a confidential  settlement  agreement in
March  2003 for the escrow  relating  to the sale of the assets of our former IA
business  in March  2001.  In  connection  with this  settlement  agreement,  we
reversed  accruals of approximately  $0.7 million recorded in March 2001 as part
of the sale.  No  corresponding  gains were recorded for the quarter ended March
31, 2004.

                                       17
<PAGE>

OTHER INCOME  (EXPENSE),  NET. We entered into a registration  rights  agreement
with the investors in the PIPE financing  pursuant to which we were obligated to
file a registration  statement with the SEC for the resale of the shares sold in
the transaction  and the shares issuable upon exercise of the warrants.  The SEC
declared the registration  statement effective on October 23, 2003. In the event
that sales cannot be made because we have not updated the registration statement
to keep it effective, we will be required to pay liquidated damages to each PIPE
investor  equal to 1.5% of the  purchase  price paid by such  investor  for each
thirty-day  period or pro rata for any portion  thereof  after the deadline that
passes before the  registration  statement is updated and declared  effective by
the  SEC.  While we view  the  liquidated  damages  contingency  related  to the
financing-related  liability as neither  probable nor reasonably  estimable,  we
recorded the  estimated  fair value of the warrant as of September 23, 2003 as a
financing-related liability in the consolidated balance sheet in accordance with
EITF 00-19.  The fair value of the  financing-related  liability  is adjusted at
each balance sheet date,  with the non-cash change in fair value reported in the
consolidated  statement of  operations  as other income or expense.  The related
mark-to-market  non-cash  gain for the  quarter  ended  March 31,  2004 was $0.7
million.  Due to the  uncertainty  surrounding  the  variables  required  by the
valuation model for the  financing-related  liability and corresponding  gain or
loss adjustment,  we cannot estimate the future income or expense resulting from
the periodic valuations of the liability.

FOREIGN CURRENCY EFFECTS ON RESULTS OF OPERATIONS. Foreign currency movements
for the quarter ended March 31, 2004 increased revenues and expenses, each by
$0.3 million from the prior year. Increases in revenues and expenses from
foreign currency fluctuations are due to the weakness versus prior year of the
U.S. dollar against the Euro, the British pound and the Japanese yen. Although
we cannot predict the future changes in foreign currency rates, any
strengthening of the U.S. dollar against the foreign currencies will have an
unfavorable impact on our revenues in 2004, and an equal but opposite favorable
impact on our expenses in 2004. We expect that changes in foreign currencies
will not have a material effect on our net income or net loss for 2004.

                                       18
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Since March 2001, our operations have largely been financed through the sales of
the assets of our Consumer Electronics and Internet Appliance businesses and the
September 2003 PIPE financing.  As of March 31, 2004, we had approximately  $6.3
million in cash and cash equivalents.

Net cash used in operating  activities  for the quarter ended March 31, 2004 was
$3.0  million,  compared to $6.8  million for the quarter  ended March 31, 2003.
Cash used in operating  activities  for the first  quarter of 2004 was primarily
the result of our net loss of approximately  $2.6 million,  $0.3 million for the
net non-cash  expenses and  financing-related  gain and other changes in working
capital  of  approximately  $0.1  million.  The  reduction  in net cash  used in
operations is primarily the result of the lower net loss.

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

Net cash used in investing  activities  for the quarter ended March 31, 2004 was
less than $0.1 million,  as compared to $0.1 million for the quarter ended March
31, 2003, and consisted of purchases of furniture and equipment in both periods.
We have no material  commitments  for capital  expenditures,  and we  anticipate
minimal   spending  on  capital   expenditures   as  our  needs  in  operations,
infrastructure and personnel arise.

Net cash used in financing  activities  was $0.3  million for the quarter  ended
March 31, 2004,  compared to $0.1 million for the quarter  ended March 31, 2003,
and consisted of principal payments reducing indebtedness in each period.

In June 2003, we executed a loan and security agreement with Silicon Valley Bank
that provides us with a line of credit, or the Line, in the amount of the lesser
of $2.0 million or the borrowing  base,  as defined  (limited to a percentage of
eligible  accounts  receivable).  As of March 31,  2004,  we had $0.1 million in
borrowings  under the Line,  which were  repaid in April  2004.  As of March 31,
2004,  we were in compliance  with all of our  covenants  under the Line. In May
2004 we renewed our line of credit with Silicon Valley Bank under  substantially
the same terms as our current agreement.

As of March 31, 2004, we have $1.1 million of estimated accrued costs related to
facilities leases that we no longer occupy. We have made significant  efforts to
terminate  these  leases,  but if these leases  cannot be  terminated  or if the
facilities  cannot be sublet, we may be required to make these payments over the
respective lease terms.

We maintain an irrevocable,  cash-secured, standby letter of credit (the "letter
of  credit")  from a bank  for  $0.15  million  as  security  for our  corporate
headquarters lease. The letter of credit expires in August 2004 and provides for
automatic one-year renewals, but not beyond August 2007. The letter of credit is
secured by a certificate  of deposit for $0.15  million from the same bank,  and
also expires in August 2004.  This amount is restricted  for  withdrawal  and is
included in other assets (non-current) in our consolidated balance sheets.

Based on our cash  resources,  our expected year over year growth in DRM Systems
revenues and the  realization  of savings from our already  implemented  expense
reductions,  we expect to have  sufficient cash resources to meet our cash needs
through  at  least  the  first  quarter  of  2005.  However,  due to  risks  and
uncertainties,  we cannot assure  investors that our future operating cash flows
will be sufficient to meet our  requirements.  In such event, our operations and
liquidity  will be  materially  adversely  affected.  We will continue to pursue
attractive  financing and investment  arrangements,  and if the capital  markets
present other  attractive  opportunities,  we may seek to raise cash through the
sale of equity or issuance of debt.  However,  additional  financing  may not be
available  when  needed  and,  if such  financing  is  available,  it may not be
available on terms favorable to us.

                                       19
<PAGE>

Employee and Director Stock Options

Option Program Description

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

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

Distribution and Dilutive Effect of Options

The table  below  provides  information  about  stock  options  granted  for the
quarters ended March 31, 2004 and 2003 to our Chief Executive Officer, Robert M.
Russell Jr., and our three other executive officers,  Dale E. Calder,  Thomas J.
Fogarty and John C. Roberts.  This group is referred to as the "Named  Executive
Officers."
<TABLE>
<CAPTION>
                                                                         Quarter Ended           Year Ended
                                                                          March 31, 2004       December 31, 2003
                                                                             -------               -------
<S>                                                                           <C>                   <C>
Net grants during the period as % of outstanding shares ...............       2.54%                 4.11%
Grants to Named Executive Officers during the period as % of
 total options granted ................................................      14.56%                11.66%
Grants to Named Executive Officers during the period as % of
 outstanding shares granted ...........................................       0.37%                 0.48%
Cumulative options held by Named Executive Officers as % of total
 options outstanding ..................................................      33.05%                34.98%
</TABLE>


                                       20
<PAGE>

General Option Information

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


                                                             Number of Options Outstanding
                                                             -----------------------------
                                      Number of Shares     Number of Shares    Weighted Average
                                       Available for     Issuable on Exercise   Exercise Price
                                          Options             of Options          (per share)
                                          -------             ----------          -----------
<S>                                            <C>         <C>                  <C>
December 31, 2002                           263,424           5,078,819            $1.95
                                            =======           =========
Grants                                  (1,329,000)           1,329,000             1.47
Exercises                                         -            (85,645)             0.17
Cancellations*                              486,902           (601,533)             2.88
Additional shares reserved                1,100,000                 N/A              N/A
                                          ---------                 ---
December 31, 2003                           521,326           5,720,641            $1.76
                                            =======           =========
Grants                                    (824,000)             824,000             1.18
Exercises                                         -            (98,212)             0.23
Cancellations*                               81,440            (81,440)             1.44
Additional shares reserved                  969,282                 N/A              N/A
                                            -------                 ---
March 31, 2004                              748,048           6,364,989            $1.71
                                            =======           =========

</TABLE>

* The "Number of Shares  Available for Options"  does not include  options under
assumed plans exercisable for 114,631 shares that were cancelled during 2003, as
no options will be granted in the future  pursuant to these  assumed  plans.  No
options granted subject to these plans were canceled in 2004.

The following table sets forth a comparison, as of March 31, 2004, of the number
of shares  subject to our  options  whose  exercise  prices were at or below the
closing price of our common stock on March 31, 2004 ("In-the-money"  options) to
the number of shares subject to options whose exercise  prices were greater than
the closing price of our common stock on such date ("Out-of-the-money" options):
<TABLE>
<CAPTION>

                                      Exercisable                    Unexercisable                  Total
                               -------------------------     -------------------------      ------------------------
                                                Weighted                    Weighted                     Weighted
                                                 Average                     Average                     Average
                                Number of       Exercise        Number of   Exercise      Number of     Exercise
                                  Shares          Price          Shares      Price          Shares        Price
                                  ------          -----          ------      -----          ------        -----
<S>                              <C>           <C>               <C>         <C>          <C>           <C>
In-the-money ............        1,395,254     $   0.16          733,512     $   0.51     2,128,766     $   0.28
Out-of-the-money (1) ....        1,907,810     $   3.39        2,328,213     $   1.66     4,236,223     $   2.44
                                 ---------     --------        ---------     --------     ---------      --------
Total options outstanding        3,303,064     $   2.02        3,061,925      $   1.38     6,364,989    $   1.71
                                 =========     ========        =========      ========     =========    ========
</TABLE>

(1)  Out-of-the-money  options are those options with an exercise price equal to
or above the  closing  price of $1.06 as of March 31,  2004,  as reported by the
NASDAQ National Market.


                                       21
<PAGE>

Executive Options

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

                                                   Individual Grants
                          -----------------------------------------------------------------
                              Number of                                                        Potential Realizable Value
                              Securities     Percentage of Total   Exercise                   at Assumed Annual Rates of
                          Underlying Option  Options Granted to   Price (Per     Expiration    Stock Price Appreciation for
Name                          Per Grant          Employees *        Share)            Date            Option Terms
----                          ---------          -----------        ------            ----            ------------
                                                                                                     5%             10%
                                                                                                     --             ---
<S>                         <C>                   <C>              <C>          <C>               <C>          <C>
Robert M. Russell, Jr.            -                    -              N/A             N/A             N/A           N/A
Dale E. Calder                    -                    -              N/A             N/A             N/A           N/A

Thomas J. Fogarty           120,000               14.56%           $ 1.17       3/23/2014         $99,732      $260,178
John C. Roberts                   -                    -              N/A             N/A             N/A           N/A
</TABLE>
     *Based on a total of 824,000 shares subject to options granted to employees
     under our option plans during 2004.

Stock Option Exercises and Option Holdings

The  following  table  shows  stock  options  exercised  by the Named  Executive
Officers for the quarter ended March 31, 2004, if any, including the total value
of gains on the date of  exercise  based on actual sale prices or on the closing
price  that day if the  shares  were not sold  that  day,  in each case less the
exercise price of the stock options.  In addition,  the number of shares covered
by both exercisable and non-exercisable  stock options, as of March 31, 2004, is
shown.  Also  reported  are the values for  "In-the-Money"  options.  The dollar
amounts shown in the "In-the-Money" column represent the positive spread between
the exercise  price of any such existing  stock options and the closing price as
of March 31, 2004 of our common stock.

<TABLE>
<CAPTION>

                            Number of
                             Shares
Named Executive            Acquired on      Value        Number of Securities Underlying               Values of Unexercised
 Officer                    Exercise      Realized            Unexercised Options                       In-the-Money Options*
-------------------         --------      --------       -----------------------------------        -------------------------------
                                                             Exercisable       Unexercisable        Exercisable        Unexercisable
                                                             -----------       -------------        -----------        -------------
<S>                          <C>           <C>               <C>                <C>                  <C>                  <C>
 Robert M. Russell              -            $ -                586,829            294,171             $316,924            $ 93,626
 Dale E. Calder                 -             -                 526,562             48,438              331,734              30,516
 Thomas J. Fogarty              -             -                 356,351            193,649              252,984              30,516
 John C. Roberts                -             -                  33,332             81,668               14,962               8,138
</TABLE>

     * Option values based on stock price of $1.06 on March 31, 2004.

                                       22
<PAGE>

                      EQUITY COMPENSATION PLAN INFORMATION

The following table gives information about our common stock that may be issued
upon the exercise of options under all of our Plans as of March 31, 2004:
<TABLE>
<CAPTION>

                                                (1)                    (2)                       (3)
                                                                                         Number of Securities
                                       Number of Securities     Weighted-Average       Remaining Available for
                                         to be Issued upon      Exercise Price of    Future Issuance Under Equity
                                            Exercise of       Outstanding Options,   Compensation Plans (Excluding
                                       Outstanding Options,   Warrants, and Rights    Securities Reflected in
Plan Category                          Warrants, and Rights        (per share)               Column (1) )
-------------                         ---------------------   --------------------   ------------------------------
<S>                                                 <C>              <C>                       <C>
Equity Compensation Plan Approved by
Shareholders (A) (B)                                6,364,989        $ 1.71                    748,048
                                                    ---------         ======                    =======
</TABLE>

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

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

Recent Accounting Pronouncements

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


                                       23
<PAGE>
FACTORS THAT MAY AFFECT FUTURE RESULTS

RISK FACTORS

Our business and industry are subject to a number of risks. You should carefully
consider the risks described below, in addition to the other information
contained in this Report and in our other filings with the SEC. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us or that we currently deem immaterial
may also affect our business operations. If any of these risks actually occur,
our business, financial condition or results of operations could be seriously
harmed. In that event, the market price for our common stock could decline and
you may lose part or all of your investment.

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

We had a loss before income taxes of approximately  $2.6 million for the quarter
ended March 31, 2004. To date, we have not achieved  operating  profitability on
an annual basis. We have invested and continue to invest  significant  resources
in  product  development,  selling  and  marketing,  services  and  support  and
administrative  expenses.  To achieve  profitability,  we will need to  increase
revenues  and/or reduce  expenses  significantly.  We cannot assure you that our
revenues  will grow or that we will  achieve or  maintain  profitability  in the
future.

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

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

WE RECEIVED A LETTER FROM NASDAQ STATING THAT WE ARE NOT IN COMPLIANCE  WITH THE
MINIMUM EQUITY REQUIREMENTS FOR CONTINUED LISTING ON THE NASDAQ NATIONAL MARKET

Our common stock is currently listed on the Nasdaq National Market, or NASDAQ.
We must satisfy a number of requirements to maintain our listing on the NASDAQ.
We were notified by NASDAQ that our common stock was scheduled for delisting at
the opening of business on May 12, 2004 as a result of falling below the minimum
stockholders' equity requirement for continued listing on the NASDAQ. On May 10,
2004, we appealed the delisting to the Listing Qualifications Panel (the Panel).
As a result of our appeal, the delisting has been postponed pending the Panel's
decision. Despite the postponement of the delisting, we cannot assure you that
our appeal will be successful. We may not be able to satisfy the minimum listing
requirements on a going forward basis.

If our common  stock is delisted  from the NASDAQ,  the trading  market for such
securities  could be  disrupted,  which could make it difficult for investors to
trade in our common stock.  If our common stock is delisted from the NASDAQ,  we
will likely apply for listing on the Nasdaq  SmallCap  Market,  the OTC Bulletin
Board or another  quotation system or exchange for which we could qualify.  This
may have a negative impact on the liquidity and/or price of our common stock. We
cannot guarantee,  however,  that if we apply for listing on the Nasdaq SmallCap
Market, the OTC Bulletin Board or another quotation system or exchange, we would
be eligible initially for such listing or, that if we do become listed,  that we
would be able to maintain eligibility.

IT MAY BE DIFFICULT TO RAISE NEEDED CAPITAL IN THE FUTURE, WHICH COULD
SIGNIFICANTLY HARM OUR BUSINESS.

We may  require  additional  capital to finance  our future  growth and fund our
ongoing  research and  development  activities.  Our capital  requirements  will
depend on many factors, including but not limited to the following:


o    acceptance of and demand for our DRM products;
o    our ability to continue year over year growth in DRM Systems revenues;
o    the costs of developing new products;
o    the  extent  to  which  we  invest  in  new  technology  and  research  and
     development projects;
o    competing technological and market developments; and
o    the   expansion  of   strategic   alliances   for  the  sales,   marketing,
     manufacturing and distribution of our products.

                                       24
<PAGE>
To the extent that our currently  available funds and revenues are  insufficient
to meet current or planned operating  requirements,  we will be required to seek
additional  funds through  equity or debt  financing,  strategic  alliances with
corporate  partners  and  others,  or  through  other  sources.  There can be no
assurance  that the financial  sources  described  above will be available  when
needed or on terms  commercially  acceptable  to us. If  adequate  funds are not
available,  we may be required to delay, further scale back or eliminate certain
aspects of our operations or attempt to obtain funds through  arrangements  with
collaborative  partners or others that may  require us to  relinquish  rights to
certain of our technologies,  products or potential  markets.  If adequate funds
are not available,  our business,  financial condition and results of operations
will be materially and adversely affected. If we issue additional stock to raise
capital, your percentage ownership in us would be reduced.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.

Competition  in the market for DRM  solutions  is emerging  and expected to grow
stronger. We expect that competition will increase in the near term and that our
primary  long-term  competitors may not yet have entered the market.  Our future
competitors  may  have   significantly  more  personnel  or  greater  financial,
technical,  marketing and other resources than either our current competitors or
we do.  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.

WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL ADVANCES.

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

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

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

o    the complexities of the problems our solutions address;

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

o    the sales channel through which the solution is sold;

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

o    any other delays arising from factors beyond our control.

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

                                       25
<PAGE>
VARIATIONS IN THE LENGTH OF OUR SALES CYCLES COULD CAUSE OUR REVENUE TO
FLUCTUATE WIDELY FROM PERIOD TO PERIOD.

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

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

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

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

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

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

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

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

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

Our future growth will be limited if:

o    we fail to work effectively with indirect distribution channels;
o    we fail to increase the number of indirect distribution channels with which
     we have relationships;
o    the business of one or more of our indirect distribution channels fails; or
o    there  is a  decrease  in the  willingness  and  ability  of  our  indirect
     distribution  channels  to  devote  sufficient  resources  and  efforts  to
     marketing and supporting our products.

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

INCREASED  SALES THROUGH  INDIRECT  CHANNELS MAY ADVERSELY  AFFECT OUR OPERATING
PERFORMANCE.

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

                                       26
<PAGE>
WE MAY DEPEND ON OUR STRATEGIC PARTNERS AND OTHER THIRD PARTIES FOR SALES AND
IMPLEMENTATION OF OUR PRODUCTS. IF WE FAIL TO DERIVE BENEFITS FROM OUR EXISTING
AND FUTURE STRATEGIC RELATIONSHIPS, OUR BUSINESS WILL SUFFER.

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


OUR BUSINESS MODEL DEPENDS UPON LICENSING OUR INTELLECTUAL PROPERTY, AND IF WE
FAIL 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. If we are not successful in protecting
our intellectual property, our business could be substantially harmed. We regard
the  protection  of  patentable  inventions  as  important to our  business.  We
currently have twelve United States patent applications  pending relating to our
DRM business and thirteen patent  applications  pending  internationally.  It is
possible that our pending patent  applications may not result in the issuance of
patents or that our patents may not be broad  enough to protect our  proprietary
rights.

We rely on a combination of laws, such as 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 would likely be expensive to resolve and would require management's
time and resources and, therefore, could harm our business.

                                       27
<PAGE>
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS AND REDUCED SALES BECAUSE OF
DEFECTS IN OUR PRODUCTS.

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

o    delay or loss of revenues;
o    it is foreseeable that a customer 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 diminish market acceptance of our products;
o    increased service and warranty costs; and
o    litigation costs.

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

SUBSTANTIAL  LITIGATION  REGARDING  INTELLECTUAL  PROPERTY  RIGHTS EXISTS IN OUR
INDUSTRY.

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

We  may be  required  to pay  substantial  damages  and  may  be  restricted  or
prohibited  from  selling  our  products  if it is proven  that we  violate  the
intellectual  property rights of others. The defense of infringement  claims and
lawsuits,  regardless of their outcome, would likely be expensive to resolve and
could require a significant  portion of management's time. We cannot assume that
we will  prevail  in  intellectual  property  disputes  regarding  infringement,
misappropriation  or other  disputes.  Litigation  in which  we are  accused  of
infringement or misappropriation  might cause a delay in the introduction of new
products, require us to develop non-infringing  technology,  require us to enter
into royalty or license  agreements,  which might not be available on acceptable
terms, or at all, or require us to pay  substantial  damages,  including  triple
damages if we are held to have willfully infringed a third party's  intellectual
property. If a successful claim of infringement was made against us and we could
not  develop  non-infringing  technology  or license  the  infringed  or similar
technology  on  a  timely  and  cost-effective  basis,  our  business  could  be
significantly harmed.

In addition,  rather than  litigating an infringement  matter,  we may determine
that it is in our best interests to settle the matter. The terms of a settlement
may include the payment of damages and our  agreement to license  technology  in
exchange for a license fee and ongoing royalties. These fees may be substantial.
If we are forced to take any of the actions described above,  defend against any
claims from third parties or pay any license fees or damages, our business could
be harmed.

                                       28
<PAGE>
WE HAVE RECEIVED NOTICES OF CLAIMS RELATED TO OUR FORMER PC PRODUCTS (OR DIGITAL
MEDIA PRODUCTS) REGARDING THE ALLEGED INFRINGEMENT OF THIRD PARTIES'
INTELLECTUAL PROPERTY RIGHTS THAT MAY CAUSE US TO PAY DAMAGES.

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

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

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

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

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

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

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

We conduct  business in a number of  different  countries.  We sell  products in
several countries  outside the United States,  including  France,  Germany,  the
Netherlands,  Japan, the United Kingdom,  Israel and other countries in Asia and
Latin  America.  Our  operations  outside the United States  include  facilities
located in France and Japan.  For the quarter  ended March 31, 2004,  we derived
approximately 63% 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.  Significant  management attention and financial resources are needed
to develop our international  sales, support and distribution  channels.  We may
not be able to  maintain  international  market  demand  for our  products.  Our
business could be adversely impacted if we are unable to successfully launch our
DRM products into our international operations.

                                       29
<PAGE>
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 HAVE RECEIVED IN
ISRAEL.

Prior to being  acquired  by us in December  2001,  eMation  received  grants in
Israel from the Office of the Chief  Scientist of Israel's  Ministry of Industry
and  Trade,  or OCS,  in the  aggregate  amount  of  $1.8  million  to fund  the
development of our Axeda Supervisor  product.  We have paid royalties to the OCS
in the  aggregate  amount of $1.4 million.  As of March 31, 2004,  the remaining
$0.4  million of  principal  liability  is accrued in accrued  expenses.  We are
obligated  to pay  royalties  of 3.0% to 3.5% of revenues  derived from sales of
products  funded  through  grants  received from the OCS, up to a maximum of the
total amount of the grants received. The terms of the OCS grants require that we
manufacture  our  products  that are  developed  with such grants in Israel.  In
addition,  we may not transfer the technology developed pursuant to the terms of
these  grants to third  parties  without the prior  approval  of a  governmental
committee.

Additionally,  prior to being acquired by us in December 2001,  eMation received
grants from the Israeli  Government  through the Fund for the  Encouragement  of
Marketing Activities, or Marketing Fund, in the aggregate amount of $1.2 million
and  royalties in the aggregate  amount of $0.6 million have been repaid.  As of
March 31,  2004,  $0.4  million  of the  remaining  potential  $0.6  million  of
principal liability is accrued in other current liabilities. We are obligated to
pay  royalties of 4.0% of revenues  derived  from sales of products  that result
from grants  received  through the Marketing  Fund, up to a maximum of the total
amount of the grants received.

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

As of March 31, 2004, our executive officers,  directors and entities affiliated
with them,  in the  aggregate,  beneficially  owned  approximately  4.0  million
shares,  or  approximately   12%,  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.

                                       30
<PAGE>
CERTAIN  PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS MAKE CHANGES
OF CONTROL DIFFICULT EVEN IF THEY WOULD BE BENEFICIAL TO OUR STOCKHOLDERS.

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

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

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

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

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

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

We prepare our financial  statements in conformity  with  accounting  principles
generally accepted in the United States of America, or GAAP. GAAP are subject to
interpretation  by  the  Financial  Accounting  Standards  Board,  the  American
Institute of Certified Public Accountants, or AICPA, the Securities and Exchange
Commission,  or SEC,  and various  bodies  appointed by these  organizations  to
interpret existing rules and create new accounting  policies.  In particular,  a
task force of the Accounting  Standards Executive  Committee,  a subgroup of the
AICPA,  meets  periodically  to review various issues arising under the existing
software  revenue   recognition  rules,  and  interpretations  of  these  rules.
Additional  interpretations  issued by the task force may have an adverse effect
on how we report revenue or on the way we conduct our business in the future.


                                       31
<PAGE>

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4: CONTROLS AND PROCEDURES

Based on their evaluation of our disclosure  controls and procedures as of March
31, 2004, our Chief Executive Officer and Chief Financial Officer have concluded
that our  disclosure  controls and  procedures  (as defined in Rule 13a-15(e) or
Rule  15d-15(e)  promulgated  under the  Securities  Exchange  Act of 1934) were
effective  as of March 31, 2004.  There were no changes in our internal  control
over  financial  reporting  during the first quarter of 2004 that has materially
affected,  or is reasonably likely to materially  affect, the Company's internal
control over financial reporting.

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<PAGE>
                               AXEDA SYSTEMS INC.

PART II: OTHER INFORMATION

ITEM 1:  LEGAL PROCEEDINGS

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. The lawsuit alleges  violations of Sections 11 and 15 of the Securities
Act of 1933 and Section 10(b) and 20(a) of the  Securities  Exchange Act of 1934
and  Rule  10b-5  promulgated  thereunder  against  one or  both  of us and  the
individual defendants.  The claims are based on allegations that the underwriter
defendants agreed to allocate stock in our July 15, 1999 initial public offering
to certain  investors in exchange for excessive and undisclosed  commissions and
agreements by those investors to make additional purchases in the aftermarket at
pre-determined  prices.  Plaintiffs  allege that the  prospectus for our initial
public  offering was false and  misleading in violation of the  securities  laws
because it did not disclose these arrangements. 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.  Certain of our employees were members of the
putative classes alleged in these actions (the "Individual Defendants"). On July
15, 2002, we moved to dismiss all claims against the  Individual  Defendants and
us. On October 9, 2002, the Court  dismissed the Individual  Defendants from the
case without prejudice.

A proposal has been made for the  settlement  and release of claims  against the
issuer  defendants,  including  us.  The  settlement  is  subject to a number of
conditions,  including  approval of the proposed settling parties and the court.
We believe the terms of the  settlement  will not have a material  impact on our
results of operations,  liquidity,  and financial condition. We were notified in
March 2004 that plaintiffs'  counsel intends to submit the settlement  agreement
to the  presiding  Judge  for  preliminary  approval  on  June 3,  2004.  If the
settlement does not occur,  and litigation  against us continues,  we believe we
have  meritorious  defenses and intend to defend the case  vigorously.  However,
failure to successfully  defend this action could substantially harm our results
of operations, liquidity and financial condition.

On March 20, 2003,  Industria  Politecnica  Meridionale Spa., or IPM, an Italian
corporation,  filed a complaint  against us in the United States  District Court
for the  Northern  District  of  California.  The lawsuit  alleges  breach of an
agreement  between IPM and our wholly  owned  subsidiary  Ravisent  Technologies
Internet  Appliance  Group,  Inc., or RTIAG,  and fraud in  connection  with the
delivery  of  circuit  boards  to IPM  that  were  not in  compliance  with  the
agreement,  and claims  damages of $15 million for breach of contract and fraud,
and unspecified  punitive  damages and attorney's fees. On May 2, 2003, we moved
to dismiss all claims  against  RTIAG.  On or about June 23, 2003,  IPM filed an
amended  complaint  adding RTIAG as a party in the action and providing  further
specificity on the fraud  allegation.  We withdrew our motion to dismiss shortly
thereafter.  We filed an answer to the amended complaint on July 3, 2003 denying
the breach of contract and fraud claims.  RTIAG filed a counterclaim  on July 3,
2003 for breach of contract against IPM,  seeking damages of $2.7 million,  plus
interest,  fees and costs. IPM filed an answer to the amended  complaint on July
22,  2003  denying the breach of  contract  claims.  IPM filed a motion to amend
their  complaint on February 19, 2004 which,  if granted,  would  withdraw their
fraud  complaint  and modify their breach of contract  claim to specify that the
defendants  breached  the  contract  by  providing  circuit  boards  which  were
underpowered,  and to an  unacceptable  extent,  incapable of operating in IPM's
products.  We filed a motion seeking summary judgment on March 9, 2004. On March
30, 2004, IPM's motion to amend their complaint was granted.  On April 13, 2004,
Axeda filed a supplement to its motion for summary judgment.  On April 27, 2004,
IPM filed a supplemental  opposition to our summary judgment motion.  We filed a
response on May 4, 2004.  The summary  judgment is  scheduled to be heard on May
18, 2004.  We believe that such lawsuit and claims are without merit and that we
have  meritorious  defenses to the  actions.  We plan to  vigorously  defend the
litigation,   however,   failure  to  successfully   defend  this  action  could
substantially harm our results of operations, liquidity and financial condition.

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

                                       33
<PAGE>

ITEM 2: CHANGES IN  SECURITIES,  USE OF PROCEEDS AND ISSUER  PURCHASES OF EQUITY
        SECURITIES

Not applicable.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5: OTHER INFORMATION

Not applicable.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

     (a)  Exhibits

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

     (b)  The following reports were filed on Form 8-K during this period:

          On  February 3, 2004 the  Company  filed a Current  Report on Form 8-K
          relating  to  its  February  3,  2004  press  release  announcing  its
          financial  results for the fourth  quarter and year ended December 31,
          2003. Under the Form 8-K, the Company furnished,  (not filed) pursuant
          to Item 12, the press release  entitled  "Axeda  Systems Inc.  Reports
          Fourth Quarter and Year-End Financial Results."






                                       34
<PAGE>




         SIGNATURES

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

May 14, 2004
Axeda Systems Inc.


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



                                       35
<PAGE>


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

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

Exhibit Number      Exhibit Title
--------------      -------------
<S>                <C>
    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>


                                       36