<PAGE>

================================================================================
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

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


                                 Form 10-K/A-1


(Mark One)
[X] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
    Act of 1934 [No fee required] for the year ended December 31, 2001.

[_] Transition Report pursuant to section 13 or 15(d) of the Securities
    Exchange Act of 1934 [No fee required] 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               (I.R.S.
                    jurisdiction         Employer Identification
                 of incorporation or             Number)
                    organization)

                           257 Great Valley Parkway
                          Malvern, Pennsylvania 19355
                   (Address of Principal Executive Offices)

      Registrant's Telephone Number, Including Area Code:  (800) 700-0362

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

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

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

                                        Name of Each Exchange on
                 Title of Each Class        Which Registered
                 -------------------    ------------------------
               Common Stock, par value           NASDAQ
                   $.001 per share

   Indicate by check mark whether the registrant (1) has filed all reports
required 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [_]

   On March 22, 2002, Axeda Systems Inc. had 27,223,566 outstanding shares of
common stock. Of those, 19,096,046 shares of common stock were held by
non-affiliates. The aggregate market value of such common stock held by
non-affiliates, based on the average of the high and low sales prices of such
shares on the NASDAQ National Market on March 22, 2002, was approximately
$52,227,686. Shares of common stock held by each executive officer and director
and each person who owns 5% or more of our outstanding common stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.

                      DOCUMENTS INCORPORATED BY REFERENCE


   Portions of the registrant's Proxy Statement prepared in connection with its
2002 Annual Meeting of Stockholders, to be held on June 17, 2002 are
incorporated by reference into Part III of this Annual Report on Form 10-K
where indicated. The table of Exhibits filed appears on page 103.

================================================================================

<PAGE>


                              AXEDA SYSTEMS INC.



                          FORM 10-K/A-1 ANNUAL REPORT

                        (Year Ended December 31, 2001)

                               Table of Contents


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                                            PART I

ITEM 1  Business..............................................................................   1

ITEM 2  Properties............................................................................  29

ITEM 3  Legal Proceedings.....................................................................  30

ITEM 4  Submission of Matters to a Vote of Security Holders...................................  31

ITEM 4a Executive Officers of Axeda...........................................................  32

                                           PART II

ITEM 5  Market for Registrant's Common Equity and Related Stockholders' Matters...............  32

ITEM 6  Selected Financial Data...............................................................  34

ITEM 7  Management's Discussion and Analysis of Financial Conditions and Results of Operations  35

ITEM 7a Quantitative and Qualitative Disclosure about Market Risk.............................  55

ITEM 8  Financial Statements and Supplementary Data...........................................  55

ITEM 9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..  97

                                           PART III

ITEM 10 Directors and Executive Officers of the Registrant....................................  98

ITEM 11 Executive Compensation................................................................  99

ITEM 12 Security Ownership of Certain Beneficial Owners and Management........................  99

ITEM 13 Certain Relationships and Related Transactions........................................  99

                                           PART IV

ITEM 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................  99
</TABLE>


<PAGE>

          Cautionary Statement Concerning Forward-Looking Statements

   This report contains forward-looking statements within the meaning of 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 of future results to differ from those discussed herein. Such
factors include, but are not limited to: the transition in businesses we are
currently undergoing; fluctuating quarterly operating results; uncertainties in
the market for DRM products and the potential for growth in the pervasive
computing market; our ability to integrate acquisitions; present and future
competition; our ability to manage technological change and respond to evolving
industry standards; our ability to manage growth and attract and retain
additional personnel; the long sales cycle for DRM products; limited
distribution channels; the difficulty of protecting proprietary rights; the
potential for defects in products; claims for damages asserted against us;
risks associated with our digital media business and the search for strategic
alternatives for such business; our ability to raise capital; risks from
international operations; and others discussed under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". In addition, such forward-looking statements are necessarily
dependent upon assumptions, estimates and dates that may be incorrect or
imprecise and involve known and unknown risks and other factors. Accordingly,
any forward-looking statements included herein do not purport to be predictions
of future events or circumstances and may not be realized. Forward-looking
statements can be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," "seeks,"
"pro forma," "anticipates," "plans," "estimates," or "intends," or the negative
of any thereof, or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. All forward-looking statements and reasons why results may differ
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.

                                    PART I

ITEM 1.  Business of Axeda

EMATION ACQUISITION AND RECENT EVENTS

   On December 7, 2001, we acquired all of the outstanding shares of eMation,
Ltd. ("eMation"), a private company organized under the laws of the State of
Israel, pursuant to a share purchase agreement amended and restated as of
October 5, 2001, in consideration for: 8 million shares of our common stock;
options exercisable for up to 1,428,710 shares of our common stock in
connection with assumed eMation stock options; options exercisable for up to
113,600 shares of our common stock issued at closing pursuant to our 1999 Stock
Incentive Plan; and warrants exercisable for up to 115,238 shares of our common
stock. The total combined value of the securities assumed and issued was
approximately $20 million.



   The acquisition was recorded under the purchase method of accounting. We
incurred transaction costs of approximately $3.4 million related to the eMation
acquisition and assumed approximately $5 million of eMation net debt. In
addition, we loaned a total of $4.3 million to eMation for working capital
purposes and expensed $3.1 million of the purchase price as acquired in-process
research and development ("IPR&D").


   An aggregate of 1.6 million shares of our common stock issued in the eMation
acquisition has been deposited with a third party escrow agent to be held in
escrow to compensate us for certain losses and taxes that may arise as a result
of the eMation acquisition. The shareholders' agent appointed pursuant to the
share purchase agreement has agreed to a claim on the escrow fund for the
return of 23,843 shares of our common stock in consideration for our issuance
of certain warrants at the closing. This escrow arrangement will expire on
December 7, 2002 and any shares remaining in escrow will be returned to former
eMation shareholders.

   eMation was formed as a private company in Tel Aviv, Israel in 1988 under
the name PC Soft International Ltd. ("PC Soft"), focusing on the development of
products designed to automate the flow of information within factories and
manufacturing facilities.

                                      1

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   In July 1998, PC Soft acquired 100% of the outstanding share capital of
FactorySoft Inc., a Massachusetts company focused on the development of
industrial control servers. The total cost of the acquisition, including
transaction costs, was $0.7 million. FactorySoft Inc. was based in Mansfield,
MA, and the corporate headquarters were subsequently moved to this location.

   In February 2000, PC Soft changed its name to eMation, Ltd. In May 2000,
eMation acquired certain assets and liabilities of Intuitive Technology
Corporation ("ITC"), for its existing software, which provides access to
distributed data in process manufacturing applications, its core technology and
ITC's 13 key employees. The total cost of the acquisition, including
transaction costs, was $7.3 million. Also in May 2000, eMation raised
$24 million through the issuance of convertible redeemable preferred stock.

   On January 14, 2002 we changed our name to Axeda Systems Inc. ("Axeda") and
effective as of February 5, 2002, our common stock is quoted on the NASDAQ
National Market under the symbol XEDA.


Overview


   Axeda is an enterprise software and services company that helps businesses
be more competitive by using the Internet to tap the value of real-time device
information, helping them to optimize their service, development, sales and
manufacturing operations. We provide a new category of enterprise business
software known as Device Relationship Management ("DRM"). DRM enables the live
exchange of information via the Internet, between remotely deployed
"intelligent devices" (instruments, equipment, machines, facilities,
appliances, vehicles, sensors or systems incorporating computer-based control
technology) and the people that build, service and use them.

   Our flagship product, the Axeda DRM(TM) System, is a distributed software
solution designed to enable businesses to remotely monitor, manage and service
intelligent devices. The Axeda DRM(TM) System enables manufacturers and service
providers to use the Internet to establish and manage continuous connections
with devices deployed at their customers' facilities, allowing them to stay in
touch with their products throughout their lifecycle, tapping the value of
remote device information with new, automated e-service, operations monitoring,
and e-commerce offerings.

   We help transform reactive businesses into proactive businesses that can
continuously gain business insight and benefits from live information sources
by helping businesses capitalize on the wealth of previously unavailable device
performance and usage data. This can result in customers benefiting from new
sources of revenue, lower costs and increased operational efficiency.

   We currently serve Global 2000 companies in the Industrial and building
automation, high technology devices, medical instrumentation, office automation
and semiconductor equipment industries through our sales and service offices in
the U.S., Europe, Israel and Japan, and distribution partners worldwide.


Company History


   We were incorporated in Pennsylvania in April 1994 as Quadrant Sales
International, Inc. and changed our name to Quadrant International, Inc. in May
1994. In April 1999, we changed our name to Divicore Inc. and then
reincorporated in Delaware as RAVISENT Technologies Inc. in June 1999. We
changed our name to Axeda Systems Inc. in January 2002.

   We intend to focus our resources and attention in 2002 on the development of
the products and services we acquired with the acquisition of eMation, in
December 2001. We expect future growth to be driven by the DRM products and
services we acquired in the eMation acquisition. Our DRM enterprise software
and services business evolved from the real-time information acquisition,
visualization, and control products that have been the basis for eMation's long
standing industrial automation products business. We have a significant
installed

                                      2

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customer base in industrial automation products. However, we have limited
experience in the new DRM enterprise software market, as eMation introduced its
first full DRM solution in the first quarter of 2001. Prior to that time
eMation's revenues were derived from industrial automation products.

   eMation as a stand-alone entity generated revenues of approximately $2.7
million, or 22.2% of eMation's stand-alone total revenues, from DRM products
and services for the year ending December 31, 2001. eMation has historically
derived its main source of revenues from its industrial automation products and
services, which generated revenues of approximately $9.5 million for the year
ending December 31, 2001.


   We also sold products and provided services in the consumer electronics
("CE") market and the Internet appliance ("IA") market until the sales of the
assets of these businesses, excluding inventories, in March 2001 to
STMicroelectronics, NV ("STMicroelectronics") and Phoenix Technologies Ltd.
("Phoenix"), respectively. We will continue to seek and evaluate alternative
strategic directions for our digital media business in 2002. See "Sale of
Consumer Electronics Business," "Sale of Internet Appliance Business" and
"Digital Media Business," below.


  Sale of Consumer Electronics Business

   STMicroelectronics, one of our CE customers, had expressed an interest in
more fully integrating our software on the microchips they manufacture for the
CE market. Our continued involvement in the CE market would have required a
commitment of substantial resources to update our software and remain
competitive. Therefore, we entered into negotiations with STMicroelectronics
that resulted in the sale of the assets of our CE business. Effective as of
March 1, 2001, and pursuant to an asset acquisition agreement dated as of
January 18, 2001, we and certain of our direct and indirect subsidiaries,
RAVISENT I.P., Inc., RAVISENT Operating Company, Inc. and VIONA Development
Hard and Software Engineering GmbH & Co. KG, transferred certain assets related
to our CE business to STMicroelectronics. The assets transferred include
certain of the contracts, equipment, intangible assets, intellectual property,
prepaid expenses, accounts receivable and other assets primarily related to the
operation of the CE business. In addition, approximately 76 of our employees,
most of whom were associated with the CE business, accepted employment with
STMicroelectronics in connection with the asset sale. Pursuant to the terms of
the asset acquisition agreement, STMicroelectronics paid approximately $55.6
million in cash consideration, of which $0.7 million is being held by a third
party in escrow for indemnification purposes until September 2002. In
connection with the asset sale, we granted STMicroelectronics certain
non-exclusive rights to license and distribute certain of our technology used
in our IA and personal computer ("PC") products. Further, pursuant to the terms
of the asset acquisition agreement, we have agreed not to compete in
significant aspects of the CE market for a period of five years from March 1,
2001.

  Sale of Internet Appliance Business

   Our continued involvement in the IA market would have required a commitment
of substantial resources to remain competitive. Therefore, we entered into
negotiations with Phoenix who were interested in integrating our IA products
with their information appliances products to provide a more complete solution
to PC OEMs. Effective as of March 23, 2001, and pursuant to an asset
acquisition agreement dated as of March 21, 2001, we and certain of our
subsidiaries, RAVISENT Technologies Internet Appliance Group, Inc., RAVISENT
I.P., Inc. and RAVISENT Operating Company, Inc. sold substantially all of the
assets of our IA business, excluding inventory, to Phoenix for approximately
$18 million in cash consideration, of which $1.8 million was being held by a
third party in escrow for indemnification purposes until March 2002. In March
2002 we received $1.3 million, including interest of approximately $0.05
million. The remaining balance of approximately $0.55 million has been withheld
pending the settlement of a claim submitted by Phoenix. We are unable to
predict the resolution of this matter, or reasonably estimate a range of
possible loss given the current status of this matter. Any escrow amounts not
returned to us will be recorded as a charge to the gain on sale of assets in
the period in which such determination is made. The assets sold include certain
of the contracts, equipment, intangible assets, intellectual property, prepaid
expenses and other assets primarily related to the operation of the

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IA business. Under the agreement, Phoenix purchased, among other things, our
e-Surfer embedded software Internet browser and related hardware designs for
the IA market. In addition, in connection with this asset sale, 13 of our
employees associated with our IA business accepted employment with Phoenix.

  Digital Media Business

   Our digital media business provides software solutions and technology to
industry leading PC OEMs, empowering them to deliver highly competitive,
cost-effective products with a strong time-to-market advantage. It also
provides customization services and customer support. We offer a web-based
retail site to allow users to upgrade and purchase the latest products from us.
Our software allows PC manufacturers to address digital multimedia formats such
as digital versatile disks, or DVD; digital video recording, or DVR; direct
broadcast satellite, or DBS; its European counterpart, digital video
broadcasting, or DVB; and high-definition television, or HDTV.

   We rely upon a combination of patent, copyright, trade secret and trademark
laws to protect our digital media business' intellectual property. We currently
have eight pending U.S. patent applications related to our digital video
management technology. We co-own with STMicroelectronics two additional U.S.
patent applications and we have three foreign applications pending based on one
of the co-owned U.S. patent applications. All of the pending U.S. patent
applications owned solely by us cover future products and do not relate
directly to our current products. In addition, we have issued U.S. trademark
registrations for the marks RAVISENT and CineMaster.

   We license technology from Dolby Laboratories ("Dolby") for the audio format
that is used in all of our DVD-related products. We pay a royalty to Dolby on a
per-unit shipped basis. The technology, called Dolby Digital, permits audio
from a DVD to be routed to different speakers in a multi-speaker set up to
permit "theater-quality" audio. The Dolby Digital technology is part of the
industry standard DVD specification. In addition, we license encryption and
decryption software technology on a royalty-free basis from the Copy Control
Association (CCA), which must also be included in any DVD products we ship.
This technology is designed to prevent unauthorized persons from accessing DVD
content such as movies. The license for the encryption and decryption
technology may be terminated at any time. We may not be able to renew either
license.

   Our typical customers and partners in the digital media business are PC,
peripherals and semiconductor manufacturers that benefit from our digital
entertainment solutions. For the year ended December 31, 2001, three customers,
Matrox Graphics, Inc., Gateway Inc. and another customer accounted for 13%, 7%
and 16%, respectively, of our revenues. For the year ended December 31, 2000,
three customers, Wongs Electronics Co., Ltd., Gateway Inc. and Hewlett-Packard
Company, accounted for 19%, 19% and 11%, respectively, of our revenues. For the
year ended December 31, 1999, one customer, Dell, accounted for 53% of our
revenues.

   We have decided to seek strategic alternatives for our digital media
business as a result of the change in our strategic focus resulting from the
sale of the assets of our CE business to STMicroelectronics, the sale of the
assets of the IA business to Phoenix Technologies, and the acquisition of
eMation, as well as the intense competitive environment in the PC market.

   Financial information regarding segment information for our digital media
business is provided in note 21 to our financial statements for the year ended
December 31, 2001, contained at Item 8 herein.


Industry Background and Trends


   Computer-based control systems are at the heart of almost every new product,
machine or system made today. These "intelligent" systems consist of hardware
and software that is used to control the operation of the device as it is
running, perform diagnostics, and enable external systems or people to input or
query data that

                                      4

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may be generated during operation. Depending on the cost and the complexity of
the device, all of this capability may be embedded within the device itself or
portions of it may reside on external computers that perform a supervisory
control function for one or more related devices.

   Intelligent devices generate valuable information as they are operating.
Initially, this information was only made available locally through custom
control interfaces on the device itself. As embedded systems and PC technology
became pervasive and inexpensive, these devices moved to "soft" interfaces
where operators worked at computer screens to monitor and control devices. In
many markets and for many devices, this remains the state of the art today.

   However, there was a demand to synchronize devices and control systems in
industrial automation markets. Therefore, control systems were developed to
simultaneously supervise multiple devices, such as those in a building or a
production line. A number of new software applications were also developed to
enable remote monitoring, visualization, and connectivity between devices,
systems, and people. These applications were oriented to managing real-time
control and operation data and were flexible and configurable to be able to
support the different types of devices, configurations, and data. As more
devices became connected, the applications had to be scalable to handle the
increasing amount of data and users.

   In the late 1980's, eMation identified an opportunity to build a business
around real-time device control and data management. eMation has built and
marketed products to address these needs in the industrial automation market
for over 13 years. These products include supervisory control and data
acquisition ("SCADA") systems for single or multiple devices. They feature
computer-based human-machine interface ("HMI") capability for local monitoring,
and offer sophisticated features for enabling remote control, monitoring, HMI,
and data management of device data via proprietary networks or the Internet.
Our communications technology enables multiple supervisory systems or other
real-time control and data management applications to be connected over
networks to remote operators or software systems.

   An opportunity exists to apply these same technologies and techniques to
address new business needs within the device manufacturers themselves. Devices
contain valuable information that could be used to monitor not only their
output, but also their health and operation. Business could work better if
these devices could communicate and if everyone in a business could tap
directly into the information within the products they sell and service, or the
systems they use. For example, companies could benefit if they could tell when
machines are out of raw materials or about to fail, how many times they were
used in a week, how a facility was operating, or what features were most
popular in products in use by their customers. Based on this information,
companies could lower costs, operate more efficiently, and add new sources of
revenue.

   With hundreds of millions of users and growing, the Internet now provides a
fundamental infrastructure for connecting people to sources of information. In
recent years the Internet has been focused on helping people exchange
information with other people. This focus is now expanding to encompass people
exchanging information with machines and machines communicating with each other
or with enterprise software applications. The growth of the Internet has
provided a ubiquitous, open, global network that can now be used in a cost
effective manner to tap into the data locked within intelligent devices.
Connectivity is now extending to devices such as medical devices, industrial
machines, fabrication equipment, utility meters, photocopiers, mobile assets,
vending machines and appliances.

   With the right enterprise software solution, devices can be monitored,
controlled and upgraded through connections made possible by the Internet.
Companies can use this capability to stay involved throughout the entire
product life cycle, building closer bonds with their customers and improving
their bottom line.

   Axeda is moving to help its customers realize this opportunity with a new
category of enterprise software that enables corporations, manufacturers and
service providers to use the Internet to manage their relationship

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with the products and systems deployed at their customers and facilities. Known
as Device Relationship Management ("DRM"), it enables the real-time exchange of
information between remote devices and the people and business systems that can
profitably utilize this information.


The Axeda DRM(TM) Solution


   The Axeda DRM(TM) System is an enterprise software solution that leverages
the global reach of the Internet to provide the real-time, continuous exchange
of information between remote devices, business systems and people. It
addresses a significant information blind spot in the enterprise by allowing
timely, accurate and unbiased information to be communicated automatically, via
the Internet, between remote devices deployed at customer facilities and
external service personnel or enterprise business systems.

   The Axeda DRM(TM) System lets businesses, manufacturers and service
providers use the Internet to monitor, manage and service intelligent devices
deployed at remote sites anywhere in the world, cost effectively and in real
time. Companies can now connect directly to their deployed products rather than
relying on feedback filtered through their users, benefiting from a continuous
yet managed flow of information that lets them improve how they develop,
manufacture, re-supply, market and service their products.

   The Axeda DRM(TM) System comprises infrastructure and application software
products that run at the device or enterprise, and together interoperate to
form an Internet-based, information distribution system for device monitoring,
management and control. Axeda DRM(TM) enables the seamless, yet secure,
integration of remote device information with a company's ongoing business
practices. Patent-pending Axeda technology allows intelligent devices hidden
behind customer firewalls to have secure, two-way, Internet-based communication
with external sales and service personnel and their enterprise applications.

   We believe that our customers use the Axeda DRM(TM) System to generate
business payback and improved customer satisfaction with lower cost proactive
customer service, real-time business interactions, new personalized product and
service offerings, and improved operational efficiencies.

   Based on our experience in implementing our products, we believe that Axeda
DRM(TM) solutions help companies:

   . Attract and retain customers;

   . Increase product uptime;

   . Expand their offerings;

   . Improve service, logistics, maintenance and support operations while
     lowering costs;

   . Remotely install, calibrate, configure, and diagnose;

   . Offer billing model flexibility and new revenue sources;

   . Exploit customer and market intelligence to make better products;

   . Provide continuous, automated monitoring of remote equipment;

   . Improve operational efficiencies within the enterprise and supply chain;
     and

   . Extend current IT investments to access valuable, previously untapped
     device information.


   Axeda DRM(TM) Systems can be used on a stand-alone basis where, for example,
personnel in a service department use the System on a day-to-day basis to
monitor and diagnose remote devices. Further, Axeda DRM(TM) solutions can be
used to feed information to existing installed enterprise software systems.
These could include enterprise resource planning ("ERP"), customer relationship
management ("CRM"), and supply chain and asset management systems. DRM can
provide live information feeds or transactions to drive these enterprise


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applications to allow timely, accurate, unbiased information to be communicated
automatically between the device and the application. This enables companies to
use DRM to gain additional value from their existing complementary IT
investments. We offer complete DRM systems and we also continue to separately
sell components of the system, such as the Axeda Supervisor, Axeda @aGlance/IT
and Axeda FactorySoft OPC, to support our traditional industrial automation
business.

   We complement our DRM products with professional service, training, and
support offerings to assure rapid adoption and value realization within our
customer base. We leverage our mix of experience in embedded systems,
enterprise software, Internet, and service automation and optimization to solve
tough problems with practical solutions.

   Financial information regarding the acquired assets and segment information
for our DRM business is provided in notes 4 and 21, respectively, to our
financial statements for the year ended December 31, 2001 contained at Item 8
herein.


Our Strategy


   Our objective is to be the leading provider of DRM solutions and services in
targeted industries worldwide. Key elements of our strategy include:

   . Reducing service costs in ready markets. Axeda is initially focused on
     helping device manufacturers in targeted industries provide better
     customer service at lower cost. We intend to continue to expand our
     products and services to ensure broad and successful adoption of the Axeda
     DRM(TM) System in customer service operations within our target accounts.

   . Reaching additional information stakeholders. Once service departments are
     automated and device data is stored within the DRM system, this data will
     also be available to additional information stakeholders both inside and
     outside the company. We intend to offer additional benefits based on
     real-time data availability by developing or acquiring new applications to
     expand our solutions to marketing, sales, operations and product
     development departments.

   . DRM-enabling complementary products and solutions. Axeda is also
     aggressively pursuing alliances with complementary solution suppliers
     whose customers can benefit from the availability of live device data
     within their businesses. By seeding the market with DRM-enabled products,
     we believe we can increase our market reach and speed of adoption across
     multiple industries.

   . Leverage our industrial automation installed base. Tapping our industrial
     automation installed base can help to accelerate our business as these
     installations grow and require more advanced remote monitoring and
     management. We are upgrading our traditional industrial products and
     installed base to be DRM-ready to enable the adoption of full DRM systems.


Markets


   We market our DRM solutions to the service operation of device original
equipment manufacturers (OEMs) and strategic large-scale end users in a variety
of industries. We target specific industries that have significant service
costs and uptime requirements as well as complex, intelligent systems. Our
current target industries are:

   . Industrial and Building Automation;

   . High-technology Devices;

   . Medical Instrumentation;

   . Office Automation; and

   . Semiconductor Equipment.

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   We believe these industries have the greatest current need and most
appropriate systems for our DRM solutions. Complex, computer controlled,
electro-mechanical devices that cannot afford downtime characterize these
industries. They often use "consumables" in their operation that device
manufacturers want to automatically and remotely monitor and re-supply.

   For example, the medical instruments market is characterized by a variety of
sophisticated machines operated by non-technical personnel. These machines must
stay operational and many use chemical consumables. Service costs and quality
of service requirements are a serious issue, and manufacturers want to maximize
revenue from consumables. High-end printers and copiers also present a number
of opportunities for DRM. They are sophisticated, computer controlled machines
that tend to have frequent failures. In addition they use consumables like
toner that represent the basis for much of their manufacturers revenue stream.

   Today's computer controlled manufacturing environments are also a target for
Internet-enabled control and industrial information solutions. Many
manufacturers face the problem of inadequate access to the gigabytes of
real-time status information produced annually by equipment on their factory
floor. Semiconductor fabrication equipment and industrial machines are
sophisticated computer controlled devices already networked on the factory
floor. Their complexity makes them targets for DRM, as they are prone to
service calls, yet any downtime is a major problem and expense for production
lines.

   Industrial automation applications in markets such as building automation,
waste and water treatment, manufacturing, and oil exploration all utilize
increasingly complex devices that demand sophisticated monitoring, control and
remote service capabilities. We also believe that there is an opportunity for
our DRM solutions in currently non-networked or mobile industries where there
is a need for wide scale management of live device information. We are
beginning to explore the transportation, home, vending, point-of-sale, and
energy management markets as secondary vertical markets with partners who
provide necessary technology or business ingredients, such as wireless
communications technology.


Products and Services


  Device Relationship Management

   The Axeda DRM(TM) System comprises a suite of software products that link
the enterprise to devices and enable remote service, commerce, monitoring and
administration. Designed for real-world environments, Axeda DRM(TM) leverages
our patent-pending Firewall-Friendly(TM) communications technology to let
remote devices exchange information securely with DRM Enterprise servers at our
customers' company headquarters, even when their devices are hidden behind
their customers' corporate firewalls, and without special handling by their
busy IT departments.

   The Axeda DRM(TM) System employs widely supported, standard Internet
protocols like email, extensible mark up language ("XML"), SOAP, TCP/IP and
HTTP to communicate over the Internet. Web browser interfaces are based on
industry standard Java and HTML. This use of open standards enhances the
system's portability and interoperability at the device and enterprise levels.
To keep information secure, users of the Axeda DRM(TM) System can employ a
system of passwords and access privileges that can cover a single device or
groups of devices. Transfer of information from devices to users is secured
through authentication services, secure socket layer encryption, and digital
signatures.

  Axeda Applications(TM)

   Axeda Applications employ web-architected interfaces for remote device
administration, desktop sharing, diagnostics and data visualization. Whether
remotely calibrating a product at a customer site, administering a remote
desktop, graphing real-time data for a device, or updating profile information
in hundreds of installed

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products, Axeda DRM(TM) users access all information via their standard web
browsers. No special client-side software is required. Axeda Applications
currently include:

   . Axeda Service(TM) provides web-based access to global summaries and
     statistics of all operating devices and enables field service and
     technical support representatives to drill down for information from an
     individual device to access the status for problem diagnosis and
     resolution. Integration of real-time device data with customer databases
     instantly provides a complete view of the system-wide status of a remote
     device. Axeda Service provides interactive real-time and historical data
     as well as alarm notification and analysis. E-mail notification of
     detected alarms can be set to enable fast reaction to potential problems.


   . Axeda Access(TM) extends the remote monitoring and diagnostics capability
     of the Axeda DRM(TM) system beyond intelligent devices to include the
     remote administration of software applications, databases, desktop
     computers, servers and operating systems. It allows service and support
     specialists to use the Internet to remotely debug, update and administer
     software, increasing responsiveness to customer problems and avoiding
     costly on-site service calls without compromising corporate network
     security.


   . Axeda Administration(TM) lets companies map the complex relationships
     between users and devices with tools to configure device business rules,
     define device information, and create and maintain user information. It
     allows organizations to provide proactive service worldwide while ensuring
     that only authorized personnel have access to sensitive device information.

  Axeda Enterprise(TM)

   Axeda Enterprise server software provides a secure, fault-tolerant
infrastructure for communicating and managing the information exchange between
remote devices and businesses. Axeda Enterprise software acts as a device data
center, storing and managing live and historical information in a secure
environment. Business rules drive automated notification with people or
initiate transactions with other enterprise business systems such as billing,
maintenance, help-desk, inventory, resupply, ordering and asset management.


   As organizations apply the benefits of DRM to larger populations of deployed
devices, servers with Axeda Enterprise software can be clustered to meet their
scalability requirements. Deploying the Axeda DRM(TM) System across multiple
servers increases scalability and makes the system fault-tolerant through
redundancy and fail-over between servers. Clustering is implemented using a
standard "n-tier" web architecture; users and devices connect into the Axeda
DRM(TM) System via a group of web servers, load balanced based on the incoming
traffic flow. At the application layer, multiple servers are added as needed to
handle business logic processing demands. Likewise, at the database layer
additional servers can be added to scale as the information flow increases. By
allowing the addition of processing power at any layer in the architecture,
Axeda Enterprise software enables servers to be tuned to scale based both on
the number of users accessing applications, and the number devices being
monitored.


   Axeda Enterprise software is based on the Java(R) 2 Enterprise Edition
(J2EE) platform standard, runs on all major server platforms, and takes full
advantage of the open extensible Markup Language (XML) standard for
communication, making it easy to share information and integrate with other
applications.

  Intelligent Agents

   Axeda Intelligent Agents at the device allow distributed monitoring,
communications and control. These software products run on or are attached to
devices, allowing local data processing and two-way, Firewall-Friendly(TM)
communications with the enterprise. By putting intelligence on devices, Axeda
DRM(TM) takes advantage of distributed processing to enable large-scale
deployment of proactive device management.

   Axeda Intelligent Agents are fully portable across the most popular
operating systems and are easily integrated with existing designs or serve as
the basis for entirely new products. Intelligent Agent technology is

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<PAGE>

offered in a variety of forms: embedded within the chip or control processor,
in an attached gateway, or as a full supervisory system capable of managing
multiple devices or a whole facility. Our family of intelligent agents
currently includes:


   . Axeda Connector(TM) is a modular embedded application server that provides
     data acquisition, local decision-making, and web user interface for
     intelligent devices and systems. It can be used independently, or as the
     embedded device component of the Axeda DRM(TM) System, connecting a single
     device to the Axeda Enterprise server. Axeda Connector functions as the
     eyes and ears of the Axeda DRM(TM) System. It includes all functionality
     and XML processing needed to perform two-way Firewall-Friendly(TM)
     communication with the Axeda Enterprise server, enabling Axeda Connector
     data and alarms to easily flow to the Enterprise Server through the
     Internet without local user or IT administration.


   . Axeda Gateway(TM) pools the information from multiple devices in a local
     area and sends it to the Axeda Enterprise server, providing a single
     interface between multiple devices and the enterprise. Axeda Gateway
     includes the functionality and XML processing needed to perform two-way
     Firewall-Friendly(TM) communication between a group of local devices and
     the Axeda Enterprise server.

   . Axeda Supervisor(TM) provides local control for complex systems of devices
     such as building controls or plant floors, sending system-wide data to the
     Axeda Enterprise server and enabling central control and monitoring of
     geographically dispersed systems. Combining both discrete and process
     control with the Internet, Axeda Supervisor supplies the software tools
     businesses need to build a complete automation solution. Axeda Supervisor
     can be used as part of a full Axeda DRM(TM) System or independently on a
     stand-alone basis as per our traditional industrial automation customers.

   . Axeda Remote(TM) provides connectivity to remote computers for
     Firewall-Friendly desktop sharing and control by the Axeda Access
     application. Axeda Remote can be easily installed from a web site or even
     an e-mail attachment, making it easy for service personnel to set up a
     connection to the Axeda Access application.

  Axeda Agent Connectivity

   A comprehensive library of customizable drivers, industry standard
protocols, and sophisticated programs complete the connection between Axeda
DRM(TM) and the device. These include:

   . Axeda @aGlance/IT(TM), a multi-platform, client-server communications
     technology for industrial information access. Through the use of Axeda
     @aGlance/IT servers, process data stored in distributed control systems,
     supervisory control software, and data historians is readily accessible to
     Axeda DRM(TM) or other client applications. Axeda @aGlance/IT can be used
     to feed information to full DRM systems and is also sold on a stand-alone
     basis to companies needing inter-device communications.

   . Axeda FactorySoft OPC(TM) Toolkits, which simplify the process of creating
     object linking embedding ("OLE") for Process Control (OPC) drivers to
     connect devices to the Axeda DRM(TM) System, offering both rapid
     deployment and full-source development OLE for companies that want to
     quickly and thoroughly implement industry standard process control in
     their products. Axeda FactorySoft OPC allows simplified device data
     exchange with OPC-compatible products, allowing greater interoperability
     between automation and control applications, field devices, and business
     and office applications. Axeda FactorySoft OPC is also sold on a
     stand-alone basis to device manufacturers wishing to add industry standard
     OPC communications to their product.

  Customization Products

   Axeda Customization products ensure that Axeda DRM(TM) can be tailored to
meet the specific needs of any organization.

   . The Axeda Application Toolkit adds the ability to customize Axeda
     Applications and create new custom applications that leverage the power of
     the Axeda DRM(TM) System.

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<PAGE>

   . The Axeda Integrator(TM) for Siebel provides seamless integration with the
     Siebel 2000 Field Service application from Siebel Systems Inc.

   . Axeda Builder is the graphical development studio for creation, deployment
     and remote administration of Axeda Connector and Axeda Gateway
     applications.

  DRM Implementation Services

   Axeda delivers experienced project and system integration services designed
to provide clients with unique DRM solutions that meet their specific business
needs in the shortest time possible. Our clients get the advantage of working
with software developers and application engineers with a broad range of
technical and commercial e-business experience. Success is delivered through a
proven methodology that ensures customer acceptance and satisfaction at each
step of the way. Our methodology begins with a detailed evaluation of the
business issues surrounding the Internet enabling of the client's products,
systems and services and can include an operational proof-of-concept designed
to show Axeda DRM(TM) technology working in conjunction with the client's
products, enabling the client management team to clearly see and understand the
value of DRM as it applies directly to their business needs. Other services
include installation, driver development, migration and tuning. Axeda also
provides a range of educational and support services to assure successful 24x7
ongoing operation.

  Service and Logistics Services

   Axeda provides comprehensive service and logistics consulting and
professional services to assist clients in optimizing the value of their
service management business through improved service, revenue, materials and
knowledge management. Provided by experienced professionals in the industry,
our solutions encompass strategy, proven process design, proven best practices
and applied technologies designed to increase customer loyalty, increase
revenue/profit, and reduce costs. Our full lifecycle of services span from
functional and organizational readiness evaluations and business case
development to the delivery of business transformation services,
strategic/tactical and operational solutions, change leadership, technology
integration, metrics and measurements, and experience-based capability models.
Post-implementation support such as staffing and mentoring services and
performance evaluation are also provided to ensure that our clients realize the
full benefits from our services.

   We specialize in the highly critical, yet frequently overlooked, areas that
directly impact the success of new technology implementations. By helping set
and achieve appropriate service goals, and addressing needed change in
processes, people and technology, Axeda helps companies effectively apply
technology to achieve breakthrough service business results.


Strategic Alliances


   We have and will continue to enter into strategic alliances with experienced
technology, systems, consulting and distribution companies carefully selected
for their expertise in systems integration, hardware, software, enterprise
applications and other critical services. Existing relationships include:

   . Siebel Systems, Inc. We are a Siebel Software Partner. Siebel is a leading
     e-business applications company, providing CRM solutions to some of the
     world's largest companies. Our Axeda Integrator for Siebel provides
     seamless integration with the Siebel 2000 Field Service application from
     Siebel Systems Inc.

   . Nokia. In January 2002, we entered into a memorandum of understanding with
     Nokia, a leading mobile communications company. We are developing
     solutions to bring together the Nokia M2M Platform and the Axeda DRM
     System. Our objective is to jointly enable businesses in multiple markets
     to offer automated monitoring, management, service and re-supply of remote
     and mobile devices via wireless communications and the Internet.

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<PAGE>

   . NetSilicon. NetSilicon is a provider of software and integrated circuit
     solutions for intelligent networked devices and a leading supplier in the
     copier market worldwide. We are working with NetSilicon to integrate our
     products and jointly market these solutions to device manufacturers in a
     number of markets including printing/imaging. The NetSilicon-Axeda
     integration allows embedded systems developers using NetSilicon products
     to network-enable their devices to also, and simultaneously, enable the
     same devices for Axeda DRM.


Sales and Marketing



   Our sales and marketing strategy is focused on target account selling in
specific industries. The majority of our direct sales resources are targeted
toward direct sales of DRM to large OEMs and strategic, large-scale end users
in the United States, Europe, Japan and Israel. These direct resources are
leveraged in the industrial automation market through a network of partners who
sell components of the DRM system, including OEMs, contracted distributors and
systems integrators, some of which support smaller customers and remote
markets, such as those in South America, Eastern Europe, and China. We apply an
integrated sales and marketing strategy with target account marketing efforts
focused on media and analyst relations, product marketing, web sites, sales
tools, targeted lead generation, executive events, direct marketing promotions
and trade shows in target industries.


   Through December 31, 2001, eMation received grants from the Israeli
Government through the Fund for the Encouragement of Marketing Activities in
the aggregate amount of $1.2 million and paid royalties in the aggregate amount
of $0.5 million. As of December 31, 2001, $0.5 million of the remaining
potential $0.7 million of principal liability is accrued in other current
liabilities. eMation is obligated to pay royalties of 4.0% of revenues derived
from sales of products which result from grants received through the Fund for
the Encouragement of Marketing Activities.

   As of December 31, 2001, eMation had an accrued liability of $0.5 million to
the fund for encouragement of marketing activities. Royalties accrued in
respect of the grants from the Fund for Encouragement of Marketing Activities
are classified as a selling expense.


Customers


   We specifically target our Axeda DRM solution at organizations that build,
service or use intelligent devices to run a business, particularly in
industries that have significant service costs and uptime requirements as well
as complex, intelligent systems. We currently serve Global 2000 companies in
the industrial and building automation, high technology devices, medical
instrumentation, semiconductor equipment, and office automation industries. Our
customers include Air Liquide, Beckman Coulter, Sauter, Shinkawa, PRI
Automation, CERN, Siemens, Toshiba and Varian Medical Systems.


Research and Development


   We believe that our future success depends in large part on our ability to
enhance existing products, reduce product cost and develop new products that
maintain technological competitiveness. We believe that we must continually
enhance the performance and flexibility of our current products and
successfully introduce new products to maintain a leadership position. Product
development involves several functional groups within our organization and is
designed to provide a framework for defining and addressing the activities
required to bring product concepts and development projects to market.


   As of December 31, 2001, our DRM business employed a total of 42 research
and development personnel in three locations, in Mansfield, MA, France and
Israel. For the years ended December 31, 2001, 2000 and 1999, eMation as a
stand alone entity had research and development expenditures, excluding
non-cash compensation, totaling $5.9 million, $6.1 million and $2.1 million,
respectively. To date, eMation has not capitalized any research and development
expenses.


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<PAGE>

   The majority of our DRM product line is developed at our research and
development headquarters in Mansfield, MA. As of December 31, 2001, we employed
a total of 24 research and development personnel in our Mansfield,
Massachusetts office.

   The Axeda Supervisor products, which have traditionally been used in
industrial automation markets, are developed in Israel. As of December 31,
2001, we employed a total of 15 research and development personnel in our
Israeli office and 3 in our offices in France.

   In Israel, under the Law for the Encouragement of Industrial Research and
Development of 1984, a research and development program that meets specified
criteria is eligible for grants of up to 50% of the program's expenses. The
program must be approved by a committee of the Office of the Chief Scientist of
the Israeli Ministry of Industry and Trade. The recipient of the grants is
required to return the grants by the payment of royalties on the sale of
products developed using the grants. Current regulations promulgated under the
law provide for the payment of royalties to the Office of the Chief Scientist
ranging from 3.0% to 3.5% on the sale of products developed using such grants
until 100% of the grant is repaid. Grants received under programs approved
after December 31, 1998 will accrue interest at an annual rate of 12-month
LIBOR applicable to dollar deposits. Royalties are paid in NIS linked to the
dollar at the exchange rate in effect at the time of payment. Following the
full payment of such royalties and interest, there is no further liability for
payment to the Office of the Chief Scientist.

   Through December 31, 2001, eMation received grants from the Office of the
Chief Scientist in the aggregate amount of $1.8 million and paid royalties in
the aggregate amount of $1.3 million. As of December 31, 2001, $0.1 million of
the remaining potential $0.5 million of principal liability is accrued in other
current liabilities. eMation is obligated to pay royalties of 3.0% to 3.5% of
revenues derived from sales of products funded through grants received from the
Office of the Chief Scientist. The terms of the Office of the Chief Scientist
grants require that eMation manufacture its products that are developed with
such grants in Israel. In addition, eMation may not transfer the technology
developed pursuant to the terms of these grants to third parties without the
prior approval of a governmental committee.

   As of December 31, 2001, eMation had an accrued liability to pay the office
of the Chief Scientist $0.1 million in royalties. Any royalties accrued in
respect of the office of the Chief Scientist grants are classified as a cost of
revenues.


Competition


   Our DRM solutions span a range of capabilities in a number of industries,
and the competitive landscape varies across each of these solutions. The
principal competitive factors that affect the DRM market are:

   . our customer service and support;

   . our product reputation, quality, performance; and

   . the price and features of our products such as adaptability, scalability,
     the ability to integrate with other products, functionality, and ease of
     use.

   The principal competitors to the Axeda DRM(TM) System today are in-house
developers within the machine and device manufacturers that are our prime sales
targets or systems integrators doing custom product development. We believe our
time to market expertise, major cost advantage (buy vs. build), breadth of
solution, and significant intellectual property enables us to win over custom
developed solutions. We believe that our strong knowledge of embedded control
systems and real-time data exchange over the Internet balanced with our
enterprise software experience make our products unique, flexible, and robust
alternatives to developing full solutions in-house.

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<PAGE>

   Some vertical market solution suppliers have also developed device
management infrastructures for use in specific industries. Today companies such
as Brooks Automation (semiconductor), Questra (medical and office), Invensys
(industrial), Imaging Portals (copiers), Motive (computers), eVend.Net
(vending) and WindRiver (home) compete in specific industries in which we also
operate. Our distributed architecture and Firewall-Friendly approach
significantly differentiate our offering by reducing costs of implementation
and support while easing system administration. Today our strategy is to
attempt to partner with vertical market solution suppliers whenever possible,
selling buy over build economics and enabling these companies to focus on their
core application competencies.

   We expect competition to intensify as the DRM market matures. We expect that
competition will increase in the near term and that our primary long-term
competitors may not yet have entered the market. Our future competitors may
have significantly more personnel or greater financial, technical, marketing
and other resources than either our current competitors or we do. Furthermore,
our future competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements than we can. Also, future
competitors may have greater name recognition and more extensive customer bases
that they can leverage. Increased competition could result in price reductions,
fewer customer orders, reduced gross profit margins and loss of market share,
any of which could harm our business.

   We expect to see new or increased competition from several areas, including:

   . Device Networking--The embedded networking companies are perhaps the most
     visible infrastructure companies in this emerging market. Axeda, however,
     does not develop networking protocols and our technology generally can
     work with any open or proprietary communications protocols. We therefore
     today see device-networking companies like NetSilicon, emWare, e-Device,
     Lantronix, ProSyst, Opto22, domainLogix, and Echelon as current or
     potential partners. We believe that the current focus of these embedded
     networking companies is primarily on Internet-enabling devices, which
     complements our focus on managing device data remotely via distributed,
     enterprise-class solutions. However, in the future these companies may
     choose to directly compete with us.

   . Industrial Automation Products--There are a number of automation products
     available worldwide from vendors large and small that are used to monitor
     and control machines and devices. Some of these PC-based HMI/SCADA
     software companies have focused on extending their business upward to
     Web-based access and enterprise application integration typically to
     support e-manufacturing. Today these companies compete directly with our
     Axeda Supervisor product, which is differentiated by its strong Internet
     monitoring, control, and visualization support. Over time we could see
     these companies as competitors in the full DRM market. These companies
     include WonderWare, Intellution, Indusoft, Afcon, Iconics, IndX, Rockwell
     Automation, Siemens and GE Fanuc.

   . e-Business Platforms--We see the large CRM companies, network management
     vendors and e-business technology platform providers such as Siebel
     Systems, Oracle, IBM, SAP, BEA, PeopleSoft, Sun Microsystems, Hewlett
     Packard, and Computer Associates as both potential competitors and
     partners. These companies have an interest in device networking and
     pervasive computing technologies and could choose to extend their offering
     into DRM. Building on well-understood and widely available standard
     infrastructure components, such as J2EE(R) application servers and
     relational databases, enables us to interoperate with and to take
     advantage of partnering opportunities with these suppliers as well as
     their application and systems integration partners. Axeda is a Siebel
     Software Partner and our Axeda Integrator(TM) for Siebel provides seamless
     integration with the Siebel 2000 Field Service application from Siebel
     Systems Inc. However, in the future these companies may choose to compete
     directly with us.

   We believe we can minimize competitive threats with extensive partnering
activities with Internet-enabling technology vendors and by providing a
comprehensive platform for vertical market application vendors who have
specific industry expertise. We believe the capabilities of our DRM solution,
which span from machine and

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<PAGE>

device control to departmental data acquisition and to full DRM, represent a
significant offering that is currently unmatched in any of the product
competitors identified above.


Intellectual Property


   Our success is heavily dependent upon our proprietary technology. To protect
our proprietary rights, we rely on a combination of patent, copyright, trade
secret and trademark laws. We currently have four patent applications pending
in the United States and three patent applications pending internationally with
respect to our DRM technology. We have applied to register the trademark
"AXEDA" in the U.S. Patent and Trademark Office, and have numerous
corresponding trademark applications filed for "AXEDA" in foreign
jurisdictions. As a part of our regular business processes, we generally enter
into nondisclosure agreements with employees, consultants, distributors and
corporate partners, as appropriate, and thereby limit access to and
distribution of our software, documentation and other proprietary information.
Further, our software licensing agreements provide for protection of our
intellectual property within our software.


Employees


   As of December 2001, we had a total of one hundred and eighty-eight (188)
full-time employees, sixty-seven (67) of whom were engaged in research and
development, fifty-one (51) in sales, eleven (11) in marketing, twenty-one (21)
in service and thirty-eight (38) in administration. As of December 2000, we had
a total of one hundred and sixty-five (165) full-time employees, ninety-seven
(97) of whom were engaged in research and development, fifteen (15) in sales,
sixteen (16) in marketing and thirty-seven (37) in administration.

   Our future performance depends in significant part upon the continued
services of our key technical, sales and senior management personnel. The loss
of the services of one or more of our key employees could harm our business.
Our future success also depends on our continuing ability to attract, train and
retain highly qualified technical, sales and managerial personnel. None of our
employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with employees to be good.


Risk Factors


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

We have never been profitable and may never achieve profitability in the future

   We had a net loss from operations of approximately $51.1 million for the
year ended December 31, 2001. To date, we have not achieved operating
profitability on an annual basis. eMation as a stand-alone entity incurred a
net loss from operations of approximately $14.3 million for the year ended
December 31, 2001 and has not achieved operating profitability on an annual
basis.

   We have invested and continue to invest significant resources in product
development, selling and marketing, services and support and administrative
expenses. To achieve profitability, we will need to increase revenues
significantly. We cannot assure you that our revenues will grow or that we will
achieve or maintain profitability in the future.

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<PAGE>

We are currently undergoing a business transition that may adversely affect our
Company

   We sold the assets of our CE business and our IA business in March 2001. As
part of these sales, approximately 89 of our employees accepted employment with
either STMicroelectronics or Phoenix Technologies. These employees were
dedicated primarily to research and development activities in the digital media
market. The reduction in our research and development workforce has adversely
affected our ability to offer new products in the digital media market. The
reduction in our sales force adversely affected our ability to sell our digital
media products. These sales negatively impacted relationships with our
partners, distributors and customers in the digital media market and left us
with a limited digital media offering of products that could be used only in
personal computers. Pursuant to the terms of our agreement with
STMicroelectronics, we may not participate in significant aspects of the CE
market prior to March 2006. As a result, we are subject to economic pressures
that adversely affect our ability to compete in the digital media market.

   In December 2001, we announced the completion of the eMation acquisition.
Our focus on the DRM business will present challenges different from those
presented by the digital media business. We cannot assure you that our
management team will be successful in managing this new business. If we are
unable to successfully operate the DRM business, our business and operating
results will be adversely affected.


   We are seeking strategic alternatives for our digital media business.


Our future success depends upon the acceptance of our DRM solution

   We expect our future growth to be increasingly driven by our DRM products
and services. We have limited experience in this market. We acquired eMation in
December 2001. eMation was founded in 1988 and historically derived its main
source of revenue from its industrial automation products.

   eMation as a stand-alone entity generated revenues of approximately $2.7
million, or 22.2% of eMation's stand-alone total revenues, from DRM products
and services for the year ending December 31, 2001. eMation has historically
derived its main source of revenue from industrial automation products and
services, which generated revenues of approximately $9.5 million and $9.6
million for the years ending December 31, 2001 and 2000, respectively.

   Factors adversely affecting the pricing of or demand for our DRM products,
such as competition and technological change, could have a material adverse
effect on our business, financial position and results of operations. If our
DRM products do not achieve market acceptance or if competitors release new
products that achieve greater market acceptance, have more advanced features,
offer better performance or are more price-competitive, revenues from our DRM
products may not grow as expected.

   Our DRM products will involve significant capital expenditures by our
customers. We have a limited history of selling DRM products and will have to
devote substantial resources to educate prospective customers about the
benefits of our DRM products. Even if our DRM products are effective in
reducing our customers' costs or in providing our customers with new revenue
sources, our target customers may not choose them for technical, cost, support
or other reasons. 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 successfully make or integrate acquisitions of other
companies

   We have in the past and intend in the future to continue to acquire
businesses. Acquisitions are particularly difficult to assess because of
rapidly changing technological standards. If we are unable to successfully
integrate acquisitions, our business could suffer. We may be subject to various
risks as a result of the eMation acquisition and other future acquisitions of
this type, including:

   . the possibility that the business cultures may not mesh;

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<PAGE>

   . interruption of the operations of the combined businesses;

   . the possibility that management may be distracted from regular business
     concerns by the need to integrate operations or operate the businesses
     separately which may result in interruption of the operations of the
     combined businesses;

   . problems in retaining employees;

   . challenges in retaining customers;

   . anticipated and unanticipated costs relating to additional administrative
     or operating expenses of each business; and

   . the potential inability to maintain uniform standards, controls,
     procedures and policies.

Our historical financial information is of limited value in projecting our
future operating results or evaluating our operating history

   We believe that comparing different periods of our operating results is not
meaningful and you should not rely on the results for any previous period as an
indication of our future performance because our business model has changed
significantly since inception and has further changed with the acquisition of
eMation.

   You should expect our quarterly operating results to fluctuate in future
periods and they may fail to meet the expectations of investors, which could
cause our stock price to decline.


   Our operating results have varied widely in the past, and we expect that
they will continue to vary significantly as we attempt to establish our
products in the DRM market and transition to a new business model. Furthermore,
our revenues and operating results will vary significantly from
quarter-to-quarter due to a number of additional factors, including:


   . variations in demand for our products and services, which are relatively
     few in number;

   . customers' decisions to defer or accelerate orders for our products or
     services;

   . capital budgeting and purchasing cycles of current and prospective
     customers may cause our sales to be seasonal; it is difficult for us to
     evaluate the degree to which this seasonality may affect our business;

   . the timing of large contracts that materially affect our operating results
     in a given quarter;

   . delays in introducing new products and services;

   . changes in our pricing policies or the pricing policies of our competitors;

   . the costs of litigation and intellectual property protection;

   . our ability to develop and attain market acceptance of enhancements to our
     products;

   . new product introductions by competitors;

   . the mix of license and services revenues;

   . unanticipated customer demands which impact our ability to deliver our
     products and ultimately recognize revenues;

   . the mix of domestic and international sales;

   . costs related to the acquisition of technologies or businesses;

   . our ability to attract, integrate, train, retain and motivate sales and
     marketing, research and development, administrative and product management
     personnel;

   . our ability to expand our operations; and

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<PAGE>

   . global economic conditions as well as those specific to the industries we
     operate in.

   We determine our operating expenses largely on the basis of anticipated
revenue trends and a high percentage of our expenses are fixed in the short
term and are significant. As a result, any delay in generating or recognizing
revenues could cause significant variations in our operating results from
quarter-to-quarter and could result in substantial operating losses.

   Due to the foregoing factors, we believe that quarter-to-quarter comparisons
of our operating results are not a good indication of our future performance.
In future quarters, our operating results may be below the expectations of
investors. In this event, the price of our common stock may fall significantly.

We may not be able to compete effectively

   Competition in the market for DRM solutions is emerging and expected to grow
stronger. If we are unable to compete effectively, the demand for, or the
prices of, our products may be reduced. To maintain and improve our competitive
position, we must continue to develop and introduce, on a timely and
cost-effective basis, new products, features and services that keep pace with
the evolving needs of our customers. The principal competitive factors that
affect our performance in the DRM market are the following:

   . our ability to effectively market and sell our products;

   . our customer service and support;

   . our product reputation, quality, performance; and

   . the price and features of our products such as adaptability, scalability,
     the ability to integrate with other products, functionality, and ease of
     use.

   We compete in a market with companies that may utilize varying approaches to
enable the remote management of information from intelligent devices. The
principal competitors to the Axeda DRM System today are in-house developers
within the machine and device manufacturers that are our prime sales targets or
systems integrators doing custom product development. These companies may
choose to deploy their own information technology personnel or utilize system
integrators to write new code or rewrite existing applications in an effort to
develop their own information extraction solutions. As a result, prospective
clients may decide against purchasing and implementing externally developed
software and, instead, may develop their own solutions similar to our DRM
solutions. Some vertical market solution suppliers have also developed device
management infrastructures for use in specific industries. Today companies such
as Brooks Automation (semiconductor), Questra (medical and office), Invensys
(industrial), Imaging Portals (copiers), Motive (computers), eVend.Net
(vending) and WindRiver (home) compete in specific industries that we operate
in.

   We expect competition to intensify as the DRM market matures. 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. Futhermore,
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 harm our business.

We may not be able to keep pace with technological advances

   The process of remotely extracting 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

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<PAGE>

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
for 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 adversely impact our business.

Our sales cycle for DRM products is long and may be seasonal and we may rely on
large contracts from relatively few DRM customers

   Our software license revenues may result from a relatively small number of
sales, some of which generate disproportionately large revenues. In addition,
our sales cycle is lengthy. Sales of our products may be subject to
seasonality. These sales typically involve significant capital investment
decisions by prospective customers, as well as a significant amount of time to
educate them as to the benefits of our products. As a result, before purchasing
our products, companies spend a substantial amount of time performing internal
reviews and obtaining capital expenditure approvals. It may take up to six to
nine months or more from the time we first contact a prospective customer
before receiving an initial order.

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. 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, then our
business could be harmed. We have recently hired new managers and may hire key
management personnel as needed. We may not be able to successfully assimilate
our recently hired managers or to hire qualified key management personnel to
replace them.

We may not be able to hire and retain qualified employees, which would impair
our ability to grow

   Hiring qualified personnel, particularly sales, marketing, engineering and
product management personnel, is very competitive in our industry due to the
limited number of people available with the necessary technical skills and
understanding of the industry. In addition, most of our United States
operations are conducted through our offices in Malvern, Pennsylvania and
Mansfield, Massachusetts. We have in the past and expect in the future to face
difficulties locating qualified personnel in these locations.

Our success depends upon the successful expansion of our sales force

   The expansion of our direct sales force and indirect distribution channels
will be difficult, will take time and will be costly. Our growth could be
limited if we fail to achieve this expansion. We need to expand our direct
sales force in order to significantly increase market awareness of our DRM
products and to generate increased revenues. New sales personnel will require
training and it will take time for them to achieve full productivity. There is
strong competition for qualified sales personnel in our business, and we may
not be able to attract and retain a sufficient number of new sales personnel to
expand our operations. Our sales and marketing expenses may increase as a
percentage of revenues while we expand our direct sales force. Unless this
expansion results in a proportionate increase in revenues, our margins and
business may be adversely affected.

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We may not achieve future growth if we are unable to expand our indirect
distribution sales channels

   We believe that our future success is dependent upon the expansion of
indirect distribution channels, consisting of relationships with independent
software vendors, software distributors and system integrators. We currently
have relationships with only a limited number of these indirect distribution
channels. 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:

   . we fail to work effectively with indirect distribution channels;

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

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

   . 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.

We rely upon technology licensed from third parties, and if we do not maintain
these license arrangements, we may experience delays until replacement
technology is licensed and integrated

   We license technology that is used in our products from third parties under
agreements and we may not be able to maintain these license arrangements. This
technology may not continue to be available on commercially reasonable terms,
if at all, and would be difficult to replace. The loss of any of these
technology licenses could result in delays until replacement technology is
licensed and integrated. In addition, any defects in this licensed technology
could prevent the implementation or impair the functionality of our products,
delay new product introductions or injure our reputation. If we are required to
enter into license agreements with third parties for replacement technology, we
could be subject to higher royalty payments.

Our business model depends upon licensing our intellectual property, and if we
fail to protect our proprietary rights, our business could be harmed

   Our ability to compete depends substantially upon our internally developed
technology. We have a program for securing and protecting rights in patentable
inventions, trademarks, trade secrets and copyrightable materials. However,
there can be no assurance that we have taken or will take all necessary steps
to protect our intellectual property rights. If we are not successful in
protecting our intellectual property, our business could be substantially
harmed.

Our pending patents may never be issued, and even if issued, may provide us
with little protection

   We regard the protection of patentable inventions as important to our
business. We currently have four U. S. patent applications pending relating to
our DRM business and three patent applications pending internationally. It is
possible that:

   . our pending patent applications may not result in the issuance of patents;

   . our patents may not be broad enough to protect our proprietary rights;

   . any issued patent could be successfully challenged by one or more third
     parties, which could result in our loss of the right to prevent others
     from exploiting the inventions claimed in those patents;

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<PAGE>

   . current and future competitors may independently develop similar
     technology, duplicate our products or design around any of our patents; and

   . effective patent protection, if any, may not be available in every country
     in which we do business.

  We rely upon trademarks, copyrights and trade secrets to protect our
  proprietary rights, which are only of limited value

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

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

   . 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;

   . 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;

   . companies we acquire may not have taken similar precautions to protect
     their proprietary rights;

   . 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;

   . 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

   . tamper-resistant copy protection codes in our software 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 revenue. Infringement
claims and lawsuits would likely be expensive to resolve and would require
management's time and resources and, therefore, could harm our business.

We may be subject to product returns, 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 network 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

                                      21

<PAGE>

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:

   . delay or loss of revenues;

   . although we have not lost a customer due to defects, it is foreseeable
     that a customer could cancel a contract due to defects;

   . diversion of development resources;

   . increase product development costs;

   . damage to our reputation;

   . delay or diminish market acceptance of our products;

   . increased service and warranty costs; and

   . litigation costs.

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

  We have received notices of claims and might become involved in litigation
  over proprietary rights, which could be costly and time consuming

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

   We have received notices of claims, and may receive additional notices of
claims in the future, regarding the alleged infringement of third parties'
intellectual property rights that may result in restrictions or prohibitions on
the sale of our products and cause us to pay license fees and damages.

   Some third parties claim to hold patents covering various aspects of DTV,
HDTV and DVD technology incorporated into our and our 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:

   . Our digital video stream management solutions comply with industry DVD
     specifications, which incorporate technology known as MPEG-2 that governs
     the process of storing a video input in digital form. We have received
     notice from two of our largest customers that a third party with a history
     of litigating its proprietary rights and which has substantial financial
     resources has alleged that aspects of MPEG-2 technology infringe upon
     patents held by the third party. These customers may in the future seek
     compensation or indemnification from us arising out of the third party
     claims and we may be required to agree to indemnify them to secure future
     business or otherwise.

   . A group of companies has 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 are incorporated into our

                                      22

<PAGE>

     products. MPEG-LA has notified us, as well as a number of PC
     manufacturers, including our customers, that the distribution of products
     that incorporate the MPEG-2 technology infringes patents owned by members
     of the consortium. MPEG-LA has requested that these PC manufacturers pay
     license fees for the use of the technology covered by MPEG-LA patents.

   . Another group of companies has 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
     are incorporated into our products. DVD6C has notified us, as well as a
     number of PC manufacturers and other companies manufacturing or licensing
     DVD-related products, including our customers, that products that
     incorporate the DVD technology infringe patents owned by members of the
     consortium. DVD6C has requested that we as well as these PC manufacturers
     pay license fees for using the DVD6C patents.

   . A third party has notified us, as well as two of our customers, that
     parental control features of our CineMaster products infringe patents held
     by the third party.

   . 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.

   . A letter dated September 12, 2000 from a third party to one of our
     customers who distributes our product claims infringement of a Japanese
     utility model patent regarding Internet terminals which can be coupled to
     a television set. This third party is seeking a license agreement as a
     resolution. We have requested more time to respond and are accumulating
     prior art to invalidate the utility model patent.

   . A third party has asserted that some of our products infringe one or more
     of such third party's patents in the field of all format decoders. The
     third party has stated that it was prepared to license the relevant
     patents to us on favorable terms. We have been in discussions with such
     third party. The third party may seek compensation from us related to this
     matter. We do not know if this party has contacted any of our customers
     regarding this matter. If so, our customers may in the future seek
     compensation or indemnification from us arising out of the third party's
     claims. No claim for such payments has been made to date. We have not
     determined whether and to what extent that the patents held by the third
     party are valid and whether and to what extent our products are covered by
     their patents.

   We may be liable to some of our customers for damages that they incur in
connection with intellectual property claims. Some of our license agreements,
including many of the agreements we have entered into with our large PC OEM
customers, contain warranties of non-infringement and commitments to indemnify
our 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 customers for all
or a portion of any license fees or other damages, including attorneys' fees,
they are required to pay or agree to pay these or other third parties. We have
received notices asserting rights under the indemnification provisions and
warranty provisions of our license agreements from several customers, including
Dell and Gateway.

   We may be required to pay substantial damages and may be restricted or
prohibited from selling our digital media products if it is proven that we
violate the intellectual property rights of others. If MPEG LA, DVD6C, 3C, or
any other third party proves that our digital media technology infringes its
proprietary rights, we may be required to pay substantial damages for past
infringement.

   In addition to the claims described above, we may receive notices of claims
of infringement of other parties' proprietary rights. 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.

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<PAGE>

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 face risks associated with the search for strategic alternatives for our
digital media business

   We are seeking strategic alternatives for our digital media business. The
internal and external changes that have and will result from our announcement
concerning the search for strategic alternatives for our digital media business
may disrupt our employees, partners, distributors, stockholders and customers
and may create a prolonged period of uncertainty, which could have a material
adverse effect on our digital media business, prospects and financial
condition. If we continue to operate our digital media business, we will
continue to face risks, including:

   . our digital media business significantly depends upon our CineMaster
     products, and it is uncertain whether the market will continue to accept
     these products;

   . the loss of a single customer could significantly harm our digital media
     business because a majority of our revenues is derived from a small number
     of customers;

   . since most of our revenues are derived from a small number of customers,
     problems those customers experience will directly impact our business;

   . since our customers have not executed long-term contracts with us, our
     revenues could decline significantly with little or no notice;

   . our revenues are dependent upon acceptance of products that incorporate
     our technology only in the PC industry;

   . we rely on the PC industry, which has risks and uncertainties that are
     beyond our control;

   . we are subject to a non-competition agreement and other contractual
     arrangements prohibiting us from selling products in significant aspects
     of the CE market;

   . we currently depend upon demand for digital entertainment products, which
     may not be sustained;

   . increasing competition may cause our prices to decline, which would harm
     our operating results;

   . competition in the digital media market is likely to continue to increase
     and could harm our business;

   . if we fail to manage technological change in the digital media business,
     respond to evolving industry standards or enhance our digital media
     products' interoperability with the products of our customers, demand for
     our digital media products will decrease and our digital media business
     will suffer;

   . we may not be able to respond to rapidly changing consumer preferences in
     the digital media market;

   . we may be restricted or prohibited from selling our products and/or may be
     required to pay license fees or royalties on future sales of our digital
     media products if it is proven that we violate the intellectual property
     rights of others; and

                                      24

<PAGE>

   . delays in providing our digital media products to our customers may affect
     how much business we receive.

It may be difficult to raise needed capital in the future, which could
significantly harm our business

   We may require substantial additional capital to finance our future growth
and fund our ongoing research and development activities beyond 2002. Our
capital requirements will depend on many factors, including:

   . acceptance of and demand for our products;

   . the number and timing of acquisitions and the cost of such acquisitions;

   . the costs of developing new products;

   . the costs associated with our expansion; and

   . the extent to which we invest in new technology and research and
     development projects.

   Although our current business plan does not foresee the need for further
financing to fund our operations for the next two years, due to risks and
uncertainties in the market place as well as a potential of pursuing further
acquisitions, we may need to raise additional capital. Additionally, to the
extent that the proceeds from the dispositions of our CE and IA assets are
exhausted, and if our existing sources of cash and cash flow from operations,
if any, are insufficient to fund our activities, we may need to raise
additional funds. If we issue additional stock to raise capital, your
percentage ownership in Axeda would be reduced. Additional financing may not be
available when needed and, if such financing is available, it may not be
available on terms favorable to us.

  Uncertainties exist regarding our stock repurchase program

   On September 27, 2001, we announced that our Board of Directors had approved
the repurchase of up to $10 million worth of our outstanding shares of common
stock. We indicated that we expected to complete these purchases over the next
12 months. Stock repurchase activities are subject to certain pricing
restrictions, stock market forces, management discretion and various regulatory
requirements. As a result, there can be no assurance as to the timing and/or
amount of shares that we may repurchase under this stock repurchase program.

We face inventory risks that may be increased by our business shift away from
the Internet appliance business

   During the year ending December 31, 2001, we recorded net inventory charges
of $18.5 million. As of December 31, 2001, we have approximately $2.1 million
of net inventory, the majority of which was acquired from May through October
2000 to support production of our IA hardware designs. This inventory was
purchased to accommodate long lead times for components in order to meet the
anticipated demand for our IA products (the Internet screen phone, set-top box
and Nucleo platform). The sale of our IA business included the assignment of
our IA customer contracts, but not the inventory to support production of the
associated products. While we have obtained assurances that we will be the
preferred supplier of inventory to Phoenix Technologies for these products, we
may not be able to sell the entire inventory that we currently have.
Furthermore, even if our efforts to sell this inventory are successful, we may
not be able to recover the remaining carrying amount of the inventory due to
market price fluctuations and other market conditions.

Stock-based compensation will negatively affect our operating results

   We have recorded deferred compensation in connection with the grant of stock
options to employees where the option exercise price is less than the estimated
fair value of the underlying shares of common stock as determined for financial
reporting purposes. We have recorded deferred compensation, net of forfeitures,
within

                                      25

<PAGE>

stockholders' equity of $2.8 million at December 31, 2001, which is being
amortized over the vesting period of the related stock options, ranging from
one to four years. A balance of $1.8 million remains at December 31, 2001 and
will be amortized as follows: $1.3 million in 2002; $0.4 million in 2003; and
$0.1 million in 2004.

   The amount of stock-based compensation in future periods will increase if we
grant stock options where the exercise price is less than the quoted market
price of the underlying shares or if we modify the terms of existing stock
options. The amount of stock-based compensation amortization in future periods
could decrease if options for which accrued, but unvested deferred compensation
has been recorded, are forfeited.

Our business is subject to risks from international operations such as legal
uncertainty, tariffs and trade barriers and political and economic instability

   We conduct business in a number of different countries. We sell products in
several countries outside the United States, including Israel, France, Holland,
the United Kingdom, Latin America and all of Asia. Our operations outside the
United States include facilities located in Israel, France, Holland, the United
Kingdom and Japan. In the year ended December 31, 2001, we, and eMation as a
stand-alone entity, derived approximately 41% and 66% of our revenues,
respectively, 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. We intend to expand our international operations in the
future. Significant management attention and financial resources are needed to
develop our international sales, support and distribution channels. We may not
be able to maintain international market demand for our products. Our business
could be adversely impacted if we are unable to successfully launch our DRM
products into our international operations.

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

   . legal uncertainty regarding liability;

   . language barriers in business discussions;

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

   . time zone differences;

   . reduced protection for intellectual property rights in some countries;

   . differing labor regulations;

   . tariffs, trade barriers and other regulatory barriers;

   . problems in collecting accounts receivable;

   . political and economic instability;

   . changes in diplomatic and trade relationships;

   . seasonal reductions in business activity;

   . potentially adverse tax consequences;

   . changes in a country's or region's political or economic conditions;

   . complexity and unexpected changes in local laws and regulations;

   . greater difficulty in staffing and managing foreign operations; and

   . increased financial accounting and reporting burdens and complexities.

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<PAGE>

We are subject to risks associated with doing business in the State of Israel

   Conditions in Israel may affect our operations. Our subsidiary Axeda
Systems, Ltd. (formerly eMation Ltd.) is incorporated in Israel. We have an
office and approximately 30 employees in Israel and approximately 3% of
eMation's sales as a stand-alone entity for the year ended December 31, 2001
were made to customers in Israel. Our Axeda Supervisor products (formerly known
as WizFactory), are developed in Israel.

   We are directly influenced by the political, economic, and military
conditions affecting Israel and the Middle East. Therefore, any major
hostilities involving Israel or the interruption or curtailment of trade
between Israel and its present trading partners could have a material adverse
effect on our operations.

We are subject to conditions attached to governmental grants we have received

   In the past, eMation was the beneficiary of certain governmental grants from
government agencies in Israel to encourage development and marketing of
technology under certain conditions. We do not expect to apply for additional
grants in the future of this nature. Through December 31, 2001, eMation
received grants from the Office of the Chief Scientist in the aggregate amount
of $1.8 million and paid royalties in the aggregate amount of $1.3 million. As
of December 31, 2001, $0.1 million of the remaining potential $0.5 million of
principal liability is accrued in other current liabilities. eMation is
obligated to pay royalties of 3.0% to 3.5% of revenues derived from sales of
products funded through grants received from the Office of the Chief Scientist.
The terms of the Office of the Chief Scientist grants require that eMation
manufacture its products that are developed with such grants in Israel. In
addition, eMation 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, through December 31, 2001 eMation
received grants from the Israeli Government through the Fund for the
Encouragement of Marketing Activities in the aggregate amount of $1.2 million
and paid royalties in the aggregate amount of $0.5 million. As of December 31,
2001, $0.5 million of the remaining potential $0.7 million of principal
liability is accrued in other current liabilities. eMation is obligated to pay
royalties of 4.0% of revenues derived from sales of products which result from
grants received through the Fund for the Encouragement of Marketing Activities.

We face risks from the uncertainties of any future governmental regulation

   Many of the industries in which our products are used are subject to U.S.
and foreign governmental regulation. We are not currently subject to direct
regulation by any domestic or foreign governmental agency (excluding regulation
by governmental agencies in Israel, that have provided grants to us), other
than regulations applicable to businesses generally. However, it is possible
that future laws and regulations may be adopted that regulate our products and
the industries in which they are sold. Our business could be harmed by any new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to our products and the industries
in which they are sold.

Because of their significant stock ownership, our officers and directors can
exert significant control over our future direction

   As of December 31, 2001, our executive officers, directors and entities
affiliated with them, in the aggregate, beneficially owned approximately 6.7
million shares, or 25% 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.

                                      27

<PAGE>

Certain provisions of our certificate of incorporation and by-laws make changes
of control difficult even if they would be beneficial to our stockholders

   The board of directors has the authority without any further vote or action
on the part of our stockholders to issue up to 5,000,000 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.

Our business and future operating results are subject to a broad range of
uncertainties arising out of the recent terrorist attacks on the United States

   Our business and operating results are subject to uncertainties arising out
of the recent terrorist attacks in New York City and Washington, D.C. These
uncertainties include the potential worsening or extension of the current
global economic slowdown and the economic consequences of military action or
additional terrorist activities. Any similar activity of this nature or even
rumors of such activity in the future could harm our operating results and
stock price.


We face risks associated with government regulation of and legal uncertainties
regarding e-commerce and the use of the Internet


   As of December 31, 2001, there were few laws or regulations, at either the
state or federal level, directed specifically at e-commerce. Despite the
scarcity of laws targeted at e-commerce, courts and administrative agencies
have shown an increased willingness to apply traditional legal doctrines to
cyberspace in areas including copyright, trade secrets, unfair competition,
consumer protection, monopolies, and unfair trade practices, creating an aura
of uncertainty regarding the legality of certain practices. Because of the
Internet's popularity and increasing use, as well as the sometimes imperfect
fit of traditional legal doctrines to Internet-related issues, new laws and
regulations may be adopted. These laws and regulations may cover issues such as
pricing, content, copyrights, distribution and quality of goods and services.
The enactment of any additional laws or regulations may impede the growth of
the Internet, which could decrease the revenue of our customers and our partner
companies and place additional financial burdens on our business and the
businesses of our customers and our partner companies.

   Laws and regulations directly applicable to e-commerce or Internet
communications are becoming more prevalent. For example, the United States
Congress recently enacted laws regarding online copyright infringement.
Although these and other laws may not have a direct adverse effect on our
business or those of our partner companies, they add to the legal and
regulatory uncertainty faced by Internet commerce and e-commerce companies.

   In 1998, the U.S. federal government enacted legislation prohibiting states
or other local authorities from imposing new taxes on Internet commerce for a
period of three years. This tax moratorium was extended by Congress in November
2001 and extends through November 2003. Even with the moratorium reenacted, it
would not prohibit states or the Internal Revenue Service from collecting taxes
that are due under existing tax rules.

                                      28

<PAGE>

   One or more states or any foreign country may seek to impose tax collection
or record keeping obligations on companies such as ours that engage in or
facilitate online commerce. Several proposals have been made at the state and
local level that would impose additional taxes on the sale of goods and
services through the Internet. These proposals, if adopted, could substantially
impair the growth of e-commerce, and could diminish our opportunity to derive
financial benefit from our activities. A successful assertion by one or more
states or any foreign country that we should collect taxes on activities
related to sales or use of our products would harm our business.

Our business is subject to changes in financial accounting standards, which may
affect our reported revenue, or the way we conduct business

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

ITEM 2.  Properties

   As part of the sale of our CE assets to STMicroelectronics in March 2001,
STMicroelectronics assumed our lease for our corporate headquarters, which
included approximately 47,000 square feet of space in an office complex located
in Malvern, Pennsylvania. In April 2001, we moved our principal offices in
Malvern to another building within the same office complex as our former
offices. The new lease is for approximately 14,000 square feet of space,
expires in November 2002 at an annual rental of approximately $240,000 plus
operating expenses. As a result of our move, our future minimum required lease
payments were reduced by a total of approximately $6.8 million. We also lease
approximately 9,000 square feet of office space under a five-year lease
expiring in March 2005 in San Jose, California, at an annual rental of
approximately $400,000 including operating expenses, with sales offices and PC
engineering facilities for our digital media business.


   We currently lease approximately 12,000 square feet of space in an office
building located in Mansfield, MA for research and development, sales and
support and administrative activities. This facility is leased through July
2004 at an average annual rental of approximately $270,000.


   We also lease approximately 1,000 square feet of space in Israel for
research and development activities at an annual rental of approximately
$142,000. This facility is leased through August 2004.

   We currently leases eight other international sales offices in France, the
Netherlands, Japan and Great Britain. We expect to close our Great Britain
facility in 2002 and consolidate activities in our offices in France. The
combined annual rental for these offices is approximately $200,000 and the
leases have terms expiring from April 2002 through November 2012.

   With the exception of the Mansfield facility, which we are currently
considering expanding, we believe these facilities will be adequate to fulfill
our needs for the foreseeable future.

   We maintain approximately 9,000 square feet of office space in Marlborough,
MA under an operating lease. This space is no longer used for operating
purposes. The lease requires annual rental payments totaling approximately
$181,000 and expires in February 2009. The present value of the future lease
payments, discounted at 5%, of approximately $0.9 million was accrued by
eMation as of the date of acquisition. We are pursuing opportunities to
sublease this office. See note 4 to the consolidated financial statements
contained at Item 8 herein.

                                      29

<PAGE>


ITEM 3.  Legal Proceedings


   On or about August 10, 2000, Corum Group, Ltd. filed an action against Cinax
Designs Inc. and us in the United States District Court for the Western
District of Washington (No. C00-132D). Corum, a business consultant, alleged
that it had an agreement with Cinax whereby Cinax would pay Corum an 8%
"transaction fee" in the event Corum located a purchaser for Cinax. We acquired
Cinax by agreement dated as of July 13, 2000 for compensation of $3.5 million
in cash and an aggregate of 825,000 shares of Axeda common stock and no par,
non-voting exchangeable preferred stock of Ravisent British Columbia Inc., an
indirectly owned subsidiary, which preferred stock is exchangeable, on a one-
for-one basis, into shares of Axeda common stock. In the complaint Corum
alleged that it introduced us to Cinax and that it was therefore entitled to
$281,362 and 66,000 shares of Axeda common stock. As part of our acquisition of
Cinax, the shareholders of Cinax agreed to indemnify us for 50% of any
liability stemming from the Corum claim and an aggregate of 53,500 shares of
Axeda common stock and non-voting exchangeable preferred stock of Ravisent
British Columbia Inc. were placed in escrow to secure this indemnification
obligation. On April 17, 2001, we entered into a settlement and release
agreement with Corum and the action was subsequently dismissed. Pursuant to the
settlement agreement, we have paid $110,000 and issued 140,000 shares of Axeda
common stock to Corum.

   Between February and April 2000, eleven class action lawsuits were filed
against certain of our current and former officers and directors and us 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 Exchange Act
of 1933, Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and
Rule 10b-5 promulgated thereunder and seeks unspecified damages on behalf of a
purported class of purchasers of our stock during the period stated above. On
July 3, 2000, we filed a motion to dismiss the consolidated and amended class
action complaint. The motion is presently fully briefed and the parties are
waiting for a hearing date to be set for the motion. Certain of our employees
and certain holders of 5% or more of Axeda common stock are members of the
putative classes alleged in these actions and therefore may have interests
adverse to us with respect to the alleged claims in these actions. We believe
that such lawsuits or claims are without merit and that we have meritorious
defenses to the actions. We plan to vigorously defend the litigation. However,
failure to successfully defend these actions could substantially harm our
results of operations, liquidity and financial condition.

   In April 2001, a third party who licenses software to us filed a lawsuit
against us in California. The dispute arose out of a contract whereby we
licensed software from this third party for use with the eSurfer browser
bundled with our Internet set-top box assets sold to Phoenix Technologies in
March 2001. The third party claimed that there were fees due and owing under
the contract. We entered into a confidential settlement agreement with the
third party in July 2001 and the case has been dismissed. The amount of the
settlement had been fully accrued as of December 31, 2000.

   On November 27, 2001, a putative shareholder class action was filed against
us, certain of our officers and directors, and several investment banks that
were underwriters of the Company's initial public offering. The action was
filed in the United States District Court for the Southern District of New
York, purportedly on behalf of investors who purchased the Company's stock
between July 15, 1999 and December 6, 2000. The lawsuit alleges violations of
Sections 11, 12(a)(2) and 15 of the Securities Exchange Act of 1933 and Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder against one or both of the Company and the individual defendants.
The claims are based on allegations that the underwriter defendants agreed to
allocate stock in the Company's July 15, 1999 initial public offering to
certain investors in exchange for excessive and undisclosed commissions and
agreements by those investors to make additional purchases in the aftermarket
at pre-determined prices. Plaintiffs allege that the Prospectus for the
Company's initial public offering was false and misleading in violation of the
securities laws because it did not disclose these arrangements. This lawsuit is
part of the massive "IPO allocation" litigation involving the conduct of

                                      30

<PAGE>

underwriters in allocating shares of successful initial public offerings. The
Company believes that more than one hundred and eighty other companies have
been named in more than eight hundred identical lawsuits that have been filed
by some of the same plaintiffs' law firms. Certain of our employees are members
of the putative classes alleged in these actions and therefore may have
interests adverse to us with respect to the alleged claims in these actions. We
believe that such lawsuit and claims are without merit and that we have
meritorious defenses to the actions. We plan to vigorously defend the
litigation. However, failure to successfully defend this action could
substantially harm our results of operations, liquidity and financial condition.

   In June 2000, we entered into a one-year distribution rights agreement ("the
Agreement") with American Trading S.A. ("ATSA") for exclusive distribution of
the Company's Internet television set-top box product in Brazil. Upon the
signing of the Agreement, we issued a warrant to purchase 1,500,000 shares of
our common stock to ATSA with an exercise price of $7.00 per share, which
approximated fair market value on the date of grant. The warrant was fully
vested and non-forfeitable on the date of grant, had a two-year term, and
contained certain exercise restrictions as described in the warrant agreement.


   Due to the parties' differing interpretations of the terms of the Agreement,
in January 2001 the parties entered into a settlement and release agreement
("the Release"). The Release provided for the immediate termination of the
Agreement, including the right for us to terminate the warrant and a
royalty-free right in 2001 for us to use the mark "WWWTV", which we would own
after December 31, 2001. In addition, in January 2001, we paid approximately
$1.2 million to ATSA in exchange for the settlement and release and were
required to pay an additional minimum finder's fee of $1 million in January
2002 for sales of the Internet set-top box in Brazil in 2001. The aggregate
amount of the settlement of $2.2 million, net of the estimated fair value of
the canceled warrant of $0.4 million (note 14c) is included in other selling
and marketing expenses in the consolidated statement of operations for the year
ended December 31, 2001. In January 2002, the parties were in disagreement
about whether and to what extent a payment for any finders fee was due to ATSA
for 2001. On January 30, 2002, the parties entered into a confidential general
settlement and release agreement, which resolved the dispute between the
parties concerning the payment of a finder's fee. In connection with the
January 2002 settlement, we paid $325,000 in cash to ATSA and transferred title
to 15,000 Internet set-top boxes, with a net book value of approximately
$675,000, for an aggregate and final settlement of the liability to ATSA of
$1,000,000.


   From time to time, we have received, and expect to continue to receive,
notices of claims of infringement of other parties' proprietary rights and
other claims in the ordinary course of our business. See "RISK FACTORS--We have
received notices of claims and might become involved in litigation over
proprietary rights, which could be costly and time consuming."

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

   Our 2001 Annual Meeting was held on December 5, 2001. The following
proposals were submitted to a vote at such meeting: to issue up to 8 million
shares of our common stock for the purchase of all of the issued share capital
of eMation, Ltd. and issue up to 1.55 million shares of our common stock upon
the exercise of eMation options to be assumed by us, as contemplated by the
share purchase agreement amended and restated as of October 5, 2001; to elect
Robert M. Russell Jr. and Francis E. J. Wilde III as directors to serve for
three-year terms ending in the year 2004 or until their successors are duly
elected and qualified; and to ratify the appointment of KPMG LLP as our
independent auditors for the year ending December 31, 2001. The results of the
votes on these matters is disclosed below.


<TABLE>
<CAPTION>
                                               Votes Withheld or
                                        --------------------------------  Broker
                                        Votes For   Against  Abstentions Non-Votes
                                        ---------- --------- ----------- ---------
<S>                                     <C>        <C>       <C>         <C>
eMation Acquisition....................  9,778,468   691,303   121,894   5,535,375

Directors
Robert M. Russell Jr................... 15,615,444   511,596        --          --
Francis E. J. Wilde III................ 14,649,617 1,477,423        --          --
Ratify appointment of KPMG LLP......... 15,735,665   345,771    45,604          --
</TABLE>


                                      31

<PAGE>

ITEM 4(A).  Executive Officers of Axeda

   The executive officers of Axeda and certain information about them as of
March 28, 2002 is provided below.


<TABLE>
<CAPTION>
Name                                    Age                       Position with Axeda
----                                    ---                       -------------------
<S>                                     <C> <C>
Robert M. Russell Jr................... 50  Chairman of the Board and Chief Executive Officer
Dale E. Calder......................... 40  President and Director
Thomas J. Fogarty...................... 39  Executive Vice President, Chief Financial Officer and Treasurer
Ned E. Barlas.......................... 38  Senior Vice President, Chief Legal Officer and Secretary
</TABLE>


   Robert M. Russell Jr.  Mr. Russell was appointed to our board on June 21,
2001 and was appointed Chief Executive Officer by our board effective on August
6, 2001. From May 2000 until August 2001, Mr. Russell was the President and
Chief Executive Officer of Thompson Learning's Life Long Learning Group. From
April 1994 to May 2000, Mr. Russell served, first, as Senior Vice President and
General Manager of McGraw Hill's Sweets Group, and subsequently, as President
of McGraw-Hill's Construction Information Group. Mr. Russell also serves on the
boards of directors of Ohio University College of Business, the American
Architectural Foundation and the National Building Museum (Washington D.C.).
Mr. Russell holds a B.S. in Computer Science from Ohio University and is a
graduate of the Yale School of Management.

   Dale E. Calder.  Mr. Calder was appointed to our board and as our President
on December 7, 2001. Mr. Calder became the President and Chief Executive
Officer of eMation in October 1998 as a result of the acquisition of
FactorySoft, Inc. by PC Soft International Ltd., which changed its name in
February 2000 to eMation, Inc. From 1996 to 1998, Mr. Calder served as the
President of FactorySoft. FactorySoft, which was founded by Mr. Calder in 1996,
produced connectivity tools for the automation industry. Mr. Calder attended
Duke University and the University of North Carolina at Charlotte and graduated
with a degree in Electrical Engineering and also attended the MBA program at
Carnegie-Mellon University.

   Thomas J. Fogarty.  Mr. Fogarty joined us in May 2000 as Senior Vice
President, Corporate Services and Chief Financial Officer and was appointed as
Executive Vice President and Chief Financial Officer in December 2001. Prior to
joining us, from September 1999 to May 2000, Mr. Fogarty served as Senior Vice
President and Chief Financial Officer of DecisionOne Corporation, a multivendor
computer software and hardware maintenance company. From January 1995 to August
1999, Mr. Fogarty served as Vice President, Finance and Treasurer of
DecisionOne. Mr. Fogarty holds both a B.B.A. in accounting and an M.B.A. from
the Wharton School at the University of Pennsylvania.

   Ned E. Barlas.  Mr. Barlas joined us in June 1999 as Vice President and
Chief Legal Officer. In May 2000, Mr. Barlas became Secretary. In July 2000, he
became Senior Vice President. From March 1994 to June 1999, Mr. Barlas was an
attorney associated with Panitch Schwarze Jacobs & Nadel, P.C., a law firm
specializing in intellectual property matters based in Philadelphia. Mr. Barlas
holds a B.A. in Economics from Swarthmore College and a J.D. from the
University of Pennsylvania Law School.

                                    PART II

ITEM 5.  Market for Registrant's Common Equity and Related Stockholder Matters

                          PRICE RANGE OF COMMON STOCK

   On January 14, 2002 we changed our name to Axeda Systems Inc. and effective
as of February 5, 2002, our common stock is quoted on the NASDAQ National
Market under the symbol XEDA. Prior to February 5, 2002 and since our initial
public offering in July 1999, our common stock was quoted on the NASDAQ National

                                      32

<PAGE>

Market under the symbol RVST. Prior to such time, there was no public market
for our common stock. On March 22, 2002, Axeda Systems Inc. had 27,223,566
outstanding shares of common stock held by 188 recordholders. Of those,
19,096,046 shares of common stock were held by non-affiliates. The following
table sets forth, for the periods indicated, the high and low sales prices per
share of the common stock as reported on the NASDAQ National Market.

<TABLE>
<CAPTION>
                                      2001         2000
                                   ----------- -------------
                                   High   Low   High   Low
                                   ----- ----- ------ ------
                    <S>            <C>   <C>   <C>    <C>
                    First Quarter. $4.75 $1.75 $47.50 $11.63
                    Second Quarter $2.55 $1.31 $15.50 $ 5.13
                    Third Quarter. $2.08 $1.06 $ 9.13 $ 2.75
                    Fourth Quarter $3.75 $1.50 $ 3.75 $ 1.47
</TABLE>

                           PRIVATE ISSUANCE OF STOCK


   On December 7, 2001, we acquired all of the outstanding shares of eMation,
Ltd., a private company organized under the laws of the State of Israel,
pursuant to a share purchase agreement amended and restated as of October 5,
2001, in consideration for: 8 million shares of our common stock; options
exercisable for up to 1,428,710 shares of our common stock in connection with
assumed eMation stock options, 530,000 of which are exercisable for $0.01 per
share and the remaining 898,710 exercisable at $2.14 per share; options
exercisable for up to 113,600 shares of our common stock issued at closing
pursuant to our 1999 Stock Incentive Plan; and warrants exercisable for up to
7,000 shares of our common stock exercisable at $2.14 issued to ex-employees of
eMation in consideration for cancellation of outstanding options to purchase
shares of eMation. We also issued or assumed warrants at closing exercisable
for up to 108,238 shares of our common stock with exercise prices ranging from
$4.88 to $21.51 per share to holders of warrants exercisable for shares of
eMation. The shareholders' agent appointed pursuant to the share purchase
agreement has agreed to a claim on the escrow fund for the return of 23,843
shares of our common stock in consideration for our issuance of these warrants.
The total combined value of the securities assumed and issued was approximately
$20 million. The securities issued in the acquisition were issued in reliance
on an exemption from the registration requirements of the Securities Exchange
Act of 1933, as amended, by virtue of Section 4(2) thereof.


   An aggregate of 1.6 million of the 8 million shares of our common stock
issued in the eMation acquisition has been deposited with a third party escrow
agent to be held in escrow to compensate us for certain losses and taxes that
may arise as a result of the eMation acquisition. This escrow arrangement will
expire on December 7, 2002 and any shares remaining in escrow will be returned
to former eMation shareholders.

                                DIVIDEND POLICY

   We have never declared or paid dividends on our capital stock and we do not
anticipate declaring or paying cash dividends in the foreseeable future. We
anticipate that we will retain all future earnings, if any, for use in our
operations and the expansion of our business. Payments of future dividends, if
any, will be at the discretion of our board of directors after taking into
account various factors, including our financial condition, operating results,
current and anticipated cash needs and plans for expansion. Moreover, pursuant
to agreements with our lender, we are prohibited from declaring or paying
dividends without the prior written consent of the lender. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

                                      33

<PAGE>

ITEM 6.  Selected Consolidated Financial Data

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                 ------------------------------------------------------------
                                                    2001         2000         1999        1998        1997
                                                 -----------  -----------  ----------  ----------  ----------
<S>                                              <C>          <C>          <C>         <C>         <C>
Revenues:
   License...................................... $     6,036  $    12,328  $   12,710  $    3,262  $      936
   Services.....................................         442        1,898         968         185         509
   Hardware.....................................       1,111        6,628      15,740      26,841       5,376
                                                 -----------  -----------  ----------  ----------  ----------
Total revenues..................................       7,589       20,854      29,418      30,288       6,821
                                                 -----------  -----------  ----------  ----------  ----------
Cost of revenues:
   License......................................       1,629        3,374       1,874         248          --
   Services.....................................         223          733         259         106         331
   Hardware.....................................       1,122        6,189      13,732      24,192       8,072
   Software amortization........................         171           --          --          --          --
   Inventory charges............................      18,502        1,708          --          --          --
                                                 -----------  -----------  ----------  ----------  ----------
Total cost of revenues..........................      21,647       12,004      15,865      24,546       8,403
                                                 -----------  -----------  ----------  ----------  ----------
Gross profit....................................     (14,058)       8,850      13,553       5,742      (1,582)
Research and development
   Non-cash compensation........................       2,100          801         200         139          --
   Other research and development expense.......       5,691       10,187       8,107       3,121       1,828
Sales and marketing
   Non-cash compensation and other expense......         147        3,480          --          --          --
   Other selling and marketing expense..........       7,670       10,863       5,296       1,964       1,158
General and administrative......................
   Non-cash compensation........................         780          467         308          --       1,408
   Other general and administrative expense.....       9,860       10,256       5,048       4,625       1,509
   Provision for doubtful accounts..............         929        4,965          31          48         201
Depreciation and amortization...................       2,844        5,897       1,886         906          86
Impairment charges..............................       3,916        2,831          --          --          --
Acquired in-process research and development....       3,112        1,373       1,888       7,900          --
                                                 -----------  -----------  ----------  ----------  ----------
       Operating loss...........................     (51,107)     (42,270)     (9,211)    (12,961)     (7,772)
Gains on sales of assets........................      52,037           --          --          --          --
Interest (income) expense, net..................      (1,753)      (1,792)     (1,192)        722         197
Other (income) expense, net.....................         133          (51)         --          --        (716)
                                                 -----------  -----------  ----------  ----------  ----------
Income (loss) before provision for income taxes.       2,550      (40,427)     (8,019)    (13,683)     (7,253)
   Provision for income taxes...................       1,123           40          52          --          --
                                                 -----------  -----------  ----------  ----------  ----------
Net income (loss)............................... $     1,427  $   (40,467) $   (8,071) $  (13,683) $   (7,253)
                                                 ===========  ===========  ==========  ==========  ==========
Accretion of discount on mandatory redeemable
  preferred stock...............................          --           --         659         754          --
Net income (loss) attributable to common
  shareholders.................................. $     1,427  $   (40,467) $   (8,730) $  (14,437) $   (7,253)
                                                 ===========  ===========  ==========  ==========  ==========
Basic net income (loss) per weighted average
  common share outstanding...................... $      0.08  $     (2.44) $    (1.02) $    (4.94) $    (3.52)
                                                 ===========  ===========  ==========  ==========  ==========
Diluted net income (loss) per weighted average
  common share outstanding...................... $      0.07  $     (2.44) $    (1.02) $    (4.94) $    (3.52)
                                                 ===========  ===========  ==========  ==========  ==========
Weighted average number of common shares
  outstanding used in calculation of basic net
  income (loss) per common share................  18,559,185   16,606,795   8,532,140   2,920,677   2,060,668
                                                 ===========  ===========  ==========  ==========  ==========
Weighted average number of common shares
  outstanding used in calculation of diluted net
  income (loss) per common share................  20,194,713   16,606,795   8,532,140   2,920,677   2,060,668
                                                 ===========  ===========  ==========  ==========  ==========
</TABLE>

   See Note 1 of the Notes to the Consolidated Financial Statements contained
at Item 8 herein for a detailed explanation of the determination of the shares
used to compute basic and diluted net income (loss) per share.

                                      34

<PAGE>


ITEM 7.  Management's Discussion and Analysis of Financial Condition and
Results of Operations


Overview and Recent Events


   Over the course of 2001 we completed several transactions transforming our
product offerings and altering the markets in which we compete. Prior to March
2001, we designed, developed, licensed and marketed innovative modular software
solutions that enabled digital video and audio stream management in PC systems,
CE devices and Internet appliances. We also licensed supporting hardware
designs to select customers, provided customization services and customer
support. In addition, we also sold Internet appliances and components to
telecommunications companies, Internet service providers and others. Our
product offerings included a software or hardware Internet set-top box
solution, which included all of the intellectual property, software, hardware
design and manufacturing design necessary for a manufacturer or Internet
service provider to launch an affordable product and Nucleo, a hardware
reference design based on our ARM-7500 processors with e-Surfer(TM)--a thin
customizable browser designed specifically for Internet appliances.


   During the first quarter of 2001 we sold substantially all of the assets of
our consumer electronics ("CE") and Internet appliance ("IA") businesses and in
the process raised approximately $73.6 million, enabling us to pursue other
strategic alternatives. Effective as of March 1, 2001, pursuant to an asset
acquisition agreement dated as of January 18, 2001, along with our
subsidiaries, Ravisent I.P., Inc., Ravisent Operating Company, Inc. and VIONA
Development Hard and Software Engineering GmbH & Co. KG, we sold and licensed
substantially all of our assets related to our CE business to
STMicroelectronics, NV, a Dutch corporation, STMicroelectronics, Inc., a
Delaware corporation, and STMicroelectronics GmbH (collectively,
STMicroelectronics). The assets sold and licensed include contracts, equipment,
intangible assets, intellectual property, prepaid expenses, accounts receivable
and other assets primarily related to the operation of the CE business. In
addition, approximately 76 of our employees, most of whom were associated with
our CE business, accepted employment with STMicroelectronics in connection with
the asset sale. Pursuant to the terms of the asset acquisition agreement,
STMicroelectronics paid approximately $55.6 million in cash consideration, of
which $0.7 million is being held by a third party in escrow for indemnification
purposes until September 2002. In connection with the asset sale, we granted to
STMicroelectronics certain non-exclusive rights to license and distribute
certain of our technology used in our IA products and our PC products. In
addition, we agreed not to compete in significant aspects of the CE market
until March 1, 2006. Revenues and gross margin for the CE business totaled
approximately $0.4 million, or 6% of total revenues, and $0.3 million, or 7% of
total gross profit, excluding inventory charges, respectively, for the year
ended December 31, 2001. These amounts are not necessarily indicative of the
results that would have been obtained for any future period.

   Effective as of March 23, 2001, pursuant to an asset acquisition agreement
dated as of March 21, 2001, along with certain of our subsidiaries, we sold
substantially all of the assets, excluding inventory, related to our IA
business to Phoenix Technologies Ltd., a Delaware corporation, for $18 million
in cash consideration, of which $1.8 million was being held in escrow by a
third party for indemnification purposes until March 2002. In March 2002 we
received $1.3 million, including interest of approximately $0.05 million. The
remaining balance of approximately $0.55 million has been withheld pending the
settlement of a claim submitted by Phoenix. We are unable to predict the
resolution of this matters, or reasonably estimate a range of possible loss
given the current status of this matter. Any escrow amounts not returned to us
will be recorded as a charge to the gain on sale of assets in the period in
which such determination is made. The assets sold include certain of the
contracts, equipment, intangible assets, intellectual property, prepaid
expenses and other assets primarily related to the operation of the IA
business. Under the asset acquisition agreement, Phoenix Technologies purchased
our e-Surfer embedded software Internet browser and related hardware designs
for the IA market. In addition, in connection with this asset sale, 13 of our
employees associated with the IA business accepted employment with Phoenix
Technologies. Revenues and gross margin for the IA business totaled
approximately $1 million, or 13% of total revenues, and less than $0.1 million,
or less than 1 % of total gross profit, excluding inventory charges,
respectively, for the year ended December 31, 2001. These amounts are not
necessarily indicative of the results that would have been obtained for any
future period. In the future, any revenue and gross margins, from this business
are expected to be nominal as inventory is either sold in the open market or
scrapped.

                                      35

<PAGE>


   On December 7, 2001, we acquired all of the outstanding shares of eMation,
Ltd. ("eMation"), a private company organized under the laws of the State of
Israel, pursuant to a share purchase agreement amended and restated as of
October 5, 2001, in consideration for: 8 million shares of our common stock;
options exercisable for up to 1,428,710 shares of our common stock in
connection with assumed eMation stock options, 530,000 of which are exercisable
for $0.01 per share and the remaining 898,710 exercisable at $2.14 per share;
options exercisable for up to 113,600 shares of our common stock issued at
closing pursuant to our 1999 Stock Incentive Plan; and warrants exercisable for
up to 7,000 shares of our common stock exercisable at $2.14 issued to
ex-employees of eMation in consideration for cancellation of outstanding
options to purchase shares of eMation. We also issued warrants at closing
exercisable for up to 108,238 shares of our common stock with exercise prices
ranging from $4.88 to $21.51 per share to holders of warrants exercisable for
shares of eMation. The total combined value of the securities assumed and
issued was approximately $20 million. Pursuant to the lock-up agreement
executed by each selling eMation shareholder, each shareholder agreed not to
directly or indirectly transfer any shares or rights relating to the shares of
Axeda common stock received pursuant to the share purchase agreement until the
one year anniversary of the closing, subject to certain exceptions. Axeda
common stock issued and to be issued to the selling eMation shareholders will
not be registered at the time of issuance.


   The acquisition was recorded under the purchase method of accounting. We
incurred transaction costs of approximately $3.4 million related to the eMation
acquisition and assumed approximately $5 million of eMation net debt. Prior to
the acquisition, we loaned a total of $4.3 million to eMation for working
capital purposes. We also paid sign-on bonuses of $0.3 million to three of
eMation's executives. In connection with the acquisition, we expensed $3.1
million of the purchase price as acquired in-process research and development
(IPR&D) and recorded identifiable intangible assets and goodwill of
approximately $9.7 million and $20.8 million, respectively. In accordance with
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"), certain provisions of which we are
required to and have adopted in 2002, we will no longer amortize goodwill, but
instead will test it for impairment at least annually and at the same time
every year.

   An aggregate of 1.6 million shares of our common stock issued in the eMation
acquisition has been deposited with a third party escrow agent to be held in
escrow to compensate us for certain losses and taxes that may arise as a result
of the eMation acquisition. The shareholders' agent appointed pursuant to the
share purchase agreement agreed to us submitting a claim on the escrow fund for
the return of 23,843 shares of our common stock in consideration for our
issuance of certain warrants at the closing. This escrow arrangement will
expire on December 7, 2002 and any shares remaining in escrow will be returned
to former eMation shareholders.

   The eMation acquisition gave us an immediate entry into the enterprise
software and services market. Axeda now provides a new category of enterprise
software products called Device Relationship Management (DRM), which allows
companies to utilize the Internet or wireless communications to access and
exploit hidden information within remote machines, devices and facilities. We
market and sell our DRM solutions to Global 2000 companies in the industrial
and building automation, high technology devices, medical instrumentation,
semiconductor equipment, and office automation industries including Air
Liquide, Beckman Coulter, Sauter, Shinkawa, PRI Automation, CERN, Siemens,
Toshiba and Varian Medical Systems.

   Our digital media business provides software solutions and technology which
allows decoding and encoding of multimedia formats such as DVD, DBS/DVB and
HDTV primarily on PC platforms to industry leading PC OEMs, empowering them to
deliver highly competitive, cost-effective products with a strong
time-to-market advantage. During 2001 and following the asset sales in March
2001, our digital media customers consisted primarily of PC and computer
graphics chip and board manufacturers and distributors. Approximately $4.5
million or 59% of our revenues for the year ended December 31, 2001 were from
licensing our digital media software solutions. Sales of our Software
CineMaster products accounted for 95% of these revenues. Approximately $2.9
million or 66% of our gross profit, excluding inventory charges, were
attributed to licensing our digital media software solutions. We will continue
to seek and evaluate alternative strategic directions for our digital media
business in 2002.

                                      36

<PAGE>

   We believe that comparing different periods of our operating results is not
meaningful and you should not rely on the results for any previous period as an
indication of our future performance because our business model has changed
significantly since the sale of assets as described above and has further
changed with the acquisition of eMation.

   In 2001 a significant portion of our license revenues were derived from a
small number of customers. In the year ending December 31, 2001, three
customers Matrox Graphics, Gateway, Inc. and another customer, accounted for
13%, 7% and 16%, respectively, of our total revenues and 6%, 5% and 28%,
respectively, of our total gross profit (excluding inventory charges of $18.5
million). As we continue to shift our strategic focus to our recently acquired
DRM business, we expect this trend to continue as early adopters of the DRM
technology more heavily influence our revenue results.

DRM

   Since December 7, 2001, our main strategic focus has been the enterprise
software and services market. Our revenue recognition policy with respect to
DRM related licenses, maintenance agreements and services arrangements will
remain consistent with our current practice. Thus far, our DRM licensing
arrangements have consisted of upfront license fees accompanied by maintenance
fees at a fixed percentage with renewable annual amounts. To date we have not
sold our DRM license fees individually and therefore do not have
vendor-specific objective evidence of fair value ("VSOE") for this element.
However, when offered with our DRMj maintenance, which we sell at a fixed
percentage, on an annual renewable basis, we apply the provisions of Statement
of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." Under this method, revenue is allocated to
each delivered element using the residual method based upon the fair value of
the undelivered elements, which in our case is the deferred maintenance.
Revenues from license fees also consist of fees paid on a per-unit basis for
our Industrial Technology for Automation ("ITA") product lines. In cases where
we sell our products on a per-unit basis, revenues are recognized when the
product ships to an original equipment manufacturer ("OEM") or distributor.
Service revenues consist of maintenance and support agreements, consulting
fees, and training. With the exception of prepaid maintenance, which is
initially deferred and later recognized on a ratable basis over the term of the
maintenance period, service revenues are recognized on a time and material
basis.

Digital Media Business

   We license technology from Dolby Laboratories ("Dolby") for the audio format
that is used in all of our DVD-related products. We pay a royalty to Dolby on a
per-unit shipped basis. The technology, called Dolby Digital, permits audio
from a DVD to be routed to different speakers in a multi-speaker set up to
permit "theater-quality" audio. The Dolby Digital technology is part of the
industry standard DVD specification. In addition, we license encryption and
decryption software technology on a royalty-free basis from the Copy Control
Association (CCA), which must also be included in any DVD products we ship.
This technology is designed to prevent unauthorized persons from accessing DVD
content such as movies. The license for the encryption and decryption
technology may be terminated at any time. We may not be able to renew either
license.

   License revenues for our digital media products consist of either fees paid
on a per-unit basis, each time a manufacturer ships a product that incorporates
our software solutions, or may consist of flat fee arrangements, bulk license
purchases, or license grants. Services revenues consist of engineering fees
from PC, peripheral and semiconductor manufacturers for custom engineering
services. During the first quarter of 2001, we earned services revenues from CE
manufacturers for custom engineering. Services are generally billed on either a
time and material basis or on a project or contract basis. License revenues for
fees paid on a per-unit basis are recognized when earned, which is generally
based on receiving notification from a licensee detailing the shipments of
products incorporating our technology. In a number of cases, this occurs in the
quarter following the sale of the licensee's product to its customers. Our PC
license agreements generally have a term of one year or less and typically
require payment within 30 days after the end of the month or calendar quarter
in which the

                                      37

<PAGE>

product is shipped. Some of our contracts may also require payment of an
up-front license fee. License fees paid in advance, with no further future
commitment, are recognized in the period that the license agreement is signed,
the fee is fixed or determinable, the technology is delivered and accepted and
collectibility is probable.

   The amount and timing of some fixed fees could cause our operating results
to vary significantly from period to period due to the timing and number of
agreements, as well as the timing of the recognition of the associated
revenues. In cases where a fixed or lump-sum license fee is associated with the
delivery of multiple elements and VSOE cannot be established for the individual
elements, the entire fee from the arrangement is deferred until the earlier of
the establishment of VSOE or the delivery of all the elements of the
arrangement. In cases where a license grants a customer unspecified upgrade
rights, the fixed or lump sum license fee is deferred and recognized ratably
over the term of the arrangement. Billed amounts due from customers in excess
of revenues recognized are recorded as deferred revenues. Services revenues are
recognized upon delivery of the service in the case of time and material
contracts or on a percentage completion basis in the case of project-based
contracts. Hardware product sales are recognized upon shipment of the product
to the manufacturer or end user.

   Our agreements with our PC customers are typically of limited duration and
do not contain minimum purchase commitments or are terminable with little or no
notice. Rather than long-term contracts, we typically enter into licensing
agreements with one-year terms or less that may automatically renew each
subsequent period unless either party receives a written cancellation. As a
result, many of our customers could elect not to renew these agreements and we
could have little warning of this election. Also, since our agreements with our
customers do not include minimum purchase requirements, the demand for our
products is unpredictable. As a result of competition or fluctuations in
demand, we could be required to reach an accommodation with our customers with
respect to contractual provisions such as price or delivery time in order to
obtain additional business and maintain our customer relationships. Any
termination, decrease in orders or election not to renew a contract by our
principal customers would harm our business.

Other Acquisitions

   Recognizing the potential growth in the IA market, we acquired Teknema in
November 1999. This acquisition gave us an immediate presence and allowed us to
compete in the emerging market for Internet appliances. Teknema designed,
developed and marketed information appliances, including software and hardware,
which enabled easy access to the Internet. We acquired Teknema for
approximately $14.9 million, consisting of $2.5 million in cash, 266,169 shares
of our common stock and the assumption of options to acquire 537,582 shares of
common stock with a combined value of $12.4 million and incurred transaction
costs of $0.9 million. Prior to the acquisition we loaned Teknema $1.0 million.
The acquisition was recorded under the purchase method of accounting. In
connection with the acquisition, we expensed $1.9 million of the purchase price
as IPR&D. We sold all of the intellectual property that we acquired from
Teknema in connection with the sale of the assets of our IA business to Phoenix
Technologies in March 2001, as described above. The remaining unamortized book
value of the goodwill recorded in connection with the acquisition of Teknema of
approximately $10.6 million, which was being amortized over its estimated
useful life of four years, has been included in the net gain on sale of assets.

   We acquired Cinax Designs Inc. ("Cinax") in August 2000. The acquisition of
Cinax provided us with complementary products such as WinVCR, a product which
allows users to record any video and audio source onto their PC hard drive in
real time. In addition, the Cinax acquisition brought with it a skilled set of
developers, which we believed would allow us to accelerate the delivery of new
products that leverage our core competencies. We acquired all of the
outstanding capital stock of Cinax for approximately $3.5 million in cash and
an aggregate of 825,000 shares of Axeda common stock and shares of no par,
non-voting exchangeable preferred stock of our subsidiary, Ravisent British
Columbia Inc., which shares of preferred stock are exchangeable, at the option
of the holder, on a one-for-one basis at any time, into shares of Axeda common
stock. The approximate value of the stock consideration on the date of
acquisition was $3.7 million. The acquisition was recorded under the purchase
method of accounting. In connection with the acquisition, we expensed $1.4

                                      38

<PAGE>

million of the purchase price as IPR&D. Goodwill and other intangible assets of
$3.2 million were recorded and were being amortized on a straight-line basis
over four years. We retained this intellectual property and did not transfer or
sell it as a result of the STMicroelectronics or Phoenix Technologies
transactions. In December 2001, following a periodic review of the expected
future cash flows from our products using the Cinax technology, we determined
that the carrying value of the goodwill and other intangible assets at December
31, 2001 was not recoverable and we recorded an impairment charge of
approximately $2.2 million. This determination was based upon factors including
the projected cash flows expected from the use of the Cinax technology and cash
flows expected from its eventual disposition, as well as our strategic shift to
becoming an enterprise software and services company.

Other Charges

   As of December 31, 2001, our net inventories totaled approximately $2.1
million and decreased approximately $18.8 million from the balance at December
31, 2000. The decrease is primarily a result of increased reserves of
approximately $14.2 million for IA components, and approximately $4.6 million
for Internet set-top boxes. The reserves were based on various factors
including expected demand, current market prices, industry conditions,
alternative uses, distribution channels and manufacturers' warranties. In
addition to the recorded reserves, we sold $1.1 million of inventory and
received additional credits from a component supplier of $0.6 million and from
a contract manufacturer of approximately $0.6 million. These combined decreases
partially offset inventory increases totaling approximately $2.6 million,
attributable to the purchase of approximately 25,000 Internet set-top boxes,
related to our divested IA group. Under a distribution rights agreement with a
South American distributor, we placed orders with our contract manufacturers
for these products during the third and fourth quarters of 2000 in expectation
of significant orders. Due to differing interpretations of the terms of the
distribution rights agreement, in January 2001 we entered into a settlement and
release agreement, terminating the distribution rights agreement. Because of
current market conditions, we have reserved approximately $2.1 million for
these units. While our current product offerings have changed as a result of
the sale of the assets of the IA business and our strategic shift to the
enterprise software and services market, we are working with several overseas
finished goods distributors and domestic parts brokers for the sale of this
inventory. We believe that we can sell the remaining inventories to recover
their year-end carrying value in the normal course of business and we are
continually assessing the market for these products. When sold, we expect
minimal gross margin on the sale of our component and finished goods
inventories. However, to the extent that we are unsuccessful at selling the
inventories through the sales channels discussed above, we may have to explore
alternative sales channels to liquidate the inventories, which may not be on
terms that will enable us to recover the carrying value of the inventories.

   In 2001, we recognized an impairment charge of approximately $1.7 million to
reduce the amount of acquired technology rights associated with a prior equity
financing to its estimated fair value of zero. This impairment charge was
recorded following a periodic review of the expected future cash flows from our
products using the acquired technology and is attributable to certain
technology acquired from Intel in connection with the sale of our Series C
preferred stock in 1999. During the fourth quarter of 2001, we determined that
we would not allocate future resources to assist in the market growth of this
technology and we do not anticipate any material future sales of products
incorporating this technology. This determination was based upon factors
including the projected cash flows expected from the use of the acquired
technology and potential cash flows that could be expected from its
disposition, as well as our strategic shift to become an enterprise software
and services company.

Geographic Areas

   Information pertaining to revenues attributed to our country of domicile,
the United States of America, foreign sales in total and individual foreign
countries is included in note 20 of the notes to the consolidated financial
statements, filed herewith at Item 8--Financial Statements and Supplementary
Data. Revenues from individual countries are based upon information available
to us regarding our customers' country of domicile.

                                      39

<PAGE>

   Information pertaining to long-lived assets is included in note 16 of the
notes to the consolidated financial statements, filed herewith at Item
8--Financial Statements and Supplementary Data.

Results of Operations


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


<TABLE>
<CAPTION>
                                                    Year Ended December 31,
                                                    ----------------------
                                                     2001    2000    1999
                                                    ------  ------   -----
    <S>                                             <C>     <C>      <C>
    Revenues:
       License.....................................   79.6%   59.1%   43.2%
       Services....................................    5.8     9.1     3.3
       Hardware....................................   14.6    31.8    53.5
                                                    ------  ------   -----
    Total revenues.................................  100.0   100.0   100.0
    Cost of revenues:
       License.....................................   21.5    16.2     6.4
       Services....................................    2.9     3.5     0.8
       Hardware....................................   14.8    29.7    46.7
       Software amortization.......................    2.2      --      --
       Inventory charges...........................  243.8     8.2      --
                                                    ------  ------   -----
    Total cost of revenues.........................  285.2    57.6    53.9
                                                    ------  ------   -----
    Gross profit................................... (185.2)   42.4    46.1
    Research and development
       Non-cash compensation.......................   27.7     3.8     0.7
       Other research and development expense......   75.0    48.8    27.6
    Sales and marketing
       Non-cash compensation and other expense.....    1.9    16.7      --
       Other selling and marketing expense.........  101.1    52.1    18.0
    General and administrative
       Non-cash compensation.......................   10.3     2.2     1.0
       Other general and administrative expense....  129.9    49.2    17.2
       Provision for doubtful accounts.............   12.2    23.8     0.1
    Depreciation and amortization..................   37.5    28.3     6.4
    Impairment charges.............................   51.6    13.6      --
    Acquired in-process research and development...   41.0     6.6     6.4
                                                    ------  ------   -----
           Operating loss.......................... (673.4) (202.7)  (31.3)
    Gains on sales of assets.......................  685.7      --      --
    Interest (income) expense, net.................  (23.1)   (8.6)   (4.0)
    Other (income) expense, net....................    1.8    (0.2)     --
                                                    ------  ------   -----
    Income (loss) before provision for income taxes   33.6  (193.9)  (27.3)
    Provision for income taxes.....................   14.8     0.2     0.2
                                                    ------  ------   -----
    Net income (loss)..............................   18.8% (194.1)% (27.5)%
                                                    ======  ======   =====
</TABLE>

Years Ended December 31, 2001 and 2000

   Revenues.  Total revenues decreased 64% or $13.3 million from $20.9 million
for the year ending December 31, 2000 to $7.6 million for the year ending
December 31, 2001. Revenues across our PC, CE & IA businesses decreased from
the prior year by $7.2 million, $1.2 million and $6.5 million, respectively,
and were

                                      40

<PAGE>

partially offset by an increase of $1.6 million in our revenues as a result of
our acquisition of eMation. Revenues across our license, services and hardware
streams decreased $6.3 million, $1.5 million, and $5.5 million, respectively,
from the prior year. The decrease in revenues was due to the discontinuance of
new hardware product lines during 2000, increased competition and continued
weakness in the personal computer industry, and the Company's sale of
substantially all of the assets of its CE and IA businesses in March 2001.

   License revenues decreased by $6.3 million from $12.3 million for the year
ended December 31, 2000 to $6 million for the year ended December 31, 2001. The
decrease was mainly attributable to increased competition and continued
weakness in the PC industry resulting in reduced unit sales of our CineMaster
product line, price erosion from a significant customer, and our strategic
shift out of the digital media market. As a result of the foregoing, we
experienced a significant loss of business from three large PC OEM's of
approximately $6.9 million. These decreases were partially offset by an
increase in our web-based business totaling approximately $0.7 million for the
year. Additional factors impacting license revenues include a decrease in our
IA revenues of $1.5 million, which was offset by a $1.6 million increase in
revenues attributable to sales of eMation's products subsequent to the
acquisition.

   Hardware revenues decreased 83% from $6.6 million for the year ended
December 31, 2000 to $1.1 million for the year ended December 31, 2001.
Approximately $4.8 million of the decrease was attributable to decreased IA
units sold in 2001 and the sale of the assets of our IA business in March 2001.
The remainder of the decrease was due to a decrease in sales of PC related
hardware to contract manufacturers in March 2001. In the future, we expect
hardware revenues to be minimal as we continue to dispose of our current
inventories and we anticipate minimal gross profit from these sales.

   Service revenues decreased 77% from $1.9 million for the year ended December
31, 2000 to $0.4 million for the year ended December 31, 2001. Approximately
$1.2 million of the decrease was attributable to service agreements associated
with our CE business, which was sold to STMicroelectronics in March 2001. The
remainder of the decrease was due to the sale of the assets of our IA business,
which was sold to Phoenix Technologies Ltd. in March 2001. In the future we
expect service revenues to increase slightly as service offerings related to
our DRM products contribute to this revenue stream.

   Historically, the majority of our revenues have been derived from a small
number of customers. For the year ended December 31, 2001, our top three
customers, including a materials broker and a fixed-fee customer for our DVD
technology, accounted for 37% of our total revenues. In the future, although we
expect our revenues to be less concentrated as sales of our enterprise software
and services spans a wider customer base, we expect early adopters of our DRM
solutions to more heavily influence our revenue results.

   We sell our digital media products primarily to PC and computer graphics
chip and board manufacturers and distributors in North America, Europe, and the
Pacific Rim. In the year ended December 31, 2001 companies based in North
America accounted for a majority of our revenues. In the future we expect a
greater portion of our revenues to be derived outside of the United States.


   Cost of Revenues.  Excluding the charges for inventory reserves, cost of
revenues decreased 69% or $7.2 million from $10.3 million for the year ended
December 31, 2000 to $3.1 million for the year ended December 31, 2001. Cost of
revenues relating to our license, services and hardware revenues decreased
$1.7, $0.5, and $5.1 million, respectively, from the prior year. The $1.7
million decrease in cost of license revenues corresponds directly to the
decrease in license revenues, offset by higher per unit Dolby Digital fees,
which were associated with lower unit volumes. The decrease in cost of hardware
is directly associated with a decrease in our Internet appliance sales. As we
license more of our DRM products in the future, we expect our cost of revenues
as a percentage of revenue to decrease. Partially offsetting this decrease, as
a percentage of revenues, will be the addition of non-cash amortization of
acquired technology, which will add approximately $2.1 million to the cost of
revenues in 2002.


                                      41

<PAGE>

   Gross Profit.  Gross profit decreased from $8.9 million for the year ended
December 31, 2000 to $(14.1) million for the year ended December 31, 2001,
primarily due to net charges for inventory reserves of approximately $18.5
million. Excluding the inventory charges in 2001 and 2000, gross profit
decreased from $10.6 million to $4.4 million due mainly to lower revenues.

   For the year ended December 31, 2001, 80% and 6% of our total revenues were
derived from license and services revenues, respectively, in comparison to 59%
and 9%, respectively, in 2000. The gross profit percentage for license revenues
and services revenues is much higher than that from hardware sales. As a
percentage of total revenues, gross profit, excluding the charges recorded for
inventory reserves, increased from 51% for the year ended December 31, 2000 to
59% for the year ended December 31, 2001, primarily as a result of a higher
proportion of license revenues, partially offset by an increase in the per-unit
cost of license fees for technologies incorporated into our products and a
decrease in services revenues due to the sale of our CE assets.

   Other Research and Development Expense.  Other research and development
expenses consist of staff, staff-related, professional and other development
related support costs associated with the development of new products,
customization of existing products for customers, quality assurance and
testing. Research and development expenses decreased 44%, from $10.2 million
for the year ended December 31, 2000 to $5.7 million for the year ended
December 31, 2001.

   The decrease in research and development expenses was due to the elimination
of the CE and IA development teams in the first quarter of 2001, which
contributed approximately $3.4 million and $2.1 million, respectively, to the
decrease. This decrease was partially offset by increases in staff expenses
including those related to our acquisition of eMation of approximately $0.5
million and staff retention expense of approximately $0.3 million. As a
percentage of total revenues, research and development expenses increased from
49% to 75%. The increase in research and development expenses as a percentage
of total revenues resulted from lower revenues. We expect research and
development expenses to increase in 2002 as we continue to invest in product
development for our enterprise software and services offerings.

   Non-cash Research and Development Expense.  Non-cash research and
development expense consists of compensation related to stock options and
acquisition-related stock compensation. Non-cash research and development
expense increased 162% from $0.8 million for the year ended December 31, 2000
to $2.1 million for the year ended December 31, 2001. $1.5 million of the
increase over the prior year is due to the immediate recognition of the prepaid
and deferred stock compensation related to reductions in staffing in connection
with the closing of our Vancouver office in March 2001, offset by a $0.2
million decrease related to the sale of the CE assets in March 2001.

   Other Selling and Marketing Expense.  Other selling and marketing expenses
consist of salaries, travel expenses and costs associated with trade shows,
advertising and other marketing efforts, as well as technical support costs.
Sales and marketing expenses decreased 29% from $10.9 million for the year
ended December 31, 2000 to $7.7 million for the year ended December 31, 2001.
The increase in other selling and marketing expenses as a percentage of total
revenues resulted from lower revenues.


   The decrease in sales and marketing expense is mainly a result of the sale
of the assets of our CE and IA businesses, which contributed $1.4 million and
$2.8 million, respectively, for the year ending December 31, 2001.
Additionally, decreases of approximately $0.6 million resulted from reduced use
of outside consultants. These decreases were offset by increases of
approximately $0.9 million relating to the addition of the eMation sales force,
approximately $0.7 million relating to our name change and branding efforts in
connection with our new corporate identity, and $0.3 million of staff related
retention expense. As a percentage of total revenues, sales and marketing
expenses increased from 52% to 101%. We expect sales and marketing expenses to
increase in 2002 as we continue to invest in our sales force for our enterprise
software and services offerings.


                                      42

<PAGE>

   Non-cash Selling and Marketing Expense.  Non-cash selling and marketing
expense consists of compensation related to stock options. Non-cash sales and
marketing expense decreased 96% from $3.5 million for the year ended December
31, 2000 to $0.1 million for the year ended December 31, 2001. The decrease
relates to the amortization of warrants for $2.8 million issued in connection
with the American Trading S.A. agreement in June 2000. These warrants were
cancelled in the first quarter of 2001. The decrease is also attributable to a
one-time charge of $0.5 million for the modification of stock options held by
two former employees. Stock options granted to employees at less than fair
market value are recorded as deferred compensation expense and amortized over
the applicable vesting periods of two to four years.

   Other General and Administrative Expense.  Other general and administrative
expenses consist of staff, staff related, and support costs for our finance,
human resources, information systems and other management departments. Other
general and administrative expenses decreased 4% from $10.3 million for the
year ended December 31, 2000 to $9.9 million for the year ended December 31,
2001. Other general and administrative expenses as a percentage of total
revenues increased from 49% to 130% due to the decrease in total revenues.

   In absolute dollars, the decrease in other general and administrative
expenses was due to decreases in professional fees related to our class action
litigation of $0.5 million, professional fees in connection with our 1999
restatement of $0.5 million, other professional fees pertaining to the pursuit
of several strategic initiatives of approximately $0.5 million, and travel and
conference expenses of $0.8 million. Offsetting these decreases were increases
in severance and retention expenses of $1.2 million, as well as the addition of
eMation's expenses since December 7, 2001, which totaled $0.7 million. We
expect general and administrative expenses to decrease in 2002 as we focus on
our infrastructure needs and reduce unnecessary overhead expenses.

   Non-cash General and Administrative Expense.  Non-cash general and
administrative expense consists of amortization of compensation related to
stock options. Non-cash general and administrative expense increased 67% from
$0.5 million for the year ended December 31, 2000 to $0.8 million for the year
ended December 31, 2001. The increase is the result of amortization of deferred
compensation recorded in connection with stock options granted to employees at
less than fair market value on the date of grant in July and August 2001.

   Provision for Doubtful Accounts.  The provision for doubtful accounts
represents management's best estimate of the doubtful accounts for each period.
The provision decreased 81% from $5 million for the year ended December 31,
2000 to $0.9 million for the year ended December 31, 2001. As a percentage of
revenues, the provision decreased from 24% to 12% for the years ended December
31, 2000 and 2001, respectively, as a result of improved credit and collection
efforts. The overall decrease was due to a decrease in the uncollectible
accounts associated with the IA products and services.

   Depreciation and Amortization.  We recorded depreciation and amortization of
$2.8 million for the year ended December 31, 2001, compared to $5.9 million for
the year ended December 31, 2000. Of the decrease, $0.7 million and $3.0
million relate to a decrease in the amortization of goodwill for our CE and IA
businesses, respectively, both of which were sold in March 2001. Offsetting
these decreases was the full year impact of goodwill amortization from our
Cinax acquisition in August 2000, of $0.7 million. The balance of intangible
assets and goodwill from this acquisition of $2.2 million was recorded as an
impairment charge in December 2001. See "Acquired In-Process Research and
Development Expense."

   Under SFAS No. 142, goodwill acquired in a business combination after June
30, 2001 is no longer amortized. The provisions of SFAS No. 142 require that
goodwill be tested for impairment on an annual basis at the same time every
year. Accordingly, we have not recorded amortization expense in 2001 for
goodwill of approximately $20.8 million acquired in our purchase of eMation in
December 2001. Intangible assets acquired in a business combination and
recognized as an asset apart from goodwill must arise from contractual or other
legal rights or otherwise are separable. Under SFAS No. 142, recognized
intangible assets with finite useful lives are amortized over the period which
the assets are expected to contribute directly or indirectly to the Company's
future cash flows. We recorded identified intangible assets totaling
approximately $9.7 million in connection

                                      43

<PAGE>

with our purchase of eMation, comprised of developed and core technologies of
approximately $1.4 million and $7.0 million, respectively, patent applications
of approximately $1.0 million and customer base of approximately $0.3 million.
The developed and core technologies will be amortized over their estimated
useful lives of 2 and 5 years, respectively, and will be recorded as cost of
revenues which totaled $0.2 million in 2001. The patent applications and
customer base will be amortized over their estimated useful life of 5 years and
will be included with operating expenses.

   Impairment charges.  Impairment charges for the year ending December 31,
2001 totaling $3.9 million, include a charge for an acquired Intel technology
license, valued at $1.7 million, as well as charges for the identified
intangible assets and goodwill remaining from the Cinax acquisition totaling
approximately $2.2 million. Both the acquired technology rights and Cinax
identified intangible assets and goodwill were deemed to be impaired based upon
various factors including the projected cash flows expected from the use of the
assets and their eventual disposition, as well as our strategic shift to
becoming an enterprise software and services company. The impairment charge for
the year ending December 31, 2000 includes a $2.8 million charge for the
write-off of capitalized distribution rights obtained in connection with a
warrant issued pursuant to a distribution rights agreement, in June 2000, to
acquire 1.5 million shares of our common stock.

   Gains on Sales of Assets.  We recorded a gain of approximately $47.5 million
for the year ended December 31, 2001 as a result of the sale of the assets
related to our CE business in March 2001 We recorded a gain on this sale of
approximately $4.5 million for the year ended December 31, 2001 as a result of
the sale of assets related to our IA business in March 2001.

   Interest (Income) and Expense, Net.  Net interest income decreased by $0.04
million, or 2%, for the year ended December 31, 2001 compared to the comparable
period in 2000. The decrease is the result of lower bank interest rates in 2001.

   Provision for Income Taxes.  Income tax expense recorded for 2001 is
attributable to the gains on sales of assets described above, offset by the
operating losses.

Years Ended December 31, 2000 and 1999

   Revenues.  Total revenues decreased 29% from $29.4 million for the year
ended December 31, 1999 to $20.9 million for the year ended December 31, 2000.
The decrease in revenues was due to a change in business strategy by which we
have chosen to emphasize licensing technology, including technology related to
our hardware products, rather than manufacturing and selling our hardware
products to our customers. Accordingly, as a result of our decision to
concentrate on licensing, hardware revenues have declined while combined
license and services revenues have increased.

   License revenues decreased 3% from $12.7 million for the year ended December
31, 1999 to $12.3 million for the year ended December 31, 2000, due primarily
to increased competition in the DVD market, offset by an increase in license
revenues attributable to our IA product offerings. Service revenues increased
96% from $1.0 million for the year ended December 31, 1999 to $1.9 million for
the year ended December 31, 2000 due to increased service fees from our CE
product offerings. Hardware revenues decreased 58% from $15.7 million for the
year ended December 31, 1999 to $6.6 million for the year ended December 31,
2000, due primarily to the discontinuance of our Hardware CineMaster product
line.

   In 2000 and 1999, we sold our products directly to PC, CE and IA
manufacturers in North America, Europe, South America and the Pacific Rim. For
the year ended December 31, 2000, companies based in the Pacific Rim and North
America accounted for a majority of our revenues. Sales outside of the United
States have been primarily through U.S. manufacturers that distribute their
products to end users overseas.

                                      44

<PAGE>

   Our revenues are derived primarily from three product lines. For the year
ended December 31, 2000, our PC software and hardware, CE software and IA
software and hardware revenues as a percentage of total revenues were 56%, 8%
and 36%, respectively. For the year ended December 31, 1999, our PC software
and hardware, CE software and IA software and hardware revenues as a percentage
of total revenues were 83%, 3% and 14%, respectively.

   Cost of Revenues.  Cost of revenues consist primarily of costs of hardware
components sold to manufacturing firms and license fees paid to third parties
for technologies incorporated into our products, including Dolby Digital
technology. Cost of revenues decreased 24% from $15.9 million for the year
ended December 31, 1999 to $12 million for the year ended December 31, 2000.
The decrease in cost of revenues was primarily due to decreased hardware
product sales and the related costs associated with the manufacturing of our
hardware products. Excluding charges for inventory reserves, cost of revenues
decreased 35% or $5.6 million from $15.9 million for the year ended December
31, 2000 to $10.3 million for the year ended December 31, 1999 to $10.3 million
for the year ended December 31, 2000.

   Cost of revenues for hardware decreased approximately $7.5 million or 55%
from $13.7 million in 1999 to $6.2 million in 2000. The decrease in cost of
revenues associated with hardware revenue was 55% and in line with the 58%
decline in hardware sales. Cost of revenues from license revenues increased
approximately $1.5 million from $1.9 million in 1999 to $3.4 million in 2000.
The increase in license cost of revenues was a result of a greater portion of
license revenues incorporating Dolby Digital technology. Cost of revenues from
services increased approximately $0.5 million from $0.3 million in 1999 to $0.8
million in 2000. The increase in services cost of revenues was due to increased
services revenues, which have lower margins than license revenues.




   Gross Profit.  Gross profit decreased from $13.6 million for the year ended
December 31, 1999 to $8.9 million for the year ended December 31, 2000, due
primarily to lower licensing revenues not incorporating Dolby Digital, $1.7
million reserve for inventory obsolescence and the discontinuance of Hardware
CineMaster. Excluding the inventory reserve, gross profit decreased from $13.6
million to $10.6 million. As a result of the inventory reserves noted above,
gross profit on hardware revenues was $(1.3) million. For the year ended
December 31, 2000, 59% of total revenues was derived from license revenues, 9%
of the total revenues was derived from services revenues and 32% of total
revenues was derived from hardware revenues, in comparison to 43%, 3% and 54%,
respectively, for the comparable period in the previous year. As a percentage
of total revenues, gross profit decreased from 46% for the year ended December
31, 1999 to 42% for the year ended December 31, 2000 as a result of a $1.7
million inventory charge, increased hardware costs, increases in the cost of
Dolby Digital and an increase in the proportion of services revenues, which
have lower margins than license revenues. As a percentage of total revenues,
gross profit, excluding the $1.7 million charge recorded for inventory,
increased from 46% to 51% for the years ended December 1999 and 2000,
respectively.


   Other Research and Development Expense.  Research and development expenses,
excluding non-cash compensation, consist of staff, staff related, professional
and other development related support costs associated with the development of
new products, customization of existing products for customers, quality
assurance and testing. Research and development expenses increased 26%, from
$8.1 million for the year ended December 31, 1999 to $10.2 million for the year
ended December 31, 2000. As a percentage of total revenues, research and
development expenses increased from 28% to 49%. The increase in research and
development expenses as a percentage of total revenues resulted from both the
decline in hardware revenues and increases in research and development spending.

   The increase in research and development expenses in absolute dollars and as
a percentage of revenues was due primarily to the increased requirements of
supporting development for an expanded product base. Approximately 65% or $1.4
million of the total increase in research and development was from increased
use of consultants utilized for development of our IA product line.

                                      45

<PAGE>

   The remainder of the growth in research and development expenses was
primarily attributable to expenses associated with the inclusion of research
and development expenses from our Teknema subsidiary (acquired in November
1999) for twelve months in 2000 and the inclusion of research and development
expenses from our Cinax subsidiary, acquired in August 2000. These expenses
included staff and staff related expenses, which increased approximately $0.4
million or 19% and development prototypes and equipment expense, which
increased approximately $0.2 million or 9%.

   Non-cash Compensation Research and Development Expense.  Non-cash
compensation relates both to stock-based compensation as well as stock-based
acquisition related compensation. The 300% increase over the prior year from
$0.2 million for the year ended December 31, 1999 to $0.8 million for the year
ended December 31, 2000, is due to the additional non-cash compensation in
connection with our Cinax acquisition. The stock-based grants from 1999 and
stock-based acquisition related compensation from 2000 are amortized as
non-cash compensation expenses over the vesting periods, ranging from 3 to 48
months.

   Other Selling and Marketing Expense.  Sales and marketing expenses excluding
non-cash compensation and other expense, consists of staff, advertising,
travel, professional, and other related sales and marketing expenses. Sales and
marketing expenses increased 105% from $5.3 million for the year ended December
31, 1999 to $10.9 million for the year ended December 31, 2000. As a percentage
of total revenues, sales and marketing expenses increased from 18% to 52%. The
increase in sales and marketing expenses as a percentage of total revenues
resulted from both lower hardware revenues and increases in selling and
marketing spending.

   The largest single portion of the increase was due to funding $2.4 million
in marketing expenses in accordance with a distribution rights agreement. The
remainder of the increase was due to the full year impact of the sales and
marketing function from the IA group included in our 2000 results as well as to
other increases in our sales and marketing support expenses. These increases
were $2.7 million and $0.5 million, respectively.

   Non-cash Compensation and Other Selling and Marketing Expense.  Non-cash
compensation and other expense relates to warrants issued to strategic partners
and options issued to employees. The increase of 3.5 million is primarily
related to a warrant valued at $5.6 million, which was recorded in connection
with a distribution rights agreement with a South American distributor of our
Internet appliances. $2.8 million of the non-cash expense relates to the
amortization of the of capitalized distribution rights obtained in connection
with a warrant issued pursuant to a distribution rights agreement, in June
2000, to acquire 1.5 million shares of common stock. The remainder of the
increase is due to stock-based compensation for employees. Stock-based
compensation for the year ended December 31, 2000 included a grant of options
with an aggregate intrinsic value of $0.7 million to certain employees. This
grant and the grants from 1999 are amortized as non-cash compensation expense
over the vesting periods of the options, ranging from 18 to 48 months. Also
included in this expense for the year ended December 31, 2000 is a one-time
charge for stock compensation of $0.4 million to a former employee and a former
consultant.

   Other General and Administrative Expense.  General and administrative
expenses, excluding non-cash compensation, consists of staff, staff related,
and support costs for our finance, human resources, information systems, legal
and other management departments. Total general and administrative expenses
increased 103% from $5.0 million for the year ended December 31, 1999, to $10.3
million for the year ended December 31, 2000. As a percentage of total
revenues, general and administrative expenses increased from 17% to 49%. The
increase in general and administrative expenses as a percentage of total
revenues resulted from both lower hardware revenues and increases in general
and administrative spending.

   The increase in general and administrative expenses was due to an increase
in professional fees of approximately $2.2 million associated with our
shareholder litigation suit, 1999 restatement work, pursuit of several
strategic initiatives, and recent sales of our CE and IA assets. In addition,
increases in conference and travel of $0.9 million, facilities costs of $0.7
million, insurance and regulatory filing fees of $0.4 million, and recruiting
efforts of $0.3 million also contributed to the increase. Finally, increases in
expenditures on administrative infrastructure to support our growing business
operations were also incurred in 2000.

                                      46

<PAGE>

   Non-cash Compensation General and Administrative Expense.  The stock-based
grants, granted at less than fair value, from 2000 are amortized as non-cash
compensation expenses over the vesting periods, ranging from 18 to 48 months.

   Provision for Doubtful Accounts.  Provision for doubtful accounts increased
$4.8 million from $0.03 million for the year ending December 31, 1999 to $4.9
million for the year ending December 31, 2000. The increase in provision for
doubtful accounts as a percentage of revenue, from 0.1% to 24% for the years
ending December 31, 1999 and December 31, 2000, respectively, was a result of
both lower revenues and increases in provision for doubtful accounts. The
majority of the increase in provision for doubtful accounts was due to the
recognition of $2.5 million of reserves for receivables acquired in connection
with the Teknema acquisition. The remainder of the increase was due to adverse
changes in the business climate in the IA and PC industries.

   Amortization of Goodwill.  We recorded amortization of goodwill of $5.2
million for the year ended December 31, 2000, related to the goodwill recorded
as part of the Viona, Teknema and Cinax acquisitions. See --Acquired In-Process
Research and Development Expense.

   Impairment Charge.  Comprising the impairment charge for the year ending
December 31, 2000 is a $2.8 million charge for the write-off of capitalized
distribution rights obtained in connection with a warrant issued pursuant to a
distribution rights agreement, in June 2000, to acquire 1.5 million shares of
common stock.

   Interest (Income) and Expense, Net.  Interest Income/Expense, Net consists
of interest income generated from investment of our excess cash balances and
interest expense from interest paid on obligations outstanding under equipment
leases and notes payable to partially fund its operations and capital
purchases. For the year ended December 31, 1999, we recorded net interest
income of $1.2 million in comparison to net interest income of $1.8 million for
the year ended December 31, 2000. The increase in interest income was due to
greater average cash on hand for the year, from our initial public offering
completed in July 1999, in 2000 versus 1999. The net proceeds from the offering
were approximately $64.2 million.

                                      47

<PAGE>

Quarterly Results of Operations (Unaudited)

   The following table presents certain unaudited quarterly consolidated
statements of operations data for the eight quarters ended December 31, 2001.
In the opinion of management, this information has been presented on the same
basis as the audited consolidated financial statements appearing elsewhere in
this Annual Report, and all necessary adjustments have been included in the
amounts stated below to present fairly the unaudited quarterly results when
read in conjunction with the our audited consolidated financial statements.
Results of operations for any quarter are not necessarily indicative of the
results to be expected for the entire fiscal year or for any future period.

<TABLE>
<CAPTION>
                                                                            Mar. 31,     Jun. 30,     Sept. 30,    Dec. 31,
                                                                              2000         2000         2000         2000
                                                                           -----------  -----------  -----------  -----------
<S>                                                                        <C>          <C>          <C>          <C>
Revenues:
 License.................................................................. $     2,774  $     3,180  $     3,318  $     3,056
 Services.................................................................         147          119          435        1,197
 Hardware.................................................................       2,789        1,547          475        1,817
                                                                           -----------  -----------  -----------  -----------
Total revenues............................................................       5,710        4,846        4,228        6,070
Cost of revenues:
   License................................................................         790          959          676          949
   Services...............................................................         274           26          110          323
   Hardware...............................................................       2,579        1,356          477        1,777
 Software amortization....................................................          --           --           --           --
 Inventory charges........................................................          --           --           --        1,708
                                                                           -----------  -----------  -----------  -----------
Total cost of revenues....................................................       3,643        2,341        1,263        4,757
                                                                           -----------  -----------  -----------  -----------
Gross profit..............................................................       2,067        2,505        2,965        1,313
Research and development
 Non-cash compensation....................................................          81           81           95          544
 Other research and development expense...................................       2,143        2,970        2,686        2,388
Sales and marketing
 Non-cash compensation and other expense..................................         359          143        1,525        1,453
 Other selling and marketing expense......................................       1,882        2,602        4,298        2,081
General and administrative
 Non-cash compensation....................................................          41           55           71          300
 Other general and administrative expense.................................       2,343        3,277        2,086        2,549
 Provision for doubtful accounts..........................................          --           90           96        4,780
Depreciation and amortization.............................................       1,356        1,385        1,489        1,667
Impairment charges .......................................................          --           --           --        2,831
Acquired in-process research and development..............................          --           --        1,373           --
                                                                           -----------  -----------  -----------  -----------
Operating loss............................................................      (6,138)      (8,098)     (10,754)     (17,280)
Gains on sales of assets..................................................          --           --           --           --
Interest (income) expense, net and other (income) ........................        (616)        (598)        (433)        (196)
                                                                           -----------  -----------  -----------  -----------
Provision for income taxes (benefit)......................................          15           23            7           (5)
                                                                           -----------  -----------  -----------  -----------
Net income (loss)......................................................... $    (5,537) $    (7,523) $   (10,328) $   (17,079)
                                                                           ===========  ===========  ===========  ===========
Basic net income (loss) per weighted average common share outstanding..... $     (0.34) $     (0.46) $     (0.61) $     (0.99)
                                                                           ===========  ===========  ===========  ===========
Diluted net income (loss) per weighted average common share outstanding... $     (0.34) $     (0.46) $     (0.61) $     (0.99)
                                                                           ===========  ===========  ===========  ===========
Weighted average number of common shares outstanding used in calculation
 of basic net income (loss) per common share..............................  16,068,969   16,289,587   16,834,358   17,225,572
                                                                           ===========  ===========  ===========  ===========
Weighted average number of common shares outstanding used in calculation
 of diluted net income (loss) per common share............................  16,068,969   16,289,587   16,834,358   17,225,572
                                                                           ===========  ===========  ===========  ===========
</TABLE>
<TABLE>
<CAPTION>
                                                                            Mar. 31,     Jun. 30,     Sept. 30,    Dec. 31,
                                                                              2001         2001         2001         2001
                                                                           -----------  -----------  -----------  -----------
<S>                                                                        <C>          <C>          <C>          <C>
Revenues:
 License.................................................................. $     2,363  $       673  $       571  $     2,429
 Services.................................................................         407           --           --           35
 Hardware.................................................................          46          121          270          674
                                                                           -----------  -----------  -----------  -----------
Total revenues............................................................       2,816          794          841        3,138
Cost of revenues:
   License................................................................         523          432          207          467
   Services...............................................................          94           --           --          129
   Hardware...............................................................          37          104          303          678
 Software amortization....................................................          --           --           --          171
 Inventory charges........................................................          --       13,420           --        5,082
                                                                           -----------  -----------  -----------  -----------
Total cost of revenues....................................................         654       13,956          510        6,527
                                                                           -----------  -----------  -----------  -----------
Gross profit..............................................................       2,162      (13,162)         331       (3,389)
Research and development
 Non-cash compensation....................................................       1,738          116          228           18
 Other research and development expense...................................       2,407          999        1,084        1,201
Sales and marketing
 Non-cash compensation and other expense..................................          69           --           18           60
 Other selling and marketing expense......................................       3,492          842        1,075        2,261
General and administrative
 Non-cash compensation....................................................          64           48          275          393
 Other general and administrative expense.................................       2,289        1,588        2,620        3,363
 Provision for doubtful accounts..........................................         126          658           --          145
Depreciation and amortization.............................................       1,666          389          358          431
Impairment charges .......................................................          --           --           --        3,916
Acquired in-process research and development..............................          --           --           --        3,112
                                                                           -----------  -----------  -----------  -----------
Operating loss............................................................      (9,689)     (17,802)      (5,327)     (18,289)
Gains on sales of assets..................................................      52,037           --           --           --
Interest (income) expense, net and other (income) ........................        (366)        (681)        (520)         (53)
                                                                           -----------  -----------  -----------  -----------
Provision for income taxes (benefit)......................................       2,979       (1,171)        (685)          --
                                                                           -----------  -----------  -----------  -----------
Net income (loss)......................................................... $    39,735  $   (15,950) $    (4,122) $   (18,236)
                                                                           ===========  ===========  ===========  ===========
Basic net income (loss) per weighted average common share outstanding..... $      2.28  $     (0.89) $     (0.22) $     (0.87)
                                                                           ===========  ===========  ===========  ===========
Diluted net income (loss) per weighted average common share outstanding... $      2.14  $     (0.89) $     (0.22) $     (0.87)
                                                                           ===========  ===========  ===========  ===========
Weighted average number of common shares outstanding used in calculation
 of basic net income (loss) per common share..............................  17,415,045   17,840,876   18,720,363   20,916,050
                                                                           ===========  ===========  ===========  ===========
Weighted average number of common shares outstanding used in calculation
 of diluted net income (loss) per common share............................  18,582,846   17,840,876   18,720,363   20,916,050
                                                                           ===========  ===========  ===========  ===========
</TABLE>

                                      48

<PAGE>

Acquired In-Process Research and Development

   In December 2001, we completed the acquisition of eMation, Ltd. ("eMation"),
which enabled us to enter into the enterprise software and services market.

   In connection with the acquisition, we expensed $3.1 million of the purchase
price as IPR&D. The potential income streams were discounted using a 15%-25%
discount rate for risks, probabilities and uncertainties, including the stage
of development of the technology, viability of target markets, and other
factors.

   As of the acquisition date, eMation was conducting ongoing research and
development into its next generation DRM product, as well as enhancing its
WizFactory and @aGlance industrial products. Due to the significant
technological risks relating to the development of these products and the fact
that the products were not completed at the time of the acquisition, the work
effort estimated to bring these products to market was considered in-process
research and development. These development efforts are expected to include
product enhancements and enable the products to perform on an increased number
of platforms. The completion date for these particular initiatives is expected
in 2002, and they are expected to generate revenue through 2004.

   In August 2000, we completed the acquisition of Cinax Designs Inc. The
acquisition of Cinax was recorded under the purchase method of accounting. A
portion of the purchase price was allocated to IPR&D, which resulted in a
charge of $1.4 million to our operations in August 2000. As of the acquisition
date, Cinax was conducting ongoing research and development into new products
in the form of two projects, including enhancements to the existing products
previously developed by Cinax. At the date of acquisition, these projects had
not reached technological feasibility and there was no alternative future use
for them.

   Based upon a periodic review of the Cinax technology in December 2001, we
determined that the carrying value of the goodwill and other intangible assets
was not recoverable and recorded an impairment charge of approximately $2.2
million. This determination was based upon various factors, including the
projected cash flows expected from the use of the assets and their eventual
disposition, as well as our strategic shift to become an enterprise software
and services company.

   In November 1999, we completed the acquisition of Teknema, Inc. The
acquisition of Teknema was recorded under the purchase method of accounting. A
portion of the purchase price was allocated to IPR&D technology, which resulted
in a charge of $1.9 million to our operations in November 1999. The in-process
research and development technology was valued using the cash flow model, under
which projected income and expenses attributable to the purchased technology
were identified, and potential income streams were discounted using a 20%-30%
discount rate for risks, probabilities and uncertainties, including the stage
of development of the technology, viability of target markets, and other
factors.

   As of the acquisition date, Teknema was conducting ongoing research and
development into three new projects including enhancements to products
previously developed by Teknema. At the date of acquisition, these projects had
not reached technological feasibility and there was no alternative future use
for them.

   In March 2001, we sold all of the intellectual property that we acquired
from Teknema to Phoenix Technologies as part of the sale of our IA business.
The remaining unamortized book value of the goodwill recorded in connection
with the acquisition of Teknema, which was being amortized over its estimated
useful life of four years, was deducted in calculating the net gain on the sale
of assets.

   In March 2001, we sold the assets, including intellectual property, which we
used in the CE business that we acquired from Viona. The remaining unamortized
book value of the goodwill recorded in connection with the acquisition of
Viona, which was being amortized over its estimated useful life of four years,
and the net book value of all of Viona's furniture and equipment was deducted
in calculating the net gain on the sale of assets.

                                      49

<PAGE>


Liquidity and Capital Resources


   Since inception, we have financed our operations primarily through the
issuance and sale of debt and equity securities to investors including our
initial public offering, which was completed July 16, 1999. Additionally, our
operations were financed in 2001 through the sale of the assets of our CE and
IA businesses. As of December 31, 2001, we had approximately $47.3 million in
cash and cash equivalents, including $2.5 million of the proceeds from the
sales of the assets of our CE and IA businesses in March 2001, which are held
in escrow by third parties for indemnification purposes. In March 2002 we
received $1.3 million, including interest of approximately $0.05 million. The
remaining balance held in escrow for the IA sale of approximately $0.55 million
has been withheld pending the settlement of a claim submitted by Phoenix. We
are unable to predict the resolution of this matter, or reasonably estimate a
range of possible loss given the current status of this matter. Any escrow
amounts not returned to us will be recorded as a charge to the gain on sale of
assets in the period in which such determination is made.

   Net cash used in operating activities for the year ending December 31, 2001
was $30.5 million. Cash used in operating activities for this period was
primarily the result of net income, adjusted for non-recurring gains,
provisions for inventory, impairment and other non-cash charges. Net cash used
in operating activities for the years ended December 31, 2000 and 1999 was
$35.3 million and $9.3 million, respectively. Cash used in operating activities
for these periods was primarily the result of net losses, adjusted for
non-recurring gains, non-cash compensation expense, and acquired IPR&D expense.

   Net cash provided by investing activities for the year ending December 31,
2001 was $68.1 million, and consisted primarily of the net proceeds from the
sales of assets related to our CE and IA businesses. Net cash used in investing
activities for the years ended December 31, 2000 and 1999 was $4.8 million and
$5.3 million, respectively. Cash used in investing activities in each annual
period consisted of purchases of furniture and equipment of approximately $0.5
million, $3.2 million, and $1.1 million, respectively. Additionally, cash used
in investing activities for the period ended December 2000 and 1999 included
the acquisitions of Cinax, for approximately $2.8 million in 2000, and Teknema,
for approximately $3.3 million in 1999.

   In connection with the purchase of eMation, Ltd. we provided $4.3 million of
interim financing to fund operating expenses through the closing of the
acquisition.

   In March 2001, we completed the sale of the assets of our CE business to
STMicroelectronics and received approximately $55.6 million in cash
consideration, of which $0.7 million is being held by a third party in escrow
for indemnification purposes until September 2002.

   In March 2001, we sold the assets of our IA business, excluding inventory,
to Phoenix Technologies for $18.0 million in cash consideration, of which $1.8
million was being held in escrow by a third party until March 2002 for
indemnification purposes. In March 2002 we received $1.3 million, including
interest of approximately $0.05 million. The remaining balance of approximately
$0.55 million has been withheld pending the settlement of a claim submitted by
Phoenix. We are unable to predict the resolution of this matter, or reasonably
estimate a range of possible loss given the current status of this matter.

   Net cash used in financing activities was nominal for the period ending
December 31, 2001. During this period, cash provided by financing activities of
$1.5 million from the exercise of stock options was offset by cash used in
financing activities for the repurchases of the Company's common stock of $0.6
million and the repayment of a bridge loan of $0.8 million in connection with
the acquisition of eMation, Ltd. Net cash provided by financing activities for
the years ended December 31, 2000 and 1999 was $1.0 million and $62.4 million,
respectively. Cash provided by financing activities for these annual periods
was attributable to net proceeds from the issuance of debt and equity
securities to investors and payment of a stock subscription receivable, offset
by repayments of other liabilities.

                                      50

<PAGE>

   In connection with the closing of the share purchase agreement to acquire
eMation on December 7, 2001, the Company acquired the balance of $1.65 million
of eMation's amount outstanding under a $1.7 million line of credit with Bank
Leumi in Israel. Borrowings under this line bear interest at an annual rate of
3-month LIBOR plus 2.2% per annum (4.083% at December 31, 2001). Under the
terms of the line of credit agreement, Bank Leumi has a security interest in
all of eMation's property and rights with the exception of the capital
equipment encumbered under an equipment line of credit with European Venture
Partners ("EVP"). In addition, Bank Leumi has a secondary security interest in
the assets encumbered by EVP. The line of credit was paid in full in January
2002, including interest of approximately $0.02 million.

   As of December 31, 2001, the Company had approximately $0.7 million
outstanding on an equipment line of credit with EVP with interest rates ranging
from 12% to 13% and payments due monthly over a 36 month period. The line of
credit was available to finance purchases of capital equipment until September
30, 2001. In connection with the agreement, EVP has a senior security interest
in substantially all of eMation's capital equipment. In addition, the line of
credit agreement requires the Company to provide EVP with copies of quarterly
financial statements within 45 days of the end of each quarter and audited
annual financial statements within 90 days of the end of each fiscal year as
well as other information and notifications regarding eMation's financial and
operating results. As of December 31, 2001, the Company was in compliance with
all of its covenants to EVP.

   On June 25, 2001, eMation obtained a bridge loan (the "bridge loan") in the
amount of $0.75 million from certain of its preferred shareholders. The bridge
loan accrued interest at an annual rate of LIBOR plus 2.5%. Under the terms of
the bridge loan, the principal and interest of the bridge loan had to be repaid
in connection with the consummation of the eMation acquisition. Accordingly,
the balance of the bridge loan of approximately $0.77 million, and interest of
approximately $0.02 million was paid in full on December 7, 2001.

   A portion of our liability for severance pay is calculated pursuant to
Israeli severance pay law based on the most recent salary of the employees
multiplied by the number of years of employment, as of the balance sheet date.
Employees are entitled to one month's salary for each year of employment or a
portion thereof. The liability for all of our employees is fully provided by
monthly deposits with insurance policies and by an accrual, totaling
approximately $0.4 million. The aggregate value of these policies is
approximately $0.3 million. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay law or labor
agreements. The value of the deposited funds is based upon the cash surrender
value of these policies.

   The Company maintains approximately 9,000 square feet of office space in
Marlborough, MA under an operating lease, which is no longer used for operating
purposes. The lease requires annual rental payments totaling approximately $0.2
million and expires in February 2009. The present value of the future lease
payments, discounted at 5%, of approximately $0.9 million was accrued by
eMation as of the date of acquisition.

   Although we have no material commitments for capital expenditures, we
anticipate minimal increases in our capital expenditures as our needs in
operations, infrastructure and personnel arise.

   In September 2001, our Board of Directors authorized a stock repurchase
program to acquire up to $10 million worth of shares of our common stock. The
shares may be purchased from time to time at prevailing market prices through
open market or unsolicited negotiated transactions, depending upon market
conditions. From September to December 2001, the Company repurchased 383,800
shares for an aggregate cost of approximately $0.6 million including
commissions, at an average market price per share of approximately $1.58.

   We believe that our current cash and cash equivalents balance and cash
anticipated to be provided by operations, if any, will be adequate to meet our
cash needs for at least the next two years.

                                      51

<PAGE>


Critical Accounting Policies


   The SEC has recently issued Financial Reporting Release No. 60, "Cautionary
Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"),
suggesting companies provide additional disclosure and commentary on those
accounting policies considered most critical. FRR 60 considers an accounting
policy to be critical if it is important to the Company's financial condition
and results, and requires significant judgment and estimates on the part of
management in its application. We believe the following represent the critical
accounting policies of the Company as contemplated by FRR 60. For a summary of
all of the Company's significant accounting policies, including the critical
accounting policies discussed below, see note 1 to the accompanying
consolidated financial statements.

   We believe the following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.

   Revenue recognition.  We derive our revenues from primarily two sources (i)
product revenue, which includes software license, hardware and royalty revenue,
and (ii) services and support revenue which includes software license
maintenance, training, and consulting revenue. As described below, significant
management judgments and estimates must be made and used in connection with the
revenue recognized in any accounting period. Material differences may result in
the amount and timing of our revenue for any period if our management made
different judgments or utilized different estimates.

   We license our software products on a one and two-year time basis or on a
perpetual basis. Some of our licenses include maintenance and support, which
typically are for periods of one year.

   We apply the provisions of Statement of Position 97-2, "Software Revenue
Recognition," ("SOP 97-2") as amended by Statement of Position 98-9
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions" ("SOP 98-9") to all transactions involving the sale of
software products. For hardware transactions where no software is involved, we
apply the provisions of Staff Accounting Bulletin 101 "Revenue Recognition"
("SAB 101").

   We recognize revenue from the sale of software licenses when persuasive
evidence of an arrangement exists, the product has been delivered, the fee is
fixed and determinable and collection of the resulting receivable is reasonably
assured. Delivery generally occurs when product is delivered to a common
carrier. If a significant portion of a fee is due after our normal payment
terms, we account for the fee as not being fixed and determinable. In these
cases, we recognize revenue as the fees become due.

   We assess collection based on a number of factors, including the transaction
history and the credit-worthiness of the customer. If we determine that
collection of a fee is not reasonably assured, we defer the fee and recognize
revenue at the time collection becomes reasonably assured, which is generally
upon receipt of cash.

   For all sales, except those completed over the Internet, we use either a
binding purchase order or a signed agreement as evidence of an arrangement. For
sales over the Internet, we utilize a third party distributor to process our
transactions. Sales through our distributors are evidenced by a master
agreement governing the relationship together with binding purchase orders on a
transaction-by-transaction basis.

   For multiple-element arrangements that are not accounted for using long-term
contract accounting (for example, undelivered maintenance and support), we
allocate revenue to the delivered elements of the arrangement using the
residual value method when there is VSOE for each of the undelivered elements.
We defer revenue from the arrangement fee equivalent to the fair value of the
undelivered elements and the difference between the total arrangement fee and
the amount deferred for the undelivered elements is recognized as revenue
related to the delivered elements. The fair value of DRM maintenance and
postcontract customer support

                                      52

<PAGE>

("PCS") obligations is based upon separate sales of renewals to other customers
or upon renewal rates quoted in the contracts. The fair value of DRM services,
such as training or consulting, is based upon separate sales by us of these
services to other customers.

   Our arrangements do not generally include acceptance clauses. However, if an
arrangement includes an acceptance provision, acceptance occurs upon the
earlier of receipt of a written customer acceptance or expiration of the
acceptance period.

   In cases where we engage a third party warehouse or distributor to sell any
of our inventory on consignment, and collectibility is not probable, revenue is
not recognized and inventory is not reduced until cash from the sale is
received. In certain consignment arrangements with distributors, if the period
under which a right to return has expired with no physical return of the
inventory, the inventory is considered sold, assuming all other criteria in SAB
101 are met.

   We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly rates,
and we generally recognize revenue as these services are performed. However, if
our services are bundled with a license component and the arrangement requires
us to perform significant work either to alter the underlying software or to
build additional complex interfaces so that the software conforms to the
customer's requirements, we recognize the entire fee using the percentage of
completion method. We estimate the percentage of completion based on the costs
incurred to date as a percentage of the estimated total costs to complete the
project. During our analysis if the work effort to complete a project exceeds
our revenue projections, a loss on the project is immediately recognized.

   Provision for doubtful accounts. Management must make estimates of the
uncollectability of our accounts receivables. Management specifically analyzes
accounts receivable and analyzes historical bad debts, customer concentrations,
customer credit-worthiness, current economic trends and changes in our customer
payment terms when evaluating the adequacy of the allowance for doubtful
accounts. Our accounts receivable balance was $4.6 million, net of allowance
for doubtful accounts of $0.2 million as of December 31, 2001.

   Valuation of inventories.  We assess the value of our inventories on a
periodic basis based upon numerous factors including expected product or
material demand, current market conditions, technological obsolescence, current
cost and net realizable value. In cases where any of these factors adversely
affects our ability to realize the carrying value of our inventories, an
inventory reserve is recorded. Because the timing and magnitude of these
changes to inventories are difficult to predict, changes to our inventories'
value may occur unexpectedly. Given our inventories balance was $2.1 million
net of reserves as of December 31, 2001, we do not believe any unanticipated
events will have a material impact upon the realization of the inventories'
carrying value.

   Valuation of long-lived and intangible assets and goodwill. We assess the
impairment of identified intangible assets, long-lived assets and related
goodwill whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Factors we consider important which could trigger
an impairment review include the following:

   . significant underperformance relative to expected historical or projected
     future operating results;

   . significant changes in the manner of our use of the acquired assets or the
     strategy for our overall business;

   . significant negative industry or economic trends;

   . significant decline in our stock price for a sustained period; and o our
     market capitalization relative to net book value.

   When we determine that the carrying value of identified intangible assets,
long-lived assets and related goodwill may not be recoverable based upon the
existence of one or more of the above indicators of impairment, we measure any
impairment based on a projected discounted cash flow method using a discount
rate determined

                                      53

<PAGE>

by our management to be commensurate with the risk inherent in our current
business model. Net identified intangible assets, long-lived assets, and
goodwill amounted to $30.4 million as of December 31, 2001.

   SFAS No. 142, which was effective January 1, 2002, requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with finite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144, beginning in 2002 and annually thereafter. As a
result, we will not amortize approximately $20.8 million of goodwill recorded
in 2001. The Company adopted certain provisions of SFAS No.142, as required in
the transition guidance contained therein, in 2001 and adopted the remaining
provisions on January 1, 2002.

   We currently do not expect to record an impairment charge upon completion of
the initial impairment review. However, there can be no assurance that at the
time the review is completed a material impairment charge will not be recorded.


   Contingencies.  Management's current estimated range of liability related to
its pending legal claims is based on claims for which our management can
estimate the amount and range of loss. We have recorded our best estimate of
the liability related to those claims, where there is a 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.


  Recent Accounting Pronouncements

   In October 2001, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), which supersedes both FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of (SFAS No. 121) and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions (APB 30), for the disposal of a
segment of a business (as previously defined in that Opinion). SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and
measuring impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving significant
implementation issues associated with SFAS No. 121. For example, SFAS No. 144
provides guidance on how a long-lived asset that is used as part of a group
should be evaluated for impairment, establishes criteria for when a long-lived
asset is held for sale, and prescribes the accounting for a long-lived asset
that will be disposed of other than by sale. SFAS No. 144 retains the basic
provisions of APB 30 on how to present discontinued operations in the income
statement but broadens that presentation to include a component of an entity
(rather than a segment of a business). Unlike SFAS No. 121, an impairment
assessment under SFAS No. 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under SFAS No. 142, Goodwill and
Other Intangible Assets.

   The Company is required to adopt SFAS No. 144 no later than the year
beginning after December 15, 2001, and plans to adopt its provisions in 2002.
Management does not expect the adoption of SFAS No. 144 for long-lived assets
held for use to have a material impact on the Company's financial position,
results of operations or cash flows because the impairment assessment under
SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of SFAS No.
144 for assets held for sale or other disposal generally are required to be
applied prospectively after the adoption date to newly initiated disposal
activities. Therefore, management cannot determine the potential effects that
adoption of SFAS No. 144 will have on the Company's financial statements.

                                      54

<PAGE>

   FASB Statement No. 143, Accounting for Asset Retirement Obligations (SFAS
No. 143), which was released in August 2001, addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and for the associated asset retirement costs. SFAS No. 143 requires an
enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and or normal use of the assets. The enterprise also
is to record a corresponding increase to the carrying amount of the related
long-lived asset (i.e., the associated asset retirement costs) and to
depreciate that cost over the life of the asset. The liability is changed at
the end of each period to reflect the passage of time (i.e., accretion expense)
and changes in the estimated future cash flows underlying the initial fair
value measurement. Because of the extensive use of estimates, most enterprises
will record a gain or loss when they settle the obligation. The Company is
required to adopt Statement No. 143 for its fiscal year beginning January 1,
2003. The effect of this standard on our results of operations and financial
position is being evaluated. While it is likely there will ultimately be
material obligations related to the future retirement of assets, management
cannot currently estimate the financial impact at the date of adoption, as we
have not yet completed our evaluation. However, it is management's belief that
any such impact would be a charge to earnings.

   In July 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001 as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for separately.
SFAS No. 142, which was effective January 1, 2002, requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with finite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 144. The Company adopted SFAS No. 141 in 2001. The
Company adopted certain provisions of SFAS No.142, as required in the
transition guidance contained therein, in 2001 and adopted the remaining
provisions on January 1, 2002.


ITEM 7a.  Quantitative and Qualitative Disclosures About Market Risk


   We develop products in the United States and in Israel 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.

                                      55

<PAGE>

ITEM 8.  Financial Statements and Supplementary Data

                              Axeda Systems Inc.
                         INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                                               Page
                                                                                               -----
<S>                                                                                            <C>
Consolidated Financial Statements
 Axeda Systems Inc.
 Independent Auditors' Report.................................................................    57
   Consolidated Balance Sheets, December 31, 2001 and 2000....................................    58
   Consolidated Statements of Operations, Years ended December 31, 2001, 2000, and 1999.......    59
   Consolidated Statements of Changes in Stockholders' Equity, Years ended December 31, 2001,
     2000, and 1999...........................................................................    60
   Consolidated Statements of Cash Flows, Years ended December 31, 2001, 2000, and 1999.......    61
   Notes to the Consolidated Financial Statements............................................. 62-97
</TABLE>


                                      56

<PAGE>

                         INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Axeda Systems Inc.:

   We have audited the accompanying consolidated balance sheets of Axeda
Systems Inc. (formerly RAVISENT Technologies Inc.) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 2001. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Axeda
Systems Inc. and subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.

   As discussed in note 1 to the consolidated financial statements, effective
July 1, 2001, Axeda Systems Inc. adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and
certain provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as
required for goodwill and other intangible assets resulting from business
combinations consummated after June 30, 2001.

KPMG LLP

Philadelphia, Pennsylvania
February 25, 2002

                                      57

<PAGE>

                              AXEDA SYSTEMS INC.

                          CONSOLIDATED BALANCE SHEETS
                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                       December 31,
                                                                                    ------------------
                                                                                      2001      2000
                                                                                    --------  --------
<S>                                                                                 <C>       <C>
ASSETS
Current assets:
   Cash and cash equivalents, including restricted cash of $2,549 in 2001 and
     $1,806 in 2000................................................................ $ 47,349  $  9,615
   Accounts receivable, net of provision for doubtful accounts of $179 in 2001
     and $2,405 in 2000............................................................    4,623     5,901
   Inventories, net................................................................    2,070    20,883
   Prepaid expenses................................................................      934       963
   Loans receivable--officers, net.................................................       34       662
   Other current assets............................................................      685       547
                                                                                    --------  --------
       Total current assets........................................................   55,695    38,571
                                                                                    --------  --------
Furniture and equipment, net.......................................................    2,567     3,995
Goodwill, net of accumulated amortization of $7,425 in 2000........................   20,819    15,814
Identified intangible assets, net of accumulated amortization of $192 in 2001......    9,553     1,716
Loan receivable--officer...........................................................       --        25
Other assets.......................................................................      472        72
                                                                                    --------  --------
       Total assets................................................................ $ 89,106  $ 60,193
                                                                                    ========  ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of notes payable................................................ $  2,149  $     --
   Accounts payable................................................................    5,047    11,088
   Accrued expenses................................................................    8,928     2,147
   Income taxes payable............................................................    1,075        --
   Deferred revenue................................................................      926     1,473
   Other current liabilities.......................................................       --       626
                                                                                    --------  --------
       Total current liabilities...................................................   18,125    15,334
                                                                                    --------  --------
Non-current liabilities:
   Notes payable, less current portion.............................................      187        --
   Other non-current liabilities...................................................    1,428        31
                                                                                    --------  --------
       Total liabilities...........................................................   19,740    15,365
                                                                                    --------  --------
Commitments and contingencies (note 15)
Stockholders' equity:
   Preferred stock, $.001 par value; 5,000,000 shares authorized in 2001 and 2000,
     none issued or outstanding....................................................       --        --
   Common stock, $.001 par value 50,000,000 authorized; 27,274,962 shares
     issued in 2001 and 17,594,429 in 2000.........................................       27        17
   Additional paid-in capital......................................................  143,454   121,330
   Deferred stock compensation.....................................................   (1,842)   (3,241)
   Accumulated deficit.............................................................  (70,953)  (72,380)
   Accumulated other comprehensive income (loss)...................................       21      (178)
   Treasury stock at cost, 583,800 shares in 2001 and 200,000 shares in 2000.......   (1,341)     (720)
                                                                                    --------  --------
       Total stockholders' equity..................................................   69,366    44,828
                                                                                    --------  --------
       Total liabilities and stockholders' equity.................................. $ 89,106  $ 60,193
                                                                                    ========  ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      58

<PAGE>

                              AXEDA SYSTEMS INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                          December 31,
                                                              ------------------------------------
                                                                 2001         2000         1999
                                                              -----------  -----------  ----------
<S>                                                           <C>          <C>          <C>
Revenues:
   License................................................... $     6,036  $    12,328  $   12,710
   Services..................................................         442        1,898         968
   Hardware..................................................       1,111        6,628      15,740
                                                              -----------  -----------  ----------
       Total revenues........................................       7,589       20,854      29,418
                                                              -----------  -----------  ----------
Cost of revenues:
   License...................................................       1,629        3,374       1,874
   Services..................................................         223          733         259
   Hardware..................................................       1,122        6,189      13,732
   Software amortization.....................................         171           --          --
   Inventory charges.........................................      18,502        1,708          --
                                                              -----------  -----------  ----------
       Total cost of revenues................................      21,647       12,004      15,865
                                                              -----------  -----------  ----------
       Gross profit..........................................     (14,058)       8,850      13,553
Research and development
   Non-cash compensation.....................................       2,100          801         200
   Other research and development expense....................       5,691       10,187       8,107
Sales and marketing
   Non-cash compensation and other expense...................         147        3,480          --
   Other selling and marketing expense.......................       7,670       10,863       5,296
General and administrative
   Non-cash compensation.....................................         780          467         308
   Other general and administrative expense..................       9,860       10,256       5,048
   Provision for doubtful accounts...........................         929        4,965          31
Depreciation and amortization................................       2,844        5,897       1,886
Impairment charges...........................................       3,916        2,831          --
Acquired in-process research and development.................       3,112        1,373       1,888
                                                              -----------  -----------  ----------
       Operating loss........................................     (51,107)     (42,270)     (9,211)
Gains on sales of assets.....................................      52,037           --          --
Interest (income) expense, net...............................      (1,753)      (1,792)     (1,192)
Other (income) expense, net..................................         133          (51)         --
                                                              -----------  -----------  ----------
Income (loss) before provision for income taxes..............       2,550      (40,427)     (8,019)
       Provision for income taxes............................       1,123           40          52
                                                              -----------  -----------  ----------
Net income (loss)............................................       1,427      (40,467)     (8,071)
Accretion of discount on mandatory redeemable preferred stock          --           --         659
                                                              -----------  -----------  ----------
Net income (loss) attributable to common shareholders........ $     1,427  $   (40,467) $   (8,730)
                                                              ===========  ===========  ==========
Basic net income (loss) per weighted average common share
  outstanding................................................ $       .08  $     (2.44) $    (1.02)
                                                              ===========  ===========  ==========
Diluted net income (loss) per weighted average common share
  outstanding................................................ $       .07  $     (2.44) $    (1.02)
                                                              ===========  ===========  ==========
Weighted average number of common shares outstanding used in
  calculation of basic net income (loss) per common share....  18,559,185   16,606,795   8,532,140
                                                              ===========  ===========  ==========
Weighted average number of common shares outstanding used in
  calculation of diluted net income (loss) per common share..  20,194,713   16,606,795   8,532,140
                                                              ===========  ===========  ==========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      59

<PAGE>

                              AXEDA SYSTEMS INC.

          CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                (In thousands, except share and per share data)

<TABLE>
<CAPTION>
                                                                                                              Accumulated
                                                           Common stock    Additional   Deferred   Accumu-       other
                                                         -----------------  paid-in      stock      lated    comprehensive
                                                           Shares   Amount  capital   compensation deficit   income (loss)
                                                         ---------- ------ ---------- ------------ --------  -------------
<S>                                                      <C>        <C>    <C>        <C>          <C>       <C>
Balance as of December 31, 1998.........................  3,520,851  $ 3    $ 13,097    $  (749)   $(23,842)     $ (25)
                                                         ----------  ---    --------    -------    --------      -----
Issuance of Series B preferred stock and stock
 subscription receivable................................         --   --         125         --          --         --
Transaction costs related to sale of Series C preferred
 stock..................................................         --   --         (30)        --          --         --
Issuance of common stock upon exercise of options.......     83,061   --         129         --          --         --
Conversion of subordinated notes payable upon initial
 public offering........................................         --   --         625         --          --         --
Issuance of common stock upon exercise of warrants......    926,002    1          54         --          --         --
Accretion of discount on mandatory redeemable
 preferred stock........................................         --   --        (659)        --          --         --
Initial public stock offering, net......................  5,750,000    6      61,416         --          --         --
Conversion of preferred stock to common stock upon
 public offering........................................  5,508,207    6      20,460         --          --         --
Deferred stock compensation related to stock
 options................................................         --   --       1,371     (1,371)         --         --
Amortization of deferred stock compensation.............         --   --          --        442          --         --
Compensation related to stock options...................         --   --         470         --          --         --
Issuance of common stock to acquire Teknema.............    264,745   --      12,402         --          --         --
Foreign currency translation adjustment.................         --   --          --         --          --        (55)
Net loss................................................         --   --          --         --      (8,071)        --
                                                         ----------  ---    --------    -------    --------      -----
Balances as of December 31, 1999........................ 16,052,866  $16    $109,460    $(1,678)   $(31,913)     $ (80)
                                                         ----------  ---    --------    -------    --------      -----
Repayment of stock subscription receivable..............         --   --          --         --          --         --
Issuance of common stock upon exercise of options.......    888,272    1       1,040         --          --         --
Issuance of common stock upon exercise of warrants......    405,298   --          20         --          --         --
Deferred compensation related to stock options..........     33,647   --         890       (758)         --         --
Amortization of deferred stock compensation.............         --   --          --      1,271          --         --
Issuance of equity securities to acquire Cinax..........    138,455   --       3,725     (2,076)         --         --
Issuance of warrants under distribution rights agreement
 and other services.....................................         --   --       5,724         --          --         --
Foreign currency translation adjustment.................         --   --          --         --          --        (11)
Unrealized loss on available-for-sale investment........         --   --          --         --          --        (87)
Issuance of common stock for employee stock purchase
 plan...................................................     75,891   --         471         --          --         --
Net loss................................................         --   --          --         --     (40,467)        --
                                                         ----------  ---    --------    -------    --------      -----
Balances as of December 31, 2000........................ 17,594,429  $17    $121,330    $(3,241)   $(72,380)     $(178)
                                                         ----------  ---    --------    -------    --------      -----
Issuance of common stock upon exercise of options.......  1,167,132    1       1,570         --          --         --
Issuance of common stock upon exercise of warrants......         --   --           4         --          --         --
Issuance of common stock for employee stock purchase
 plan...................................................     38,735   --          86         --          --         --
Issuance of equity securities related to Cinax..........    474,666    1          14        344          --         --
Issuance of common stock to acquire eMation, Ltd........  8,000,000    8      19,752       (847)         --         --
Compensation related to stock options and warrants......         --   --         698        549          --         --
Amortization of deferred stock compensation.............         --   --          --      1,353          --         --
Repurchases of common stock.............................         --   --          --         --          --         --
Foreign currency translation adjustment.................         --   --          --         --          --        112
Reclassification adjustment for available-for-sale
 investment sold........................................         --   --          --         --          --         87
Net income..............................................         --   --          --         --       1,427         --
                                                         ----------  ---    --------    -------    --------      -----
Balances as of December 31, 2001........................ 27,274,962  $27    $143,454    $(1,842)   $(70,953)     $  21
                                                         ----------  ---    --------    -------    --------      -----
</TABLE>
<TABLE>
<CAPTION>
                                                                                 Total     Compre-
                                                                             stockholders' hensive
                                                         Treasury    Note       equity     income
                                                          stock   receivable (deficiency)  (loss)
                                                         -------- ---------- ------------- --------
<S>                                                      <C>      <C>        <C>           <C>
Balance as of December 31, 1998......................... $  (720)   $  --      $(12,236)   $(13,708)
                                                         -------    -----      --------    ========
Issuance of Series B preferred stock and stock
 subscription receivable................................      --     (500)         (375)         --
Transaction costs related to sale of Series C preferred
 stock..................................................      --       --           (30)         --
Issuance of common stock upon exercise of options.......      --       --           129          --
Conversion of subordinated notes payable upon initial
 public offering........................................      --       --           625          --
Issuance of common stock upon exercise of warrants......      --       --            55          --
Accretion of discount on mandatory redeemable
 preferred stock........................................      --       --          (659)         --
Initial public stock offering, net......................      --       --        61,422          --
Conversion of preferred stock to common stock upon
 public offering........................................      --       --        20,466          --
Deferred stock compensation related to stock
 options................................................      --       --            --          --
Amortization of deferred stock compensation.............      --       --           442          --
Compensation related to stock options...................      --       --           470          --
Issuance of common stock to acquire Teknema.............      --       --        12,402          --
Foreign currency translation adjustment.................      --       --           (55)        (55)
Net loss................................................      --       --        (8,071)     (8,071)
                                                         -------    -----      --------    --------
Balances as of December 31, 1999........................ $  (720)   $(500)     $ 74,585    $ (8,126)
                                                         -------    -----      --------    ========
Repayment of stock subscription receivable..............      --      500           500          --
Issuance of common stock upon exercise of options.......      --       --         1,041          --
Issuance of common stock upon exercise of warrants......      --       --            20          --
Deferred compensation related to stock options..........      --       --           132          --
Amortization of deferred stock compensation.............      --       --         1,271          --
Issuance of equity securities to acquire Cinax..........      --       --         1,649          --
Issuance of warrants under distribution rights agreement
 and other services.....................................      --       --         5,724          --
Foreign currency translation adjustment.................      --       --           (11)        (11)
Unrealized loss on available-for-sale investment........      --       --           (87)        (87)
Issuance of common stock for employee stock purchase
 plan...................................................      --       --           471          --
Net loss................................................      --       --       (40,467)    (40,467)
                                                         -------    -----      --------    --------
Balances as of December 31, 2000........................ $  (720)   $  --      $ 44,828    $(40,565)
                                                         -------    -----      --------    ========
Issuance of common stock upon exercise of options.......      --       --         1,571          --
Issuance of common stock upon exercise of warrants......      --       --             4          --
Issuance of common stock for employee stock purchase
 plan...................................................      --       --            86          --
Issuance of equity securities related to Cinax..........      --       --           359          --
Issuance of common stock to acquire eMation, Ltd........      --       --        18,913          --
Compensation related to stock options and warrants......      --       --         1,247          --
Amortization of deferred stock compensation.............      --       --         1,353          --
Repurchases of common stock.............................    (621)      --          (621)         --
Foreign currency translation adjustment.................      --       --           112         112
Reclassification adjustment for available-for-sale
 investment sold........................................      --       --            87          87
Net income..............................................      --       --         1,427       1,427
                                                         -------    -----      --------    --------
Balances as of December 31, 2001........................ $(1,341)   $  --      $ 69,366    $  1,626
                                                         -------    -----      --------    ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                      60

<PAGE>

                              AXEDA SYSTEMS INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (In thousands)


<TABLE>
<CAPTION>
                                                                            December 31,
                                                                    ----------------------------
                                                                      2001      2000      1999
                                                                    --------  --------  --------
<S>                                                                 <C>       <C>       <C>
Cash flows from operating activities:
   Net income (loss)............................................... $  1,427  $(40,467) $ (8,071)
   Adjustments to reconcile net income (loss) to net cash
     used in operating activities:
       Depreciation and amortization...............................    3,015     5,897     1,886
       Impairment charges..........................................    3,916     2,831        --
       Gain on sales of assets.....................................  (52,037)       --       (17)
       Non-cash compensation and other expenses....................    2,599     4,496       937
       Provision for doubtful accounts.............................      929     4,965        31
       Provision for inventory.....................................   18,783        --        --
       Acquired in-process research and development................    3,112     1,373     1,888
       Changes in items affecting operations (excluding the
         effects of acquisitions and divestitures):
          Accounts receivable......................................    2,252     4,822      (262)
          Inventories..............................................     (895)  (19,560)      260
          Loan receivable--officer.................................      494      (209)     (418)
          Prepaid expenses and other current assets................   (1,590)     (220)   (1,042)
          Other assets and intangible assets.......................      572       152        --
          Accounts payable.........................................  (15,623)    4,980   (10,152)
          Accrued expenses, other current and other
            non-current liabilities................................    2,257    (1,205)    1,136
          Income taxes payable.....................................    1,075        --        --
          Deferred revenue.........................................     (765)   (3,186)    4,486
                                                                    --------  --------  --------
Net cash used in operating activities..............................  (30,479)  (35,331)   (9,338)
                                                                    --------  --------  --------
Cash flows from investing activities:
   Capital expenditures............................................     (505)   (3,204)   (1,139)
   Net proceeds from sales of assets...............................   68,112       141       129
   Acquisition, net of cash acquired...............................      497    (2,763)   (3,267)
   Proceeds from (investment in) short-term investment.............       --     1,018    (1,018)
                                                                    --------  --------  --------
Net cash provided by (used in) investing activities................   68,104    (4,808)   (5,295)
                                                                    --------  --------  --------
Cash flows from financing activities:
   Net proceeds from exercise of stock options and warrants........    1,538       970       184
   Repurchases of common stock.....................................     (621)       --        --
   Borrowings (repayments) under capital lease obligations.........      (38)      (40)       60
   Repayments under other liabilities..............................     (132)     (441)   (2,321)
   Repayment of shareholder bridge loan............................     (750)       --        --
   Note receivable.................................................       --       500        --
   Net proceeds from issuance of common stock......................       --        --    61,422
   Net proceeds from Series B and C preferred stock................       --        --     3,125
   Payments for convertible securities.............................       --        --       (30)
                                                                    --------  --------  --------
Net cash provided by (used in) financing activities................       (3)      989    62,440
Effect of exchange rate changes on cash and cash equivalents.......      112       (11)      (55)
                                                                    --------  --------  --------
Net increase (decrease) in cash and cash equivalents...............   37,734   (39,161)   47,752
Cash and cash equivalents:
   Beginning of period.............................................    9,615    48,776     1,024
                                                                    --------  --------  --------
   End of period................................................... $ 47,349  $  9,615  $ 48,776
                                                                    ========  ========  ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
   Interest........................................................ $     20  $     33  $    356
   Income taxes....................................................      308        --        --
Non-cash investing and financing activities:
   Equipment acquired under capital lease obligation...............       --        --       109
   Issuance of warrants and options in connection with
     equity transactions...........................................    2,262     8,253     1,437
   Amortization of deferred stock compensation.....................    1,353     1,271       442
</TABLE>


         See accompanying notes to consolidated financial statements.

                                      61

<PAGE>

                              AXEDA SYSTEMS INC.

                NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1)  Summary of Significant Accounting Policies

  a) Description of Business

   Axeda Systems Inc. ("the Company" or "Axeda"), which changed its name from
RAVISENT Technologies Inc. in January 2002, develops, markets and sells
software products and technologies used by multiple industries and customers
worldwide for Device Relationship Management ("DRM"), data visualization, data
acquisition and control and communication through the Internet (note 4a). The
Company distributes its DRM products through direct sales to original equipment
manufacturers ("OEM's") and enterprise customers, as well as through
distributors and value-added resellers. The Company maintains regional sales
and support offices for DRM in the United States, Japan, France, Israel and the
Netherlands.

   The Company also designs, develops, licenses and markets core-based modular
software solutions that enable digital video and audio stream management in
personal computer ("PC") systems. In March 2001, the Company sold the assets of
its consumer electronics ("CE") and Internet appliance ("IA") businesses (note
5). The Company also provides supporting hardware designs to selected customers
as well as customization services and customer support. The Company's solutions
enable decoding (playback) and encoding (recording) of multimedia formats such
as digital versatile disk (DVD); direct broadcast satellite (DBS) and
high-definition television (HDTV) on existing personal computers and, during
2000, CE platforms. The Company's customers for its digital video products
consist principally of PC manufacturers.

   During 2001 and 2000 the Company's revenues were substantially generated
from selling digital video solutions and IA devices to PC, CE, and IA OEM's.
During 1999 the Company's revenues were substantially generated from selling
hardware-based digital video solutions to PC and CE OEM's. The Company changed
its strategic focus during 1999 from selling hardware-based digital video
solutions to licensing its proprietary technology to provide software-based
digital video solutions to primarily PC and CE OEM's. In November of 1999, the
Company acquired Teknema Inc., which expanded the Company's product offerings
to the IA market (note 4c). In August 2000, the Company acquired Cinax Designs
Inc. (note 4b), which enhanced the Company's digital video product line. In
December 2001 the Company purchased all of the outstanding capital stock of
eMation, Ltd., a private company organized under the laws of the State of
Israel and headquartered near Boston, MA, for the purpose of acquiring a
company with greater opportunity than its existing product line. As a result of
the acquisition, the Company is a provider of DRM solutions. See note
4a-Acquisitions for the description and accounting for the acquisition of
eMation.

   The Company has sustained significant net losses and negative cash flows
from operations since its inception. For the years ended December 31, 2001,
2000 and 1999, the Company's net losses excluding gains on sales of assets,
were $50.6 million, $40.5 million, and $8.1 million, respectively. The Company
plans on investing heavily in product development, and sales and marketing, and
to a lesser degree in operations and administrative areas. There can be no
assurances that the Company will be able to generate sufficient revenues
necessary to achieve or sustain profitability in the short or long term.
However, management believes that the current cash and cash equivalent amounts
will be sufficient to sustain the Company's operations through December 31,
2002.

  b) Principles of Consolidation

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

                                      62

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  c) Cash and Cash Equivalents

   For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with an original maturity of three months
or less to be cash equivalents.

  d) Inventories

   Inventories are valued at the lower of cost or market. Cost is determined
using the first-in, first-out method (FIFO). Inventory is net of reserves of
approximately $21.3 million and $3.8 million at December 31, 2001 and 2000,
respectively.

  e) Furniture and Equipment

   Furniture and equipment is stated at cost. Equipment under capital leases is
stated at the lower of the present value of the minimum lease payments or the
fair value of the equipment. Depreciation and amortization on furniture and
equipment is calculated on the straight-line method over the estimated useful
lives of the assets. Equipment under capital leases is amortized straight-line
over the lease term or the estimated useful lives of the assets. The estimated
useful lives of the assets are as follows:

<TABLE>
                  <S>                                <C>
                  Purchased software................ 3-5 years
                  Computer equipment................ 3-5 years
                  Research and development equipment   5 years
                  Furniture and equipment...........   7 years
</TABLE>

  f) Goodwill and Intangible Assets

   Goodwill represents the excess of cost over fair value of assets of
businesses acquired. In accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"), approximately $20.8 million of goodwill
acquired subsequent to June 30, 2001, in connection with the acquisition of
eMation, Ltd. (note 4a), is not being amortized. Also under SFAS No. 142,
through December 31, 2001, all other goodwill was amortized on a straight-line
basis over the expected period to be benefited, estimated at four years. Other
identified intangible assets, consisting of developed and core technology,
patent applications and customer base are amortized on a straight-line basis
over periods from two to five years. Accumulated amortization at December 31,
2001 and 2000 was approximately $192,000 and $7,425,000, respectively.
Amortization expense was approximately $2,418,000, $5,234,000 and $1,526,000 in
2001, 2000 and 1999, respectively. See Recent Accounting Pronouncements (note
1q) for further discussion of SFAS No. 142 and notes 4, 6 and 7 for further
discussion of acquisitions, acquired intangible assets and goodwill,
respectively.

  g) Long-lived Assets

   The Company periodically evaluates its intangible assets for indications of
impairment. If this evaluation indicates that the value of the intangible asset
may be impaired, an evaluation of the recoverability of the net carrying value
of the asset over its remaining useful life is made. If this evaluation
indicates that the intangible asset is not recoverable, based on the estimated
undiscounted future cash flows of the entity or technology acquired over the
remaining amortization period, the net carrying value of the related intangible
asset will be reduced to fair value and the remaining amortization period may
be adjusted.

   In 2001, the Company recognized an impairment charge of approximately $2.2
million to reduce the amount of goodwill and intangible assets associated with
a prior acquisition to their estimated fair value of zero. The

                                      63

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

impairment charge is attributable to certain technology acquired from, and
goodwill related to the acquisition of Cinax Designs Inc. in 2000. During the
fourth quarter of 2001, the Company determined that it would not allocate
future resources to assist in the market growth of this technology and the
Company does not anticipate material future sales of the products. Also in
2001, the Company recognized an impairment charge of approximately $1.7 million
to reduce the amount of acquired technology rights associated with a prior
equity financing to its estimated fair value of zero. This impairment charge is
attributable to certain technology acquired from Intel in connection with the
sale of the Company's Series C preferred stock in 1999. During the fourth
quarter of 2001, the Company determined that it would not allocate future
resources to assist in the market growth of this technology and the Company
does not anticipate any material future sales of products incorporating this
technology. The aggregate amount of impaired long-lived assets of approximately
$3.9 million recorded in 2001 is included in impairment charges in the
accompanying statement of operations.

   For the year ended December 31, 2000, the Company recognized an impairment
charge of approximately $2.8 million to reduce the amount of an intangible
prepaid distribution rights fee (the "Fee") with a recorded fair value based on
a warrant to purchase 1.5 million shares of the Company's common stock issued
to a distributor in connection with a one-year distribution rights agreement
(the "Agreement") to its estimated fair value of zero. The impairment charge
was attributable to the parties' differing interpretations of the terms of the
Agreement, resulting in the immediate termination of the Agreement and no sales
under it. As a result, the Company determined that, as of December 31, 2000,
the carrying amount of the Fee was not recoverable and the excess of the
carrying amount of the Fee over the fair value of the Fee of approximately $2.8
million was recorded as an impairment charge in the accompanying statement of
operations.

   There were no impairments of intangible assets charged to operations in 1999.

   Judgments and assumptions are inherent in management's estimate of
undiscounted future cash flows used to determine recoverability of an asset and
the estimate of an asset's fair value used to calculate the amount of
impairment to recognize. The use of alternate judgments and/or assumptions
could result in the recognition of different levels of impairment charges in
the financial statements.

  h) Revenue Recognition

   In 2001 and 2000, the Company's primary revenue categories consist of:
software licenses for PC and CE products, including DVD; IA products, including
Internet browser software and hardware reference designs; services for PC, CE
and IA products, including non-recurring engineering customization and
development services; and hardware for PC products, primarily DVD boards and IA
products, including Internet set-top boxes, and integrated circuit boards (note
5). Beginning in December 2001, the Company has also licensed its DRM products
to customers in the industrial, building automation, technology, medical
instrumentation, office and semiconductor equipment industries (note 4).

   The Company recognizes software revenues in accordance with the American
Institute of Certified Public Accountants' (AICPA) Statement of Position 97-2,
"Software Revenue Recognition" ("SOP 97-2"), as amended by SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, With Respect to
Certain Transactions" ("SOP 98-9"). License revenues are recognized in the
period in which the license agreement is signed, the fee is fixed and
determinable, delivery of the technology has occurred requiring no significant
production modification or customization and collectibility is probable.
Royalties representing software license fees paid on a per unit basis are
recognized when earned, which is generally based on receiving notification from
licensees stating the number of products sold which incorporate the licensed
technology from the Company and for which license fees, based on a per unit
basis, are due. The terms of the license agreements generally require the
licensees to

                                      64

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

give notification to the Company within 45 to 60 days of the end of the quarter
during which the sales of the licensees' products take place. In a number of
cases, the revenue recorded by the Company will occur in the quarter following
the sale of the licensee's products to its customers.

   For software arrangements that include multiple elements, SOP 97-2 requires
the Company to allocate the fee to the individual elements based on
vendor-specific objective evidence of fair value ("VSOE"), regardless of the
prices stated within the contract. VSOE is limited to the price charged when
the element is sold separately or, for an element that is not yet sold
separately, the price established by management having the relevant authority.
When there is VSOE for the undelivered elements in multiple-element
arrangements that are not accounted for using contract accounting, the Company
allocates revenue to the delivered elements of the arrangement using the
residual value method. Therefore, the Company defers revenues from the
arrangement fee equal to the fair value of the undelivered elements and the
difference between the total arrangement fee and the amount deferred for the
undelivered elements is recognized as revenue related to the delivered
elements. The fair value of maintenance and postcontract customer support
("PCS") obligations are based upon separate sales of renewals to other
customers or upon renewal rates quoted in the contracts. The fair value of
services, such as training or consulting, is based upon separate sales by us of
these services to other customers.

   When VSOE does not exist to allocate revenue to each of the various elements
of an arrangement and revenue cannot be allocated using the residual value
method, the entire fee from the arrangement is deferred until the earlier of
the establishment of VSOE or the delivery of all the elements of the
arrangement. In cases where a license grants a customer unspecified upgrade
rights, the license fee is deferred and recognized ratably over the term of the
arrangement. Billed amounts due from the customers in excess of revenue
recognized are recorded as deferred revenue.

   Hardware revenues are recognized upon shipment of products to customers. The
Company's sales to original equipment manufacturers do not provide a right of
return unless in the event of manufacturing defect, which is the responsibility
of the Company's third party contract manufacturers. For hardware transactions
where no software is involved, we apply the provisions of Staff Accounting
Bulletin 101 "Revenue Recognition" ("SAB 101") issued by the U.S. Securities
and Exchange Commission ("SEC").

   We recognize revenue for maintenance services ratably over the contract
term. Our training and consulting services are billed based on hourly rates or
fixed fees, and we generally recognize revenue as these services are performed.

   The Company recognizes services revenues in accordance with the provisions
of AICPA Statement of Position 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"). Revenues
related to services are recognized upon delivery of the service in the case of
time and material contracts. Revenues related to development contracts
involving significant modification or customization of hardware or software
under development arrangements are recognized using the
percentage-of-completion method, based on the efforts-expended method or based
on performance milestones specified in the contract where such milestones
fairly reflect progress toward contract completion. For software license
arrangements that include services requiring significant modification or
customization of the licensed software, the Company applies the
percentage-of-completion method of contract accounting to the entire
arrangement. Losses on contracts are recognized for the entire anticipated
loss, if any, as soon as the loss becomes evident.

  i) Computer Software Costs

   Computer software costs consist of purchased software capitalized under the
provisions of Statement of Financial Accounting Standards No. 86, "Computer
Software to be Sold, Leased or Otherwise Marketed"

                                      65

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

("SFAS 86"). Amortization of capitalized software costs is computed on a
straight-line basis over the estimated economic life of the product (notes 4a
and 6) or on a basis using the ratio of current revenue to the total of current
and anticipated future revenue, whichever is greater, and included in cost of
revenues in the accompanying statement of operations. To date, no internally
developed software costs have been capitalized. All other research and
development expenditures are charged to research and development expense in the
period incurred.

   Software developed for internal use is recognized in accordance with SOP
98-1, "Accounting For The Cost Of Computer Software Developed Or Obtained For
Internal Use" ("SOP 98-1"). SOP 98-1 requires all costs related to the
development of internal use software other than those incurred during the
application development stage to be expensed as incurred. It also provides
guidance on the capitalization of costs incurred during the application
development stage for computer software developed or obtained for internal use.
SOP 98-1 has not had a material impact on the Company's operating results or
financial position.

  j) Advertising Costs

   Advertising costs are expensed as incurred. Advertising expense was
approximately $1,908,000, $2,527,000 and $139,000 and for the years ended
December 31, 2001, 2000 and 1999, respectively.

  k) Income Taxes

   Income taxes are accounted for in accordance with SFAS No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"). Under the asset and liability method of
SFAS No. 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry forwards.

  l) Financial Instruments

   The Company's financial instruments principally consist of cash and cash
equivalents, accounts receivable, accounts payable, notes payable and capital
lease obligations that are carried at cost, which approximates fair value.

  m) Stock Options

   SFAS No. 123, "Accounting for Stock-based Compensation" ("SFAS No. 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" ("APB 25") with pro forma disclosures of results of operations as if
the fair value method had been applied. The Company applies APB 25 for stock
options and stock-based awards to employees and has disclosed pro forma net
income (loss) as if the fair value method had been applied (note 14).

  n) Use of Estimates

   The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial

                                      66

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

  o) Foreign Currency Translation

   All assets and liabilities of foreign subsidiaries are translated into U.S.
dollars at fiscal year-end exchange rates. Income and expense items are
translated at average exchange rates prevailing during the fiscal year. The
resulting translation adjustments are recorded as a component of stockholders'
equity in the accompanying consolidated financial statements.

  p) Computation of Net Income (Loss) Per Share

   The Company computes earnings per share in accordance with SFAS No. 128,
"Computation of Earnings Per Share" ("SFAS No. 128"). In accordance with SFAS
No. 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 preferred stock
(using the if-converted method). Common equivalent shares are excluded from the
calculation if their effect is anti-dilutive.

   The following is a reconciliation of the numerators and denominators of the
basic and diluted EPS computations for net income (in thousands, except per
share data):

<TABLE>
<CAPTION>
                                                      Income       Shares     Per-Share
                                                    (Numerator) (Denominator)  Amount
                                                    ----------- ------------- ---------
<S>                                                 <C>         <C>           <C>
Basic EPS
   Net income available to common stockholders.....   $1,427       18,559       $0.08
                                                      ------       ------       -----
Effect of Dilutive Securities
   Warrants........................................       --          218
   Outstanding options.............................       --          659
   Contingently issuable shares....................       --          759
                                                      ------       ------
Diluted EPS
   Net income available to common stockholders and
     assumed conversions...........................   $1,427       20,195       $0.07
                                                      ======       ======       =====
</TABLE>

   Options to purchase approximately 2.0 million shares of common stock at
various exercise prices were outstanding during the twelve months ended
December 31, 2001 but were not included in the computation of diluted EPS
because the corresponding exercise prices of the options were greater than the
average market price of the common shares and are therefore anti-dilutive. The
options have various expiration dates during the next 10 years.

   Warrants to purchase approximately 0.2 million shares of common stock, net
of the warrant issued to American Trading S.A. that was canceled on March 28,
2001, issued at various exercise prices were outstanding during the year ended
December 31, 2001, but were not included in the calculation of diluted EPS
because the corresponding exercise prices were greater than the average market
price of the common shares and are therefore anti-dilutive. The warrants have
various expiration dates during the next 5 years.

                                      67

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The effects of dilution for the years ended December 31, 2000 and 1999 are
not considered since the effects of assumed conversion or exercise would have
an anti-dilutive effect on EPS.

  q) Recent Accounting Pronouncements

   In October 2001, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS No. 144), which supersedes both FASB Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of (SFAS No. 121) and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations--Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions (APB 30), for the disposal of a
segment of a business (as previously defined in that Opinion). SFAS No. 144
retains the fundamental provisions in SFAS No. 121 for recognizing and
measuring impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving significant
implementation issues associated with SFAS No. 121. For example, SFAS No. 144
provides guidance on how a long-lived asset that is used as part of a group
should be evaluated for impairment, establishes criteria for when a long-lived
asset is held for sale, and prescribes the accounting for a long-lived asset
that will be disposed of other than by sale. SFAS No. 144 retains the basic
provisions of APB 30 on how to present discontinued operations in the income
statement but broadens that presentation to include a component of an entity
(rather than a segment of a business). Unlike SFAS No. 121, an impairment
assessment under SFAS No. 144 will never result in a write-down of goodwill.
Rather, goodwill is evaluated for impairment under SFAS No. 142, Goodwill and
Other Intangible Assets.

   The Company is required to adopt SFAS No. 144 no later than the year
beginning after December 15, 2001, and plans to adopt its provisions for the
quarter ending March 31, 2002. Management does not expect the adoption of SFAS
No. 144 for long-lived assets held for use to have a material impact on the
Company's financial position, results of operations or cash flows because the
impairment assessment under SFAS No. 144 is largely unchanged from SFAS No.
121. The provisions of SFAS No. 144 for assets held for sale or other disposal
generally are required to be applied prospectively after the adoption date to
newly initiated disposal activities. Therefore, management cannot determine the
potential effects that adoption of SFAS No. 144 will have on the Company's
financial statements.

   FASB Statement No. 143, Accounting for Asset Retirement Obligations (SFAS
No. 143), which was released in August 2001, addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and for the associated asset retirement costs. SFAS No. 143 requires an
enterprise to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and or normal use of the assets. The enterprise also
is to record a corresponding increase to the carrying amount of the related
long-lived asset (i.e., the associated asset retirement costs) and to
depreciate that cost over the life of the asset. The liability is changed at
the end of each period to reflect the passage of time (i.e., accretion expense)
and changes in the estimated future cash flows underlying the initial fair
value measurement. Because of the extensive use of estimates, most enterprises
will record a gain or loss when they settle the obligation. The Company is
required to adopt Statement No. 143 for its fiscal year beginning January 1,
2003. The effect of this standard on our results of operations and financial
position is being evaluated. While it is likely there will ultimately be
material obligations related to the future retirement of assets, management
cannot currently estimate the financial impact at the date of adoption, as we
have not yet completed our evaluation. However, it is management's belief that
any such impact would be a charge to earnings.

   In July 2001, FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business

                                      68

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. SFAS No. 141 also
specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill, noting that any purchase price allocable to an assembled workforce
may not be accounted for separately. SFAS No. 142, which was effective January
1, 2002, requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with finite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144. The Company adopted
SFAS No. 141 in 2001. The Company adopted certain provisions of SFAS No.142, as
required in the transition guidance contained therein, in 2001 and adopted the
remaining provisions on January 1, 2002.

  r) Reclassifications

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

2)  Furniture and Equipment

   Furniture and equipment consist of the following at December 31, 2001 and
2000 (in thousands):

<TABLE>
<CAPTION>
                                                          2001   2000
                                                         ------ ------
         <S>                                             <C>    <C>
         Furniture and fixtures......................... $  805 $1,321
         Leasehold improvements.........................    201    326
         Computer equipment.............................  1,525  1,926
         Research and development equipment.............    519  1,664
         Software.......................................    445    329
                                                         ------ ------
                                                          3,495  5,566
         Less: accumulated depreciation and amortization    928  1,571
                                                         ------ ------
         Furniture and equipment, net................... $2,567 $3,995
                                                         ====== ======
</TABLE>

   Assets recorded under capital leases are approximately $86,000 and $108,000
as of December 31, 2001 and 2000, respectively. Related accumulated
amortization is approximately $64,000 and $50,000 as of December 31, 2001 and
December 31, 2000, respectively. Depreciation expense was approximately
$597,000 and $666,000 for the years ended December 31, 2001 and 2000,
respectively. Included in depreciation expense is amortization of assets
recorded under capital leases of approximately $30,000 and $44,000 for each of
the years ended December 31, 2001 and 2000, respectively.

3)  Restricted Cash

   Included in restricted cash is a portion of the sales price, held by a third
party in escrow for indemnification purposes, related to the sales of the
assets of the Company's Consumer Electronics ("CE") and Internet Appliance
("IA") businesses totaling approximately $2.5 million (note 5). In March 2002
the Company received $1.3 million, including interest of approximately $0.05
million. The remaining balance of approximately $0.55 million has been withheld
pending the settlement of a claim submitted by Phoenix. The Company is unable
to predict the resolution of this matter, or reasonably estimate a range of
possible loss given the current status of this matter. Any escrow amounts not
returned to the Company will be recorded as a charge to the gain on sale of
assets in the period in which such determination is made.

                                      69

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   As of December 31, 2000 the Company issued letters of credit to vendors
totaling approximately $1.8 million. Under the terms of the letters, the
Company was required to secure the letters with cash in amounts equal to the
amount of the outstanding letters of credit. Upon the expiration of the letters
of credit, the cash was returned to the Company.

   On November 8, 1999 the Superior Court in the Commonwealth of Massachusetts
approved an attachment of funds for approximately $0.5 million to be held in
trust pending the settlement of a complaint by a former supplier. In connection
with the settlement agreement, on June 1, 2000, the attachment was vacated and
the funds were returned to the Company (note 15c).

4)  Acquisitions

  a) eMation, Ltd.

   On December 7, 2001, the Company acquired all of the outstanding shares of
eMation, Ltd., a private company organized under the laws of the State of
Israel and headquartered near Boston, MA, a developer of Internet-based
solutions that extract and manage information from intelligent devices and make
that information available to people and business systems. The Company acquired
eMation to acquire a company with greater opportunity than its existing product
line. As a result of the acquisition, the Company is a provider of DRM
solutions worldwide. The Company also expects to reduce costs through economies
of scale. The results of eMation's operations are included in the Company's
consolidated financial statements since the date of acquisition.

   The Company acquired eMation in consideration for: 8 million shares of Axeda
common stock, valued at approximately $17.4 million; the assumption of
1,428,710 shares of Axeda common stock reserved for issuance upon exercise of
assumed eMation stock options, 530,000 of which are exercisable for $0.01 per
share and the remaining 898,710 exercisable at $2.14 per share; options
exercisable for up to 113,600 shares of Axeda common stock issued at closing
pursuant to the Company's 1999 Stock Incentive Plan; and warrants exercisable
for up to 7,000 shares of Axeda common stock exercisable at $2.14 issued to
ex-employees of eMation in consideration for cancellation of outstanding
options to purchase shares of eMation. The aggregate value of these issued and
assumed options and warrants was approximately $2.6 million. The total combined
value of the securities assumed and issued was approximately $20 million and
the Company incurred transaction costs of approximately $3.4 million related to
the eMation acquisition, for an aggregate purchase price of $23.4 million. The
Company also assumed approximately $5 million of eMation net debt.

   The value of the common stock issued was determined based on the average
market price of the Company's common stock a few days before and after the
terms of the acquisition were agreed to and announced. The value of the assumed
and issued options was estimated using the Black-Scholes option-pricing model
with the following assumptions: risk-free interest rate of 3.15%, volatility
factor of 125%, no dividend factor and a remaining life of 2 years.

   The acquisition was recorded under the purchase method of accounting. Prior
to the acquisition, we loaned a total of $4.3 million to eMation for working
capital purposes. We expensed $3.1 million of the purchase price as IPR&D in
connection with the eMation acquisition.


   The Company also issued or assumed warrants at closing exercisable for up to
115,238 shares of Axeda common stock with exercise prices ranging from $2.14 to
$21.51 per share to holders of warrants exercisable for shares of eMation.


                                      70

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   An aggregate of 1.6 million shares of Axeda common stock issued in the
eMation acquisition has been deposited with a third party escrow agent to be
held in escrow to compensate the Company for certain losses and taxes that may
arise as a result of the eMation acquisition. The shareholders' agent appointed
pursuant to the share purchase agreement agreed to the Company submitting a
claim on the escrow fund for the return of 23,843 shares of the Company's
common stock in consideration for the Company's issuance of 108,238 warrants,
described above, at the closing. This escrow arrangement will expire on
December 7, 2002 and any shares remaining in escrow will be returned to the
former eMation shareholders.


   Pursuant to the lock-up agreement executed by each selling eMation
shareholder, each shareholder agreed not to directly or indirectly transfer any
shares or rights relating to the shares of Axeda common stock received pursuant
to the share purchase agreement until the one year anniversary of the closing,
subject to certain exceptions. Axeda common stock issued and to be issued to
the selling eMation shareholders will not be registered at the time of issuance.

   Prior to the acquisition, the Company loaned eMation $4.3 million with an
interest rate of 3-month LIBOR plus 2.5%. On the date of the closing of the
transaction, the Company paid certain employees of eMation for joining the
Company sign-on bonuses totaling $0.3 million.

   The following table summarizes the estimated fair value of the assets
acquired and the liabilities assumed as of the date of acquisition (in
thousands):

<TABLE>
    <S>                                                             <C>
    Current assets................................................. $ 3,856
    Property and equipment.........................................   1,168
    Identified intangible assets...................................   9,745
    In-process research and development ("IPR&D")..................   3,112
    Goodwill.......................................................  20,819
                                                                    -------
       Total assets acquired.......................................  38,700
                                                                    -------
    Current liabilities............................................  12,358
    Long-term debt.................................................   2,336
    Other non-current liabilities..................................   1,428
                                                                    -------
       Total liabilities assumed...................................  16,122
                                                                    -------
    Unvested stock options allocated to deferred stock compensation    (847)
                                                                    -------
       Net assets acquired......................................... $23,425
                                                                    =======
</TABLE>

   The identifiable intangible assets acquired that are subject to amortization
total $9,745,000 and consist of the following (amounts in thousands):

<TABLE>
<CAPTION>
                                                                  Weighted
                                                                   Average
                                                                  Estimated
                                                                 Useful Life
                                                          Amount   (Years)
                                                          ------ -----------
   <S>                                                    <C>    <C>
   Developed Technology.................................. $1,378      2
   Core Technology.......................................  7,055      5
   Patent Applications...................................    990      5
   Customer Base.........................................    322      5
                                                          ------
      Total.............................................. $9,745      5
                                                          ======
</TABLE>

                                      71

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The amount allocated to IPR&D was determined by independent appraisal. The
projects in progress, the next generation DRM product and industrial automation
products, require resolution of high-risk testing and development issues in
order to be completed. At acquisition, those projects had not reached
technological feasibility and had no alternative future uses. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 2, Accounting for
Research and Development Costs, and FASB Interpretation No. 4, Applicability of
SFAS No. 2 to Business Combinations Accounted for by the Purchase Method,
amounts assigned to IPR&D technology meeting the above stated criteria must be
charged to expense as part of the allocation of purchase price of a business
combination. The IPR&D technology was valued using the income approach, a cash
flow model under which projected income and expenses attributable to the
purchased technology were identified, and potential income streams were
discounted using a 25% discount rate for risks, probabilities and
uncertainties, including the stage of development of the technology, viability
of target markets and other factors. Accordingly, the amount allocated to IPR&D
of $3.1 million was recorded as a charge in the accompanying statement of
operations in the period of acquisition.

   The amount allocated to deferred stock compensation was determined in
accordance with Financial Accounting Standards Board Interpretation No. 44,
"Accounting for Certain Transactions involving Stock Compensation-an
interpretation of APB Opinion No. 25," ("FIN 44"). Under FIN 44, to the extent
that service is required subsequent to the consummation date of the acquisition
in order to vest in the assumed options, a portion of the intrinsic value (if
any) of the unvested awards shall be allocated to unearned compensation and
recognized as compensation cost over the remaining future vesting (service)
period. The amount allocated to unearned compensation cost shall be based on
the portion of the intrinsic value at the consummation date related to the
future vesting (service) period. Accordingly, the intrinsic value, which
corresponds to 530,000 of the total 1,550,000 stock options and warrants
assumed and issued, of approximately $847,000 has been deducted from the fair
value of the awards for purposes of the allocation of the purchase price and
allocated to deferred stock compensation. The Company is amortizing this amount
over the respective vesting periods of 6 to 24 months and recorded
approximately $40,000 of non-cash compensation expense in 2001 related to these
awards.

   The following unaudited pro forma information is presented as if the
acquisition of eMation occurred as of the beginning of each of the respective
years. The pro forma information, however, is not necessarily indicative of the
results that would have resulted had the acquisition occurred at the beginning
of the period presented, nor is it necessarily indicative of future results.

<TABLE>
<CAPTION>
                                                                           2001        2000
                                                                         --------    --------
                                                                         (in thousands, except
                                                                            per share data)
<S>                                                                      <C>         <C>
Revenues................................................................ $ 18,148    $ 30,866
                                                                         ========    ========
Net loss................................................................ $(17,718)   $(61,160)
                                                                         ========    ========
Basic and diluted net loss per weighted average common share outstanding $  (0.68)   $  (2.49)
                                                                         ========    ========
</TABLE>

  b) Cinax Designs Inc.

   In August 2000, the Company acquired all of the outstanding capital stock of
Cinax Designs Inc. ("Cinax"), a company located in British Columbia, Canada
involved in the development of digital video software products based on MPEG
audiovisual compression for approximately $3.5 million in cash and an aggregate
of 825,000 shares of our common stock and shares of no par, non-voting
exchangeable preferred stock ("preferred stock") of our subsidiary, Ravisent
British Columbia Inc. ("Ravisent BC"). The shares of preferred stock are
exchangeable, at the option of the holder at any time, on a one-for-one basis,
into shares of the Company's common stock, have

                                      72

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

an automatic redemption date of August 1, 2005, and contain certain dividend
restrictions, as defined. The acquisition was recorded under the purchase
method of accounting. The results of operations of Cinax have been included in
the Company's consolidated financial statements from August 11, 2000.

   In connection with the acquisition, the Company expensed $1.4 million of the
purchase price as IPR&D and incurred transaction costs of $0.3 million.
Goodwill and other intangible assets of $3.2 million was recorded and was being
amortized on a straight-line basis over a period of four years. In December
2001 the Company evaluated the goodwill and other intangible assets recorded in
connection with the acquisition and recognized an impairment charge of $2.2
million (note 1g). The intellectual property acquired in this acquisition was
not transferred or sold as a result of the STMicroelectronics or Phoenix
transactions (note 5).

   On the date of acquisition the Company recorded prepaid compensation of $0.8
million and deferred stock compensation of $2.1 million in connection with the
cash, common stock (39,807 shares or $0.2 million) and preferred stock (420,806
shares or $1.9 million), that were held in escrow and subject to vesting and
continued employment subsequent to the acquisition. The deferred stock
compensation included amounts recorded for common stock (10,719 shares) and
preferred stock (88,990 shares) with an aggregate value of $0.4 million, held
in escrow for the former non-employee stockholders of Cinax, which were for
Company indemnification purposes and were not subject to post-acquisition
employment requirements. No cash was held in escrow for the former non-employee
stockholders. When the employment of the former employees of Cinax was
terminated by the Company in March 2001, the remaining balance of $0.3 million
of prepaid compensation was released from the escrow, paid to the former
employees, and charged to non-cash research and development expense in the
accompanying statement of operations. In addition, the unamortized balance of
$0.9 million of the initial $2.1 million recorded as deferred stock
compensation related to 22,840 of the escrowed shares of the Company's common
stock and 260,526 shares of the escrowed preferred stock was released from the
escrow, paid to the former employees, and charged to non-cash research and
development expense in the accompanying statement of operations. In August and
September 2001, an additional 11,847 shares of common stock and 111,903 shares
of preferred stock, for a total of 123,750 shares were released from escrow
resulting in a charge of $0.1 million to non-cash research and development
expense for the net book value of deferred stock compensation recorded for
these shares. In September 2001, at the end of the escrow claim period, 53,497
shares were returned to the Company, comprised of common stock (5,120 shares)
and preferred stock (48,377 shares) recorded at an aggregate amount of $0.2
million, which was recorded as a reduction to deferred stock compensation.

   As of December 31, 2001, 484,968 shares of the Company's common stock issued
for this transaction are recorded as issued and outstanding for financial
reporting and earnings per share purposes, including 311,826 shares of
preferred stock which were exchanged in 2001. As the remaining unexchanged
shares of preferred stock totaling 286,535 shares are exchanged by the
preferred stockholders, such shares will be recognized as issued and
outstanding.

   The purchase price was allocated as follows (in thousands):

<TABLE>
             <S>                                            <C>
             Fair value of assets acquired................. $  347
             Goodwill and intangible assets (note 1g)......  3,234
             Workforce in place............................     80
             In-process research and development technology  1,373
             Liabilities acquired..........................   (276)
                                                            ------
                Total...................................... $4,758
                                                            ======
</TABLE>

                                      73

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  c) Teknema Inc.

   In November 1999, the Company acquired all of the outstanding capital stock
of Teknema, Inc. ("Teknema"), a company located in Palo Alto, California
involved in the development of products for the emerging market in information
appliances.

   The Company paid $2.5 million in cash, issued 266,169 shares of the
Company's common stock and options to acquire approximately 537,000 shares of
common stock with a combined value of $12.4 million and incurred transaction
costs of $0.9 million. Prior to the acquisition, the Company loaned Teknema $1
million with an annual interest rate of 10%. On the date of the closing of the
transaction, the Company paid certain employees of Teknema for joining the
Company sign-on bonuses totaling $1,280,000. The bonuses were recorded in
general and administrative expense in the Company's December 31, 1999
consolidated financial statements.

   The acquisition of Teknema was recorded under the purchase method of
accounting. The results of operations of Teknema were included in the Company's
consolidated financial statements from November 8, 1999. In connection with the
acquisition, we expensed $1.9 million of the purchase price as IPR&D. At the
date of acquisition, Teknema had three development projects that had not
reached technological feasibility and for which there was no alternative future
use. The in-process research and development technology was valued using a cash
flow model, under which projected income and expenses attributable to the
purchased technology were identified, and potential income streams were
discounted using a 20%-30% discount rate for risks, probabilities and
uncertainties, including the stage of development of the technology, viability
of target markets and other factors. The three development projects ranged in
percentage of completion at the date of acquisition from 15% to 50%.

   The excess of the purchase price over the fair value of the net identifiable
assets and in-process research and development technology acquired of $16.2
million has been recorded as goodwill and other intangible assets and was being
amortized on a straight-line basis over four years. The purchase price was
allocated as follows (in thousands):

<TABLE>
            <S>                                            <C>
            Fair value of assets acquired................. $ 5,018
            Goodwill and other intangible assets (note1g).  16,031
            Workforce in place............................     190
            In-process research and development technology   1,888
            Liabilities acquired..........................  (7,343)
                                                           -------
            Total......................................... $15,784
                                                           =======
</TABLE>

5)  Sales of Assets

  a) Sale of Consumer Electronics Assets

   On March 1, 2001, pursuant to an Asset Acquisition Agreement, the Company
sold certain assets related to its CE business to STMicroelectronics NV
("STMicroelectronics"), a Dutch corporation. The assets sold included certain
contracts, equipment, intangible assets, intellectual property, prepaid
expenses, accounts receivable and other assets primarily related to the
operations of the CE business. In connection with the sale, the Company and
STMicroelectronics entered into certain agreements including an Assignment and
Assumption of Lease with respect to the Company's former corporate headquarters
office facility located in Malvern, Pennsylvania. Certain employees of the
Company entered into employment agreements with STMicroelectronics. Pursuant to
the terms of the Asset Acquisition Agreement, STMicroelectronics paid
approximately $55.6 million in cash consideration,

                                      74

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of which $0.7 million remains held in escrow by a third party in escrow for
indemnification purposes until September 2002 and is included in restricted
cash in the consolidated balance sheet as of December 31, 2001. In connection
with the asset sale, the Company and certain of its subsidiaries granted to
STMicroelectronics certain non-exclusive rights to license and distribute
certain of its technology used in its IA products (note 5b) and PC products.

   The Company recorded a gain on the sale of approximately $47.5 million
during the quarter ended March 31, 2001. The net gain was calculated as follows
(in thousands):

<TABLE>
           <S>                                              <C>
           Sale price...................................... $55,602
           Accounts receivable acquired....................    (261)
           Accrued expenses assumed........................     137
           Net book value of deferred stock compensation...    (498)
           Net book value of furniture and equipment sold..  (2,036)
           Net book value of goodwill and intangible assets    (968)
           Other assets....................................     (18)
           Employee transition and inducement costs........  (2,956)
           Professional and legal fees.....................  (1,487)
                                                            -------
           Gain on sale of CE assets....................... $47,515
                                                            =======
</TABLE>

  b) Sale of Internet Appliance Assets

   On March 23, 2001, pursuant to an Asset Acquisition Agreement, the Company
sold certain assets related to its IA business to Phoenix Technologies Ltd.
("Phoenix"), a Delaware corporation. The assets sold included certain
contracts, equipment, intangible assets, intellectual property and prepaid
expenses primarily related to the operations of the IA business, including
those purchased from Teknema. Certain employees of the Company entered into
employment agreements with Phoenix Technologies, Ltd. Pursuant to the terms of
the Asset Acquisition Agreement, Phoenix paid $18 million in cash
consideration, of which $1.8 million was being held by a third party in escrow
for indemnification purposes until March 2002 and is included in restricted
cash in the consolidated balance sheet as of December 31, 2001. In March 2002,
the Company received $1.3 million, including interest of approximately $0.05
million. The remaining balance of approximately $0.55 million has been withheld
pending the settlement of a claim submitted by Phoenix. The Company is unable
to predict the resolution of this matter, or reasonably estimate a range of
possible loss given the current status of this matter. Any escrow amounts not
returned to the Company will be recorded as a charge to the gain on sale of
assets in the period in which such determination is made.

   The Company recorded a gain on the sale of approximately $4.5 million during
the quarter ended March 31, 2001. The net gain was calculated as follows (in
thousands):

<TABLE>
           <S>                                              <C>
           Sale Price...................................... $ 18,000
           Prepaid expenses................................     (954)
           Net book value of deferred stock compensation...     (121)
           Net book value of furniture and equipment sold..     (466)
           Net book value of goodwill and intangible assets  (10,586)
           License fee.....................................     (250)
           Employee transition and inducement costs........     (763)
           Professional and legal fees incurred............     (338)
                                                            --------
           Gain on sale of IA assets....................... $  4,522
                                                            ========
</TABLE>

                                      75

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  c) Unaudited Pro Forma Financial Information

   The following unaudited pro forma financial information presents the results
of operations of the Company for the year ended December 31, 2001, as if the
dispositions occurred on January 1, 2001, after giving effect to certain
adjustments, primarily revenues and personnel costs associated with the
disposed businesses, amortization of goodwill, the gains recorded upon the
dispositions and income taxes. The unaudited pro forma financial information
for the year ended December 31, 2001 does not necessarily reflect the results
of operations that would have occurred had the dispositions been completed on
January 1, 2001 (in thousands except per share data).

<TABLE>
<CAPTION>
                                                                           2001      2000
                                                                         --------  --------
<S>                                                                      <C>       <C>
Revenues................................................................ $  7,142  $ 11,739
                                                                         ========  ========
Net loss................................................................ $(49,487) $(15,734)
                                                                         ========  ========
Basic and diluted net loss per weighted average common share outstanding $  (2.67) $  (2.49)
                                                                         ========  ========
</TABLE>

6)  Acquired Intangible Assets

   Acquired intangible assets that are subject to amortization at December 31,
2001 and 2000, consist of the following (in thousands):

<TABLE>
<CAPTION>
                                           Gross      Accumulated
                                      Carrying Amount Amortization
                                      --------------- ------------
                                       2001    2000   2001   2000
                                      ------  ------- ----  ------
              <S>                     <C>     <C>     <C>   <C>
              Developed Technology... $1,378  $    -- $ 55  $   --
              Core Technology........  7,055       --  116      --
              Patent Applications....    990       --   16      --
              Customer Base..........    322       --    5      --
              Intel Technology Rights     --    1,716   --      --
              Goodwill-Cinax.........     --    3,376   --     277
              Goodwill-Teknema.......     --   16,253   --   4,655
              Goodwill-Viona.........     --    3,610   --   2,493
                                      ------  ------- ----  ------
                 Total............... $9,745  $24,955 $192  $7,425
                                      ======  ======= ====  ======
</TABLE>

   Aggregate amortization expense was approximately $2.4 million for the year
ended December 31, 2001, and approximately $5.2 million for the year ended
December 2000. Estimated aggregate expense for each of the next 5 years is as
follows (in thousands):

<TABLE>
<CAPTION>
                                                     Charged to:
                                                  ------------------
                                                  Cost of  Operating
                                           Total  Revenues  Expense
                                           ------ -------- ---------
           <S>                             <C>    <C>      <C>
           Fiscal year ending December 31,
              2002........................ $2,367  $2,104    $263
              2003........................  2,305   2,043     262
              2004........................  1,673   1,411     262
              2005........................  1,673   1,411     262
              2006........................  1,535   1,294     241
</TABLE>

                                      76

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


7)  Goodwill

   The changes in the gross carrying amount of goodwill for the years ended
December 31, 2001 and 2000, are as follows (in thousands):

<TABLE>
<CAPTION>
                                                     PC       CE        IA     Other*   Total
                                                   -------  -------  --------  ------- --------
<S>                                                <C>      <C>      <C>       <C>     <C>
Balance as of January 1, 2000..................... $    --  $ 3,610  $ 16,221  $    -- $ 19,831
Goodwill acquired during the year.................   3,376       --        32       --    3,408
                                                   -------  -------  --------  ------- --------
Balance as of December 31, 2000...................   3,376    3,610    16,253       --   23,239
Goodwill acquired during the year.................     729       --        --   20,819   21,548
Impairment losses.................................  (4,105)      --        --       --   (4,105)
Goodwill written off related to sales of assets of
  businesses......................................      --   (3,610)  (16,253)      --  (19,863)
                                                   -------  -------  --------  ------- --------
Balance as of December 31, 2001................... $    --  $    --  $     --  $20,819 $ 20,819
                                                   =======  =======  ========  ======= ========
</TABLE>

   Goodwill acquired in 2001 is not expected to be deductible for income tax
purposes.
--------
*  Because the Company has not completed its assignment of the goodwill
   acquired in 2001 to reporting units, it is not practicable to disclose the
   amount of this goodwill by reportable segment (note 4a).

8)  Inventories

   Inventories consist of the following at December 31, 2001 and 2000 (in
thousands):

<TABLE>
<CAPTION>
                                            December 31,
                                           --------------
                                            2001   2000
                                           ------ -------
                       <S>                 <C>    <C>
                       Raw materials...... $  936 $17,369
                       Products in process     --     762
                       Finished products..  1,134   2,752
                                           ------ -------
                       Inventories, net... $2,070 $20,883
                                           ====== =======
</TABLE>

9)  Notes Payable

  Note Payable--Bank Leumi

   In connection with the closing of the share purchase agreement to acquire
eMation on December 7, 2001, the Company acquired the balance of $1,650,000 of
eMation's amount outstanding under a $1,700,000 line of credit with Bank Leumi
in Israel. Borrowings under this line bear interest at an annual rate of
3-month LIBOR plus 2.2% per annum (4.083% at December 31, 2001). Under the
terms of the line of credit agreement, Bank Leumi has a security interest in
all of eMation's property and rights with the exception of the capital
equipment encumbered under an equipment line of credit with European Venture
Partners Limited ("EVP"). In addition, Bank Leumi has a secondary security
interest in the assets encumbered by EVP. The line of credit was paid in full
in January 2002, including interest of approximately $21,000.

  Equipment Line of Credit

   As of December 31, 2001, the Company had approximately $686,000 outstanding
on an equipment line of credit with EVP with interest rates ranging from 12% to
13% and payments due monthly over a 36 month period.

                                      77

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The line of credit was available to finance purchases of capital equipment
through September 30, 2001. In connection with the agreement, EVP has a senior
security interest in substantially all of eMation's capital equipment. In
addition, the line of credit agreement requires the Company to provide EVP with
copies of quarterly financial statements within 45 days of the end of each
quarter and audited annual financial statements within 90 days of the end of
each fiscal year as well as other information and notifications regarding
eMation's financial and operating results.

   As of December 31, 2001, the Company was in compliance with all of its
covenants to EVP.

  Bridge Loan

   On June 25, 2001, eMation obtained a bridge loan (the "bridge loan") in the
amount of $750,000 from certain of its preferred shareholders. The bridge loan
accrued interest at an annual rate of LIBOR plus 2.5%. Under the terms of the
bridge loan, upon the acquisition of eMation by the Company, the principal and
interest of the bridge loan were required to be repaid in connection with the
consummation of the acquisition. Accordingly, the balance of the bridge loan of
approximately $768,000, including interest of approximately $18,000, was paid
in full on December 7, 2001.

10)  Accrued Expenses

   Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                      December 31,
                                                      -------------
                                                       2001   2000
                                                      ------ ------
             <S>                                      <C>    <C>
             Legal and professional fees............. $2,708 $  290
             Payroll and related costs...............  2,951    397
             Severance...............................    899     --
             Unutilized leased facility..............    107     --
             Royalties to Israeli government agencies    620     --
             Legal settlements.......................    277     --
             Accrued Dolby royalties.................    122    664
             Warranty................................     50    361
             Other...................................  1,194    435
                                                      ------ ------
                                                      $8,928 $2,147
                                                      ====== ======
</TABLE>

11)  Loans Receivable--Officers

   In November 2000, the Company entered into an agreement to loan a newly
hired officer of the Company $50,000 for the purpose of relocation. In
September 2001, the officer's employment was terminated and the remaining
balance of the loan of $31,000, including interest of approximately $4,000, was
forgiven.

   From September to November 2000, the Company advanced $189,510 to an officer
of the Company. In March 2001, the officer accepted employment with
STMicroelectronics in connection with the sale of our CE assets (note 5a). The
loan is payable on demand.

   In August and September 2000, the Company entered into agreements to loan an
executive officer of the Company $52,000 and $96,000, respectively, for an
aggregate loan amount of $148,000. The loans are secured by all of the
Company's stock held or subsequently acquired by the officer. The loans bear
interest at 5% per

                                      78

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

annum and were originally due and payable on December 31, 2000, including all
accrued and unpaid interest. In July 2001, the Company advanced this executive
officer of the Company an additional $250,000. Under the terms of the executive
officer's separation agreement, the aggregate amount of the advances of
$414,000, including interest of approximately $16,000 was forgiven.

   In January 2000, the Company entered into an agreement to loan a former
officer of the Company $160,000. The loan is secured by all of the Company's
stock held or subsequently acquired by the former officer and any proceeds from
the disposition of the stock. The loan bears interest at 5% per annum and was
originally due December 31, 2000. The former officer committed to a payment
plan of $5,000 per month and is now in default. The former officer has paid
$15,000 and the Company is negotiating to receive full payment.

   In November 1999, the Company entered into an agreement to loan an officer
of the Company approximately $288,800. The loan was to be repaid in twenty-four
monthly installments of approximately $13,000, and bears an interest rate of
8%. The agreement also provided for a monthly bonus to the officer in an amount
equal to the monthly loan repayment. In connection with the sale of the IA
assets (note 5b) in March 2001, the unpaid loan balance of approximately
$114,000 was forgiven.

12)  Other Liabilities

  Severance

   A portion of the Company's liability for severance pay is calculated
pursuant to Israeli severance pay law based on the most recent salary of the
employees multiplied by the number of years of employment, as of the balance
sheet date. Employees are entitled to one month's salary for each year of
employment or a portion thereof. The Company's liability for all of its
employees, is fully provided by monthly deposits with insurance policies and by
an accrual, totaling approximately $493,000 and is included in other
non-current liabilities as of December 31, 2001. The aggregate value of these
policies of approximately $322,000 is included in other assets in the Company's
consolidated balance sheet as of December 31, 2001. The deposited funds may be
withdrawn only upon the fulfillment of the obligation pursuant to Israeli
severance pay law or labor agreements. The value of the deposited funds is
based upon the cash surrender value of these policies.

  Acquisition

   In connection with a previous acquisition, $1.35 million of the purchase
price, recorded at a present value of $1.1 million, was payable in equal annual
installments from 1999 to 2001. The final installment, which was included in
other current liabilities as of December 31, 2000, of $0.4 million was paid in
January 2001.

13)  Equity Transactions and Capital Stock

  Stock Repurchase Program and Treasury Stock

   In September 2001, the board of directors approved and the Company commenced
a program to repurchase up to $10 million worth of its outstanding shares of
common stock in the open market over the next 12 months, at the discretion of
management. From September to December 2001, the Company repurchased 383,800
shares for an aggregate cost of approximately $621,000 including commissions,
at an average market price per share of approximately $1.58.

   In April 1998, the Company purchased 200,000 shares of common stock for
$3.60 per share or $720,000 in the aggregate from the former Chief Executive
Officer of the Company.

                                      79

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Capital Stock and Stock Splits

   In 1999, the Company's articles of incorporation were amended and restated.
The Company is authorized to issue 50,000,000 shares of $.001 par value common
stock and 5,000,000 shares of $.001 par value undesignated preferred stock.

   On July 15, 1999, the Company effected a one-for-six reverse stock split.
All shares and per share amounts in the consolidated financial statements have
been restated to reflect the reverse stock split.

  Initial Public Offering

   On July 15, 1999, the Company consummated an initial public offering of its
common stock. The Company sold 5,750,000 shares of its common stock at an
initial public offering price of $12.00 per share. After deducting the
underwriters' discount and other offering expenses, the net proceeds to the
Company were approximately $61.4 million. Contemporaneous with the offering,
5,508,207 shares of preferred stock were converted into common stock.

  Preferred Stock

   Upon the closing of the Company's initial public offering in July 1999, all
of the outstanding shares of mandatory redeemable preferred stock, including
the shares under the stock subscription below, were converted into shares of
common stock on a one for one basis.

   In April 1999, the Company completed a financing in which it issued
convertible securities to an affiliate of Intel for $4.7 million and entered
into a license agreement covering certain Intel technology. The purchase price
received from Intel consisted of cash consideration of $3.0 million and, in
addition, the Company was granted a license for Intel technology valued at $1.7
million. The Intel license permits the Company to incorporate the Intel digital
content receiver technology into the Company's products on a royalty free basis
as the Company's products are subsequently licensed to its customers. The
Company capitalized the $1.7 million and subsequently wrote the balance off in
December 2001 as an impairment charge (note 1g).

  Preferred Stock Subscription

   In March 1998, the Company entered into a subscription and technology
license agreement. This agreement provides, among other things, for the Company
to license certain technology to an unrelated third party (the licensee). In
connection with the agreement, the licensee is required to pay a minimum of
$750,000 at the end of each calendar quarter during the first year and a
minimum of $900,000 at the end of each calendar quarter during the second year.
Included in the first year quarterly payments is $125,000 per quarter that was
applied towards the purchase of the Company's Series B preferred stock at $4.98
per share. The quarterly payment for the fourth quarter of the second year
included $500,000 that was to be applied towards the purchase of the Company's
Series B preferred stock at $4.98 per share. The purchase of the preferred
stock under this agreement was on the same terms as the licensee's purchase of
Series B preferred stock in April 1998. As of December 31, 1998, the Company
had issued 75,301 shares of Series B preferred stock under this agreement. In
April 1999 the Company issued 25,100 shares of Series B preferred stock under
the preferred stock subscription agreement. In addition, the Company amended
this agreement and issued 100,402 shares of Series B preferred stock and
warrants for the purchase of 40,863 shares of common stock in exchange for
which it received a promissory note with an aggregate value of $500,000 due in
April 2000. The $500,000 note reflects the payment due in the fourth quarter of
the second year of the above agreement. The note was satisfied in June 2000.

                                      80

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


14)  Stock Options, Stock Purchases and Warrants

  a) Stock Options

   The Company adopted the 1995 Stock Option Plan (the 1995 Plan) in May 1995.
The 1995 Plan provides for the grant of incentive stock options and
non-qualified stock options to employees, consultants, advisors to the Company,
and members of the board of directors to purchase shares of common stock. Prior
to the adoption of the 1995 Plan, 43,258 options were granted to employees.
Under the terms of the 1995 Plan, authorized options are granted at estimated
fair value. The options generally vest over a period ranging from 2 to 5 years
and expire 5 to 10 years from the grant date. In 1998 the board of directors
approved an amendment to the Company's 1995 Plan in which the total number of
options available for grant was increased to 8,500,000. In April 1999, the
Company, with the approval of the board of directors, adopted the 1999 Stock
Incentive Plan (1999 Plan) as a successor to the 1995 Plan. The 1999 Plan has
reserved 3,905,361, 3,383,529 and 2,725,000 shares as of December 31, 2001,
2000 and 1999, respectively. The 1999 Plan has three separate programs which
include; the discretionary option grant program under which employees may be
granted options to purchase shares of common stock; the stock issuance program
under which eligible employees may be granted shares of common stock; and the
automatic grant program whereby eligible non-employee board members are granted
options to purchase shares of common stock.

   In December 2001 and in connection with the acquisition of eMation (note 4),
the Company assumed 530,000 unvested stock options held by certain officers and
employees of eMation exercisable at a price of $0.01, which was less than the
fair market value of the Company's common stock of $2.14 on the date of the
acquisition. The Company recorded deferred stock compensation of approximately
$847,000 that is being amortized on a pro rata basis over the vesting periods
of 6 to 24 months. Also in connection with the acquisition of eMation (note 4),
the Company assumed 883,710 unvested and 15,000 fully vested stock options held
by certain officers and employees of eMation and issued 113,600 unvested stock
options to an officer and certain employees of eMation exercisable at a price
of $2.14, which was equal to the fair market value of the Company's common
stock on the date of the acquisition.

   In August 2001, the board of directors granted an aggregate of 331,000 stock
options to an officer-employee with an exercise price of $0.01 per share. The
Company recorded deferred stock compensation of approximately $0.5 million that
is being amortized over the vesting period of three years. In connection with
the closing of the acquisition of eMation (note 4), in February 2002, options
for 100,000 shares became immediately vested and exercisable. As a result the
Company will record additional non-cash compensation expense of approximately
$0.1 million attributable to the accelerated vesting of this option. Also in
August 2001, the board of directors granted 300,000 stock options to the
officer-employee with an exercise price equal to the fair market value on the
date of grant. These options vest 25% upon completion of one year of service
from the date of grant, with the balance vesting equally over a 36-month period
measured from the first anniversary of the vesting commencement date.

   In July 2001 the board of directors granted 380,000 stock options to
employees with an exercise price of $0.01 per share. The Company recorded
deferred stock compensation of approximately $0.8 million that is being
amortized on a pro rata basis over the vesting period of 12 months. Also in
July 2001, the board of directors granted 162,500 stock options to employees
with an exercise price equal to the fair market value on the date of grant,
that are fully vested upon the completion of one year of service from the date
of grant.

   In May 2000, the Company granted 78,500 options to purchase common stock to
employees, with an exercise price of $0.01 per share. The Company has recorded
approximately $633,000 of deferred stock compensation in connection with these
options that is being amortized over the option vesting periods, ranging

                                      81

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

from 18 to 24 months. In June 2000 the Company granted 17,500 options to
purchase common stock, with an exercise price of $0.01 per share. The Company
recorded approximately $112,000 of deferred stock compensation in connection
with these options that are being amortized over the option vesting period of
24 months.

   In February 2000, subsequent to the original dates of grant, the portion of
an employment agreement for an employee relating to stock option vesting was
amended. The amendment was considered a modification of the original terms of
the awards, requiring a new measurement date as if the rights were newly
granted. The amount of compensation expense recognized was determined by
calculating the total number of options that would have vested at the end of
the six-month post-termination period multiplied by the difference between the
fair market value on the date of modification and the original exercise price.
Because subsequent to the modification the individual was no longer an
employee, there was no service period and the intrinsic value of the modified
options of approximately $346,000 was expensed immediately.

   In November 1999, the Company, in accordance with the terms of the Teknema
acquisition agreement assumed approximately 537,000 of Teknema's outstanding
options. These options ranged in price from $.10 to $.94, and vested over a
four-year period. In March 2001, in connection with the sale of the assets of
the Company's IA business (note 5), the balance of the approximately 0.1
million unexercised options were exercised.

   In June 1999, the Company granted 481,555 options, with an exercise price of
$10.20 per share. The Company recorded $866,800 of deferred stock compensation
in connection with these options that are being amortized over the option
vesting period.

   In February 1999, the Company granted 144,688 options, with an exercise
price of $2.52 per share. The Company recorded $503,514 of deferred stock
compensation in connection with these options that are being amortized over the
option vesting period.

   A summary of stock option activity follows:

<TABLE>
<CAPTION>
                                        2001                2000                1999
                                -------------------- ------------------- -------------------
                                            Weighted            Weighted            Weighted
                                            average             average             average
                                Number of   exercise Number of  exercise Number of  exercise
                                 Options     price    Options    price    Options    price
                                ----------  -------- ---------  -------- ---------  --------
<S>                             <C>         <C>      <C>        <C>      <C>        <C>
Balance as of beginning of year  3,055,318   $5.69   3,479,316   $ 5.09  2,113,952   $ 1.80
Options granted................  1,600,300   $1.07     933,254   $ 6.35    986,563   $13.95
Options assumed................  1,428,710   $1.35          --   $   --    537,560   $ 0.53
Options (forfeited)............ (1,135,604)  $9.53    (468,980)  $11.05    (75,697)  $ 2.64
Options (exercised)............ (1,167,132)  $1.35    (888,272)  $ 1.17    (83,062)  $ 1.55
                                ----------           ---------           ---------
                                 3,781,592   $2.43   3,055,318   $ 5.69  3,479,316   $ 5.09
                                ==========           =========           =========
</TABLE>

   At December 31, 2001, 1,226,317 options with a weighted-average exercise
price of $3.45 were fully vested and exercisable.

                                      82

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The weighted-average exercise prices and weighted average grant-date fair
value of options granted during 2001 is as follows:

<TABLE>
<CAPTION>
                                                    2001
                                      ---------------------------------
                                      Weighted average Weighted average
                                       exercise price     fair value
                                      ---------------- ----------------
        <S>                           <C>              <C>
        Exercise price equals fair
          market value...............      $1.96            $1.85
        Exercise price exceeds fair
          market value...............        N/A              N/A
        Exercise price is less than
          fair market value..........      $0.01            $1.96
                                           $1.07            $1.90
</TABLE>

   The following summarizes information about the Company's stock options
outstanding at December 31, 2001:

<TABLE>
<CAPTION>
                                 Options outstanding            Options exercisable
                         ------------------------------------ -----------------------
                                          Weighted
                             Number       average    Weighted     Number     Weighted
                         outstanding at  remaining   average  outstanding at average
                          December 31,  contractual  exercise  December 31,  exercise
Range of exercise prices      2001      life (years)  price        2001       price
------------------------ -------------- ------------ -------- -------------- --------
<S>                      <C>            <C>          <C>      <C>            <C>
     $0.01--3.88........   3,249,530        8.6       $ 1.27      896,548     $ 1.33
     $3.89--7.75........     205,350        6.5         6.07      137,851       6.04
     $7.76--11.63.......     271,812        3.0         9.97      163,019      10.06
     $11.64--15.50......      22,700        5.3        14.88       12,761      14.88
     $15.51--19.38......      21,850        3.7        15.94       10,675      15.94
     $19.39--38.75......      10,350        8.0        38.75        5,463      38.75
                           ---------        ---       ------    ---------     ------
        Totals..........   3,781,592        8.1       $ 2.43    1,226,317     $ 3.45
                           =========        ===       ======    =========     ======
</TABLE>

   The Company applies APB 25 and related interpretations in accounting for its
stock option plan. For pro forma purposes, had compensation cost been
recognized pursuant to SFAS No. 123, the Company's net income would have been
decreased and the net (loss) would have been increased as follows (in
thousands, except per share data):

<TABLE>
<CAPTION>
                                                        2001      2000      1999
                                                       -------  --------  --------
<S>                                                    <C>      <C>       <C>
Net income (loss) attributable to common stockholders:
   As reported........................................ $ 1,427  $(40,467) $ (8,730)
   Pro forma.......................................... $(1,043) $(45,005) $(10,758)
Net income (loss) per common share--basic:
   As reported........................................ $  0.08  $  (2.44) $  (1.02)
   Pro forma.......................................... $ (0.06) $  (2.71) $  (1.26)
Net income (loss) per common share--diluted:
   As reported........................................ $  0.07  $  (2.44) $  (1.02)
   Pro forma.......................................... $ (0.06) $  (2.71) $  (1.26)
</TABLE>

   The per-share weighted-average fair value of stock options issued by the
Company during 2001, 2000 and 1999 was $1.90, $6.56 and $10.63, respectively.

                                      83

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The following range of assumptions were used by the Company to determine the
fair value of stock options granted using the Black-Scholes option-price model:


<TABLE>
<CAPTION>
                                                 2001    2000    1999
                                                ------- ------- -------
        <S>                                     <C>     <C>     <C>
        Dividend yield.........................      0%      0%      0%
        Expected volatility....................    192%    167%    119%
        Average expected option life........... 4 years 4 years 4 years
        Risk-free interest rate................   2.28%   5.71%   5.51%
</TABLE>


  b) Employee Stock Purchase Plan

   In April 1999, the Company, with the approval of the board of directors,
adopted an Employee Stock Purchase Plan and reserved 500,000 shares of common
stock for issuance thereunder. The purchase plan permits eligible employees to
acquire shares of the Company's common stock through periodic payroll
deductions of up to 15% of total compensation. Each offering period will have a
maximum duration of twenty-four months. The price at which the common stock may
be purchased is 85% of the lesser of the fair market value of the Company's
common stock on the first day of the applicable offering period or on the last
day of the respective purchase interval. The initial offering period commenced
on the effectiveness of the Company's initial public offering in July 1999 and,
because the fair market value of the Company's common stock on the last day of
the second purchase interval was below the enrollment price, ended on the last
business day of July 2000. The second offering period commenced August 2000
and, because the fair market value of the Company's common stock on the last
day of the purchase interval was below the enrollment price, ended January
2001. The third offering period commenced February 2001 and, because the fair
market value of the Company's common stock on the last day of the purchase
interval was below the enrollment price, ended on the last business day of July
2001. The fourth offering period began August 2001.

   A summary of the shares purchased is as follows:

<TABLE>
<CAPTION>
                                           Number of
          Purchase Date                 Shares Purchased Purchase Cost
          -------------                 ---------------- -------------
                                                (in thousands)
          <S>                           <C>              <C>
          January 31, 2000.............      27,513          $281
          July 31, 2000................      48,378           190
          January 31, 2001.............      27,330            71
          July 31, 2001................      11,405            15
             Total.....................     114,626          $557
                                            =======
</TABLE>

  c) Warrants

   The warrants issued by the Company generally contain customary provisions
requiring proportionate adjustment of the exercise price in the event of a
stock split, stock dividend, or dilutive financing in the case of the warrants
for preferred stock.

                                      84

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A summary of warrant activity follows:


<TABLE>
<CAPTION>
                                            Preferred             Common
                                        ------------------ --------------------
                                                  Weighted             Weighted
                                                  Average              Average
                                        Number of exercise Number of   exercise
                                        Warrants   price   Warrants     price
                                        --------- -------- ----------  --------
<S>                                     <C>       <C>      <C>         <C>
Balance as of December 31, 1998........  920,006   $0.60    1,608,171   $ 0.35
                                        ========   =====   ==========   ======
   Warrants granted....................       --      --       51,079     0.06
   Warrants canceled...................       --      --           --       --
   Warrants exercised.................. (920,006)  $0.60     (926,936)    0.10
                                        --------   -----   ----------   ------
Balance as of December 31, 1999........       --      --      732,314   $ 0.65
                                        ========   =====   ==========   ======
   Warrants granted....................                     1,509,166     6.98
   Warrants canceled...................                            --       --
   Warrants exercised..................                      (405,847)    0.18
                                                           ----------   ------
Balance as of December 31, 2000........                     1,835,633   $ 5.96
                                                           ==========   ======
   Warrants granted....................                        48,077    12.84
   Warrants assumed (note 4)...........                        74,661     5.52
   Warrants canceled...................                    (1,500,000)    7.00
   Warrants exercised..................                            --       --
                                                           ----------   ------
Balance as of December 31, 2001........                       458,371   $ 3.19
                                                           ==========   ======
</TABLE>



   In December 2001 and in connection with the acquisition of eMation (note 4),
the Company issued or assumed 115,238 fully-vested stock warrants at exercise
prices ranging from $2.14 to $21.51.


   In June 2000, the Company entered into a one-year distribution rights
agreement (the Agreement) with American Trading S.A. (ATSA) for exclusive
distribution of the Company's Internet television set-top box product in
Brazil. Upon the signing of the Agreement the Company issued a warrant to
purchase 1,500,000 shares of the Company's common stock to ATSA with an
exercise price of $7.00 per share, which approximated fair market value on the
date of grant. The warrant was fully vested and non-forfeitable on the date of
grant, had a two- year term, and contained certain exercise restrictions as
described in the warrant agreement. At June 30, 2000, the Company recorded the
estimated fair value of the warrant of $5.6 million as an intangible prepaid
distribution rights fee and additional paid-in capital. On March 28, 2001,
pursuant to the January 2001 settlement and release agreement with ATSA
canceling the Agreement, the warrant was canceled (note 15c). On March 28,
2001, the warrant had an estimated fair value of approximately $435,000, which
was estimated using the Black-Scholes option pricing model with the following
assumptions: risk-free interest rate of 4.21%, volatility factor of 96%, no
dividend factor and a remaining life of 1.25 years.

   The warrants for preferred stock were all exercised and converted to common
stock on a one for one basis in connection with the Company's initial public
offering in July 1999.

15)  Commitments and Contingencies

  a) Leases

      The Company leases its office facilities and various equipment under
   operating leases that expire at various dates through 2012. The following is
   a schedule by year of future minimum lease payments (in

                                      85

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   thousands) relating to non-cancelable operating leases as of December 31,
   2001. The schedule includes the effects of the assumption by
   STMicroelectronics, effective March 1, 2001, of the Company's corporate
   headquarters lease (note 5a), which expires in May 2007. As a result, our
   future minimum required lease payments were reduced by approximately $6.8
   million.

<TABLE>
<CAPTION>
                                                    Operating Leases
                                                    ----------------
           <S>                                      <C>
           Year ending December 31,
              2002.................................      $1,726
              2003.................................       1,312
              2004.................................         831
              2005.................................         206
              2006.................................         197
              Thereafter...........................         426
                                                         ------
                  Total minimum lease payments.....      $4,698
                                                         ======
</TABLE>

   Total rent expense for the years ended December 31, 2001, 2000, and 1999,
respectively, was approximately $931,000, $1,633,000 and $667,000, respectively.

   The Company leases offices in Malvern, Pennsylvania for approximately 14,000
square feet of space. The lease expires in November 2002 and is for an annual
rental of approximately $240,000 plus operating expenses.

   The Company also leases approximately 9,000 square feet of office space
under a five-year lease expiring in March 2005 in San Jose, California, at an
annual rental of approximately $400,000 including operating expenses, with
sales offices and PC engineering facilities for our digital media business.

   The Company currently leases approximately 12,000 square feet of space in an
office building located in Mansfield, Massachusetts for its research and
development, sales and support and administrative activities. This facility is
leased through July 2004 at an average annual rental of approximately $270,000.

   The Company also leases approximately 1,000 square feet of space in Israel
for research and development activities at an annual rental of approximately
$142,000. This facility is leased through August 2004.

   The Company currently leases 8 other international sales offices in France,
the Netherlands, Japan and Great Britain. In 2002 the Company expects to close
its Great Britain facility and consolidate its activities in our offices in
France. The combined annual rental for these offices is approximately $200,000
and the leases have terms expiring from April 2002 through November 2012.

   The Company believes these facilities will be adequate to fulfill our needs
for the foreseeable future, with the exception of the Mansfield facility, which
the Company is currently considering expanding.

   The Company maintains approximately 9,000 square feet of office space in
Marlborough, MA under an operating lease. This space is no longer used for
operating purposes. The lease requires annual rental payments totaling
approximately $181,000 and expires in February 2009. The present value of the
future lease payments, discounted at 5%, of approximately $0.9 million was
accrued by eMation as of the date of acquisition. The Company is pursuing
opportunities to sublease this office (note 4).

                                      86

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  b) Royalties

   Under various licensing agreements, the Company is required to pay
royalties, generally on per unit basis, on the sales of certain products that
incorporate licensed technology. Royalty expense under such agreements was
approximately $1,324,000, $3,245,000, and $1,678,000 for the years ended
December 31, 2001, 2000 and 1999, respectively, and is included in cost of
revenues in the consolidated statements of operations.

   Royalty Commitments to the Chief Scientist:

      eMation has received grants from the Chief Scientist of Israel's Ministry
   of Industry and Trade to finance the research and development of certain
   products. The Company is obligated to pay royalties at a rate of 3-3.5%
   resulting from sales of the products being developed within the framework of
   the aforementioned grants, and the services related to the products, up to
   an amount equal to 100% of the grants received, linked to the U.S. dollar.
   Grants received in respect of approvals obtained after December 31, 1998,
   will bear interest at an annual rate equal to 12-month LIBOR (2.445% at
   December 31, 2001).

      eMation received and accrued no grants in 2001.

      As of December 31, 2001, the Company had accrued royalties of
   approximately $0.1 million.

   Royalties to the Fund for the Encouragement of Marketing Activities:


      The Israeli Government, through the Fund for the Encouragement of
   Marketing Activities, awarded eMation grants for participation in foreign
   marketing expenses. The Company is required to pay royalties at the rate of
   4% of the increase in export sales, up to an amount equal to 100% of the
   grants received linked to the U.S. dollar. Grants received after January 1,
   1998 bear interest at an annual rate equal to 6-month LIBOR (1.983% at
   December 31, 2001).


      As of December 31, 2001, the Company has accrued royalties of
   approximately $0.5 million.

  c) Contingencies

   On November 27, 2001, a putative shareholder class action was filed against
the Company, certain of the Company's officers and directors, and several
investment banks that were underwriters of the Company's initial public
offering. The action was filed in the United States District Court for the
Southern District of New York, purportedly on behalf of investors who purchased
the Company's stock between July 15, 1999 and December 6, 2000. The lawsuit
alleges violations of Sections 11, 12(a)(2) and 15 of the Securities Exchange
Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder against one or both of the Company and the
individual defendants. The claims are based on allegations that the underwriter
defendants agreed to allocate stock in the Company's July 15, 1999 initial
public offering to certain investors in exchange for excessive and undisclosed
commissions and agreements by those investors to make additional purchases in
the aftermarket at pre-determined prices. Plaintiffs allege that the Prospectus
for the Company's initial public offering was false and misleading in violation
of the securities laws because it did not disclose these arrangements. This
lawsuit is part of the massive "IPO allocation" litigation involving the
conduct of underwriters in allocating shares of successful initial public
offerings. The Company believes that more than one hundred and eighty other
companies have been named in more than eight hundred identical lawsuits that
have been filed by some of the same plaintiffs' law firms. Certain of Axeda's
employees are members of the putative classes alleged in these actions and
therefore may have interests adverse to the Company with respect to the alleged
claims in these actions. The Company believes that such lawsuit and claims are
without merit and that the Company has meritorious defenses to the actions. The
Company plans to vigorously defend the litigation. However, failure to
successfully defend this action could substantially harm Axeda's results of
operations, liquidity and financial condition.

                                      87

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Between February and April 2000, eleven class action lawsuits were filed
against Axeda and certain of its 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 Exchange Act of 1933,
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5
promulgated thereunder and seeks unspecified damages on behalf of a purported
class of purchasers of our stock during the period stated above. On July 3,
2000, we filed a motion to dismiss the consolidated and amended class action
complaint. The motion is presently fully briefed and the parties are awaiting a
hearing date to be set for the motion. In connection with the Company's initial
public offering, the Company purchased directors and officers insurance that
provides the Company with protection from claims made against officers,
directors or the Company arising from claims including but not limited to any
written demand for damages and any civil, criminal, administrative, or
regulatory proceedings and appeals. Certain of our employees and certain
holders of 5% or more of our common stock are members of the putative classes
alleged in these actions and therefore may have interests adverse to us with
respect to the alleged claims in these actions. We believe that such lawsuits
or claims are without merit and that we have meritorious defenses to the
actions. We plan to vigorously defend the litigation. However, failure to
successfully defend these actions could substantially harm our results of
operations, liquidity and financial condition.

   In April 2001, a third party who licensed software to the Company filed a
lawsuit against the Company in California. The dispute arose out of a contract
whereby the Company licensed software from the third party for use with the
eSurfer browser bundled with the Company's Internet set-top box assets sold to
Phoenix Technologies in March 2001 (note 5b). The third party claimed that
there were fees due and owing under the contract. The Company and the third
party entered into a confidential settlement agreement in July 2001 and the
case has been dismissed. The amount of the settlement had been fully accrued as
of December 31, 2000.

   In June 2000, the Company entered into a one-year distribution rights
agreement ("the Agreement") with American Trading S.A. ("ATSA") for exclusive
distribution of the Company's Internet television set-top box product in
Brazil. Upon the signing of the Agreement the Company issued a warrant to
purchase 1,500,000 shares of the Company's common stock to ATSA with an
exercise price of $7.00 per share, which approximated fair market value on the
date of grant. The warrant was fully vested and non-forfeitable on the date of
grant, had a two-year term, and contained certain exercise restrictions as
described in the warrant agreement.

   Due to the parties' differing interpretations of the terms of the Agreement,
in January 2001 the parties entered into a settlement and release agreement
("the Release"). The Release provides for the immediate termination of the
Agreement, including the right for Axeda to terminate the warrant and a
royalty-free right in 2001 for Axeda to use the mark "WWWTV", which Axeda owns
as of January 1, 2002. In addition, in January 2001 the Company paid
approximately $1.2 million to ATSA in exchange for the settlement and release
was required to pay an additional minimum finder's fee of $1 million in January
2002 for sales of the Internet set-top box in Brazil in 2001. The aggregate
amount of the settlement of $2.2 million, net of the estimated fair value of
the canceled warrant of $0.4 million (note 14c) is included in other selling
and marketing expenses in the consolidated statement of operations for the year
ended December 31, 2001. In January 2002, the parties were in disagreement
about whether and to what extent a payment for any finders fee was due to ATSA
for 2001. On January 30, 2002, the parties entered into a confidential general
settlement and release agreement, which resolved the dispute between the
parties concerning the payment of a finder's fee. In connection with the
January 2002 settlement, in January 2002 the Company paid $325,000 in cash to
ATSA and transferred title to 15,000 Internet set-top boxes, with a net book
value of approximately $675,000, for an aggregate and final settlement of the
liability to ATSA of $1,000,000.

                                      88

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Various third parties have notified the Company, as well as some of the
Company's customers, that the Company's products infringe patents held by such
third parties. The Company has not determined whether and to what extent that
the patents held by such third parties are valid and whether and to what extent
Axeda's products may infringe such patents. Axeda is unable to predict the
outcome of these matters, or reasonably estimate a range of possible loss given
the current status of these matters.

   On or about August 10, 2000, Corum Group, Ltd. filed an action against Axeda
and Cinax Designs Inc. in the United States District Court for the Western
District of Washington (No. C00-1352D). Corum, a business consultant, alleged
that it had an agreement with Cinax whereby Cinax would pay Corum an 8%
transaction fee in the event Corum located a purchaser for Cinax. The Company
acquired Cinax by agreement dated as of July 13, 2000 for compensation of $3.5
million in cash and an aggregate of 825,000 shares of the Company's common
stock and non-voting exchangeable preferred stock of one of our subsidiaries,
Ravisent British Columbia Inc., which preferred stock is exchangeable, on a
one-for-one basis, into shares of our common stock. In the complaint Corum
alleged that it introduced Axeda to Cinax and that it was therefore entitled to
$281,362 and 66,000 shares of our common stock. As part of our acquisition of
Cinax, the shareholders of Cinax agreed to indemnify us for 50% of any
liability stemming from the Corum claim and an aggregate of approximately
53,500 shares of our common stock and non-voting, no-par exchangeable preferred
stock of Ravisent British Columbia Inc. were placed in escrow to secure this
indemnification obligation. On April 17, 2001, the parties entered into a
settlement and release agreement whereby the Company paid cash of $110,000 and
issued 110,000 shares of Axeda common stock to Corum totaling approximately
$0.3 million in full settlement of the matter and the action has been
dismissed. The amount of the settlement was accrued in full as of March 31,
2001 and all of the shares that were placed in escrow to indemnify the Company
for this liability were returned to the Company in September 2001. The
settlement agreement provided that if a registration on Form S-3 was not filed
by August 7, 2001 and every 45-day interval thereafter, then Corum could make a
claim for an additional 15,000 shares of Axeda common stock. As the S-3 was not
filed until December 5, 2001, Corum made a claim for such additional 30,000
shares, as provided in the settlement agreement. The S-3 was filed on December
5, 2001 and the shares were registered. In September 2001 upon the resolution
of the escrow, the Company recorded the balance of the settlement for the
additional 30,000 shares of $44,100.

   On May 25, 1999, a complaint was filed against the Company in the Superior
Court of California, Santa Clara County, by a former supplier, alleging breach
of oral and written contract and other claims totaling approximately $1.2
million. The complaint was removed to federal court and, on September 23, 1999
the Company filed a counterclaim against the supplier for the damages the
Company incurred as a result of the supplier's failure to timely ship the
Company non-defective parts. On June 30, 2000, the parties entered into a
confidential settlement agreement and mutual release in full settlement of any
claims under the complaint. The amount of the settlement was accrued as of
December 31, 1999.

   On November 4, 1999, a complaint was filed against the Company in the
Commonwealth of Massachusetts, Norfolk Superior Court Department, alleging
breach of agreements to allow a former supplier to purchase an undetermined
number of shares of the Company's common stock at $1.00 per share. The
complaint was removed to federal court on December 3, 1999. The Company
disputed the claim as being wholly without merit. To that end, on December 14,
1999, the Company filed a Motion to Dismiss, which was denied on January 13,
2000. On May 17, 2000, pursuant to a confidential settlement agreement, the
case was dismissed under a joint motion for dismissal. The amount of the
settlement was accrued as of December 31, 1999. On November 8, 1999, the
Superior Court in the Commonwealth of Massachusetts approved an attachment of
funds for $525,000 to be held in trust pending the settlement of the complaint
by a former supplier. In connection with the settlement agreement, on June 1,
2000, the attachment was vacated and the funds were returned to the Company.

                                      89

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  d) Employment Agreements

   The Company has entered into employment agreements with certain officers and
employees of the Company. The agreements are generally for two to three-year
periods, generally provide for annual bonuses, guaranteed bonuses and incentive
and nonqualified stock options, as determined by the board of directors, and
covenants not-to-compete during the employment term and for one year
thereafter. The employment agreements also generally provide for severance
benefits of six months to one year's salary and health insurance coverage in
the event the individual is terminated under the terms of the agreements.

16)  Business Risks and Credit Concentration

   The Company's growth will be increasingly driven by its DRM products and
services, a market in which the Company has limited experience. Axeda markets
its DRM solutions worldwide to the service operation of device original
equipment manufacturers (OEMs) and strategic large-scale end users in a variety
of industries including the industrial and building automation, high-technology
devices, medical instrumentation, office automation and semiconductor equipment
industries. Although the market for DRM products and services is relatively
new, the Company faces risks from both external and internal participants.
Additionally, technological change, could adversely affect the Company's
ability to grow and compete.

   The Company also licenses and sells its digital media products principally
in the intensely competitive PC OEM industry. This industry has been
characterized by price erosion, rapid technological change, short product life
cycles, cyclical market patterns and heightened foreign and domestic
competition. Significant technological changes in the industry would adversely
affect operating results. The Company has decided to seek strategic
alternatives for its digital media business as a result of the change in its
strategic focus resulting from the sale of the assets of its CE business to
STMicroelectronics (note 5), the sale of the assets of the IA business to
Phoenix Technologies (note 5), and the acquisition of eMation (note 4), as well
as the intense competitive environment in the PC market.

   The Company's customers, including its major customers disclosed in note 20,
have not executed long-term contracts and generally are not required to
purchase minimum quantities from the Company. The Company's software license
revenues from DRM products may result from a relatively small number of sales,
some of which generate disproportionately large revenues. As such, the
Company's operating results could be materially affected by a decrease in
business with these customers or if fewer than expected customers purchase the
Company's products.

   The Company performs ongoing credit evaluations of its customers' financial
condition and generally no collateral is required. The Company had three
customers representing, in the aggregate, 26% and 44% of accounts receivable at
December 31, 2001 and 2000, respectively.

                                      90

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


  Geographic Areas

   Long-lived assets, at cost, consisting principally of furniture and
equipment, were located in the following countries, including our country of
domicile, the U.S., for the following years noted (in thousands):

<TABLE>
<CAPTION>
                                         December 31,
                      Country        --------------------
                                      2001   2000   1999
                                     ------ ------ ------
                      <S>            <C>    <C>    <C>
                      United States. $2,994 $4,844 $1,970
                      Canada........     --     79     --
                      France........    113     --     --
                      Germany.......     --    643    547
                      Israel........    240     --     --
                      Japan.........     64     --     --
                      Netherlands...     79     --     --
                      United Kingdom      5     --     --
                                     ------ ------ ------
                         Total...... $3,495 $5,566 $2,517
                                     ====== ====== ======
</TABLE>

17)  Income Taxes

   The provision for income taxes is as follows (in thousands):

<TABLE>
<CAPTION>
                                  Years ended December 31,
                                  ------------------------
                                    2001       2000  1999
                                   ------     ----   ----
                        <S>       <C>         <C>    <C>
                        Federal.. $  668      $--    $--
                        State....     55       --     --
                        Foreign..    400       40     52
                                   ------     ---    ---
                           Total. $1,123      $40    $52
                                   ======     ===    ===
</TABLE>

   No provision for deferred income taxes is required to be recorded for the
years ended December 31, 2001, 2000 or 1999.

   The table below reconciles the U.S. federal statutory income tax rate to the
recorded provision for income taxes (in thousands):

<TABLE>
<CAPTION>
                                                                      December 31,
                                                               --------------------------
                                                                2001      2000     1999
                                                               -------  --------  -------
<S>                                                            <C>      <C>       <C>
Federal income tax expense (benefit) at U.S. federal statutory
  rate........................................................ $   864  $(13,745) $(2,726)
State income tax benefit, net of federal income tax expense
  (benefit)...................................................    (656)   (1,966)    (524)
In-process research and development expenses and goodwill.....   6,560     2,221    1,005
Foreign income taxes..........................................     400        40       52
Warrant and option expense....................................   1,162    (1,271)      --
Non-deductible acquisition costs..............................     630        --       --
Change in valuation allowance.................................  (3,045)   13,047    2,180
Acquired deferred tax assets..................................  (4,526)       --       --
Other.........................................................    (266)    1,714       65
                                                               -------  --------  -------
                                                               $ 1,123  $     40  $    52
                                                               =======  ========  =======
</TABLE>

                                      91

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The components of the net deferred tax assets (liabilities) as of December
31, 2001 and 2000, consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                           December 31,
                                                        ------------------
                                                          2001      2000
                                                        --------  --------
     <S>                                                <C>       <C>
     Deferred tax assets:..............................
        Net operating losses........................... $ 22,283  $ 20,452
        Reserves and accruals not currently deductible.      214     2,296
        Depreciation/Amortization......................     (189)    3,152
        Deferred compensation and other................    2,390     1,843
                                                        --------  --------
                                                          24,698    27,743
     Valuation allowance...............................  (24,698)  (27,743)
                                                        --------  --------
     Net deferred tax assets........................... $     --  $     --
                                                        ========  ========
</TABLE>

   Deferred income taxes reflect the net tax effects of temporary differences
between carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which temporary
differences representing net future deductible amounts become deductible. Due
to the uncertainty of the Company's ability to realize the benefit of the
deferred tax assets, the deferred tax assets are fully offset by a valuation
allowance at December 31, 2001 and 2000.

   As of December 31, 2001, the Company had approximately $54.8 million of
federal and $59.9 million of state net operating loss carryforwards available
to offset future taxable income. These carryforwards will begin expiring in
2011 and 2006, respectively, if not utilized. In addition, approximately $37.9
million of the state net operating loss carryforwards is subject to a $2
million annual limitation.

   Under the Tax Reform Act of 1986, the utilization of a corporation's net
operating loss carryforward is limited following a greater than 50% change in
ownership. Due to the Company's prior and recent transactions, the Company's
net operating loss carry forwards are subject to an annual limitation. Any
unused annual limitation may be carried forward to future years for the balance
of the net operating loss carryforward period. The Company is currently in the
process of determining the amount of this annual limitation.

   Additionally, approximately $5.4 million of the gross deferred tax assets
will reduce goodwill to the extent such assets are realized and a portion of
the gross deferred tax assets will reduce equity to the extent such assets are
realized.

   Subsequent to December 31, 2001, the Job Creation and Worker Assistance Act
of 2002 was enacted. The Act allows net operating loss carryforwards to 2001
and 2002 tax years to offset 100% of alternative minimum taxable income.
Accordingly, the Company will not owe federal alternative minimum tax liability
for 2001 and the Company will be entitled to a refund of taxes paid for the
year. The Company will record this tax benefit of approximately $667,000 in the
first quarter of 2002.


                                      92

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

18)  Related-Party Transactions

  Severance


   The Company paid severance to former officers of the Company totaling
approximately $572,000, $158,000 and none for the years ended December 31,
2001, 000 and 1999, respectively. In addition, as of December 31, 2001 the
Company accrued additional severance of approximately $899,000 for former
employees, whose employment was terminated in December 2001. Approximately
$630,000 of severance was paid in January 2002 and the remaining severance will
be paid by October 2002. See note 11 for loans receivable--officers.


19)  Defined Contribution Plan

   The Company has a defined contribution plan for qualified employees as
defined in the plan. Participants may contribute up to 20% of pre-tax
compensation, as defined. Under the plan, the Company can make discretionary
contributions. To date, the Company has not made any contributions to the plan.
In addition, in December 2001, the Company assumed the defined contribution
plan of eMation, Ltd. (the eMation plan) (note 4a). Both plans are Internal
Revenue Code section 401(k) plans. The eMation plan provides for employer
matching contributions for all employees equal to 50% of salary reductions of
up to 6% of a participant's compensation. During 2001 and prior to the
acquisition, eMation paid its matching contribution to the plan.

20)  Segment and Major Customer Information

   The Company operates in a single industry segment, which is the development
and licensing of its technology.

   The Company had the following customers that combined represented in excess
of 37%, 49%, and 65% of revenues for the years ended December 31, 2001, 2000
and 1999, respectively (in thousands):

<TABLE>
<CAPTION>
                                       December 31
                                  ---------------------
                         Customer  2001   2000   1999
                         -------- ------ ------ -------
                         <S>      <C>    <C>    <C>
                            1.... $1,250 $4,019 $15,689
                            2.... $  990 $3,900 $ 2,461
                            3.... $  585 $2,292 $ 1,213
</TABLE>

   The Company sells and licenses its technology to customers primarily in
North America, Asia-Pacific and Europe. The net income (loss) for all periods
presented is derived primarily from the Company's North American operations,
which generate revenues from the following geographic regions (in thousands):

<TABLE>
<CAPTION>
                                             Year Ended December 30,
                                             -----------------------
            Country/ Geographic Region        2001    2000    1999
            --------------------------       ------  ------- -------
            <S>                              <C>     <C>     <C>
            North America:
               United States................ $4,461  $ 9,235 $18,279
               Canada.......................  1,208    2,972   4,437
                                             ------  ------- -------
                   Total--North America.....  5,669   12,207  22,716
                                             ------  ------- -------
</TABLE>

                                      93

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
                                             Year Ended December 30,
                                             -----------------------
            Country/ Geographic Region        2001    2000    1999
            --------------------------       ------  ------- -------
            <S>                              <C>     <C>     <C>
            Europe:
               Italy........................      4    2,312     131
               Germany......................    525      878   1,977
               France.......................    419       75   1,137
               Turkey.......................      6       62     105
               Spain........................      1       20      --
               Other........................    412       51   1,471
                                             ------  ------- -------
                   Total--Europe............  1,367    3,398   4,821
                                             ------  ------- -------
            Asia-Pacific:
               Taiwan.......................     --    4,020   1,230
               Japan........................    390      841     631
               China........................     76       --      --
               Other........................     30       --      --
                                             ------  ------- -------
                   Total--Asia-Pacific......    496    4,861   1,861
                                             ------  ------- -------
            South America--Other............     15      383      --
            Israel..........................     42       --      --
            Australia and New Zealand--Other     --        5      20
                                             ------  ------- -------
            Total........................... $7,589  $20,854 $29,418
                                             ======  ======= =======
</TABLE>

21)  Segment Reporting

   Segment information is presented in accordance with Statement of Financial
Account Standards No. 131 ("SFAS 131"), "Disclosures About Segments Of An
Enterprise And Related Information." This standard requires segmentation based
upon the Company's internal organization and disclosure of revenue and
operating income based upon internal accounting methods. For the year ended
December 31, 2001 the Company had four reportable segments: device relationship
management ("DRM"), personal computer ("PC"), consumer electronics ("CE") and
Internet appliance ("IA") (note 5). Included in other is the aggregate of
additional product offerings for industrial automation ("Industrial") customers
obtained in the acquisition of eMation in December 2001, that are reported on
an aggregated basis to the chief operating decision maker.

   DRM(TM):  Created as a result of the acquisition of eMation in December 2001
(note 4), this segment provides a distributed software solution designed to
enable businesses to remotely monitor, manage and service intelligent devices.
DRM enables the live exchange of information via the Internet, between remotely
deployed "intelligent devices" (instruments, equipment, machines, facilities,
appliances, vehicles, sensors or systems incorporating computer-based control
technology) and the people that build, service and use them. The Axeda DRM/TM/
System enables manufacturers and service providers to use the Internet to
establish and manage continuous connections with devices deployed at their
customers' facilities, allowing them to stay in touch with their products
throughout their lifecycle, tapping the value of remote device information with
new, automated e-service, operations monitoring, and e-commerce offerings. The
product offerings enable customers to gain business insight and benefits from
live information sources by helping them capitalize on the wealth of previously
unavailable device performance and usage data.

   PC:  This segment designs, develops, licenses and markets core-based modular
software solutions that enable digital video and audio stream management in PC
systems. The segment also provides supporting

                                      94

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

hardware designs to selected customers as well as customization services and
customer support. The segments solutions enable decoding (playback) and
encoding (recording) of multimedia formats such as digital versatile disk
(DVD); direct broadcast satellite (DBS) and high-definition television (HDTV)
on existing personal computers.

   CE:  This segment designed, developed, licensed and marketed core-based
modular software solutions that enable digital video and audio stream
management in CE devices. The segment also provided supporting hardware designs
to selected customers as well as customization services and customer support.
The segments solutions enable decoding (playback) and encoding (recording) of
multimedia formats such as digital versatile disk (DVD); direct broadcast
satellite (DBS) and high-definition television (HDTV) on existing CE platforms
(note 5a).

   IA:  The Company's Internet technology segment was involved in the
development of products for the emerging market in information appliances. The
segment sold IA hardware reference designs and software technology through
intellectual property licenses and agreements with Internet service providers.
This segment provided the Company with a number of Internet-related products,
including an efficient web browser, and several IA reference designs including
a Web Pad design, Internet ready TV and monitor designs and an Internet-ready
screenphone (note 5b).

   The Company evaluates operating segment performance based on revenue and
gross profit. It has not historically evaluated segment performance based on
operating income nor allocated assets to its individual operating segments.

<TABLE>
<CAPTION>
                                                                   Year Ended December 31,
                                                                   -----------------------
                                                                    2001    2000    1999
                                                                   ------  ------- -------
                                                                       (In thousands)
<S>                                                                <C>     <C>     <C>
Revenues:
   PC............................................................. $4,534  $11,739 $24,460
   CE.............................................................    421    1,614     986
   IA.............................................................  1,020    7,501   3,972
   DRM............................................................    554       --      --
   Other..........................................................  1,060       --      --
                                                                   ------  ------- -------
       Total...................................................... $7,589  $20,854 $29,418
                                                                   ======  ======= =======
Gross profit:
   PC excluding inventory charges of $0 and $1.1 million for 2001
     and 2000, respectively....................................... $2,925  $ 7,359 $10,270
   CE.............................................................    327    1,211     637
   IA, excluding net inventory charges of $18.5 million and $0.6
     million for 2001 and 2000, respectively......................     15    1,988   2,646
   DRM............................................................    360       --      --
   Other..........................................................    817       --      --
                                                                   ------  ------- -------
       Total...................................................... $4,444  $10,558 $13,553
                                                                   ======  ======= =======
</TABLE>

                                      95

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


22)  Selected Quarterly Financial Data (unaudited)


<TABLE>
<CAPTION>
                                                         Per Share of
                                                         Common Stock
                                                        Income (Loss)    Stock Prices
                                                      ----------------   -------------
                                           Net Income Assuming
                      Revenue Gross Profit   (Loss)   Dilution  Basic     High   Low
                      ------- ------------ ---------- --------  ------   ------ ------
                          (in thousands except per share amounts and stock prices)
<S>                   <C>     <C>          <C>        <C>       <C>      <C>    <C>
2001
  First Quarter (A).. $ 2,816   $  2,162    $ 39,735   $ 2.14   $ 2.28   $ 4.75 $ 1.75
  Second Quarter (B).     794    (13,162)    (15,950)   (0.89)   (0.89)    2.55   1.31
  Third Quarter......     841        331      (4,122)   (0.22)   (0.22)    2.08   1.06
  Fourth Quarter (C).   3,138     (3,389)    (18,236)   (0.87)   (0.87)    3.75   1.50
                      -------   --------    --------   ------   ------
   Total (G) (I)..... $ 7,589   $(14,058)   $  1,427   $ 0.07*  $ 0.08*
                      =======   ========    ========   ======   ======
2000
  First Quarter...... $ 5,710   $  2,067    $ (5,537)  $(0.34)  $(0.34)  $47.50 $11.63
  Second Quarter (D).   4,846      2,505      (7,523)   (0.46)   (0.46)   15.50   5.13
  Third Quarter (E)..   4,228      2,965     (10,328)   (0.61)   (0.61)    9.13   2.75
  Fourth Quarter (F).   6,070      1,313     (17,079)   (0.99)   (0.99)    3.75   1.47
                      -------   --------    --------   ------   ------
   Total (H) (I)..... $20,854   $  8,850    $(40,467)  $(2.44)* $(2.44)*
                      =======   ========    ========   ======   ======
</TABLE>

--------
*  EPS in each quarter is computed using the weighted-average number of shares
   outstanding that quarter while EPS for the year is computed using the
   weighted-average number of shares outstanding during the year. Thus, the sum
   of the four quarters' EPS does not equal the full-year EPS.

Notes to Selected Quarterly Financial Data (unaudited)

   Axeda's net income (loss) per common share in 2001 and 2000 has been
affected by certain unusual or infrequently occurring items. These items
consisted of:

    A. First quarter 2001

       1) gain on sale of assets of CE business of $47.5 million (notes 5a and
          5c)

       2) gain on sale of assets of IA business of $4.5 million (notes 4c, 5b
          and 5c)

       3) non-cash charges of $1.2 million to write off balances of prepaid and
          deferred stock compensation no longer subject to vesting

       4) a charge of $1.8 million related to the settlement of a distribution
          rights agreement, net of $0.4 million for the fair value of the
          warrant issued to the distributor that was canceled (notes 1f and 15c)

    B. Second quarter 2001

       1) inventory charges of $13.4 million

       2) doubtful account charges of $0.7 million for accounts related to the
          IA business, certain assets of which were sold in March 2001 (notes
          4c, 5b and 5c)

    C. Fourth quarter 2001

       1) inventory charges of $5.1 million, net of warranty write-off of
          $(0.3) million

       2) IPR&D charge of $3.1 million for the acquisition of eMation (note 4a)


                                      96

<PAGE>

                              AXEDA SYSTEMS INC.

          NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

       3) an impairment charge of $2.2 million for goodwill related to the
          acquisition of Cinax (notes 1f and 4b)

       4) an impairment charge of $1.7 million for acquired technology rights
          (notes 1g and 13)

       5) non-capitalizable acquisition-related costs of $0.9 million for the
          acquisition of eMation related to branding and marketing fees

    D. Second quarter 2000

       1) Legal fees of $0.5 million incurred in connection with the April 2000
          securities class action litigation (note 15c)

    E. Third quarter 2000

       1) Joint marketing initiatives of $2.5 million related to a distribution
          rights agreement (note 15c)

       2) IPR&D charge of $1.4 million for the acquisition of Cinax (note 4b)

    F. Fourth quarter 2000

       1) doubtful account charges of $5 million, primarily for accounts
          related to the IA business, certain assets of which were sold in
          March 2001 (note 4c, 5b and 5c)

       2) an impairment charge of $2.8 million for intangible distribution
          rights fee (notes 1g and 15c)

       3) inventory charges of $1.7 million

    G. The aggregate net effect of these items in 2001 was to increase basic
       and diluted net income per common share by $2.81 and $2.64,
       respectively, in the first quarter, increase basic and diluted net
       (loss) per share by $(0.79) in the second quarter and $(0.65) in the
       fourth quarter, thereby aggregating net income of $1.37 per basic common
       and $1.19 per diluted common share outstanding for the year (see Note
       (I) below).

    H. The aggregate net effect of these items in 2000 was to increase basic
       and diluted net loss per common share by $0.03 in the second quarter,
       $(0.23) in the third quarter and $0.26 in the fourth quarter, thereby
       aggregating $(0.52) per basic and diluted common share outstanding for
       the year (see Note (I) below).

    I. Per common share amounts for the quarters and full years have each been
       calculated separately. Accordingly, quarterly amounts may not add to the
       annual amounts because of differences in the average common shares
       outstanding during each period and, with regard to diluted per common
       share amounts only, because of the inclusion of the effect of
       potentially dilutive securities only in the periods in which such effect
       would have been dilutive.

ITEM 9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

   None.

                                      97

<PAGE>

                                   PART III

ITEM 10.  Directors and Executive Officers of the Registrant

   The information required by this item relating to Axeda's executive officers
is included in Item 4(a) of this 10-K. The directors of Axeda and certain
information about such directors who are not also executive officers are
provided below.


<TABLE>
<CAPTION>
      Name                  Age Position with Axeda
      ----                  --- -------------------
      <S>                   <C> <C>
      Robert M. Russell Jr. 50  Chairman of the Board and Chief
                                Executive Officer
      Dale E. Calder....... 40  President and Director
      Walter L. Threadgill. 55  Director
      Paul A. Vais......... 42  Director
      Evangelos Simoudis... 41  Director
      Bruce J. Ryan........ 58  Director
      Thomas J. Fogarty.... 39  Executive Vice President, Chief Financial
                                Officer and Treasurer
      Ned E. Barlas........ 38  Senior Vice President, Chief Legal
                                Officer and Secretary
</TABLE>


   Walter L. Threadgill.  Mr. Threadgill has served as one of our directors
since January 1998. Since February 1996, Mr. Threadgill has served as General
Managing Partner of Atlantic Coastal Ventures, L.P., a venture capital firm.
From June 1979 to February 2000, Mr. Threadgill served as President and Chief
Executive Officer of Multimedia Broadcast Investment Corporation (or MBIC), a
venture capital company specializing in broadcast financing. He also serves on
several boards of directors including: ICG Communications, Inc., Citywide
Broadcasting, Inc., Roxy Satellite & Wireless, Inc. and Unisource Network
Services, Inc. Mr. Threadgill holds a B.A. in Business Administration from
Bernard M. Baruch College, City University of New York, an M.B.A. from Long
Island University and an M.A. in International and Telecommunications Law from
Antioch School of Law. Mr. Threadgill is the Chairman of the audit committee of
the board of directors, but holds no other position or offices of Axeda.

   Evangelos Simoudis.  Dr. Simoudis was appointed to our board on December 7,
2001. Dr. Simoudis is a Managing Director at Apax Partners, a venture capital
firm, and has been with the firm since July 2000. From June 1998 to June 2000,
Dr. Simoudis was the President and Chief Executive Officer of Customer
Analytics, a venture-backed, eCRM company that was acquired by Xchange, Inc.
From February 1995 to May 1998, Dr. Simoudis was Vice President of Global
Business Intelligence Solutions at IBM. Prior to his career at IBM, Dr.
Simoudis held positions at Lockheed Corporation and Digital Equipment
Corporation. Dr. Simoudis holds a B.S. in electrical engineering from the
California Institute of Technology and a Ph.D. in computer science from
Brandeis University.

   Paul A. Vais.  Mr. Vais has served as one of our directors since April 1998.
Mr. Vais has been a Managing Director of Apax Partners, a venture capital firm,
since March 1997. From March 1995 to December 1996, Mr. Vais served as Vice
President of Enterprise Partners V.C., a venture capital firm. From October
1994 to March 1995, Mr. Vais served as a consultant for International Business
Machines and several early stage companies, providing expertise in strategic
marketing and technology development. Mr. Vais also worked at NeXT Computer,
Inc., from July 1988 to October 1994, where he served as the Executive Director
of Worldwide Marketing and with Apollo Computer, an engineering workstation
company. Mr. Vais serves as a director of Icarian, Inc., Oblix, Inc. and
InfoLibria, Inc. Mr. Vais holds a B.A. in Computer Science from the University
of California at Berkeley. Mr. Vais is a member of the compensation and audit
committees of the board of directors, but holds no other position or offices of
Axeda.

                                      98

<PAGE>

   Bruce J. Ryan.  Mr. Ryan was appointed to our board in January 2002. Mr.
Ryan has been the Executive Vice President and Chief Financial Officer of
Global Knowledge Network, a leading worldwide IT training company and a leader
in e-learning solutions, since February 1998. From 1994 until 1997, Mr. Ryan
was Executive Vice President and Chief Financial Officer at Amdahl Corporation.
Mr. Ryan held several executive positions at Digital Equipment Corporation from
1969 until 1994, including Senior Vice President of Financial Services,
Government and Professional Industries. Mr. Ryan earned his Bachelors degree in
Business Administration from Boston College and his MBA from Suffolk
University. Mr. Ryan serves as a director of Inrange Technologies Corporation
and Ross Systems, Inc. Mr. Ryan is a member of the audit committee of the board
of directors, but holds no other position or offices of Axeda.

ITEM 11.  Executive Compensation

   The information required by this item is incorporated by reference to our
Proxy Statement for the 2002 Annual Meeting of Stockholders to be filed by
Axeda with the Securities and Exchange Commission on or before April 30, 2002.

ITEM 12.  Security Ownership of Certain Beneficial Owners and Management

   The information required by this item is incorporated by reference to our
Proxy Statement for the 2002 Annual Meeting of Stockholders to be filed by
Axeda with the Securities and Exchange Commission on or before April 30, 2002.

ITEM 13.  Certain Relationships and Related Transactions

   The information required by this item is incorporated by reference to our
Proxy Statement for the 2002 Annual Meeting of Stockholders to be filed by
Axeda with the Securities and Exchange Commission on or before April 30, 2002.

                                    PART IV

ITEM 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

   a) Documents filed as a part of this Report

      (1) Consolidated Financial Statements


   The Consolidated Financial Statements of Axeda Systems, Inc. and related
Notes thereto as set forth in Item 8 of this Annual Report on Form 10-K begin
at page 56.


      (2) Financial Statement Schedules

                        Report of Independent Auditors

The Board of Directors and Stockholders
Axeda Systems Inc.:

Under date of February 25, 2002, we reported on the consolidated balance sheets
of Axeda Systems Inc. (formerly RAVISENT Technologies Inc.) and subsidiaries as
of December 31, 2001 and 2000, and the related consolidated statements of
operations, changes in stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 2001. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedule. The consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the consolidated financial
statement schedule based on our audits.

                                      99

<PAGE>

In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

As discussed in note 1 to the consolidated financial statements, effective July
1, 2001, Axeda Systems Inc. adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," and certain
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," as required
for goodwill and other intangible assets resulting from business combinations
consummated after June 30, 2001.

KPMG LLP

Philadelphia, Pennsylvania
February 25, 2002

   The following consolidated financial statement schedule of Axeda Systems
Inc. for each of the years ended December 31, 1999, 2000 and 2001 should be
read in conjunction with the Consolidated Financial Statements and related
Notes thereto contained herein at Item 8.

                      Axeda Systems Inc. and Subsidiaries
                 Schedule of Valuation and Qualifying Accounts
                                (in thousands)

<TABLE>
<CAPTION>
                          Balance at  Charge to Charged to
                         beginning of cost and    other               Balance at
                             year      expense   accounts  Deductions end of year
-                        ------------ --------- ---------- ---------- -----------
<S>                      <C>          <C>       <C>        <C>        <C>
Accounts receivable
For the year ended
 December 31, 1999......    $  265     $   165    $   --    $  (111)    $   319
For the year ended
 December 31, 2000......    $  319     $ 4,966    $   --    $(2,880)    $ 2,405
For the year ended
 December 31, 2001......    $2,405     $   929    $   --    $(3,155)    $   179

Inventories
For the year ended
 December 31, 1999......    $  174     $   410    $   --    $   (28)    $   556
For the year ended
 December 31, 2000......    $  556     $ 1,708    $1,600    $   (64)    $ 3,800
For the year ended
 December 31, 2001......    $3,800     $18,783    $   --    $(1,264)    $21,319
</TABLE>

   b) Current reports on form 8-K during the quarter ended December 31, 2001.

      On December 21, 2001 the Registrant filed a Form 8-K to announce that it
   completed its acquisition of eMation, Ltd. pursuant to a share purchase
   agreement, amended and restated as of October 5, 2001.

   Schedules other than the one listed above are omitted because they are not
required or are not applicable, or the required information is shown in the
Consolidated Financial Statements or Notes thereto contained in this Annual
Report on Form 10-K.

                                      100

<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, in the city
of Malvern, Commonwealth of Pennsylvania on this 28th day of March 2002.


<TABLE>
                                         <C>    <S>
                                         AXEDA SYSTEMS INC.
                                         March 28, 2002

                                         By:     /s/  ROBERT M. RUSSELL JR.
                                                -----------------------------
                                                     Robert M. Russell Jr.
                                                    Chief Executive Officer
                                                  and Chairman of the Board
</TABLE>


                                      101

<PAGE>


                              AXEDA SYSTEMS INC.


   KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below in so signing also makes, constitutes and appoints jointly and severally
Robert M. Russell Jr. and Ned E. Barlas, and each one of them, his true and
lawful attorney-in-fact and agents, each with full power of substitution for
him and in his name, place and stead in any and all capacities, to execute and
cause to be filed with the Securities and Exchange Commission additional
reports or filings for the same period covered by this Annual Report on form
10-K for the fiscal year ended December 31, 2001 and all amendments to this
report, and in each case to file the same, with all exhibits thereto and other
documents in connection therewith, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and conforming that each of said attorneys-in-fact or
agents or any of them or his or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.

   IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.

   Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Annual Report has been signed by the persons whose signatures
appear below, which persons have signed such Annual Report in the capacities
and on the dates indicated.


<TABLE>
<CAPTION>
Signature                     Title                                  Date
---------                     -----                                  ----
<S>                           <C>                                    <C>

 /s/  ROBERT M. RUSSELL JR.   Chief Executive Officer and            March 28, 2002
----------------------------- Chairman of the Board
    Robert M. Russell Jr.     (Principal Executive Officer)

     /s/  DALE E. CALDER      Director and President                 March 28, 2002
-----------------------------
       Dale E. Calder

   /s/  THOMAS J. FOGARTY     Chief Financial Officer,               March 28, 2002
----------------------------- Executive Vice President and Treasurer
      Thomas J. Fogarty       (Principal Financial and Accounting
                              Officer)

      /s/  PAUL A. VAIS       Director                               March 28, 2002
-----------------------------
        Paul A. Vais

  /s/  WALTER L. THREADGILL   Director                               March 28, 2002
-----------------------------
    Walter L. Threadgill

   /s/  EVANGELOS SIMOUDIS    Director                               March 28, 2002
-----------------------------
     Evangelos Simoudis

     /s/  BRUCE J. RYAN       Director                               March 28, 2002
-----------------------------
        Bruce J. Ryan
</TABLE>


                                      102

<PAGE>


                              AXEDA SYSTEMS INC.


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

  2.1   Sales Agreement Concerning Shares, dated January 16, 1998, by and among Ulrich Sigmund,
          Hendrik Horak, Jorg Ringelberg, Erste CINCO Vermogensverwaltungs GmbH and
          RAVISENT.(1)

  2.2   Appendix to Sales Agreement Concerning Shares, dated January 16, 1998, by and among Ulrich
          Sigmund, Hendrik Horak, Jorg Ringelberg, Erste CINCO Vermogensverwaltungs GmbH and
          RAVISENT.(1)

  2.3   Agreement and Plan of Merger, by and between Divicore Inc., a Pennsylvania corporation, and
          RAVISENT.(1)

  2.4   Agreement and Plan of Reorganization, dated as of October 8, 1999, by and among RAVISENT,
          Merger Sub, Teknema, Inc. and certain security holders of Teknema, Inc. identified therein.(3)

  2.5   Asset Acquisition Agreement dated as of January 18, 2001 among STMicroelectronics, Inc.,
          STMicroelectronics, NV and RAVISENT Technologies Inc., RAVISENT I.P., Inc. and
          RAVISENT Operating Company, Inc.(7)

  2.6   Asset Acquisition Agreement dated as of March 21, 2001 among Phoenix Technologies Ltd. and
          RAVISENT Internet Appliance Group, Ravisent I.P., Inc. and RAVISENT Operating Company,
          Inc.(8)

  2.7   Acquisition Agreement by and among RAVISENT Technologies Inc., Ravisent Nova Scotia ULC,
          Ravisent British Columbia Inc., Cinax Designs Inc. and certain shareholders of Cinax Designs
          Inc., dated as of July 13, 2000.(6)

  2.8   Amended and Restated Share Purchase Agreement dated as of October 5, 2001 by and among
          RAVISENT Technologies Inc., a Delaware corporation, eMation, Ltd., a private company
          organized under the laws of the State of Israel and certain of the shareholders of eMation, Ltd.(12)

  3.1   Amended and Restated Certificate of Incorporation.(1)

  3.2   Amended and Restated Bylaws.(1)

  3.3   Certificate of Incorporation.(1)

  3.4*  Amended and Restated Bylaws of Ravisent Technologies Inc., as approved by the Board of Directors
          on December 7, 2001

  4.1   Form of RAVISENT's Specimen Common Stock Certificate.(1)

  4.2   Registration Rights Agreement dated April 30, 1998, by and among RAVISENT and parties listed on
          Schedule A therein.(1)

  4.3   Quadrant International, Inc. Common Stock Purchase Warrant Certificate, dated July 30, 1998, by
          and between RAVISENT and Progress Capital, Inc. for the purchase of up to 75,000 shares of
          common stock.(1)

  4.4   Quadrant International, Inc. Common Stock Purchase Warrant Certificate, dated July 30, 1998, by
          and between RAVISENT and Progress Capital, Inc. for the purchase of up to 200,000 shares of
          common stock.(1)

  4.5   Quadrant International, Inc. Common Stock Purchase Warrant Certificate, dated July 30, 1998, by
          and between RAVISENT and Progress Capital, Inc. for the purchase of up to 100,000 shares of
          common stock.(1)

  4.6   Quadrant International, Inc. Common Stock Purchase Warrant Certificate, dated June 11, 1996, by
          and between RAVISENT and Meridian Bank.(1)
</TABLE>

                                      103

<PAGE>

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

 4.7    Quadrant International, Inc. Common Stock Purchase Warrant Certificate, dated March 15, 1996, by
          and between RAVISENT and Meridian Bank.(1)

 4.8    Subordinated Note and Warrant Purchase Agreement, dated March 18, 1996, by and between
          RAVISENT and NEPA Venture Fund II, L.P.(1)

 4.9    Convertible Debenture and Warrant Purchase Agreement, dated December 17, 1997, by and between
          RAVISENT and Atlantic Coastal Ventures, L.P.(1)

 4.10   Convertible Debenture and Warrant Purchase Agreement, dated February 17, 1998, by and between
          RAVISENT and Donald Horton and Marty Horton, as community property.(1)

 4.11   Quadrant International, Inc. Convertible Debenture and Warrant Purchase Agreement, dated April 7,
          1998, by and between RAVISENT and the parties who are signatories thereto.(1)

 4.12   Convertible Debenture and Warrant Purchase Agreement, dated March 31, 1998, by and among
          RAVISENT and the parties who are signatories thereto.(1)

 4.13   Subordinated Note and Warrant Purchase Agreement, dated May 4, 1995, by and between
          RAVISENT and NEPA Venture Fund II, L.P.(1)

 4.14   Convertible Promissory Note Purchase Agreement, dated as of April 26, 1999, among RAVISENT
          and the parties who are signatories thereto.(1)

 4.15   Registration Rights Agreement, dated as of April 26, 1999, among RAVISENT and the parties listed
          on Schedule A thereto.(1)

 4.16   Revolving Demand Note, dated July 21, 1999 from Divico, Inc. in favor of Liuco, Inc.(4)

10.1    RAVISENT's 1999 Stock Incentive Plan.(1)

10.2    RAVISENT's 1999 Employee Stock Purchase Plan.(1)

10.3    Form of Directors' and Officers' Indemnification Agreement.(1)

10.4    Letter Agreement, dated October 28, 1997, by and between RAVISENT and Dell Products, L.P.(1)

10.5@   License Agreement, dated June 30, 1998, by and between RAVISENT and STMicroelectronics,
          Inc.(1)

10.6    Source and Object Code License Agreement, dated September 1, 1998, by and between RAVISENT
          and Microsoft Corporation.(1)

10.7    Development and License Agreement, dated March 2, 1998, by and between RAVISENT and ATI
          Technologies, Inc.(1)

10.8@   Sti5505 Development Contract, dated February 1, 1999, by and between RAVISENT and
          STMicroelectronics, S.A.(1)

10.9@   Digital Audio System License Agreement: Consumer Products-Decoder Hardware, dated May 20,
          1997, by and between RAVISENT and Dolby Laboratories Licensing Corporation.(1)

10.10   Agreement of Lease, dated June 5, 1998, by and between RAVISENT and Liberty Property Limited
          Partnership.(1)

10.11   Form of Software License Agreement.(1)

10.12   Silicon Valley Bank Loan and Security Agreement, dated July 14, 1998, by and between RAVISENT
          and Silicon Valley Bank.(1)

10.13   Commercial Rental Agreement, dated October 18, 1995, between Viona Development Hard &
          Software Engineering GmbH & Co. KG and Deutsche-Bernanten-Lebensversicherung AG.(1)

10.14+  Letter Agreement, dated August 20, 1997, by and between RAVISENT and Francis E.J. Wilde III.(1)

10.15+  Employment Agreement, dated November 12, 1997, by and between RAVISENT and Michael
          Harris.(1)
</TABLE>

                                      104

<PAGE>


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

10.16+  Employment Agreement, dated November 12, 1997, by and between RAVISENT and Jason Liu.(1)

10.17+  Employment Agreement, dated December 11, 1997, by and between RAVISENT and Leonard
          Sharp.(1)

10.18+  Employment Agreement, dated January 12, 1998, by and between RAVISENT and Robert Russell.(1)

10.19+  Employment Agreement, dated December 15, 1997, by and between RAVISENT and Gregg
          Garnick.(1)

10.20+  Amendment to Employment Agreement dated March 19, 1998, by and between RAVISENT and
          Gregg Garnick.(1)

10.21@  Software License Agreement, dated as of April 23, 1999, by and between RAVISENT and Intel
          Corporation.(1)

10.22   Amended and Restated CSS Interim License Agreement, dated November 28, 1997, by and between
          RAVISENT and Matsushita Electric Industrial Co., Ltd.(1)

10.23   Intangible Property License Agreement, dated July 21, 1999 by and between DVA, Inc. and
          Divico, Inc.(4)

10.24   Tax Sharing Agreement, dated July 21, 1999, by and between RAVISENT and its subsidiaries,
          Liuco, Inc., and Divico, Inc.(4)

10.25+  Employment Agreement, dated June 2, 1999, by and between RAVISENT and Ned Barlas.(1)

10.26+  Employment Agreement, dated March 1, 1999, by and between RAVISENT and Sharon K. Taylor.(2)

10.27+  Employment Agreement, dated March 1, 1999, by and between RAVISENT and E. Joseph
          Vitetta, Jr.(2)

10.28+  Employment Agreement, dated March 1, 1999, by and between RAVISENT and William H.
          Wagner.(2)

10.29   Assignment of Intellectual Property Rights, dated July 21, 1999, from RAVISENT to DVA, Inc.(4)

10.30   Bill of Sale, Assignment and Assumption Agreement, dated July 21, 1999, between RAVISENT and
          Divico, Inc.(4)

10.31@  Distribution Rights Agreement, dated June 30, 2000, by and between American Trading S.A. and
          RAVISENT.(5)

10.32+  Employment Agreement, dated April 17, 2000 by and between RAVISENT and Thomas J.
          Fogarty.(9)

10.33+  Employment Agreement, dated May 10, 2001 by and between RAVISENT and Ned E. Barlas.(10)

10.34+  Employment Agreement, dated March 1, 2001 by and between RAVISENT and Francis X.
          Brown.(10)

10.35+  Employment Agreement, as amended, dated August 6, 2001 by and between RAVISENT and
          Robert M. Russell, Jr.(11)

10.36   Not used.

10.37+* Employment Agreement, dated June 28, 2001 by and between RAVISENT and Dale Calder.

10.38+* Employment Agreement, dated July 13, 2001 by and between RAVISENT and Thomas J. Fogarty.

10.39+* Employment Agreement, dated May 10, 2001 by and between RAVISENT and Ned E. Barlas.

10.40+* Employment Agreement, dated July 30, 2001 by and between RAVISENT and Francis X.
          Brown III.

10.41+* Employment Agreement, dated June 27, 2001 by and between RAVISENT and Paul Henderson.
</TABLE>


                                      105

<PAGE>


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

 10.42  eMation Ltd. 2001 Share Incentive Plan.(13)

 10.43  eMation Ltd. 2001 Share Incentive Plan Form of Stock Option Agreement.(14)

 10.44  Form of Assumption Agreement.(15)

 21.1*  Subsidiaries of AXEDA.

 23.1*  Consent of KPMG LLP, Independent Auditors.

 24.1*  Power of Attorney. (reference is made to page 116)
</TABLE>

--------
 (1) Incorporated by reference to identically numbered exhibit to RAVISENT's
     registration statement on Form S-1 declared effective with Securities and
     Exchange Commission on July 15, 1999 (File NO. 333-77269).
 (2) Incorporated by reference to identically numbered exhibit to RAVISENT's
     quarterly report on Form 10-Q for the quarterly period ended September 30,
     1999.
 (3) Incorporated by reference to identically numbered exhibit to RAVISENT's
     current report on Form 8-K dated November 8, 1999, as filed with the
     Securities and Exchange Commission on November 22, 1999 (File No.
     00-26287).
 (4) Incorporated by reference to identically numbered exhibit to RAVISENT's
     annual report on Form 10-K for the period ended December 31, 1999.
 (5) Incorporated by reference to identically numbered exhibit to RAVISENT's
     quarterly report on Form 10-Q for the quarterly period ended June 30, 2000
 (6) Incorporated by reference to exhibit 99 to RAVISENT's quarterly report on
     Form 10-Q for the quarterly period ended September 30, 2000.
 (7) Incorporated by reference to exhibit 2.1 to RAVISENT's current report on
     Form 8-K dated March 1, 2001, as filed with the Securities and Exchange
     Commission on March 16, 2001.
 (8) Incorporated by reference to exhibit 2.1 to RAVISENT's current report on
     Form 8-K dated March 23, 2001, as filed with the Securities and Exchange
     Commission on April 9, 2001.
 (9) Incorporated by reference to identically numbered exhibit to RAVISENT's
     annual report on Form 10-K for the period ended December 31, 2000.
(10) Incorporated by reference to identically numbered exhibit to RAVISENT's
     quarterly report on Form 10-Q for the quarterly period ended June 30, 2001.
(11) Incorporated by reference to identically numbered exhibit to RAVISENT's
     quarterly report on Form 10-Q for the quarterly period ended September 30,
     2001.
(12) Incorporated by reference to RAVISENT's Definitive Proxy Statement on Form
     14A dated November 9, 2001, as filed with the Securities and Exchange
     Commission on November 19, 2001.
(13) Incorporated by reference to exhibit 99.2 to Axeda's registration
     statement on Form S-8 as filed with the Securities and Exchange Commission
     on February 11, 2002.
(14) Incorporated by reference to exhibit 99.3 to Axeda's registration
     statement on Form S-8 as filed with the Securities and Exchange Commission
     on February 11, 2002.
(15) Incorporated by reference to exhibit 99.4 to Axeda's registration
     statement on Form S-8 as filed with the Securities and Exchange Commission
     on February 11, 2002.
  @ Confidential treatment granted for portions of this agreement.
  + Compensation plans and arrangements for executives and others.
  * Filed herewith.

                                      106