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

                                    FORM 10-Q

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

For the quarterly period ended March 31, 2005

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

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

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


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

                                 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 13, 2005, 32,900,984 shares of the registrant's Common Stock, $0.001 par
value, were outstanding.


<PAGE>


                               AXEDA SYSTEMS INC.
                                    FORM 10-Q
                          Quarter Ended March 31, 2005

                                Table of Contents

<TABLE>
<CAPTION>

                                                                                                             Page
                 PART I - FINANCIAL INFORMATION
<S>            <C>                                                                                          <C>
Item 1           Financial Statements (unaudited)

                 Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 .......................2

                 Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004......3

                 Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004......4

                 Notes to the Consolidated Financial Statements ...............................................5


Item 2           Management's Discussion and Analysis of Financial Condition and Results of Operations ........12

Item 3           Quantitative and Qualitative Disclosures About Market Risk ...................................28

Item 4           Controls and Procedures ......................................................................28

                 PART II - OTHER INFORMATION

Item 1           Legal Proceedings ............................................................................28

Item 2           Unregistered Sales of Equity Securities  and Use of Proceeds .................................29

Item 3           Defaults Upon Senior Securities ..............................................................29

Item 4           Submission of Matters to a Vote of Security Holders ..........................................29

Item 5           Other Information ............................................................................29

Item 6           Exhibits .....................................................................................29

                 Signatures ...................................................................................30

                 Exhibit Index ................................................................................31

                 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)
                                   (unaudited)

<TABLE>
<CAPTION>

                                                                       March 31,     December 31,
                                                                         2005            2004
                                                                         ----            ----
ASSETS
Current assets:
<S>                                                                <C>            <C>
   Cash and cash equivalents                                         $   1,841      $   2,429
   Accounts receivable, net                                              4,173          4,108
   Prepaid expenses and other current assets                               647            714
                                                                     ---------      ---------
     Total current assets                                                6,661          7,251

   Furniture and equipment, net                                          1,147          1,308
   Goodwill                                                              3,640          3,640
   Identified intangible assets, net                                       830            949
   Other assets                                                            949            946
                                                                     ---------      ---------
     Total assets                                                    $  13,227      $  14,094
                                                                     =========      =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of note payable                                   $     751      $     293
   Accounts payable                                                      1,560          1,436
   Accrued expenses                                                      3,963          3,923
   Income taxes payable                                                    888            780
   Deferred revenue                                                      1,604          1,521
                                                                     ---------      ---------
     Total current liabilities                                           8,766          7,953

Non-current liabilities:
   Note payable, less current portion                                    1,820          2,052
   Other non-current liabilities                                            92            103
   Financing-related liabilities                                          --            3,243
                                                                     ---------      ---------
     Total liabilities                                                  10,678         13,351
                                                                     ---------      ---------
Commitments and contingencies (Note 5)

Stockholders' equity:
   Preferred stock, $0.001 par value; 5,000,000 shares authorized
     in 2005 and 2004, none issued or outstanding                         --             --

   Common stock, $0.001 par value; 100,000,000 shares authorized
     in 2005 and 50,000,000 shares authorized in 2004; 33,476,938
     shares issued in 2005 and 33,173,288 shares issued in 2004             33             33
   Additional paid-in capital                                          150,091        148,027
   Deferred stock compensation                                             (90)           (90)
   Accumulated deficit                                                (146,414)      (146,179)
   Accumulated other comprehensive income                                  309            332
   Treasury stock at cost, 603,800 shares in 2005 and 2004              (1,380)        (1,380)
                                                                     ---------      ---------
     Total stockholders' equity                                          2,549            743
                                                                     ---------      ---------

     Total liabilities and stockholders' equity                      $  13,227      $  14,094
                                                                     =========      =========
</TABLE>

         See accompanying notes to the consolidated financial statements


                                       2
<PAGE>

                               AXEDA SYSTEMS INC.
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (In thousands, except share and per share data)
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                Three Months Ended March 31,
                                                ----------------------------
                                                     2005            2004
                                                     ----            ----
Revenues:
<S>                                            <C>               <C>
  License                                      $      2,285      $      2,334
  Services and maintenance                            1,581             1,181
  Hardware                                                2                20
                                               ------------      ------------

    Total revenues                                    3,868             3,535
                                               ------------      ------------
Cost of revenues:
  License                                               123               194
  Services and maintenance                              768             1,123
  Software amortization                                 112               112
                                               ------------      ------------
    Total cost of revenues                            1,003             1,429
                                               ------------      ------------
    Gross profit                                      2,865             2,106
                                               ------------      ------------
Research and development (R&D)
  Other R&D expense                                     884             1,091
Sales and marketing (S&M)
  Non-cash compensation                                --                  45
  Other S&M expense                                   1,554             2,126
General and administrative (G&A)
  Non-cash compensation                                --                  30
  Other G&A expense                                   1,287             1,898
Depreciation and amortization                           196               263
                                               ------------      ------------

    Total operating costs                             3,921             5,453
                                               ------------      ------------

    Operating loss                                   (1,056)           (3,347)

Interest income (expense), net                         (390)              (12)
Other income                                          1,317               740
                                               ------------      ------------

Loss before provision for income taxes                 (129)           (2,619)

     Provision for income taxes                         106                20
                                               ------------      ------------
Net loss                                       $       (235)     $     (2,639)
                                               ============      ============

Basic and diluted net loss per weighted
  average common share outstanding             $      (0.01)     $      (0.08)
                                               ============      ============
Weighted average number of common shares
  outstanding used in calculation of basic
  and diluted net loss per common share          32,776,796        32,413,006
                                               ============      ============
</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,
                                                                ----------------------------
                                                                    2005         2004
                                                                  ---------     ----------
Cash flows from operating activities:
<S>                                                              <C>          <C>
  Net loss                                                       $  (235)     $(2,639)
  Adjustments to reconcile net loss to net cash
    used in operating activities:
  Depreciation and amortization                                      308          375
  Unrealized gain on financing-related liabilities                (1,310)        (739)
  Non-cash interest expense                                          303         --
  Non-cash compensation                                             --             75
  Provision for doubtful accounts                                   --              7
Changes in items affecting operations:
  Accounts receivable                                                (65)          36
  Prepaid expenses and other current assets                           67          (37)
  Other assets                                                        (3)           10
  Accounts payable                                                   124          103
  Accrued expenses and non-current liabilities                        66          104
  Income taxes payable                                               108          (39)
  Deferred revenue                                                    83         (294)
                                                                 -------      -------
    Net cash used in operating activities                           (554)      (3,038)
                                                                 -------      -------

Cash flows from investing activities:
  Capital expenditures                                               (38)         (40)
                                                                 -------      -------
    Net cash used in investing activities                            (38)         (40)
                                                                 -------      -------

Cash flows from financing activities:
   Net proceeds from exercise of stock options                        14           23
  Net repayments under bank line of credit                          --           (308)
                                                                 -------      -------
    Net cash provided by (used in) financing activities               14         (285)
                                                                 -------      -------

Effect of exchange rate changes on cash and cash equivalents         (10)          27
                                                                 -------      -------

      Net decrease in cash and cash equivalents                     (588)      (3,336)

Cash and cash equivalents:
  Beginning of period                                              2,429        9,617
                                                                 -------      -------
  End of period                                                  $ 1,841      $ 6,281
                                                                 =======      =======
</TABLE>


        See accompanying notes to the consolidated financial statements.


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

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

1) Summary of Significant Accounting Policies

     a) Description of Business - Overview

     Axeda Systems Inc. is a software and services company  providing  solutions
     in an emerging market known as Machine To Machine, or M2M. Solutions in the
     M2M market enable communications  between people,  devices, and systems and
     turn the  resulting  data  into  information  companies  can act  upon.  We
     develop,  market and sell  software  products and services used by multiple
     industries and customers worldwide for device relationship  management,  or
     DRM, a segment of the M2M market, to access and exploit information located
     within remote  machines,  devices and  facilities.  We  distribute  our DRM
     products through direct sales to original equipment manufacturers, or OEMs,
     and enterprise  customers,  as well as through distributors and value-added
     resellers.  We maintain  regional  sales and support  offices in the United
     States and France.

     In December  2001 we  purchased  all of the  outstanding  capital  stock of
     eMation,  Ltd., or eMation,  a private company  organized under the laws of
     the State of Israel and  headquartered  near Boston,  Massachusetts.  Since
     2003,  our  revenues  have been  substantially  generated  from selling DRM
     products and services.

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

     We have  sustained  significant  losses from  operations  and negative cash
     flows from operations since our inception.  There can be no assurances that
     we will be able to generate sufficient revenues or positive cash flows from
     operations  necessary to achieve or sustain  profitability  in the short or
     long term.  For the  quarters  ended March 31, 2005 and 2004 our net losses
     were  $235  and  $2,639,  respectively,,   and  negative  cash  flows  from
     operations were $504 and $3,038, respectively.

     The report of our  independent  registered  public  accounting  firm on our
     December 31, 2004 consolidated financial statements included an explanatory
     paragraph  indicating  there is  substantial  doubt  about our  ability  to
     continue  as a  going  concern.  Management  has  developed  and  begun  to
     implement a plan to address  this issue and allow us to continue as a going
     concern  through  at least the first  quarter of 2006.  This plan  includes
     additional   financing   from   new  and   current   investors,   continued
     cost-cutting,  and stabilizing and growing our revenue streams. Although we
     believe the plan will be realized,  there is no assurance that these events
     will occur,  or that any  financing  will be on terms  favorable to us. The
     accompanying unaudited consolidated financial statements do not include any
     adjustments that might result from the outcome of this uncertainty.

     b) Basis of Presentation

     The interim consolidated financial statements of Axeda included herein have
     been prepared by us, without audit,  pursuant to the rules and  regulations
     of the Securities and Exchange Commission,  or SEC. Certain information and
     footnote  disclosures normally included in financial statements prepared in
     accordance  with  accounting  principles  generally  accepted in the United
     States of America, or GAAP, have been condensed or omitted pursuant to such
     rules and regulations relating to interim financial statements.

     In  the  opinion  of  management,   the  accompanying   unaudited   interim
     consolidated  financial  statements reflect all adjustments,  consisting of
     normal recurring items, necessary to present fairly our financial position,
     results of operations and cash flows for the interim periods presented. The
     unaudited  consolidated  financial  statements  included  in this Form 10-Q
     should  be read in  conjunction  with the  audited  consolidated  financial
     statements and notes thereto,  included in our Form 10-K for the year ended
     December  31,  2004.  The interim  results  presented  are not  necessarily
     indicative  of results  for any  subsequent  quarter or for the year ending
     December 31, 2005.

     c) Principles of Consolidation

     The  unaudited  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

     We  consider  all highly  liquid  instruments  purchased  with an  original
     maturity  of three  months  or less to be cash  equivalents.

     e) Revenue Recognition

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

     f) Financial Instruments

     Our financial instruments principally consist of cash and cash equivalents,
     accounts receivable,  accounts payable,  and a note payable.  Cash and cash
     equivalents,  accounts receivable and accounts payable are carried at cost,
     which approximates fair value. The estimated fair value of the note payable
     is approximately $4,226.

     g) Computation of Earnings Per Share

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

          i) Quarter Ended March 31, 2005

          Options  to  purchase   6,514,075   shares  of  common  stock  with  a
          weighted-average  exercise  price of $1.13 per share were  outstanding
          during the three  months ended March 31, 2005 but were not included in
          the computation of diluted EPS because the effects of assumed exercise
          would have an  anti-dilutive  effect on EPS. The  outstanding  options
          include  3,586,965  options that were vested,  with a weighted average
          exercise price of $1.38 per share,  of which 1,394,018 were vested and
          in the money,  with a  weighted  average  exercise  price of $0.37 per
          share.  The options have various  expiration dates during the next ten
          years.

          Warrants  to  purchase   6,587,010  shares  of  common  stock  with  a
          weighted-average  exercise  price of $1.01 per share  were  vested and
          outstanding during the three months ended March 31, 2005, but were not
          included  in the  calculation  of diluted  EPS  because the effects of
          assumed  exercise  would  have an  anti-dilutive  effect  on EPS.  The
          outstanding  warrants  include  2,550,000  that were vested and in the
          money,  with a weighted average exercise price of $0.53 per share. The
          warrants have various expiration dates during the next five years.

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

          ii) Quarter Ended March 31, 2004

          Options  to  purchase   6,364,989   shares  of  common  stock  with  a
          weighted-average  exercise  price of $1.71 per share 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 were vested,  with a weighted average
          exercise price of $2.02 per share,  of which 1,438,226 were vested and
          in the money,  with a  weighted  average  exercise  price of $0.19 per
          share.  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 per share  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  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.

                                       6
<PAGE>
     h) Stock-based Compensation (see Note 1i)

     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.

     We  account  for our  stock-based  employee  compensation  plan  under  the
     recognition   and   measurement   principles   of  APB   25   and   related
     interpretations. The following table illustrates the effect on net loss and
     net loss per share if we had applied the fair value recognition  provisions
     of SFAS 123 to stock-based compensation:

                                                   Three Months Ended March 31,
                                                   ----------------------------
                                                        2005         2004
                                                      -------      -------
 Net loss, as reported                                $  (235)     $(2,639)
 Add:  Stock-based employee compensation
  included in reported net loss                          --             75
 Deduct: Stock-based employee compensation
  expense determined under fair value based
  method for all awards                                  (188)        (454)
                                                     -------      -------
 Pro forma                                            $  (423)     $(3,018)
                                                      =======      =======
 Net loss per common share - basic and diluted:
      As reported                                     $ (0.01)     $ (0.08)
                                                      =======      =======
      Pro forma                                       $ (0.01)     $ (0.09)
                                                      =======      =======

     We used the  following  assumptions  to  determine  the fair value of stock
     options  granted  using  the  Black-Scholes  option  pricing  model for the
     quarters ended March 31, 2005 and 2004:

                                            2005       2004
                                            ----       ----
        Dividend yield                        0%         0%
        Expected volatility                 122%       112%
        Average expected option life     4 years    4 years
        Risk-free interest rate            3.92%      1.12%

     In March 2005 we granted  options to purchase  325,000 shares of our common
     stock to our chief financial  officer,  with an exercise price of $0.56 per
     share,  which was equal to the fair market value of our common stock on the
     date of grant.

     i) Recent Accounting Pronouncements

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

     SFAS 123R would  eliminate  our ability,  starting in 2006,  to account for
     stock-based  awards granted to employees  using the intrinsic  value method
     prescribed  by APB 25,  and  would  instead  require  that  such  awards be
     accounted  for using a fair value based  method,  which would require us to
     measure the  compensation  expense  for all such  awards,  including  stock
     options, at fair value at the grant date.  Compensation  expense would then
     be recognized over the service or vesting period.

     j) Reclassifications

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

                                       7
<PAGE>
2) Acquired Intangible Assets

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

<TABLE>
<CAPTION>

                                     Gross Carrying Amount                 Accumulated Amortization
                                  March 31, 2005 and December
                                            31, 2004                 March 31, 2005         December 31, 2004
                                            --------                 --------------         -----------------
<S>                                        <C>                       <C>                    <C>
Developed technology*                      $  210                    $210                   $  210
Core technology                             1,840                   1,056                      944
Customer base                                 110                      64                       57
                                              ---                      --                       --
     Total                                $ 2,160                  $1,330                 $  1,211
                                          =======                 ========                 ========
</TABLE>

*  -  fully amortized as of March 31, 2005 and December 31, 2004

Aggregate amortization expense was $119 for each of the three months ended March
31, 2005 and 2004.

3) Accrued Expenses

Accrued expenses consist of the following:

                                                   March 31,      December 31,
                                                        2005              2004
                                                        ----              ----
     Legal and professional fees                       $ 401            $  319
     Payroll and related costs                         1,349             1,065
     Royalties to Israeli government agencies            550               734
     Sales, excise and other taxes                       590               480
     Severance                                           282               520
     Unutilized leased facilities                        282               302
     Other                                               509               503
                                                         ---               ---
                   Total accrued expenses            $3,963             $3,923
                                                     =======            ======

4) Financing-related Liabilities

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.

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

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 could
have been required to pay pursuant to the registration  rights  agreements if we
failed to keep our  registration  statements  effective  were potential net cash
settlements  pursuant to EITF 00-19.  While we viewed these  liquidated  damages
contingencies as neither probable nor reasonably estimable, through February 16,
2005 we  recorded  the  estimated  fair value of the  warrants  issued to Laurus
Master Fund, Ltd., or Laurus,  and Special  Situations Private Equity Fund, L.P.
and its affiliates, or SSF, as a financing-related liability in the consolidated
balance  sheets  in  accordance   with  EITF  00-19.   The  fair  value  of  the
financing-related  liability was adjusted at each balance  sheet date,  with the
non-cash  change  in  fair  value  reported  in the  consolidated  statement  of
operations as other income or expense.
                                       8
<PAGE>
     a) Amendments of Agreements with Laurus and SSF

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

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

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

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

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

     The  estimated  fair values of the  warrants  issued to Laurus and SSF were
     calculated using the Black-Scholes model using the following assumptions:
<TABLE>
<CAPTION>

                                                 February 16, 2005                 March 31, 2004
                                                 -----------------                 --------------
                                            Laurus              SSF                     SSF
                                            ------              ---                     ---
<S>                                       <C>                  <C>                     <C>
Current market price per share              $0.53                $0.53                   $1.06
Exercise price per share                    $0.53                $1.35                   $1.71
Dividend yield                                 0%                   0%                      0%
Expected volatility                          107%                 107%                    111%
Expected life                          4.62 years           3.60 years              4.48 years
Risk-free interest rate                     3.77%                3.69%                   2.96%
</TABLE>

     On May 4, 2005,  we amended the Note and several of the related  agreements
     for the primary purpose of postponing the principal payments due in May and
     June 2005, of $150 each, until September and October 2007, respectively. In
     exchange  for these  amendments,  we issued to Laurus a warrant to purchase
     750,000 shares of our common stock at an exercise price of $0.37 per share.
     The warrant is  exercisable  for a term of five years and has an  estimated
     fair value of approximately $300 which will be amortized over the remaining
     term of the loan as additional non-cash interest expense.

                                       9
<PAGE>

5) Commitments and Contingencies

SECURITIES CLASS ACTION
Between February and April 2000, eleven class action lawsuits were filed against
us and certain of our officers and directors in the United States District Court
for the  Eastern  District  of  Pennsylvania.  On May 25,  2000,  the cases were
consolidated  under Civil  Action No.  00-CV-1014,  and entitled "In re RAVISENT
Technologies, Inc. Securities Litigation." Pursuant to the Court's consolidation
order, a consolidated  and amended class action  complaint was filed on June 14,
2000 with an alleged class period of July 15, 1999 through April 27, 2000.  This
complaint  alleges  violations  of the  federal  securities  laws,  specifically
Sections 11 and 15 of the  Securities  Act of 1933,  Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and Rule 10b-5 promulgated  thereunder.  On
July 3,  2000,  we and the  other  defendants  filed a  motion  to  dismiss  the
consolidated  and amended class action  complaint.  On July 13, 2004,  the Court
denied the motion. On approximately September 23, 2004, the parties to the class
action  reached an  agreement in principle to settle the class action for $7,000
million.  On September 24, 2004,  the  defendants  filed a stipulation  with the
Court,  suspending  motion and discovery  deadlines  pending  negotiation of the
settlement  documents.  On December 15, 2004, the parties filed with the Court a
Stipulation  and  Agreement of  Settlement to settle the class action for $7,000
million.  The Court issued a Preliminary  Approval Order on December 21, 2004. A
fairness  hearing was held on April 6, 2005. On April 18, 2005, the Court issued
its Order and Final  Judgment  approving  the  settlement.  Our  directors'  and
officers'  liability  insurance  carriers  paid  the  full  amount  of the  cash
settlement.

OTHER
We have accrued for estimated losses in the accompanying  unaudited 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.
Management's  current  estimated range of liability related to our pending legal
claims is based on claims for which  management can estimate the amount or range
of loss.  Because of the  uncertainties  related to both the amount and range of
loss on the  remaining  pending  legal  claims,  management  is unable to make a
reasonable  estimate of the  liability  that could  result  from an  unfavorable
outcome.  As  additional  information  becomes  available,  we will  assess  the
potential  liability  related  to  our  pending  legal  claims  and  revise  our
estimates.  Such  revisions in our  estimates of the potential  liability  could
materially impact our results of operations, financial position and cash flows.


6) Segment and Major Customer Information

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

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

                                    Three Months Ended March 31,
                                        2005           2004
           Revenues:
              DRM                         $ 3,866          $ 3,515
              Other                             2               20
                                               --               --
                Total                     $ 3,868          $ 3,535
                                          =======          =======

           Gross profit:
              DRM                         $ 2,863          $ 2,086
              Other                             2               20
                                               --               --
                Total                     $ 2,865          $ 2,106
                                          =======          =======

Three customers  accounted for 28%, or $1,082,  and 37%, or $1,323,  of revenues
for the quarters ended March 31, 2005 and 2004, respectively

                                       10
<PAGE>
We sell and license our  technology  to customers  primarily  in North  America,
Europe and Asia.  Our North  American  operations  generated  49% and 37% of our
revenues in the three  months ended March 31, 2005 and 2004,  respectively,  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,
                                  ----------------------------------------------
Country/ Geographic Region                2005                         2004
--------------------------        --------------------    ----------------------
                                  Amount     % of Total   Amount     % of Total
                                  ------     ----------   ------     ----------
<S>                               <C>         <C>        <C>         <C>
North America:
     United States                  $1,884         49%     $1,297         37%
     Canada                           --         --             9       --
                                    ------     ------      ------     ------
          Total - North America      1,884         49       1,306         37
                                    ------     ------      ------     ------
Europe:
     Germany                           160          4         121          3
     France                            615         16         389         11
     Netherlands                       168          4         222          6
     Switzerland                       230          6         305          9
     United Kingdom                    129          3         146          4
     Other                             269          8         341         10
                                       ---          -         ---         --
          Total - Europe             1,571         41       1,524         43
                                     -----         --       -----         --
Asia:
     Israel                            199          5          18       --
     Japan                             146          3         627         18
     Other                              28          1          34          1
                                     -----         --       -----         --
          Total - Asia                 373          9         679         19
                                     -----         --       -----         --

Other                                   40          1          26          1
                                     -----         --       -----         --
         Total                      $3,868        100%     $3,535        100%
                                    ======        ===      ======        ===
</TABLE>

7) Consolidated Statements of Cash Flows

Supplemental disclosure of cash flow information:
<TABLE>
<CAPTION>
                                                              Three Months Ended March 31,
                                                              ----------------------------
                                                                      2005     2004
                                                                      ----     ----
Cash paid during the period for:
<S>                                                                   <C>      <C>
  Interest                                                            $  1     $  2
                                                                      ====     ====
  Income taxes                                                        $  9     $ 59
                                                                      ====     ====

  Non-cash financing activities:
  Issuance of 220,578 shares of common stock in connection
   with convertible term note (principal and interest)                $106       $-
                                                                      ====     ====
  Reclassification of financing-related liability to permanent
   equity (see Note 4a)                                               $1,934     $-
                                                                      ======    ====
</TABLE>

8) Comprehensive Loss

The components of comprehensive loss are as follows:

                                              Three Months Ended March 31,
                                              ----------------------------
                                                  2005         2004
                                               -------      -------
   Net loss                                    $  (235)     $(2,639)
   Foreign currency translation adjustment         (23)          (5)
                                               -------      -------
   Comprehensive loss                          $  (258)     $(2,644)
                                               =======      =======
                                       11
<PAGE>
Item 2: Management's  Discussion and Analysis of Financial Condition and Results
of Operations

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

OVERVIEW AND RECENT EVENTS

On August 26,  2004,  we  received a letter  from the staff of The NASDAQ  Stock
Market  informing us that our common stock failed to maintain a minimum  closing
bid price of $1.00 over the previous 30 consecutive  trading days as required by
Marketplace Rule 4310(c)(4) and that we had 180 calendar days, or until February
22, 2005, to regain compliance. On November 26, 2004, we received another letter
from The NASDAQ  Stock  Market  informing  us that we also did not  comply  with
Marketplace  Rule  4310(c)(2)(B)  which  requires a company to have a minimum of
$2.5  million  in  stockholders'  equity or  $35million  market  value of listed
securities or $0.5 million of net income from continuing operations for the most
recently  completed  fiscal  year or two of the three  most  recently  completed
fiscal  years.  We submitted our plan to regain  compliance  with these rules on
December 13, 2004. On January 7, 2005, The NASDAQ Stock Market  informed us that
we did not provide a definitive plan evidencing our ability to achieve near term
compliance  with the continued  listing  requirements or sustain such compliance
over an extended period of time and that our common stock would be delisted.

We appealed the staff's  determination to a NASDAQ Listing  Qualifications Panel
at a hearing that was held on February 17, 2005. As a result of the hearing,  we
were  granted  continued  inclusion  on The  Nasdaq  SmallCap  Market  under  an
exception  to the  stockholders'  equity/market  value of listed  securities/net
income  requirement  and the  minimum  bid  price  requirement.  This  continued
inclusion  on  The  Nasdaq   SmallCap  Market  was  pursuant  to  the  following
conditions:

     o    On or before April 30, 2005,  we had to publicly  announce that we had
          stockholders'  equity of at least $2.5 million as of March 31, 2005 on
          an actual basis.

     o    If, on or before April 30, 2005, we showed  stockholders' equity of at
          least $5.0 million, then we would have an extension through August 15,
          2005  to  evidence   compliance  with  the  $1.00  closing  bid  price
          requirement,  and  immediately  thereafter,  a closing bid price of at
          least $1.00 per share for at least ten  consecutive  business days (or
          such longer period requested by The NASDAQ Stock Market to demonstrate
          our  ability to  maintain  long-term  compliance  with the minimum bid
          price requirement).

     o    If we did not show stockholders' equity of at least $5.0 million on or
          before April 30,  2005,  then we must show  compliance  with the $1.00
          closing bid price requirement on or before June 30, 2005 and a closing
          bid price of at least  $1.00  per  share for at least ten  consecutive
          business  days (or such longer  period  requested  by The NASDAQ Stock
          Market to  demonstrate  our ability to maintain  long-term  compliance
          with the minimum bid price requirement).

     o    Our financial  statements contained in all periodic reports filed with
          the Securities and Exchange Commission and The NASDAQ Stock Market for
          reporting  periods  ending on or before  April 30, 2006 must  evidence
          stockholders' equity of at least $2.5 million.

                                       12
<PAGE>
On May 2, 2005 our publicly  reported total  stockholders'  equity exceeded $2.5
million as of March 31, 2005,  in  compliance  with the March 2005 decision of a
NASDAQ  Listings  Qualifications  Panel.  We  therefore  continue to qualify for
continued  conditional  listing on The Nasdaq SmallCap Market.  We must evidence
compliance  with the $1.00 per share closing bid price  requirement on or before
June 30,  2005 and a closing  bid price of at least $1.00 per share for at least
ten  consecutive  business days  thereafter to continue to qualify for continued
listing on The Nasdaq SmallCap Market.

For the three months ended March 31, 2005, our operating  expenses  decreased by
$1.5  million,  or 28%,  and our net loss  decreased  by $2.4  million,  or 91%,
compared to the prior year  quarter,  which  reflects the  reduction in our cost
structure and increase in revenues.

On October 5, 2004,  we entered into  definitive  agreements  with Laurus Master
Fund,  Ltd.,  or  Laurus,  pursuant  to which we  issued to Laurus a note in the
principal amount of $4.5 million  convertible into shares of our common stock at
an initial fixed conversion price of $0.48 per share. We also issued to Laurus a
warrant to purchase up to  2,500,000  shares of our common  stock at an exercise
price of $0.53 per share with a term of five years. The note has a term of three
years and accrues  interest at the prime rate plus 2% per year.  Interest on the
principal  amount is payable  monthly,  in arrears until the maturity  date. The
minimum monthly principal  repayment of $0.15 million commences on July 1, 2005,
and continues through the October 5, 2007 maturity date.  Principal and interest
are payable in shares of common stock if certain criteria are met.

On September 23, 2003, we issued 4,918,100 shares of our common stock to certain
accredited  investors  affiliated with Special  Situations  Private Equity Fund,
L.P., or SSF, in a private  placement of our common stock.  The shares were sold
at a price of $1.22 per share with net proceeds of  approximately  $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. Our transaction with Laurus triggered an adjustment to
the exercise  price of the SSF warrants.  The effect of this  adjustment  was to
make the SSF warrants exercisable for an additional 655,747 shares, or 3,114,797
shares in the aggregate, at an adjusted exercise price of $1.35 per share.

In February 2005, we amended  several of our agreements  with Laurus and SSF. We
amended the  registration  rights  agreement  with SSF such that any  liquidated
damages  that may arise for  failure to file a  registration  statement  for any
shares  that may be  issued to SSF in the  future,  to cause  such  registration
statement  to  become  effective  or  to  maintain  the  effectiveness  of  such
registration  statement would be payable in unregistered shares of common stock,
rather  than  cash  and we  would  be  obligated  to use  our  best  efforts  to
subsequently  register the shares. We amended the securities  purchase agreement
and registration  rights agreement with Laurus such that any liquidated  damages
that may arise for failure to deliver shares of common stock upon  conversion of
Laurus'  note in a timely  manner  would be  payable  in a warrant  to  purchase
unregistered  shares of common  stock rather than cash and we would be obligated
to use our best efforts to  subsequently  register  the  underlying  shares.  In
addition,  any  liquidated  damages  that  may  arise  for  failure  to  file  a
registration  statement  for any  shares  that may be  issued  to  Laurus in the
future,  to cause such registration  statement to become effective,  to maintain
the  effectiveness  of such  registration  statement or to keep our common stock
listed or quoted would be payable in a warrant to purchase  unregistered  shares
of  common  stock  rather  than cash and we would be  obligated  to use our best
efforts to subsequently  register the underlying  shares.  Effective in February
2005,  as a result  of  these  amendments,  the  mark-to-market  accounting  and
reporting requirements no longer apply.

On May 4, 2005,  we amended  the Note and  several  related  agreements  for the
primary  purpose of having Laurus postpone our repayment of principal in May and
June 2005. These principal  repayments will become payable in September 2007 and
October  2007,  respectively.  In exchange  for these  amendments,  we issued to
Laurus a warrant to purchase  750,000  shares of our common stock at an exercise
price of $0.37 per share. The warrant is exercisable for a term of five years.

At March  31,  2005 our cash and  cash  equivalents  balance  was $1.9  million,
compared  with  $2.4  million  as of  December  31,  2004.  The  report  of  our
independent   registered  public  accounting  firm  on  our  December  31,  2004
consolidated  financial statements included an explanatory  paragraph indicating
there is  substantial  doubt about our  ability to continue as a going  concern.
Management has developed and begun to implement a plan to address this issue and
allow us to continue as a going  concern  through at least the first  quarter of
2006. This plan includes  additional  financing from new and current  investors,
continued  cost-cutting,  and  stabilizing  and  growing  our  revenue  streams.
Although we believe the plan will be realized,  there is no assurance that these
events will occur,  or that any financing will be on terms  favorable to us. Our
unaudited  consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

                                       13
<PAGE>

Axeda Systems Inc. is a software and services company providing  solutions in an
emerging market known as Machine To Machine, or M2M. We develop, market and sell
software  products  and  services  used by  multiple  industries  and  customers
worldwide  for device  relationship  management,  or DRM, , a segment of the M2M
market,  to access and  exploit  information  located  within  remote  machines,
devices and facilities.  We distribute our DRM products  through direct sales to
original equipment manufacturers,  or OEMs, and enterprise customers, as well as
through distributors and value-added  resellers.  We maintain regional sales and
support offices in the United States and France. Our flagship product, the Axeda
DRM system, helps manufacturing and service organizations increase revenue while
lowering  costs by  proactively  monitoring  and  managing  devices  deployed at
customer sites around the world. Our customers  include Global 2000 companies in
many markets including medical instrument, life sciences, enterprise technology,
office  and print  production  systems,  industrial,  and  building  automation.
Representative customers include: Abbott Laboratories, Kodak Versamark, Inc. and
Network Appliance, Inc.

We currently operate in three principal regions:  the United States,  Europe and
Japan.  Despite the continued  difficult capital spending  climate,  our overall
revenues  increased  by $0.3  million in 2005 due to an increase in services and
maintenance  revenues  of $0.4  million,  offset by  decreases  in  license  and
hardware  revenues of $0.1 million.  The $0.3 million increase in total revenues
in  2005 is due to  increases  in the  U.S.  and  Europe,  partially  offset  by
decreases in Japan.  These net increases  were driven by additional  spending by
our existing  customers,  as well as an accelerated  acquisition of new customer
accounts.  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  continue to increase in 2005 due to further  orders from
our  current   customer  base,  our  sales  pipeline  and  improvements  in  the
marketplace.

                                       14
<PAGE>

RESULTS OF OPERATIONS

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004.

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

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

                                                        Three Months Ended March 31,
                                                      2005                    2004
                                                      -------        ------
                                                      Percent of                Percent of
                                              Amount   Revenues    Amount      Revenues
Revenues:
<S>                                          <C>         <C>       <C>              <C>
   License                                   $ 2,285     59.1%     $ 2,334          66.0%
   Services and maintenance                    1,581     40.9        1,181          33.4
   Hardware                                        2      --            20           0.6
                                             -------   -------       ------       ------
     Total revenues                            3,868    100.0        3,535         100.0
                                             -------   -------       ------       ------

Cost of revenues:
   License                                       123      3.2          194           5.5
   Services and maintenance                      768     19.8        1,123          31.8
   Software amortization                         112      2.9          112           3.1
                                             -------   -------      ------      ------
     Total cost of revenues                    1,003     25.9        1,429          40.4
                                             -------   -------      -------      ------
Gross profit                                   2,865     74.1        2,106          59.6
                                             -------   -------      -------      ------
Research and development (R&D)
   Other R&D expense                             884     22.8        1,091        30.9
Sales and marketing (S&M)
   Non-cash compensation                         --        --           45         1.3
   Other S&M expense                           1,554     40.2        2,126        60.1
General and administrative (G&A)
   Non-cash compensation                         --        --           30         0.9
   Other G&A expense                           1,287     33.3        1,898        53.7
Depreciation and amortization                    196      5.1          263         7.4
                                             -------   -------      ------      ------
         Total operating costs                 3,921    101.4        5,453       154.3
                                             -------   -------       ------      ------

Operating loss                                (1,056)   (27.3)      (3,347)       (94.7)

Interest income (expense), net                  (390)   (10.1)        (12)          (.3)
Other income                                   1,317     34.1         740          20.9
                                               -----     ----         ---          ----

Loss before provision for income taxes          (129)    (3.3)       (2,619)       (74.1)

Provision for income taxes                       106     (2.8)          20           0.6
                                             -------   -------       -------      ------

Net loss                                     $  (235)    (6.1)       $(2,639)      (74.7)
                                             =======   =======       =======      ======

</TABLE>


                                       15
<PAGE>

RESULTS OF OPERATIONS

REVENUES.  Our DRM  revenues  increased  by $0.4  million,  or 10%, in the first
quarter of 2005 to $3.9  million,  compared to $3.5 million in the first quarter
of 2004.  This increase in revenue was driven by an  accelerated  acquisition of
new customer accounts, as well as additional spending by our existing customers.

License revenues  decreased 2% to $2.3 million,  comparing the first quarters of
2005 and 2004,  due in part to the deferral of $0.1 million of certain  revenues
pending customer acceptance.

Services and  maintenance  revenues  increased  during the same period by 34% to
$1.6 million due to greater demand for our  professional  services in connection
with the expansion of existing DRM installations,  additional  maintenance plans
sold with new DRM systems licenses and increasing sales of our hosting solution,
which was launched in the second quarter of 2004.

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 2005 due to further  orders from our current  customer
base, the size of our sales pipeline and improvements in the marketplace.

Currency  movements  in the first  quarter of 2005  increased  revenues  by $0.1
million as compared to the first quarter of 2004 due to more favorable  exchange
rates.  Increases in net revenues due to currency movements are primarily due to
the weakness versus the respective prior year quarter of the U.S. dollar against
the Euro. Although we cannot predict the future movements in currency rates, any
future  strengthening of the U.S. dollar against foreign currencies will have an
unfavorable impact on our revenues in 2005.

COST OF REVENUES.  For the first  quarter of 2005 cost of revenues  decreased by
$0.4  million,  or 30%,  to $1  million  compared  to $1.4  million in the first
quarter of 2004, due to decreases in staff and staff-related expenses, resulting
from our ongoing cost monitoring initiatives.

Cost of license revenues decreased $0.1 million,  or 37%, to $0.1 million due to
lower third-party  licensing  costs,  including  no charge in the quarter  ended
March 31, 2005 related to royalties that had been due to the Office of the Chief
Scientist in Israel,  because the remaining amounts due for those royalties were
charged in the quarter ended March 31, 2004.

Cost of services and maintenance decreased $0.4 million, or 32%, during the same
period,  of  which  $0.3  million  is  due to the  workforce  reduction  actions
implemented  in 2002 through 2004, and $0.1 million is  attributable  to reduced
severance expense from the prior year.

Currency  movements in the first quarter of 2005 increased  expenses  (operating
and cost of revenues)  by $0.1 million as compared to the first  quarter of 2004
due to  unfavorable  exchange  rates.  Increases  in  expenses  due to  currency
movements  are due  primarily to the  weakness  versus prior year quarter of the
U.S. dollar against the Euro. Although we cannot predict the future movements in
currency  rates,  any future  strengthening  of the U.S.  dollar against foreign
currencies will have a favorable impact on our expenses.

GROSS PROFIT. Gross profit increased 36% to $2.9 million in the first quarter of
2005,  compared  to $2.1  million  in the first  quarter  of 2004 due to the 10%
increase in DRM  revenues  and the 30%  decrease  in cost of revenues  discussed
above.

The increase in services and maintenance  profitability in the quarter, compared
to the prior year  quarter,  was due to the  staffing  efficiencies  achieved by
previous cost reduction actions  commencing in 2002 and continuing through 2004.
We expect services and  maintenance  gross profit margin to continue to increase
slightly as services and maintenance revenues increase,  including revenues from
sales of our hosting service.

The gross profit  margin on license  revenues  for the quarters  ended March 31,
2005 and 2004 was 95% and 92%, respectively. The increase in gross profit margin
from license revenues is due to the lower third-party costs described above.

                                       16
<PAGE>

OTHER  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 DRM  products,  quality  assurance  and  testing.  Other R&D
expense for the quarter ended March 31, 2005 decreased $0.2 million,  or 19%, to
$0.9 million,  compared  with the prior year quarter.  The decrease in other R&D
expense for the quarter  ended March 31, 2005 was due to  decreases in staff and
staff-related expenses of $0.1 million, and the reclassification of $0.1 million
to  services  and  maintenance  cost of revenues  for the cost of R&D  personnel
utilized  for  professional  services  engagements.   Other  R&D  expense  as  a
percentage  of total  revenues  decreased  from 31% in 2004 to 23% in 2005,  due
primarily to the reduction in other R&D expense and the increase in revenues. We
expect  other R&D expense to continue to decrease in 2005 and also expect  other
R&D expense to decrease as a percentage of revenues, as we grow our revenues and
optimize our development team to meet our current business requirements.

OTHER S&M EXPENSE.  Other S&M expense consists of salaries,  travel expenses and
costs  associated  with trade shows,  advertising  and other sales and marketing
efforts.  Other S&M expense for the quarter ended March 31, 2005  decreased $0.6
million to $1.6  million,  or 27%,  as  compared  with the prior  year  quarter.
Reduced staff and staff-related expense,  travel,  severance,  and other expense
contributed  $0.2  million,  $0.1  million,  $0.2  million,  and  $0.1  million,
respectively,  to the decrease in other S&M expense for the quarter  ended March
31, 2005 compared to the prior year quarter,  which were partially  offset by an
increase in commissions of $0.1 million. As a percentage of revenues,  other S&M
expense decreased from 60% to 40% for the quarter ended March 31, 2005, compared
to the same period in 2004,  due to reduced S&M expense  from the prior year and
the increase in  revenues.  We expect other S&M expense to decrease in 2005 as a
result of the reorganization  that took place in 2004.  Additionally,  we expect
other S&M expense as a percentage of revenues to decrease as our future revenues
increase.

OTHER G&A  EXPENSE.  Other G&A  expense  consists of staff,  staff-related,  and
support  costs for our  finance,  human  resources,  legal and other  management
departments.  Other G&A expense for the quarter  ended March 31, 2005  decreased
$0.6 million to $1.3  million,  or 32%, as compared with the prior year quarter.
The  decrease  was due to the prior year staff  reductions  resulting in reduced
staff and related  compensation  expense of $0.5  million,  changes in insurance
coverage and more favorable  premiums  resulting in cost savings of $0.1 million
and  reductions  in travel  expenses of $0.1 million as part of our ongoing cost
management initiatives.  These decreases were partially offset by an increase in
third party  consulting fees of $0.1 million.  Other G&A expense as a percentage
of total revenues  decreased from 54% in the first quarter of 2004 to 33% in the
first quarter of 2005 due to the reduction in other G&A expense and the increase
in revenues.  In 2005, we expect other G&A expense to continue to decrease based
on cost  reductions  that occurred in 2004, and we also expect other G&A expense
to decrease as a percentage of revenues, as our future revenues increase.

INTEREST INCOME  (EXPENSE),  NET. Net interest expense increased by $0.4 million
to $0.4  million  for the quarter  ended  March 31,  2005  compared to a nominal
amount of net interest  expense for the same period in 2004. The increase is the
result of the amortization  totaling $0.3 million of original issue discount and
deferred  financing costs incurred in securing the convertible note financing in
October 2004, as well as the coupon interest on the note of $0.1 million.

OTHER INCOME.  Other income consists  primarily of the  mark-to-market  non-cash
gain related to the  financing-related  liabilities  recorded in connection with
the SSF and Laurus financings. For the quarter ended March 31, 2005, we recorded
a net mark-to-market  non-cash gain of $1.3 million, as compared to $0.7 million
for the quarter  ended  March 31,  2004.  The  mark-to-market  non-cash  gain is
primarily  attributable  to a lower stock price as of the  respective  valuation
dates  compared  to the stock  price as of the end of the  respective  preceding
year.  We were  required  to  adjust  the fair  value  of the  financing-related
liabilities  associated  with the warrants held by Laurus and SSF as of the date
of the amendments.  The increase in first quarter 2005 income as compared to the
first quarter of 2004 is because there were two financing-related liabilities in
2005 as compared to one in 2004.

                                       17
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Since March 2001, our operations have largely been financed through the sales of
the assets of our former CE and IA businesses,  the sale of shares of our common
stock in a private  placement  transaction  with SSF in  September  2003 and the
issuance  of  the  convertible  term  note  to  Laurus  in a  private  placement
transaction  in October  2004.  As of March 31, 2005 we had  approximately  $1.9
million in cash and cash equivalents.

Net cash used in operating  activities  for the quarter ended March 31, 2005 was
$0.5  million,  compared to $3.0  million for the quarter  ended March 31, 2004.
Cash used in operating  activities  for the first  quarter of 2005 was primarily
the  result  of our net  loss  of  approximately  $0.2  million  and  unrealized
financing-related  gains of $1.3  million,  offset by non-cash  expenses of $0.6
million and other  increases in working  capital of $0.4  million.  Cash used in
operating  activities  for the first quarter of 2004 was primarily the result of
our net loss of $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.

Net cash used in investing  activities for the quarters ended March 31, 2005 and
2004 was less than $0.1  million,  and  consisted of purchases of furniture  and
equipment.  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  provided by  financing  activities  was less than $0.1 million for the
quarter ended March 31, 2005 and was received from stock option exercises during
the quarter. In the first quarter of 2004, net cash used in financing activities
was $0.3  million,  and  consisted  primarily  of  principal  payments  reducing
indebtedness.

FINANCING EVENTS AND AMENDMENTS
Laurus

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

On May 4,  2005,  we  amended  the note  issued to Laurus  and  several  related
agreements  for the primary  purpose of  amending  some of the due dates for the
repayment of principal. Specifically, the principal payments due in May and June
2005, of $0.15 million each,  were postponed  until  September and October 2007,
respectively. In exchange for these amendments, we issued to Laurus a warrant to
purchase  750,000  shares of our common stock at an exercise  price of $0.37 per
share. The warrant is exercisable for a term of five years.

SSF
On September 23, 2003, we issued  4,918,100 shares of our common stock to SSF in
a private placement of our common stock. The shares were sold at $1.22 per share
with net proceeds of $5.6 million.

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

                                       18
<PAGE>

OTHER

We maintain an irrevocable,  cash-secured,  standby letter of credit from a bank
for $0.15 million as security for our corporate  headquarters  lease. The letter
of credit  expires  on August  31,  2005 and  provides  for  automatic  one-year
renewals,  but not  beyond  August  2007.  The  letter of credit is secured by a
certificate of deposit for $0.15 million from the same bank, and also expires on
August 31, 2005.  This amount is restricted  for  withdrawal  and is included in
other assets (non-current) in our consolidated balance sheets.

LACK OF LIQUIDITY AND AVAILABILITY OF FINANCIAL RESOURCES

We have  limited  financial  resources  currently  available  to  invest  in new
initiatives,  additional key personnel, new equipment and operating capital. The
report of our independent  registered public accounting firm on our December 31,
2004  consolidated   financial  statements  included  an  explanatory  paragraph
indicating  there is substantial  doubt about our ability to continue as a going
concern.  Management has developed and begun to implement a plan to address this
issue and allow us to  continue  as a going  concern  through at least the first
quarter of 2006.  This plan includes  additional  financing from new and current
investors,  continued  cost  cutting,  and  stabilizing  and growing our revenue
streams.  Although we believe the plan will be  realized,  there is no assurance
that these events will occur or that any financing will be on terms favorable to
us.  Our  unaudited   consolidated  financial  statements  do  not  include  any
adjustments that might result from the outcome of this uncertainty.




                                       19
<PAGE>

FACTORS THAT MAY AFFECT FUTURE RESULTS

RISK FACTORS

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

IF WE FAIL TO  COMPLY  WITH  THE  CONDITIONS  OF OUR  EXCEPTION  PERMITTING  OUR
CONTINUED  LISTING  ON THE NASDAQ  SMALLCAP  MARKET,  OUR  COMMON  STOCK WILL BE
DELISTED,  WHICH MAY CAUSE OUR STOCK PRICE TO DECLINE AND YOU MAY  EXPERIENCE  A
DECLINE IN YOUR ABILITY TO TRADE OUR STOCK.

We have been  granted  continued  inclusion on The Nasdaq  SmallCap  Market by a
Nasdaq Listing  Qualifications  Panel,  or the Panel,  under an exception to the
stockholders'  equity/market value of listed  securities/net  income requirement
and the minimum bid price requirement,  as set forth in Nasdaq Marketplace Rules
4310(c)(2)(B) and 4310(c)(4).  Because we publicly announced on May 2, 2005 that
we had stockholders'  equity of at least $2.5 million as of March 31, 2005 on an
actual basis,  we now have until June 30, 2005 to show compliance with the $1.00
closing  bid price  requirement  and a closing  bid price of at least  $1.00 per
share for at least ten  consecutive  business  days  thereafter  (or such longer
period  requested by The NASDAQ Stock  Market,  or Nasdaq,  to  demonstrate  our
ability  to   maintain   long-term   compliance   with  the  minimum  bid  price
requirement).  In addition,  we will lose our conditional  listing unless all of
our  financial  statements  contained  in all  periodic  reports  filed with the
Securities and Exchange Commission and Nasdaq for reporting periods ending on or
before April 30, 2006 evidence stockholders' equity of at least $2.5 million.

If we fail to evidence  stockholders'  equity of at least $2.5 million,  fail to
achieve a minimum  bid  price of $1.00 per share by June 30,  2005 or  otherwise
fail to satisfy any other requirement for continued listing, then the Panel will
promptly  conduct a written or oral  hearing  with  respect to the  failure  and
render a  determination  with  respect  to our  continued  listing on The Nasdaq
SmallCap  Market,  which could  result in a delisting of our common  stock.  The
Panel  will  continue  to  monitor  our  ongoing  compliance  with  the  minimum
stockholders'  equity threshold until we have demonstrated an ability to sustain
compliance  with the rule.  In  addition,  the Panel has  reserved  the right to
reconsider  the  terms  of the  exception  based  on  any  event,  condition  or
circumstance  that exists or develops  that would,  in the opinion of the Panel,
make continued listing of our securities inadvisable or unwarranted.

If we are unable to maintain  our  listing on The Nasdaq  SmallCap  Market,  our
common stock will be delisted from The Nasdaq SmallCap Market and we will likely
seek to list our common  stock on the OTC  Bulletin  Board or another  quotation
system, market or exchange for which we could then qualify. We cannot guarantee,
however,  that if we are unable to maintain  our listing on The Nasdaq  SmallCap
Market  that we would be  eligible  for  listing  on the OTC  Bulletin  Board or
another quotation system, market or exchange, or, that if we do become listed on
the OTC Bulletin  Board or another  quotation  system,  market or exchange  that
there would be no  interruption  in the  trading of our common  stock or that we
would be able to  maintain  our  listing  on such  quotation  system,  market or
exchange.

If our common stock is not listed on any quotation  system,  market or exchange,
we could  incur  penalties  under  certain  agreements  to which we are a party,
including  under  the  terms  of our  agreements  relating  to  the  convertible
promissory  notes and  warrants  we issued to Laurus on  October  5, 2004  which
provide for penalties if our stock is not listed for more than three consecutive
trading days.

If our common  stock is  delisted  from The Nasdaq  SmallCap  Market,  or if our
common stock is not listed on any other quotation system, market or exchange for
any  period,  the market  price of our common  stock  could  decline and you may
experience difficulty in trading our stock, regardless of whether we are able to
list our common stock on another quotation system, market or exchange.


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

If we are not able to use shares of our common stock to repay the  principal and
interest on the note held by Laurus,  we may not have sufficient  funds to repay
Laurus when our debt  obligations to Laurus become due.  Laurus must convert the
monthly  principal and interest into shares of our common stock if the following
criteria are met:

     o    the  average  closing  price  of  our  common  stock  as  reported  by
          Bloomberg,  L.P. on the principal  trading  exchange or market for our
          common  stock for the five  trading  days  immediately  preceding  the
          repayment  date is  greater  than or equal  to 110% of the  conversion
          price of the Note (based upon the current  conversion  price of $0.48,
          the average closing price would need to be $0.53);

                                       20
<PAGE>
     o    the  amount of such  conversion  cannot  exceed  25% of the  aggregate
          dollar  trading volume of our common stock for the previous 10 trading
          days;

     o    there must be an effective  registration statement covering the shares
          of our common stock into which the  principal  and interest  under the
          Note  are  convertible  or an  exemption  from  registration  must  be
          available pursuant to Rule 144 of the Securities Act; and

     o    there must be no event of default existing under the Note that has not
          been  cured or is  otherwise  waived in  writing  by Laurus at Laurus'
          option.

In addition,  we will not be able to issue more than 6,491,440  shares of common
stock at a price of below  $0.47  unless  these  issuances  are  approved by our
stockholders.

In May 2005, we amended the Note and several related  agreements for the primary
purpose of having  Laurus  postpone  our  repayment of principal in May 2005 and
June 2005. These principal  repayments will become payable in September 2007 and
October 2007, respectively.  We may be required to obtain the funds necessary to
repay our  obligations  either through  refinancing,  the issuance of additional
equity or debt securities or the sale of assets.  We may be unable to obtain the
funds  needed,  if any, to repay the  obligations  from any one or more of these
sources on favorable  economic  terms or at all. We have also  granted  Laurus a
right of first refusal on any debt or equity  financings that we complete before
October 3,  2005.  This may impede  our  ability  to secure  additional  funding
because it may  discourage  third  parties  from making an offer that Laurus may
match.  If we are unable to obtain funds to repay this  indebtedness,  we may be
forced to  dispose of assets or take other  actions  on  disadvantageous  terms,
which  could  result in losses and could have a material  adverse  effect on our
financial condition and results of operations.

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

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

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

We had a net loss of approximately $0.2 million for the three months ended March
31, 2005. To date,  we have not achieved  operating  profitability  on an annual
basis and have an accumulated deficit of $146.4 million as of March 31, 2005. 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  eMationin 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
Axeda Supervisor,  Axeda  @aGlance/IT,  Axeda Web @aGlance and Axeda FactorySoft
OPC to support our  industrial  automation  business.  The market for DRM system
solutions is new and evolving.  If the market for our products  fails to grow or
grows more slowly than we anticipate, our business will suffer.

WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.

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

                                       21
<PAGE>
WE MAY NOT BE ABLE TO KEEP PACE WITH TECHNOLOGICAL ADVANCES.

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

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

Our sales cycle is lengthy and may be subject to business cycles. Our DRM system
sales typically involve significant capital investment  decisions by prospective
customers,  as well as a  significant  amount of time to educate  them as to the
benefits of our products.  As a result,  companies spend a substantial amount of
time performing  internal reviews and obtaining  capital  expenditure  approvals
before purchasing our products.  It may take up to nine to twelve months or more
from the time we first  contact  a  prospective  customer  before  receiving  an
initial  order.  The length of our DRM system  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.

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

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.

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.

                                       22
<PAGE>
WE HAVE  UNDERTAKEN  A NUMBER OF MEASURES TO REDUCE OUR  OPERATING  EXPENSES AND
THESE AND OTHER EXPENSE REDUCTION MEASURES MAY HAVE NEGATIVE CONSEQUENCES.

Beginning in the second quarter of 2002, we initiated a series of steps designed
to consolidate and streamline our operations,  and decrease our operating losses
and corresponding use of cash,  including  reducing our number of global offices
by  more  than  50%,  reducing  staffing  levels  by 53% by  eliminating  or not
replacing 111 employees,  engaging partners to provide us with variable staffing
capabilities  to  meet  peak  demand  periods  and  by  closely  monitoring  our
infrastructure  costs.  Although it is not possible to anticipate  all potential
effects the  implementation of these expense control measures will have on us or
our  development,  these  activities  have and could continue to have a negative
effect on our business and  operations.  The extent and  ramifications  of these
measures will be dependent upon our ability to raise additional  financing,  the
timing of the receipt of financing and the amount of such financing,  if any. We
continue  to  evaluate  our cost  structure,  and  continue  to take  additional
measures  to reduce  expenses.  We recorded  charges of $1.4  million in 2004 to
reduce staffing levels and further consolidate our operations.

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

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

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

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

Our future growth will be limited if:

     o    we fail to work effectively with indirect distribution channels;

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

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

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

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

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

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

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

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

                                       23
<PAGE>
OUR BUSINESS MODEL DEPENDS UPON LICENSING OUR INTELLECTUAL  PROPERTY,  AND IF WE
FAIL OR ARE UNABLE TO PROTECT OUR  PROPRIETARY  RIGHTS,  OUR  BUSINESS  COULD BE
HARMED.

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

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

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

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

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

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

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

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

The laws of other  countries in which we market our products  might offer little
or no effective protection of our proprietary  technology.  Reverse engineering,
unauthorized  copying or other  misappropriation  of our proprietary  technology
could enable third parties to benefit from our technology  without paying us for
it, which could significantly harm our business.

Any failure to  adequately  protect our  proprietary  rights could result in our
competitors offering similar products, potentially resulting in the loss of some
of our competitive advantage and a decrease in our revenues. Infringement claims
and lawsuits, such as the complaint we filed on June 30, 2004 against one of our
competitors for  infringement of our recently issued patent entitled  "Reporting
the State of an Apparatus  to a Remote  Computer,"  and the patent  infringement
lawsuit filed in November 2004 against us by one of our competitors  charging us
with  infringement of U.S. Patent No.  6,377,162,  are likely to be expensive to
resolve  and may not be  successful,  and  will  require  management's  time and
resources and, therefore, could harm our business.

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

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

                                       24
<PAGE>

     o    delay or loss of revenues;
     o    customers could cancel a contract due to defects;
     o    diversion of development resources;
     o    increased product development costs;
     o    damage to our reputation;
     o    delay or diminished market acceptance of our products;
     o    increased service and warranty costs; and
     o    litigation costs.

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

SUBSTANTIAL  LITIGATION  REGARDING  INTELLECTUAL  PROPERTY  RIGHTS EXISTS IN OUR
INDUSTRY AND WE ARE CURRENTLY  SUBJECT TO PATENT  INFRINGEMENT  LITIGATION  THAT
COULD HARM OUR BUSINESS.

In  June  2004,  we  filed  a  complaint  in  U.S  Federal   District  Court  in
Massachusetts  against Questra Corporation,  one of our competitors,  for patent
infringement.  In November  2004,  Questra filed a patent  infringement  lawsuit
against us in the United  States  District  Court for the  Northern  District of
California  seeking  injunctive  relief and unspecified  monetary  damages.  Our
defenses against the suit brought by Questra may be unsuccessful.  At this time,
we  cannot  reasonably  estimate  the  possible  range  of any  loss or  damages
resulting from this suit due to uncertainty  regarding the ultimate outcome.  We
expect that the Questra  litigation  will result in future legal and other costs
to us, regardless of the outcome, which could be substantial.

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

We  may be  required  to pay  substantial  damages  and  may  be  restricted  or
prohibited  from selling our products if it is proven that we have  violated the
intellectual  property rights of Questra or 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.

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
disc, or DVD, technology incorporated into our former PC products 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:

     o    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.

                                       25
<PAGE>

     o    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.

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

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

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

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

We conduct  business in a number of  different  countries.  We sell  products in
numerous countries outside of the United States, including France,  Switzerland,
Japan,  Germany,  the Netherlands and other countries in Europe,  Asia and Latin
America.  Our operations outside the United States include facilities located in
France.  For the quarter ended March 31, 2005, we derived  approximately  51% of
our revenues from sales to foreign  companies.  We anticipate that revenues from
international operations will continue to represent a significant portion of our
revenues.  As a result,  we are  subject to risks  associated  with  selling and
operating in foreign countries.  For example, some of our contracts with foreign
customers are  denominated  in foreign  currencies.  We do not  currently  hedge
against the risk of such  transactions  and as a result,  we face a risk of loss
related to possible fluctuations in currency exchange rates.

Our geographic diversity requires significant management attention and financial
resources in order to develop our international  sales, support and distribution
channels.  We may not be able to maintain  international  market  demand for our
products.  Our  business  could  be  adversely  impacted  if we  are  unable  to
successfully launch our DRM products internationally.

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

     o    legal uncertainty regarding liability;
     o    language barriers in business discussions;
     o    cultural  differences  in the  negotiation  of contracts  and conflict
          resolution;
     o    time zone differences;
     o    reduced protection for intellectual property rights in some countries;
     o    differing labor regulations;
     o    tariffs, trade barriers and other regulatory barriers;
     o    problems in collecting accounts receivable;
     o    political and economic instability;
     o    changes in diplomatic and trade relationships;
     o    seasonal reductions in business activity;
     o    potentially adverse tax consequences;
     o    complexity and unexpected changes in local laws and regulations;
     o    greater difficulty in staffing and managing foreign operations; and
     o    increased financial accounting and reporting burdens and complexities.

                                       26
<PAGE>
WE ARE  SUBJECT TO  CONDITIONS  ATTACHED TO  GOVERNMENTAL  GRANTS WE RECEIVED IN
ISRAEL.

Prior to being  acquired  by us in December  2001,  eMation  received  grants in
Israel from the Office of the Chief  Scientist of Israel's  Ministry of Industry
and  Trade,  or OCS,  in the  aggregate  amount  of  $1.8  million  to fund  the
development of our Axeda Supervisor  product.  As of March 31, 2005 we have paid
royalties to the OCS in the aggregate  amount of $1.6  million.  As of March 31,
2005,  the remaining  $0.2 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, 2005,  $0.3 million 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.

Assuming the exercise of all stock options exercisable by them within 60 days of
April  30,  2005,  they  would  have,  in  the  aggregate,   beneficially  owned
approximately  5.7 million  shares,  or  approximately  17%, of our  outstanding
common  stock.  These  stockholders,  if  acting  together,  would  be  able  to
significantly  influence  all matters  requiring  approval by our  stockholders,
including the election of directors,  the approval of mergers or other  business
combination transactions or a sale of all or substantially all of our assets.

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

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

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.


                                       27
<PAGE>
Item 3: Quantitative and Qualitative Disclosures about Market Risk

We  develop  products  in the  United  States  and sell such  products  in North
America,  Asia and  various  countries  in  Europe.  We collect a portion of our
revenues and pay a portion of our operating expenses in foreign currencies. As a
result,  our  financial  results could be affected by factors such as changes in
foreign currency exchange rates or weak economic  conditions in foreign markets.
Currently,  we do not use derivative  instruments to hedge our foreign  exchange
risk,  although we may do so in the future.  Our interest income is sensitive to
changes in the general  level of U.S.  interest  rates,  particularly  since the
majority of our investments are in short-term instruments.  Due to the nature of
our short-term  investments,  we have concluded that there is no material market
risk exposure.  Therefore,  no quantitative tabular disclosures are required. We
are exposed to certain  market risks  arising  from adverse  changes in interest
rates, primarily due to the potential effect of such changes on the note held by
Laurus,  as described under  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity  and Capital  Resources."  We do
not use interest rate derivative instruments to manage exposure to interest rate
changes.  If the interest rate on the note held by Laurus,  which accrues at the
prime rate plus 2% per year,  were to  increase  by 1% per year,  we would incur
additional interest expense of approximately $41,000 in 2005.

Item 4: Controls and Procedures

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

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

PART II: OTHER INFORMATION

Item 1:  Legal Proceedings

SECURITIES CLASS ACTION
Between February and April 2000, eleven class action lawsuits were filed against
us and certain of our officers and directors in the United States District Court
for the  Eastern  District  of  Pennsylvania.  On May 25,  2000,  the cases were
consolidated  under Civil  Action No.  00-CV-1014,  and entitled "In re RAVISENT
Technologies, Inc. Securities Litigation." Pursuant to the Court's consolidation
order, a consolidated  and amended class action  complaint was filed on June 14,
2000 with an alleged class period of July 15, 1999 through April 27, 2000.  This
complaint  alleges  violations  of the  federal  securities  laws,  specifically
Sections 11 and 15 of the  Securities  Act of 1933,  Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934, and Rule 10b-5 promulgated  thereunder.  On
July 3,  2000,  we and the  other  defendants  filed a  motion  to  dismiss  the
consolidated  and amended class action  complaint.  On July 13, 2004,  the Court
denied the motion. On approximately September 23, 2004, the parties to the class
action  reached an  agreement  in  principle to settle the class action for $7.0
million.  On September 24, 2004,  the  defendants  filed a stipulation  with the
Court,  suspending  motion and discovery  deadlines  pending  negotiation of the
settlement  documents.  On December 15, 2004, the parties filed with the Court a
Stipulation  and  Agreement  of  Settlement  to settle the class action for $7.0
million.  The Court issued a Preliminary  Approval Order on December 21, 2004. A
fairness  hearing was held on April 6, 2005. On April 18, 2005, the Court issued
its Order and Final  Judgment  approving  the  settlement.  Our  directors'  and
officers'  liability  insurance  carriers  paid  the  full  amount  of the  cash
settlement.

                                       28
<PAGE>

IPM
On March 20, 2003,  Industria  Politecnica  Meridionale Spa., or IPM, an Italian
corporation,  filed a complaint  against us in the United States  District Court
for the  Northern  District  of  California.  The lawsuit  alleged  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 claimed  damages of $15.0  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 provided 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 its
complaint on February 19, 2004,  which was granted on March 30, 2004,  and which
withdrew  its fraud  complaint  and  modified  its 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 April 13, 2004, we filed a supplement to our motion for summary judgment.  On
April 27, 2004,  IPM filed a  supplemental  opposition  to our summary  judgment
motion.  We filed a response on May 4, 2004 and our motion for summary  judgment
was heard on May 18, 2004. On June 22, 2004,  the Court issued an order granting
our motion for summary  judgment and  dismissing  IPM's  claims  against us. The
parties then  entered into a written  settlement  agreement  and mutual  general
release dated January 14, 2005 which called for a "walk-away" settlement with no
money or other consideration being exchanged.  In connection with the settlement
the parties also executed a written stipulation for dismissal of the action with
prejudice.  The  stipulation for dismissal was filed on February 9, 2005 and the
entire action was dismissed with prejudice.

OTHER
From time to time, we have received  notices of claims of  infringement of other
parties'  proprietary  rights  and other  claims in the  ordinary  course of our
business.  See "Factors That May Affect Future  Results - Risk Factors - We have
received  notices  of  claims  related  to our PC  products  (or  digital  media
products)  regarding the alleged  infringement  of third  parties'  intellectual
property rights that may cause us to pay damages."

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

On May 4, 2005, we issued to Laurus a warrant to purchase  750,000 shares of our
common  stock at an  exercise  price of $0.37  per  share in  consideration  for
postponing  the payment of some  principal  payments on the note. The warrant is
exercisable  for a term of five  years.  We issued the  warrant in  reliance  on
Section  4(2) of the  Securities  Act of 1933,  as  amended,  and  Regulation  D
thereunder as a transaction not involving any public offering. No advertising or
general solicitation was employed in offering the warrant, the offering and sale
were made to one entity and we restricted  transfer of the warrant in accordance
with the  requirements  of the  Securities  Act.  The  recipient  of the warrant
represented  its  intention to acquire the warrant for  investment  only and not
with a view to or for sale in  connection  with any  distribution  thereof,  and
appropriate legends were affixed to the instruments issued in such transaction.

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

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


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<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 16, 2005
Axeda Systems Inc.

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


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





                                       30
<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>
       3.1             Amended and Restated Certificate of Incorporation, as amended.  (1)
       3.2             Bylaws of Axeda Systems Inc., as amended by the Board of Directors on February 22, 2002. (2)
       4.1             Amendment No. 1 to Registration Rights Agreement, dated as of February 16, 2005, by and among Axeda Systems
                       Inc., Special Situations Private Equity Fund, L.P., Special Situations Technology Fund, L.P. and Special
                       Situations Technology Fund II, L.P. (3)
       4.2             Amendment No. 1 to Securities Purchase Agreement, dated as of February 16, 2005, by and between Axeda
                       Systems Inc. and Laurus Master Fund, Ltd. (3)
       4.3             Amendment No. 1 to Registration Rights Agreement, dated as of February 16, 2005, by and between Axeda
                       Systems Inc. and Laurus Master Fund, Ltd. (3)
       4.4             Agreement, dated as of May 4, 2005, by and between Axeda Systems Inc. and Laurus Master Fund, Ltd. (4)
       4.5             Common Stock Purchase Warrant, dated as of May 4, 2005, issued by Axeda Systems Inc. to Laurus Master Fund,
                       Ltd. (4)
       31.1            Certification of the Chief Executive Officer of Axeda Systems Inc. required pursuant to Section 302 of the
                       Sarbanes-Oxley Act of 2002.
       31.2            Certification of the Chief Financial Officer of Axeda Systems Inc. required pursuant to Section 302 of the
                       Sarbanes-Oxley Act of 2002.
       32.1            Certification of the Chief Executive Officer and Chief Financial Officer of Axeda Systems Inc. required
                       pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
</TABLE>

(1) Incorporated by reference to the registrant's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission on April 12, 2005.

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

(3) Incorporated by reference to the registrant's Current Report on Form 8-K
dated February 16, 2005, as filed with the Securities and Exchange Commission on
February 23, 2005.

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


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